The last two years have seen a downturn in China-India relations. Border skirmishes in 2020 have essentially frozen ties, pushing them back decades. Promising trade and investment patterns that had picked up from the early 2000s up until the Galwan Valley conflict have all but stalled.
From 2014 to 2020, China’s FDI into India soared. Until 2014, China’s net investments in India was around US$1.5 billion, largely derived from state-owned enterprises (SOEs)' investments in infrastructure. From 2014, however, the tenor and volume of China’s investment changed, being largely made up of market-driven investments made by private firms into India’s thriving technology sector.
This influx merits some explanation. What’s driving China’s investments in India’s technology sector? And what does this scenario portend for Chinese investments in India after Galwan?
Chinese funds in India's digital economy
Of late, Chinese firms have been investing heavily in India’s digital economy, and targeting Indian start-ups in particular. In fact, their investments in India increased twelve-fold between 2016 and 2019; in 2017, China invested three times as much in Indian start-ups as in the past 55 years.
As of March 2020, 18 of India’s top unicorns received Chinese investment. Alibaba, Xiaomi, and Tencent have invested over US$3 billion into Indian start-ups like Ola, Zomato, BigBasket, and Swiggy. Some Chinese firms like Tencent focused on late-stage investments initially, before moving on to newer ventures.
Besides these Chinese big tech firms, Chinese venture capital funds have also invested capital in India’s fintech, edutech, and e-commerce sectors. Indian journalist Ananth Krishnan attributes these investments to an “attitude shift” among Chinese tech companies like Baidu, Alibaba, and Tencent to “replicate their success” in a market that resembles China in size and stage of development and online consumer practices and trends.
The US push factor
If so, then why did these investments accelerate since 2017 and not before? What is also puzzling about China’s interest in India’s unicorns over the past few years is that India’s digital economy has been turning inward, exemplified by a litany of restrictive policies from 2017.
India’s proposed data protection legislation requires companies to divest data gathered locally. Subsequent changes to the bill further empower the Indian government, not tech firms, vis-a-vis data gathering, storage and processing.
India’s e-commerce policy erects a policy framework that favours domestic companies over foreign competitors; the draft policy also requires e-commerce companies to localise certain kinds of data in India.
These policy moves should have raised Chinese apprehensions, not drive capital to India.
Increased pressures from the Committee on Foreign Investment in the United States (CFIUS) compelled Beijing to shift its investment gaze to hitherto untapped markets like India.
One broader trend appears to be driving such Chinese tech-focused investments in India — the erosion of China’s economic relationship with the US as seen by increased scrutiny of China’s US-bound investments from the time of the Obama administration.
Increased pressures from the Committee on Foreign Investment in the United States (CFIUS) compelled Beijing to shift its investment gaze to hitherto untapped markets like India.
Since 2012, CFIUS, the US government body responsible for screening investment deals and acquisitions for national security risks, has continually raised alarms on Chinese purchases of American companies, especially firms deemed vital to national security.
One key shift that amplified CFIUS’ scrutiny, during the first Obama term, was a shift in the orientation of Chinese investments abroad from sectors like energy and agriculture to technology, specifically Chinese interest in telecom, e-commerce, and semiconductors firms.
Between 2012 and 2015, the “big three” Chinese tech companies — Baidu, Alibaba, and Tencent and e-commerce giant Jingdong (JD.com) invested nearly US$10 billion in the US, acquiring major tech start-ups including Snap Inc, Lyft, and Magic Leap.
The pace of Chinese investment into the US raised misgivings, fuelling fears that this capital could rob American intellectual property and eventually erode America’s economic primacy. Also irking American policymakers was Beijing’s disinclination to reciprocate by further liberalising China’s market for American firms.
The Trump administration zealously defended these concerns through CFIUS, throttling Chinese investments. From 2017 to 2019, Chinese transactions dropped across the US economy, including the IT and telecom sectors where several key deals, including Broadcom’s purchase of Qualcomm Inc, were thwarted, or disbanded after CFIUS intervention.
Concerns regarding data and network security also surfaced as Trump’s term began, complicating the politics of potential Chinese acquisitions in the US. Trump’s imposition of tariffs on China in July 2018 and subsequent retaliation further dampened tensions around Chinese investments in the US.
India, as a result, emerged as an attractive venue given the ongoing digital transformation that New Delhi spearheaded since the development of the flagship digital identity program Aadhaar, around which several digital campaigns and initiatives have emerged to create a flourishing digital economy.
Unlike other markets that Chinese firms invest in, India, critically, offers hundreds of millions of new users...
The draw of India’s tech start-ups
To be sure, the surge in Chinese outbound investments from 2015 was part of Beijing’s broader strategy to invest capital abroad; in fact, outward investments from China nearly doubled from US$108 billion in 2013 to US$196 billion in 2016.
India, however, ranked in the middle (31st) in terms of where those investments went as Chinese interest in the Indian economy increased. However, what proved different was inbound Chinese FDI in India’s technology industry from 2016 to 2018 through direct investments and acquisitions of Indian start-ups.
Dozens of Chinese firms, including behemoths like Alibaba, Xiaomi, and Tencent, have acquired major stakes in Indian start-ups like Ola, Paytm, Snapdeal, BigBasket, etc. These investments have allowed these Indian unicorns to scale up and draw from the experiences and know-how of Chinese companies.
Unlike other markets that Chinese firms invest in, India, critically, offers hundreds of millions of new users, which translates not just into more customers for the company's services and applications, but a greater means of helping the company generate value and leverage the funding.
If eroding economic interdependence between the US and China precipitated Chinese investments into India, the Sino-India border clashes in mid-2020 have crippled this infusion.
In July 2020, New Delhi banned 100 Chinese mobile applications, including the two largest, TikTok and WeChat. This ban came on the heels of an earlier move to restrict FDI coming in from ”a country, which shares its land border with India”. Both applications were wildly popular in India with surging demand — TikTok had 200 million users and 600 million downloads.
We appear to have moved into a world where investment patterns are determined by statecraft.
Throughout 2021, the Modi government held on to over 100 proposals on Chinese investments entering India, some of which have moved since. Chinese investments to India have also been redirected via other markets like Singapore, US, UK, and Europe with Indian firms retaining the upper hand on how and where that capital should be deployed.
We appear to have moved into a world where investment patterns are determined by statecraft. This is exemplified by the US’s reliance on CFIUS and sanctions to constrain Chinese investments and India’s TikTok ban and clampdown on Chinese investments into India post-Galwan.
Such shifting patterns testify to the growing importance and influence of national security concerns and political considerations on technology investments, and the imperative to closely manage the technology sector in order to advance national security and economic objectives.
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