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Unraveling the Puzzle of Differing Rates of FDI and FVCI in India and China

This study seeks to unravel the puzzle underlying China's and India's differing experiences in attracting two types of foreign investment: namely foreign direct investment (FDI') and foreign venture capital investment (FVCI'). Complementing the law and finance literature, we argue that foreign investors prefer the direct investment mode in China despite its poor governance environment because direct investment provides private means of control over the business, and China's institutional environment provides a more facilitating arena for FDI than India's. In contrast, India's legal infrastructure and related institutional settings prove to be better than China's in accommodating foreign portfolio (indirect) investment especially in the form of venture capital. The conclusion of this article has implications for the two countries' legal reform in the direction of the desired type of foreign investment. It also provides comparative insights into the legal institutions of China and India in fostering national innovative capacity and entrepreneurship.