When Autodesk planned to set up an Asian global research and development (R&D) hub in 2003, the US software maker found it had to decide between China and India.

The debate over the location was heated, recalls Jack Gao, who was head of Autodesk's China operations.

He eventually managed to persuade the US headquarters to locate the R&D centre in Shanghai.

Gao's clinching argument was that China's sustained economic boom and rosy prospects promise a larger customer base while India was not an investment hotbed with its economy lagging far behind China's.

It's a different story today as multinationals find India and China becoming inextricably linked, leaving executives in a dilemma over how to allocate investment, resources and manufacturing activities between the two rising economic powers.

In a neat solution, Autodesk last November set up Asia-Pacific Emerging Geo, encompassing India and China; and Gao was appointed as the head of the new regional operations, aimed at "keeping with the company's growing priority to India."

Gao shuttles between China and India these days and the firm is to "announce further investments and market development strategies for India."

Autodesk is on a long list of global giants which have taken the plunge into India in recent months, signalling a shift in their investment strategies.

South Korea's POSCO, the world's fifth-largest steel maker, has announced that it would build a US$12 billion steel plant in India, the biggest foreign direct investment deal in the country.

And the world's biggest steel maker LN Mittal announced its maiden venture in India, by investing US$9 billion.

Technology firms are also in a rush. Microsoft has announced that it would invest US$1.7 billion in the country, its largest overseas investment deal; Cisco Systems and AMD have committed to invest US$1.1 billion and US$3 billion respectively.

Some of the investment deals come at the expense of China.

David Ho, president of Nokia (China) Investment Co Ltd, suggests an investment of US$150 million by the Finnish firm to set up its first mobile phone factory in India should come to China.

And Chengdu, capital of Southwestern China's Sichuan Province, almost lost to an Indian city when Nokia chose a venue for an R&D centre focusing on 3G (third generation) mobile communications.

"India is becoming increasingly competitive," Ho says.

The Indian plant, which is aimed at the South Asian market, could snatch some orders from Nokia's two factories in China, which accounted for one-third of the total mobile phone exports from the country in 2003.

India is already rapidly emerging as an investment hot bed for multinationals, which fret that some of China's lustre could be fading. The latest annual global survey by consultants A.T. Kearney found India last year overtook the United States to become the most attractive foreign direct investment (FDI) destination after China.

In Kearney's FDI Confidence Index 2004, India was ranked third compared to the sixth spot in 2003.

FDI inflows to India exceeded US$5 billion last year, but are only a fraction of the US$60.33 billion China pulled it.

Yet, what is significant is that the FDI inflows to China last year decreased 0.5 per cent year-on-year, compared to a 13 per cent increase in 2004.

FDI is crucial to China as foreign-funded firms account for about 60 per cent of the country's exports, one of the engines behind the sizzling economic growth.

Some analysts believe China remains the most attractive destination but FDI growth is expected to moderate in the coming years and some would likely to slip away to India as its government opens up many sectors with aggressive incentives.

"It is quite evident that India is fast opening to rest of the world," says Kamal Rungta, a partner and director of global banking firm E. J. McKay's Indian operations.

"The investment policies and procedures are being streamlined in a very substantial manner to enable faster implementation of projects in India."

One major advantage for China as the most favoured FDI destination is its low labour cost, which seems to have been eclipsed by India.

The latest survey by Mercer Human Resource Consulting found "multinational companies seeking to set up lower-cost operations in Asia will face higher wage costs in China than in India."

The report shows that for 95 per cent of the 42 job roles surveyed, the average base pay is higher in China than in India.

"While it is far cheaper to employ staff in both China and India than Europe or the United States, India appears to have the advantage of slightly lower wage costs," says Mark Sullivan, Worldwide Partner at Mercer.

And a McKinsey report found fewer than 10 per cent of university graduates in China had the skills to work for a foreign company, compared to 25 per cent in India.

According to Sun Jian, vice-president of AT Kearney, China, one of the main drivers for the increasing investment in India is the trend of business process offshoring (BPO), such as moving non-core businesses or functions out of home countries such as the United States.

According to Kearney's FDI survey, about 42 per cent of offshoring investment will go to India, with China garnering 17 per cent.

"In terms of the offshoring environment, we do see India has a certain advantage over China," says Sun.

"Besides a well-educated labour force and a competitive cost structure, one thing that makes India outstanding is its experience in implementing BPO."

India's growing attractiveness for FDI and rapid growth rates in recent years have spawned discussions that India could eventually draw level with China.

"India's economy is really on a fast track. I expect the country to maintain a 7-8 per cent economic growth in the coming years," says Ma Jiali, a research fellow with the China Institute of Contemporary International Relations.

"But in the foreseeable future, it's hard for India to catch up with China."

In terms of most criteria such as per capita GDP, purchasing power, literacy rates and ownership of telephones and Internet access, India remains far behind China.

Infrastructure, particularly, is a major concern. A bumpy ride from the airport to downtown Mumbai India's economic hub, which the country's prime ministers wants to be another Shanghai could potentially undermine foreign investors' enthusiasm.

Yet, in some areas, the competition between China and India is undeniable, says Ma.

For instance, India's strength largely rests on its IT (information technology) service sector, but the government is now seeking to leverage it in the manufacturing sector.

With the diminishing of China's cost advantages, some multinationals might choose to transfer some manufacturing activities to India. And "as offshoring related investment increases, the competition between India and China may intensify over time, particularly when the Chinese Government starts promoting BPO and the IT service sector," says Sun.

China has been expanding its advantages as a global manufacturing hub of products such as PCs, mobile phones and gaming devices, and leveraging them in product development, designs and brands, according to Fang Fang, managing director of JP Morgan Asia-Pacific.

"The country desperately needs world-level software companies," he says.

Most Chinese software firms are small and it's hard for them to secure an order valued more than US$1 million for software outsourcing when competing with Indian giants, insiders say.

But Beijing is making substantial efforts to revamp its software sector, which could start challenging India.

Top software service company HiSoft Technology last December acquired two domestic rivals, the biggest merger in China's software service industry largely aimed at warding off formidable competition from Indian counterparts.

(China Daily 01/23/2006 page1)