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Wal-Mart cozies up to China as it shelves India

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Wal-mart's decision to ramp up its presence in China while suspending expansion plans in India is a striking reminder that the South Asian nation still has a way to go before it establishes itself as attractive investment destination for foreign multi-nationals, say experts.

"Wal-mart's decision reflects the very different regulatory environment for foreign direct investment in the retail sector in China compared to India," Rajiv Biswas, Asia-Pacific Chief Economist at IHS told CNBC.

(Read more: Wal-Mart to open up to 110 new China stores by 2016)

The world's largest retailer on Thursday revealed plans to add as many as 110 outlets in China by 2016 as it looks to raise profitability in the country's competitive retail sector. The announcement came a week after Wal-mart ended a six-year joint venture with Indian conglomerate Bharti Enterprises; the two companies had sought to open retail outlets in India but ultimately decided to relinquish that plan.

"India is shooting itself in the foot with extremely complex regulatory impediments to foreign direct investment (FDI), protracted investment approval processes and a hostile approach to taxing incoming FDI investments," Biswas said.

(Read more: Wal-Mart's India departure, a sign of things to come?)

In addition, Shaun Rein, managing director of the China Market Research Group says policy uncertainty remains a key concern for many global companies looking to expand into India. "China has a more open investing environment than India many Fortune 500 firms tell us. They know what they are allowed to invest in and those policies stay constant," he said.

"In India, many [multi-national corporations] complain that the laws are always changing and seem protectionist. In a difficult economic environment, having stable and clear regulations towards FDI is critical for attracting investment," he added.

For example, the Indian government's attempt to tax Vodafone's acquisition of Hutchison Whampoa's Indian mobile business that was completed in 2007 despite a ruling in favor of the Britain-based company by the Indian Supreme Court in 2012 has created a negative perception of the regulatory environment in the country.

In China, Rein says foreign companies appreciate that there is a clear set of regulations overseeing foreign investment into the country.

(Read more: Wal-Mart to go solo in India, calls off JV with Bharti)

While there are concerns in China including attacks on foreign firms by the state media, he said problems are overcome by the "profits, the potential and the pro-business government." Last year, FDI into China totaled $111.7 billion, four times larger than India's $27.3 billion.

Discussing Wal-mart's progress in China versus India, Anil Gupta, Professor of Strategy & Globalization at the University of Maryland says "appearances can be deceptive."

"They've been in India for less than 4 years and have 20 cash-and-carry stores where the average revenue is much greater than in a typical Wal-mart retail store. In China, it took Wal-mart 7 years (from 1996 to 2003) to reach 20 'retail' stores. So, Wal-mart is much further ahead in India after 4 years than it was in China," Gupta said.

Wal-mart and Bharti jointly operate 20 wholesale stores in the country. However, Wal-Mart will buy out Bharti's 50 percent stake in the venture. India allows full foreign ownership in cash-and-carry or wholesale operations.

"India is rapidly easing up the restrictions on FDI in retail. Even [Walmart Asia CEO] Scott Price has said that, once the regulations ease up, they'd ramp up their investment," he added.

Countering the argument that India is less conducive for foreign investment than China, he points that there are some sectors in India that are more open to investment.

"In China, foreign car companies cannot own more than 50 percent equity. India permits 100 percent foreign equity. In telecom, China pretty much doesn't permit foreign companies at all. India is very, very open to foreign players," he said.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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