Why Do Indian Investors Go Abroad?

Outward FDI by Indian firms has increased considerably in recent years.

Such investments have gone to more than hundred host countries and into
various sectors. The higher volume of outward FDI following policy reforms
requires examination of factors that have motivated Indian firms to invest in
different host countries. Now read on

I Introduction by its exports. Indian firms have raised

considerable volumes of funds in
Overseas investments by the emerging
international capital markets for
economies are a feature of globalisation.
financing their overseas investments.
Investments by Indian firms, though not
According to the Statistical Bulletin of
large in volume, differ from that of other
China’s Outward Direct Investment
emerging economies such as China in
(Ministry of Commerce, 2008) China’s
their composition, destination and
overseas investments, more than 90%
modality of investments. A relatively
of the total, are in developing
high proportion of their investments are
countries in search of raw materials and
in the manufacturing and services
oil to fuel the growing Chinese economy/
sectors of the developed economies
India’s investments, for the most part are
such as the UK and the USA. A number
in developed countries, such as the UK, in
of statistical studies have attempted to
skill-intensive manufactures and services.
identify the factors motivating Indian
India’s investments abroad add a new
firms to invest abroad. Most of these
dimension to the observed flows of
studies attempt to ground the analysis
technology and know-how across
in the received theory of foreign direct
frontiers with interplay between trade,
investment centred on the ownership
labour flows and FDI.
advantages, location and internalization
(OLI) paradigm. India’s ODI is significantly
different from that of China in its
China has financed its
composition-whereas a large
investments abroad from its huge
proportion of China’s investments is in
reserves of foreign exchange generated
oil and raw materials, India’s
investments are in manufacturing and in the decision of Indian manufacturing
services. firms to go abroad.

II Traditional Explanations It is widely noted that the high capital

intensity of India’s manufacturing sector
Firms invest abroad to exploit their
is mostly driven by the numerous
monopoly over advantages(O)
stringent labour laws that render hiring
especially so when market
of labour and arduous and expensive
imperfections of various sorts and
task. The highly capital intensive
institutional factors deny them the
organized manufacturing sector
options of exporting the products or
contributes only 13 per cent to total
licensing the advantages they possess
employment in the Indian economy. For
to foreign entities. The choice of
these reasons high labour productivity
locations abroad for investment would
may not be an indicator of ownership
be dictated by a number of factors
advantages gained by labour training
including the availability of efficient
and organization, but a product of high
labour, infrastructure facilities, and
capital intensity of Indian industry in
stability of institutions and policies of
general.
host governments. All of these and
other host country attributes favourable
to investing firms are clubbed
Most studies report to be a factor in the
together as location advantage (L). and
decision of firms to go abroad although
sources of raw materials and distribution
none can identify the specific ownership
outlets (I). These three aspects of FDI are
advantages it yields,
clubbed together and referred to as
the OLI paradigm or the eclectic III The Unique Attributes of Indian
theory of FDI Firms That Go Abroad

The firms that invest abroad do exercise The theory of FDI suggests that firms
control over operations. Most of the venturing abroad should possess a
studies suggest that firms with high monopoly over advantages that other
labour productivity, R and D firms including those in overseas markets
expenditures, managerial skills as do not enjoy. As discussed earlier the
defined above, exports and the post results of statistical studies on ODI by
1991 liberalisation measures are a factor Indian firms do not adequately endorse
this proposition. The so called ownership
advantages are enjoyed by both firms in the developed countries, is the
domestic market oriented and foreign so called asset seeking motive on the
market oriented firms. It is impossible to part of investors. There is some truth in
generalise on the factors influencing this explanation as acquisitions provide a
firms that go abroad. ready and easy access to tried and tested
technologies in place. The utilization of
In fact, most firms from emerging
these technologies back home requires
markets invest abroad to acquire
their assimilation and adaptation to suit
technological capabilities- this is the so
Indian conditions. There may be two
called asset seeking motive for ODI.
other explanations for this spectacular
Additionally the acquired firms may have
growth of Indian investments abroad in
to be revived, they may possess
the post liberalization era- foreign locales
production oriented advantages but may
may be easier to access and operate in
be ailing because of their inability to
than the domestic locale. Although
explore and develop markets.
the 1991 reforms did do way with
In the words of Nathaniel Leff many cumbersome procedures including
(1979) the licensing system and reservation of
specific sectors for small industries,
” entrepreneurship may reflect
corruption and cumbersome red tape
superior information, more
persists. Recent reports in the media
importantly imagination, which
note the frustrations of Indian
subjectively reduces the risks and
businessmen with the slow moving
uncertainties of new opportunities,
government regulatory system, even
which are ignored or rejected by other
on the part of those, known as the
investors”
bollygarchs, who had built up a
The attraction of investing working relationship with the
abroad in the presence of a large bureaucrats (Crabtree, 2012). Add to
domestic market, not just a potential this the often cited poor
one but one in place, fuelled by the infrastructure facilities; investing
demand for luxury goods and services by abroad in developed countries may be
India’s large middle and upper income attractive to profit laden Indian firms.
groups, may seem odd. An often cited Yet another factor though not a
explanation for India’s investments significant one in the decision of Indian
abroad, especially acquisitions of existing firms to go abroad may be the
complementarity between trade and IV Conclusion
investment abroad. Exports of raw
Outward FDI from India for reasons of
materials from the parent companies
history and the evolution of India’s economic
to their subsidiaries, however, may
policies over the years is unique and
provide only a partial explanation for
distinct from that of other emerging
this complementarity. It is likely that
economies. The proximate reason for
whilst these firms export standardised
the growth of India’s outward FDI is
undifferentiated products they invest
her inheritance of a gifted
abroad to manufacture differentiated
entrepreneurial class of businessmen.
products. Presence in markets abroad
The roots of the entrepreneurial class
may be essential for the production
and the economic and social factors
and sales of differentiated products.
that have endowed them with the
In addition to the explanation in terms sort of entrepreneurial abilities that
of costs of production stated above there firms in other emerging economies do
is also the consumer preferences for not possess. The abolition of rules,
variety, especially the love of goods regulations and restraints on
produced abroad which provides an entrepreneurship during the 1990s
explanation for the growth in intra unleashed the animal spirits of the
industry trade. As The Economist (2009) entrepreneurs and their desire to
puts it “Indians are fond of shopping participate in the global economy
abroad, a habit left over from the era of through trade and investment. The
import substitution, when they had to sort of ownership advantages Indian
put up with shoddy homespun goods firms investing abroad possess is in the
in the name of national self- domain of organisation, identification
sufficiency”. Recognition of the growth of investment and market opportunities
in demand for differentiated products at and entrepreneurial talent that enables
home that could be serviced from them to operate in international
investments abroad provides yet markets.
another example of the
entrepreneurial abilities of Indian
business houses.