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India’s Emerging Multinationals : Trends, Patterns and Determinants of outward investments

India’s Emerging Multinationals : Trends, Patterns and Determinants of outward investments. by Nagesh Kumar RIS www.ris.org.in. Objectives. Outward investment from India becoming a significant trend since 1990s Policy shifts Emerging patterns, trends Determinants: does the theory help?

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India’s Emerging Multinationals : Trends, Patterns and Determinants of outward investments

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  1. India’s Emerging Multinationals:Trends, Patterns and Determinants of outward investments by Nagesh Kumar RIS www.ris.org.in

  2. Objectives • Outward investment from India becoming a significant trend since 1990s • Policy shifts • Emerging patterns, trends • Determinants: does the theory help? • Policy implications

  3. Policy Liberalization since 1991 • Guidelines revised 1992, 1999, 2002, 2004 • Investment upto 200% is permitted; automatic approval for outward investment upto 100% of net worth • Financing of outward investment by Exim Bank • Seen as an instrument of global economic integration of Indian economy

  4. Trends and Patterns • Sharp rise in numbers and magnitudes especially since 2000 • Acquisition of Tetley by Tata Tea in 2000 was a turning point

  5. Marked shift in Patterns after 1990 • Geographical diversification • Before 1990: concentrated largely in Asian and African developing countries • After 1990: nearly 60% in developed countries • Sectoral distribution • Before 1990: 65% in manufacturing, generally low tech. sectors • 1990-: 60% in services; high-tech manufacturing, natural resources, extraction etc. • Changing motivations • Before 1990: generally market seeking in low technology areas e.g. textiles & leather goods, light engineering • 1990s: trade supporting • 2000-: seeking strategic assets, strategic access to markets, natural resources through acquistions • Evolution of global corporate strategy: emergence of Indian MNEs

  6. Evolution of Indian ODI

  7. Asia as a destination for Indian Investments • Asia accounted for more than 55% of Indian ODI till 1995 • Share came down to about 20 % after 1996 because of bulky acquisitions in Europe and North America • Asian investments have become important segments of Indian companies’ global and regional strategies; e.g. • Tata Steel’s acquisitions of NatSteel (Singapore) and Millenium Steel (Thailand): footprints in 12 Asian countries • Tata Motors acquisitions of Daewoo Commercial Vehicles: production restructuring to exploit synergies • Bharat Forge, TCS, Infosys, Ranbaxy in China • Underestimation due to indirect investments through acquired companies • E.g. Thomson’s plants in China controlled by Videocon • India has emerged as the 4th largest source of FDI in Sri Lanka • Singapore is emerging a regional hub for Indian IT companies operations in Asia

  8. Determinants of Outward Investment by a Company: hypotheses • Sources of Ownership Advantages of Indian Enterprises • Accumulated learning (LEARNING):proxied by age of firms • Technological Effort (TECHEFFORT): proxied by R&D intensity • Product Differentiation (BRANDS): proxied by advertisement intensity • Cost Effectiveness (COSTEFFECT): proxied by price cost margins • Firm Size (SIZE and SIZE2): proxied by sales • Foreign exposure measured through export-orientation (EXPORT): export to sales ratio • Technological dependence (TECHIM, MACHIM) –inverse: intensity of royalty payments and machinery imports • Foreign ownership (FOREIGN)- inverse • Policy change (LIBERAL) • Industry effects

  9. Data set and estimation methodology • Sample: 4271 quoted companies from Prowess • Outward investment variable added on the basis of information gathered from government sources • Panel data for period: 1988/89 to 2000/01 • Logit model; ML estimation with robust standard errors

  10. Findings • LEARNING, TECHEFFORT, BRANDS: strong positive effect • SIZE: inverted u-shaped effect • EXPORT: strong positive effect • MACHIM –iveeffect • FOREIGN- negative effect • LIBERAL-positive effect • Some variation in effectiveness of variables across technology classes: • ownership advantages effective in low and medium tech industries • Cost effectiveness: effective in low technology industries

  11. Concluding remarks • Indian enterprises draw their ownership advantages from their accumulated production experience, technological effort for process adaptations and innovations, and ability to differentiate their product. • Encourage learning/ innovative activity/ branding • Effect of firm size • Some consolidation of fragmented capacities might be useful • Liberalization • Enabling policy environment helps

  12. Thank you

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