Indian Direct Investment in Developed Region

1. [A Study Prepared for the CBS Conference on Emerging Multinationals, 9-10 October 2008, Copenhagen, Denmark.] Indian Direct Investment in Developed Region Jaya Prakash Pradhan Institute for Studies in Industrial Development, New Delhi

2. The Context • Remarkable transformations in the internationalization behaviours of Indian firms in recent years: • Emergence of OFDI as an important mode, besides exports. • OFDI volume has gone up from $32 mn in 1961─69 to $106 mn in 1980─89 and further to $692 million in 1990─99 and $24440 in 2000─2007. • Number of Indian firms with OFDI has grown from mere 6 in 1961─69 to 1257 in 1990─99 and further to 2104 in 2000─2007. • Divergence from the traditional wisdom about developing country multinationals: • Indian OFDI is now less intra-regional (i.e., developing country oriented); less in the ownership form of joint venture; not just confined to sectors with standardized technologies. • Since Indian FDI is primarily destined to developed region in recent years, this presentation looks at following issues: • What is the trend of Indian FDI in developed region? • What are its sectoral and regional patterns? • Who are the major Indian investing firms in developed region? • What is the nature of ownership preference of Indian investors in developed region? • What are the factors affecting developed region bound Indian FDI flows? • What are its development implications for host developed countries? ISID

3. Size and Trends of Greenfield FDI • The Origin: • Early 1960s with the establishment of a WOS by Tata group in Switzerland in 1961. In 1965, Dosal Private ( a WOS in Germany), Kirloskar Oil Engines (a JV in Germany) and Raymonds Woolen Mills (a WOS in Switzerland) joined the OFDI process. • Modest flows of Indian FDI into developed region until 1980s but dramatic growth since 1990s. • Number of investing Indian firms has increased from 6 in 1961─69 to 55 in 1980─89; further to 687 in 1990─99 and 1327 in 2000─2007. • Number of host developed countries has gone up from 2 in 1961─69 to 9 in 1980─89; further to 27 in 1990─99 and 28 in 2000─2007. ISID

4. The OFDI operation of 1866 Indian firms covers a total of 30 developed countries: • EU alone accounts for 76% of FDI in developed region. North America 19% and other developed countries (4%). • UK (53%), USA (16%), Netherlands (10%) and Cyprus (8%) are important individual host developed countries. Regional Distribution ISID

5. Service sector dominated manufacturing throughout 1961–1999 but manufacturing has taken over in 2000–07. • Software & IT, financial & insurance, and films & entertainment are important services host; pharmaceuticals, food & beverage are important manufacturing host sectors. Sectoral Composition ISID

6. Since the beginning Indian firms investing in developed region had strong preference for WOS as compared to joint venture. WOS accounted for 78 per cent of the total number of Indian OFDI approvals targeted at developed region in 1961─2007. Ownership choice ISID

7. 1960s: Tata Sons Ltd. (Tata Group), Dodsal (P) Ltd (Dodsal Group), Shanudeep Ltd. (Stanrose Mafatlal Group), Kirloskar Oil Engines (Kirloskar Group) and Raymond Ltd. (JK Singhania Group); two developed host countries such as Switzerland and Germany; mostly trading and services projects; in 1970s continued to be dominated by large Indian business houses like Tata, Arvind Mafatlal (Mafatlal Industries Ltd.), Murugappa Chettiar (E I D-Parry (India) Ltd.), Jumbo Group (Shaw Wallace & Co. Ltd.) and JB Boda (JB Boda & Co);  two developed host countries such as UK and USA; mostly trading and services projects. Main Indian Investors ISID

8. Indian Acquisitions in Developed Region • Since 2000s an increasing number of Indian companies are aggressively following the businesses strategy of overseas acquisition in developed region. • From the year 2000 to March 2008, the Indian FDI flows into developed region on account of acquisition stand at US $47.4 billion; far greater as compared to greenfield investment. • A total of 306 Indian firms engaged in acquisitions covering 28 developed countries; major factors are: strong sales growth, increased corporate profits and capability to raise international resources for M&As, liberalized Indian OFDI policy regime. • Regionally, European Union (50% of total acquisition value) and North America (43%) are major host developed sub-regions. • UK in European Union with 37 per cent share and USA in North America with 39 per cent share are by far the two largest destinations for Indian brownfield investment in developed region—they together claimed 76 per cent share. • Sectoral Composition: Manufacturing (79%), Services (15%) and Primary sector (5.8%). • Metal and fabricated metal products (47%), food & beverages (6%), chemicals and electrical machinery (5.8% each), and pharmaceuticals (5%) are important manufacturing sectors for Indian acquisitions. • IT&ITES (11.6%) and Telecommunication services (1.9%) are two important services host sectors to Indian brownfield investment. ISID

9. Drivers and Factors • Drivers of early growth (1960s to 1980s): • Stagnant domestic market. • Policy restrictions on growth of large firms. • The ownership advantages of Indian companies derived from modified and adapted foreign technologies were not suitable for exploitation through manufacturing in developed region with strong patent regime and different factor conditions. Indian firms have found trade-supporting FDI and services projects as feasible strategies with respect to developed region. • Drivers of recent growth (since 1990s) • Liberalization and growing competition in domestic markets (entry of foreign firms and cheap imports)→need to access new markets and the need to acquire strategic assets. • Growing competition in export markets→need to expand overseas trade-supporting infrastructure and gaining insider status in trade blocks. • Growing firm-specific competitive assets in sectors like chemicals, pharmaceuticals, auto components, software, consultancy, etc.→ability to exploit them in overseas developed countries. • The liberalization of Indian OFDI policy. ISID

10. Implications for host developed countries • Crowding-out? • Indian multinational firms are still small when compared to developed country local firms in terms of scale of operation, financial strength and extent of intangible asset bundle; the scope of Indian greenfield FDI leading to crowding out of domestic investment appears to be limited. • Enlargement of consumer welfare? • Indian companies offer cheap and quality products and services→ promote consumer welfare in developed countries (product and service substitutes with downward pressure on prices). • More competitive production process: • Local producers in developed countries are now required to meet competitive challenges of outward investing Indian firms, which impart strength to enterprise level productivity growth and technological activities. • Transfer of technologies: • Apart from directly augmenting capital formation in developed countries, greenfield Indian FDI projects involve transfer of unique Indian technologies and skills diversifying the knowledge base of host developed countries. ISID

11. Implications for host developed countries • Sectoral Impacts: • Indian service sector FDI helps in tremendous cost-saving achieved by host developed country manufacturing and non-manufacturing companies. The emergence of Indian software and information technology companies enable developed country firms to achieve significant cost reduction, productivity growth and increased flexibility to remain competitive in global markets and to save existing jobs. • Impact of acquisitions • Predicted to be negative in the short-term for both local R&D and employment. • Indian acquiring firms may step up affiliates’ R&D activities in the long-run. ISID