Importance of outward FDI to the Indian economy

Trade liberalization in India post 1991 has transformed the scenario of capital influx in the country and has triggered the growth of secondary and tertiary sectors significantly. The growth dynamics of Indian economy especially the service sector propelled forward. Due to increased revenues, outward Foreign Direct Investment (FDI) (i.e. FDI outflow) of India has also been significant (Someshu., 2010). Given the fact that FDI inflow and its impact in India is a major area of discussion and interest, similarly outward FDI can be also contemplated as an important subject of discussion. Outward FDI is a mechanism through which a domestic firm expands its operations to other countries. Outward FDI in India mainly occurred after the year 2003. During the economic crisis in the year 2008-09. Due to which the outward FDI flow increased significantly. The following graph depicts the trend of the flow during the past 15 years.

Fig. 1 Outward FDI of India from 2003 to 2017 (Source: Reserve Bank of India)

Fig. 1 Outward FDI of India from 2003 to 2017 (Source: Reserve Bank of India)

 

Growth in the domestic corporate sector is one of the reasons of rise in outward FDI

After 1991, when the FDI inflow augmented in the country, the corporate sector realized that opening of trade barriers and free flow of funds is a two way process. The domestic corporate houses readily recognized that outward FDI has several benefits including:

  • Seamless access to global networks & markets.
  • Easy engagement in the process of successful technology transfer.
  • Participating in the process of productive research and development (R & D).

Outward FDI has mainly been for resource seeking as well as technology seeking. For example, in terms of resource seeking, India focused on oil and petroleum products and in the manufacturing trajectory. In terms of technology seeking, India concentrated on leveraging technologies especially in the area of computing and information technology (Varma, & Nayyar, 2014).

Promotion of indigenous business through Joint Ventures (JVs) gave rise to outward FDI

Indian entrepreneurs making good fortune domestically recognized that it would be judicious to join hands with corporate houses overseas through Joint Ventures (JVs) and Wholly Owned Subsidiaries (WOS) and promote Indian businesses outside India. In the second half of the year 2000, there was a steady rise in capital strengthening the foreign exchange position of the nation. With simplification of government policies on outward FDI, opportunities opened up in front of the Indian companies to invest in resource rich (oil and petroleum) countries. Indulgence was given to form JVs. For example, India Linoleum entered a JV with  Diesel Locomotive Works (DLW) of Germany and Haloi plant of Hind motors entered a JV with General Motors of USA in the year 2006.

The benefits reaped by the Indian counterparts were in the form of cheaper petroleum and import of automobile parts at comparatively feasible rates (Paarlberg and Perry, 2007).

Global economic Crisis

The global economic crisis of 2008-09 can be also regarded as a major impetus for outward FDI from India. The economic crisis put forward significant risks to the domestic companies overseas. But a sizeable portion of the Indian companies exploited the opportunities brought by the crisis. In the years 2009 and 2010, a large amount of investments were in acquisitions. More than half of the acquisitions done by the Indian companies in USA were in distressed assets. The parent companies which had been adversely affected by the global crisis got sold to Indian companies at very cheap prices (Khan, 2012). Below are a few examples of such deals:

  • Indian IT/ITeS company HCL EAS purchased Axon Group in UK for $800 million.
  • Technology giant Wipro acquired Infocrossing in United States for $600 million.
  • Tata Steel purchased Arcelor in Luxemberg for $47440 million.
  • Videocon purchased Thompson Multimedia in France for $300 million (Paarlberg and Perry, 2007).

The above reasons are some important and significant reasons of outward FDI flow. There are many other reasons such as tapping the opportunity of depreciating foreign currency abroad, reaping return on re-invested earnings, grabbing the opportunity of foraying into emerging and less developed economies and so on (Exim Bank, 2014).

Major destinations

Some major destinations of outward FDI flow from India apart from USA in the last ten years can be seen in a two-fold manner i.e. in the first half (2005 – 2010) and the latter half (2011 – 2016). The left column of the table below consists of mainly resources rich countries whereas the right column comprises of countries that provided larger tax benefits (Ibef, 2018).

Outward FDI in 2005 – 2010 Outward FDI in 2011-16
USA (United States of America) Mauritius
UAE (United Arab Emirates) Singapore
Sudan British Virgin Islands
Australia
Germany

Table 1: Outward FDI in some major countries in the last decade (Ibef, 2018).

Market size

With respect to market size, India is one of the strongest performers in terms of mergers and acquisitions (M&A). As reported by Ibef (2018), M&A amounted to US $ 46.8 billion in 2017 which translated to a 14% increase in the volume of the deals compared to 2016. Also as reported by the Reserve bank of India (RBI), the outward FDI from India in February 2018 was US $ 784.28 million as compared to $ 866 million in January 2018 (RBI, 2018).

Impact of outward FDI on Indian economy

The impact of outward FDI on Indian economy is quite significant. The returns on investments outside the country in the form of foreign exchange inflow are very much necessary for economic growth. The areas where the positive impact of outward FDI  has been highest are IT/ITeS, infrastructure, agriculture, consumer goods and pharmaceuticals. One of the major positive impacts of outward FDI is that India has been able to bring newer technologies from abroad and implement them domestically at cheaper prices (due to monopolistic advantages) to lure the IT/ITeS segment. For instance, machine learning techniques, artificial intelligence and big data analytics has been a boon to the IT/ITeS industry. In the pharmaceutical industry, technologies to cure cancer has been taken from outside.

Outward FDI has largely benefitted the manufacturing sector through easy access to natural resources. There has been also large scale amplification in skill formation and institutional capacity building. In the current scenario, the Government of India is relaxing policies to channelize investments outside for further growth amplifications. With the waves of globalization and encouragement given to start-ups and venture capital initiatives, the Government of India will roll out hybrid instruments like optionally or partially convertible debentures (The Hindu, 2018).

References

  • Baig. MM, Kiran.S, Bilal., M. (2016) ‘Relationship between FDI and GDP: A Case Study of South Asian Countries’, Journal of Business & Financial Affairs, 5(3), pp. 3–6. doi: 10.4172/2167-0234.1000199.
  • Exim Bank (2014) ‘Outward Direct Investment from India: Trends, Objectives and Policy Perspectives’, (165).
  • Ibef (2018) Indian Investment Abroad – Overseas Direct Investment by Indian Companies.
  • Khan, H., R. (2012) ‘Outward Indian FDI – recent trends & emerging issues’, BIS central bankers’ speeches, pp. 1–15.
  • Paarlberg, L. E. and Perry, J. L. (2007) ‘Organization Goals’, The American Review of Public Administration, 37(1981), pp. 387–408.
  • RBI (2018) Reserve Bank of India – Data on Overseas Investment, 2018. Available at: https://rbi.org.in/Scripts/Data_Overseas_Investment.aspx (Accessed: 12 April 2018).
  • Someshu., P. (2010) ‘Impact of FDI on manufacturing sector in India’, 81(78), pp. 1–2.
  • The Hindu (2018) Union Budget 2018: ‘Separate policies soon on outward direct investment, hybrid instruments’ – The Hindu.
  • Varma, S & Nayyar, R. (2014) ‘OFDI between India and the LAC Region : A firm level motive analysis’, (21465).
Arijit Shankar Chaudhury

Arijit Shankar Chaudhury

Research Analyst at Project Guru
Arijit is a post graduate in Economics. He has keen interest in finding new patterns from data in different areas of research and analysis. He is proficient with different statistical analysis applications like SPSS, SAS, R and Eviews. In his spare time he listens to music and is an avid guitar player.
Arijit Shankar Chaudhury

Latest posts by Arijit Shankar Chaudhury (see all)

Related articles

Discuss

We are looking for candidates who have completed their master's degree or Ph.D. Click here to know more about our vacancies.