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India’s Emerging Multinationals: Outward Investment Trends

Explore the trends, patterns, and determinants of outward investments by Indian companies since the 1990s. Discover the policy shifts, emerging patterns, and the role of ownership advantages and policy implications in shaping India’s outward investment landscape.

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India’s Emerging Multinationals: Outward Investment Trends

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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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