[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
The Context n Remarkable transformations in the internationalization behaviours of Indian firms in recent years: Emergence of OFDI as an important mode, besides exports. n 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. n 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: n 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: n What is the trend of Indian FDI in developed region? n What are its sectoral and regional patterns? n Who are the major Indian investing firms in developed region? n What is the nature of ownership preference of Indian investors in developed region? n What are the factors affecting developed region bound Indian FDI flows? n What are its development implications for host developed countries? ¨ Indian FDI ISID 2
Size and Trends of Greenfield FDI n The Origin: n Early 1960 s 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. n Modest flows of Indian FDI into developed region until 1980 s but dramatic growth since 1990 s. ¨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. Indian FDI ISID 3
Regional Distribution n The OFDI operation of 1866 Indian firms covers a total of 30 developed countries: n EU alone accounts for 76% of FDI in developed region. North America 19% and other developed countries (4%). n. UK (53%), USA (16%), Netherlands (10%) and Cyprus (8%) are important individual host developed countries. FDI flows in $ million Region/Country 1961– 1970– 1980– 1990– 2000– 69 79 89 99 07 No. of Investing Per cent Firms All Years Value Developed Region 10 3 36 1460 15652 17162 100 1866 European Union 2 3 18 1021 12061 13105 76. 36 857 Cyprus 20 1359 1379 8. 04 36 The Netherlands 0. 01 57 1701 1759 10. 25 79 UK 3 17 798 8353 9171 53. 44 531 8 0 8 175 191 1. 12 49 8 0. 4 7 175 191 1. 11 44 0. 1 17 388 2815 3221 18. 77 1, 156 Canada 5 411 416 2. 42 45 USA 0. 1 17 384 2404 2805 16. 35 1124 43 601 645 3. 76 104 3 596 599 3. 49 74 Other developed Europe Switzerland North America Other developed countries Australia Indian FDI ISID 4
Sectoral Composition n. Service sector dominated manufacturing throughout 1961– 1999 but manufacturing has taken over in 2000– 07. n Software & IT, financial & insurance, and films & entertainment are important services host; pharmaceuticals, food & beverage are important manufacturing host sectors. FDI flows in $ million Industry Primary Ores & Minerals Gas, Petroleum and related products Manufacturing Food, beverages and tobacco Textiles and wearing apparel Basic metals and fabricated metal product Machinery and equipment Electrical machinery and equipment Transport equipment Computer, electronic, medical, precision Pharmaceuticals Services Construction and engineering services Film, entertainment and broadcasting Hospital and health services Financial and insurance Services Telecommunication services Software development, packages and ITES Total Indian FDI All Years 1961– 1970– 1980– 1990– 2000– Per 69 79 89 99 07 Value cent 13 6966 6979 40. 67 1 217 218 1. 27 0. 1 6727 39. 2 1 1 10 501 4468 4981 29. 02 1 2 19 421 443 2. 58 0. 02 1 0. 5 77 153 231 1. 35 No. of Firms Countries 48 8 4 3 14 5 864 29 72 17 180 18 1 0. 1 0. 4 1 0. 3 1 64 41 19 7 364 177 206 238 429 219 225 246 2. 5 1. 28 1. 31 1. 44 62 57 60 54 12 13 15 10 9 1 2 0. 001 0. 02 0. 2 26 10 0. 1 15 135 921 45 473 15 129 319 2334 4200 48 251 177 999 45 334 2470 5158 105 724 177 1014 174 1. 95 14. 39 30. 05 0. 61 4. 22 1. 03 5. 91 1. 01 66 102 1030 51 35 28 67 15 12 18 23 10 7 5 10 4 10 3 5 36 199 1460 2309 2513 14. 64 15652 17162 100 692 1866 21 30 ISID 5
Ownership choice n. 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 Mode 1961– 69 JV WOS Total 1980– 89 JV WOS Total 1990– 99 JV WOS Total 2000– 07 JV WOS Total All Years JV WOS Total Percentage share of WOS Indian FDI European Union Number of OFDI Approvals Total Developed Region Other developed North Percentage Europe America countries Number share to total 1 2 3 3 3 1 5 6 16. 7 83. 3 100 17 11 28 1 1 2 7 15 22 25 27 52 48. 1 51. 9 100 158 283 441 8 10 18 122 327 449 21 15 36 309 635 944 32. 7 67. 3 100 247 1099 1346 13 49 62 390 1689 2079 34 117 151 684 2954 3638 18. 8 81. 2 100 427 1400 1827 22 63 85 520 2032 2552 55 132 187 1024 3627 4651 22 78 100 76. 6 74. 1 79. 6 70. 6 78 ISID 6
Main Indian Investors n 1960 s: 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 Germany; mostly trading and services projects; in 1970 s 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. Company Name 1990 s Zee Telefilms Ltd. Videsh Sanchar Nigam Ltd. Iridium India Telecom Pvt. Ltd. Silverline Industries Ltd. Ranbaxy Laboratories Ltd. Sun Pharmaceutical Industries Ltd. Wockhardt Ltd. Ramco Industries Ltd. NIIT Ltd. Jindal Saw Ltd. 2000 s Dr. Reddy's Laboratories Ltd. Business House Areas of Operation Zee Govt. owned** Ranbaxy Sun Pharmaceutical Group Wockhardt Group Ramco HCL Group Om Prakash Jindal Group Broadcasting & telecasting Telecommunication services Telecommunication Services Software services Drugs & pharmaceuticals Computer software services Metallurgical products Dr. Reddy's Drugs & pharmaceuticals Generators, turbines and other electrical machineries Drugs & pharmaceuticals Non-ferrous metals, investment services Software development services Tea processing and blending Electronics equipments Oil exploration Software development services 7 Suzlon Energy Ltd. Suzlon Ranbaxy Laboratories Ltd. Hindalco Industries Ltd. Trans. Works Information Services Pvt. Ltd. Tata Consultancy Services Ltd. Tata Tea Ltd. Videocon Industries Ltd. ONGC Videsh Ltd. Indian FDI Mphasis BFL Ltd. Ranbaxy Aditya Birla Tata Videocon Govt. owned Mphasi. S ISID
Indian Acquisitions in Developed Region n. Since 2000 s an increasing number of Indian companies are aggressively following the businesses strategy of overseas acquisition in developed region. n. 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. n. 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. n. Regionally, European Union (50% of total acquisition value) and North America (43%) are major host developed sub-regions. n UK in European Union with 37 per cent share and USA in North America with 39 per cent share by far the two largest destinations for Indian brownfield investment in developed region—they together claimed 76 per cent share. n. Sectoral Composition: Manufacturing (79%), Services (15%) and Primary sector (5. 8%). n 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. n IT&ITES (11. 6%) and Telecommunication services (1. 9%) are two important services host sectors to Indian brownfield investment. Indian FDI ISID 8
Drivers and Factors n. Drivers of early growth (1960 s to 1980 s): §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. n. Drivers of recent growth (since 1990 s) §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. Indian FDI ISID 9
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. Indian FDI ISID 10
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. Indian FDI ISID 11
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