The Hindu Business Line : Going global with outbound FDI

Ranbaxy's takeover of Romania's Terapia and Tata's $3-billion investment in Bangladesh, the largest in that country, clearly show up Indian corporates' ambition to become multinational corporations. With these Indian MNCs' overseas investments on a rise, the inbound Foreign Direct Investment is being swamped by outbound FDI that reached $4.5 billion in 2005, against $4.3 billion of the former. Yet, the talk is invariably about promoting inbound FDI.

Outbound investments are the new routes for Asians to go global. According to Unctad's World Investment Report 2005, developing nations emerged as the major sources of FDI. China led the charge, with FDI outflow of $5 billion in 2004, up from from $0.7 billion in 2001.

Going global

China is a good example for going global by investing. China made a policy shift from attracting FDI to making investments with the dual objectives of transforming its companies into MNCs and to feed its resource hunger. China's globalisation has so far been driven by foreign entrepreneurs and not by Chinese companies. Though China is the world's shopfloor for consumer durables, few of its brands are known globally. China has been striving for a global brand image through mergers with, and acquisitions of, international MNCs.

India has also been on an outbound FDI binge, thanks to the foreign exchange reserves it has accumulated and the strong economy. Its stock of outbound FDI spurted in the past few years, to $7 billion in 2004-05 from $600 million in 1995-96. Most of these investments were in the manufacturing sector.

India is placed 20th among developing countries in terms of outbound FDI stock. India's rank improved to 61 in 2003 (close to China's 58) from 107 in 1999 in the outward FDI performance index of Unctad. According to Mr Mark Dolan, Deputy Director, Inward Investment, UK Government, India is now the second biggest source of FDI into the UK from Asia in terms of projects and job creation, and seventh in terms of FDI inflow in the UK from the world. In France, India ranked 13th in terms of projects and job creation from the world.

Major investors

Indian companies are flying high in the global investment market. The top 92 Indo-American joint ventures generated $2 billion and provided full-time employment to about 19,000 people in 2002.

Indian companies acquired 120 foreign firms during 2001-03, worth $1.6 billion. More and more Indian companies are getting listed on the New York Stock Exchange, Nasdaq and the London Stock Exchange.

The major destinations for India's outbound investment are the US, Russia, Mauritius, the UK and Sudan. The US emerged the most attractive destination for Indian investors, accounting for a fourth of all outbound investments approved during the last 10 years. The US was followed by the UK and British Virgin Islands, which accounted for one-fifth of all investments approved in the last 10 years.

Differing reasons for globalisation

However, factors contributing to India's going global are different from those for China. India went global to pitch for a bigger stake in the world knowledge-based industry market, unlike China, which sought to establish its brand image for manufacturing products and to feed its hunger for resources. Nearly 170 Indian IT companies have set up sales and marketing offices in the US and an overwhelming number is setting up R&D centres there.

In Singapore, more than 450 technology enterprises are Indian companies. India's rich human capital is the bedrock for its knowledge-based industry.

Indian pharmaceutical companies are making forays in the global market. During 1998-2003, the share of Indian applications to the US' Food and Drugs Administration (FDA) for selling bulk drugs in the US rose from 1.8 per cent to 6.2 per cent.

Besides securing market penetration, access to technologies was another motive for Indian MNCs making overseas acquisitions. Wipro acquired the US company Nerve Wire Inc to gain domain knowledge in IT-related technology. i-flex solutions acquired US Supersolution Corporation for access to technology and knowledge.

However, India, like China, is also on a global hunt for energy security. The yawning gap between the energy demand and supply forced Indian companies to make overseas investments in oil procurement.

ONGC Videsh Ltd — an overseas arm of ONGC — has invested in over 15 countries through oil equity investment. Only 30 per cent of India's crude oil demand is met by domestic resources and 70 per cent is imported.

Chinese brand image in tatters

China's GDP growth rate may be great thanks to FDI inflows, but not its manufacturing industry or brand image. This should be a lesson for India that too much dependence on FDI inflow has a dark side too, unless the domestic industry grows alongside and builds up its own brand image in the world market.

Outbound FDI is the vehicle to enhance exports and build domestic brand image. The experiences of Korean outbound FDI are noteworthy in this perspective. A decade ago, people hardlyknew Korean brands such as Hyundai, LG and Samsung. Now they have overshadowed the Japanese global brands. Similarly, Japan was forced to shift to overseas investments after the Plaza Accord to sustain its brand image in the global market.

India may soon join the `capital convertibility' club. This will accentuate the scope for outbound investment. The policymakers must ponder over an active outbound FDI promotion framework as a strategy for export promotion and an attempt at globalisation.

(The author is Adviser, JETRO, New Delhi. The views are personal.)

More Stories on : Foreign Direct Investment

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Taxing zones

Triggering the right growth impulses

Because derivatives are merely contracts, just about anything can be an underlying asset

Secondees, on second thoughts

M&A with a foreign company

The Company, a tragedy

Going global with outbound FDI

Safety norms at Defence airfields