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The increasing number of home-grown firms such as Tata Group, Infosys, Ranbaxy and their improving ownership-specific advantages including financial capability are among the key drivers.

New Delhi , Oct. 23

EVEN as India's inflows of foreign direct investment since 1991 till 2003 amounted to $29 billion, India's outward FDI stock has grown from $0.6 billion in 1996 to $5.1 billion in 2003, catapulting the country to 14th slot in terms of outward FDI stock among developing economies.

The UN Conference on Trade and Development (UNCTAD) in a new report released on Thursday said that India has become an important source of FDI to the South Asian region and other countries. Indian outward FDI in information technology (IT) and software service are likely to grow rapidly with countries such as Belgium, Canada, China, Japan and the UK courting Indian IT companies to invest in their shores.

India's annual average outward FDI flows during 2001-03 reached $1.1 billion, which were comparable to those of Malaysia and almost double those of Greece, a member of rich countries' club the OECD. Most Indian FDI is in manufacturing but FDI in IT services has begun to grow rapidly through mergers and acquisitions (M&As). "The increasing competitiveness of Indian firms and their interest to expand globally in IT-related services and pharmaceuticals, are driving its outward FDI growth" according to Mr. Karl P. Sauvant, Director of Unctad's Investment Division. Access to markets, natural resources, distribution networks, foreign technologies and strategic assets like brand names are the main motivations, Unctad said.

The increasing number of home-grown Indian firms such as Tata Group, Infosys, Ranbaxy and their improving ownership-specific advantages including financial capability are among the key drivers. Indian firms are investing abroad to access foreign markets, production facilities and international brand name. Access to technology and knowledge has been a strategic factor for Indian firms seeking to strengthen their competitiveness and to move up their production value chain, Unctad said.

India's membership in various regional integration arrangements such as BIMSTEC (Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation), South Asia Free Trade Area, Indian Ocean Rim Association for Regional Cooperation and FTAs with Sri Lanka and ASEAN would provide Indian firms with a favourable platform to beef up their presence in these partner countries.

The most crucial destinations of Indian outward FDI till date are the United States, which accounted for 19 per cent of total cumulative outflows during fiscal years 1996-2003 and the Russian Federation, with 18 per cent of the cumulative outflows, a share that includes the $1.7 billion acquisition of a 20 per cent stake in Sakhalin Oil field by the Oil and Natural Gas Commission (ONGC) in 2001.

Two tax havens, Bermuda and British Virgin Islands, together accounted for 11 per cent of cumulative outward FDI followed by Mauritius (9 per cent). The double taxation avoidance treaty between India and Mauritius appears to have encouraged Indian firms to "round trip" investment through Mauritius and other tax haven countries to take advantage of the tax benefits enjoyed by overseas investors, Unctad said adding that recent steps aimed at taxing in India companies resident in Mauritius that are also resident in and effectively managed from India should diminish the round-tripping phenomenon.

Stating that FDI in new service industries is causing a change in the geographical and industrial pattern of India's outward equity flows in the services sector, the Unctad said that Singapore,

Thailand, Sri Lanka and Malaysia took the lion's share of outward FDI in-services from India during 1975-90. However, by the 1990s, most Indian FDI in services was concentrated in developed countries, the United Kingdom and the United States. The top 15 Indian IT software and related service companies have all invested abroad, mostly in developed countries.

In recent years, cross-border M&As have become a new mode of overseas market entry for Indian companies in the services sector. During 2000-03, Indian companies were involved in 182 overseas M&As as compared to just 60 in 1996-99.

Most of the deals were in the US and the UK with M&A strategies being prominent in the IT software services and pharmaceutical industries.

More Stories on : Mergers & Acquisitions | Foreign Direct Investment

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