The Gist of Yojana: February 2015
Why Do Indian Firms Go Abroad ?
In recent years, India and China have not only liberalised
their FDI regimes, but also emerged as investors abroad. Although, the volume of
India’s investments is much lower than that of China, the composition of India’s
FDI, centered on manufactures and services, its heavy presence in the developed
countries, its method of entry into foreign markets based on acquisitions
principally the UK and the US, sets it apart from the other emerging economy
Size and Pattern of India’s Investments Abroad
The total stock of India’s FDI increased from a meagre $124
million in the year 1990 to $ 111,257 million in 2011 with a share of 3 per cent
in the total Overseas Direct Investment (ODI) stock of the developing countries.
India’s ODI is significantly different from that of China in its
composition-whereas a large proportion of China’s investments is in oil and raw
materials, India’s investments are in manufacturing and services.
Third, more than 50 per cent of India’s ODI is in the developed economies while
more than 75 per cent of China’s ODI is in the developing economies.
By the end of the year 2008, India was the second largest investor in the UK,
next only to the US.
Fourthly, the growth of India’s ODI is mostly through
acquisitions. In the year ending in August 2010, India was second in the list of
the ten most acquisitive nations, with a share of 24 per cent of cross-border
M&A transactions originating from emerging economies.
The latest tests of the OLI theory relate to ODI from India
and China (Pradhan 2011, Buckley et.al, 2007; Kumar, 2007 & Nunnenkamp et.al,
2010). The pioneering studies relating to India are those by Jayaprakash Pradhan
who has (2008,2011, 2004). painstakingly put together a set of data from a
number of sources including the media and unpublished data from government
Pradhan’s analysis suggests that high labour productivity, R
and D expenditures, managerial skills as defined above, exports and the post
1991 liberalisation measures are all factors in the decision of Indian
manufacturing firms to go abroad. It is arguable whether or not these results
endorse the proposition that Indian firms venturing abroad possess ownership
advantages of the sort that the OLI theory emphasizes. High labour productivity
of the Indian manufacturing firms flows from the relatively high capital
intensity of their production process and their heavy presence in industries
that are typically capital intensive.
On top of the list of variables included in Pradhans’
analysis of ODI by Indian firms is managerial skills. Indeed, managerial
expertise of Indian firms is an ownership advantage that influences firms to go
abroad. But managerial abilities that consist of a variety of attributes are not
easily quantifiable. Pradhan quantifies it by regressing profits per unit of
assets of firms on age, size, R and D, royalties paid for imported know, how,
sales expenditures and a set of dummy variables for type and ownership of
industries and sector.
The statistical results referred to earlier suggest that
firms with large profits tend to go abroad. But not all firms with large profits
may be able to do so. Indeed, it is likely that many of the firms that have
invested abroad may have raised funds for investment in international capital
markets. Those Indian firms that have ventured abroad enjoy a unique ownership
advantage that can be termed entrepreneurship that includes managerial
efficiency, risk taking, forecasting and identification of new markets to name
‘only a few of the attributes of entrepreneurship. Indian firms may be unique
amongst the firms of the emerging economies in this respect. How and where do
these unique attributes of Indian managers come from?
The Unique Attributes of Indian Firms That Go Abroad
It is impossible to generalise on the factors that influence
firms to go abroad. The one reason most firms from emerging markets invest
abroad is to acquire technological capabilities inherent in existing firms- this
is the so called asset seeking motive for ODI. The acquisition of existing firms
requires managerial efficiency, but it is not the kind that is referred to in
the statistical studies. They are of a different order and include
identification of the nature and productivity of the assets that the targeted
firms possess, their market potential, risks involved in operating abroad and
above, all the ability to manage operations in a foreign locale.
Additionally, the acquired firms may have to be revived, they
may possess production oriented advantages but may be ailing because of their
inability to explore and develop markets. Indian managers investing abroad seem
to possess these sorts of skills, or to use an expression coined by Keynes
“animal spirits” of entrepreneurs. It is such entrepreneurial talent that seems
to have led several Indian firms, to raise the capital required for their
investments abroad in international capital markets.
The entrepreneurial instincts and expertise of Indian firms
is to be traced to several unique features of the Indian economy. Foremost of
these is the inheritance from history. India has had a long history of business
entrepreneurship marked by its caste and community orientation. Foremost amongst
these groups are the Banias and the Marwaris, primarily merchants and money
lenders with a prominent role in financing India’s foreign trade during the
British colonial era. The Parsis who had no religious affiliation with either
the Hindus or the Muslims were in a class of their own. They provided a link
between the British and the Indian business houses.
The second factor that has contributed to the development of entrepreneurial
talent amongst Indian firms is the existence of business groups, mostly of the
family orientation. Three quarters of the number of foreign acquisitions
estimated at 1347 during the period 2000-2008 are reported to be undertaken by
group affiliated firms as opposed to stand alone firms. This reflects the
superior advantage enjoyed by business groups over stand alone firms that enable
them to efficiently internalize market externalities.
A third factor that has contributed to the entrepreneurial
skills of Indian business is the system of education, unique to India, from
historic times to the present day. As Tirthankar Roy (2011) notes, the education
system in India during the colonial days was caste based and dominated by those
who wished to enter the professions. It was thus that the elite caste groups
advanced from primary to higher education and the system catered to their needs
and primary education for the population in general was ignored. It is the caste
based education, primarily oriented towards the civil service and the
professions, which laid the base for the growth of the services economy and
software in the services group, which is one of India’s major investors abroad.
A fourth factor that has contributed to the growth of
managerial expertise of the Indian business houses is the presence of India’s
diaspora in the UK and the US. Available data for the later part of the last
decade shows that there were 1.6 million Indians in the UK accounting for 1.8
per cent of total population of the country and in the US, there were 2.8
million Indians accounting for 0.9 per cent of US population.There may be two
other explanations for this spectacular growth of Indian investments abroad.
First, it may be easier to operate in the business environment abroad than that
Second, the attraction of foreign markets in the presence of
a fairly lucrative domestic market in India has echoes of Britain’s experience
during the second half of the 19th century. During the period 1870-1914, Britain
exported substantial volumes of portfolio capital mostly to the colonies, the
total stock of British capital abroad in the year 1914 is estimated at $20
In sum, the sort of skills Indian entrepreneurs possess that
serves them well in their quest for investment locales abroad are an inheritance
from the country’s history – entrepreneurial and business skills from the
colonial days and the engineering and human skills form the more recent past –
the post-independence years. These skills were locked up during the days of the
license Raj that lasted for more than three decades until the year 1991. The
economic liberalisation measures let the genie out of the bottle. They liberated
the entrepreneurs from the sort of dull and dreary chores of coping with rules
and regulations and provided an environment for risk taking and facing the
challenges posed by competitive markets in a globalised world.