India

1
Indias 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

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Evolution of Indian ODI
First wave pre-1990s Second wave 1990s Third Wave 2000-
Motivations Market-seeking Trade supporting Strategic assets and natural resources seeking
Sectors Low technology light engg., palm oil refining, rayon, paper IT services, pharma., etc. Metals, pharma, auto,
Magnitudes Small Moderate Large
Entry modes Greenfield Greenfield acquisitions
Destinations Asian and African low income countries Similar to exports Resource rich and strategic resource rich countries, e.g. UK, USA, Russia, S. Korea, Singapore
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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 Steels 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. Thomsons 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 RD
  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

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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

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Findings

• LEARNING, TECHEFFORT, BRANDS strong positive
  effect
• SIZE inverted u-shaped effect
• EXPORT strong positive effect
• MACHIM ive effect
• 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

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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

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Thank you