Key Players And Factors Affecting Ofdi In India

Published Date: 02 Nov 2017

EMEs have emerged as a source of foreign investment in recent times. It indicates their increasing presence in the global markets and their increasing competence to match up the global standards. A growing impulse for change today is coming from developing nations and economies in transition where private as well as state-owned enterprises are increasingly initiating outward expansion through foreign direct investments (FDI). Companies are expanding their business operations by investing overseas with a view to acquiring a regional and global reach.

According to UNCTAD’s World Investment Report 2011, the stock of outward FDI from developing economies reached US$ 3.1 trillion in 2010 (15.3 per cent of global outward FDI stock), up from US$ 857 billion (10.8 per cent of global outward FDI stock) 10 years ago. On flow basis, outward FDI from developing economies has grown from US$ 122 billion in 2005 to US$ 328 billion in 2010 accounting for around a quarter of total outward FDI witnessed at global level. (UNCTAD, 2011)

We begin by understanding the two closely related terms of Foreign Direct Investment(FDI) and Outward or Reverse Foreign Direct Investment. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. (World Bank Report, 2012)

The concept of reverse investment is viewed from a recent reversing trend of worldwide investments. The investment from transitional economies to developed nations is termed as reverse FDI. The term is coined to specialize in the dynamical trend of investments from developing nations outside their economies.

FDI is a natural extension of globalisation process that often begins with exports. In the process, countries try to access markets or resources and gradually reduce the cost of production by expanding overseas manufacturing operations in countries where certain ownership-specific advantages can help them to compete globally. Adoption of such methods helps them to catch up with competitive economies. A major uptrend in outward FDI has conjointly been ascertained within the case of India in recent years. Since this process may be a two-way, integration of the Indian economy with the remainder of the globe is clear not solely in terms of upper level of FDI inflows but conjointly in terms of steep rise in level of FDI outflows.

The overseas investment through FDI has provided them with better access to global networks and markets, transfer of technology and skills and also enables them to share research and development efforts and outcomes. In the Indian context, overseas investments have been primarily driven by either resource seeking or market seeking or technology seeking motives. Of late, there has been a surge in resource seeking overseas investments by Indian companies, especially to acquire energy resources in Australia, Indonesia and Africa. (Khan, March 2012 ).The Foreign direct investment; net outflows (% of GDP) in India was last reported at 0.78 in 2010, according to a World Bank report published in 2012. (World Bank Report, 2012).

1.1: Positive outcomes of the reforms during the past decade

Liberalisation of industry policy in India leads to a spurt of economic growth and rise in standards of living. In the post-reform phase, India recorded an average economic growth rate of 6.5% per annum and it shoot as high as 8.9% per annum since FY 2003-04.There were a few slumps during the sub-prime crisis, but India still managed to grow between 5-6% during the crisis. (OECD Report, 2007).

The services sector, led by communications, insurance and information technology services, has outperformed other sectors. Knowledge workers in the software industry increased from 56 000 in FY 1990-91 to over 1 million by FY 2004-05. Exports of products in the IT and ITES sectors have grown at an annual rate of 33.7%11 since FY 2000-01 (NASSCOM, 2008).

The uptrend in economic growth was accompanied by robust growth of domestic savings and investment. Gross domestic savings have increased from an average of 21.5% of GDP at the start of reform in FY 1991-92 to almost 37.7% in FY 2007-08. Over the same period, domestic investment rates have increased from 22.1% of GDP to close to 39.1%. The Indian economy has become noticeably more open and globally integrated. The share of combined imports and exports in GDP rose from 13% in FY 1985-86 to 46% in FY 2007-08. (OECD Investment Policy Review , 2009)

1.2: Objective of the study

The purpose of my dissertation is to analyze the expansion in outflows of foreign direct investment from India and the spurt in foreign acquisitions by Indian firms, during the past decade. The economic stimulus and the strategic motive for the internationalization of firms from India were provided by a range of underlying factors driving the process:

market access for exports, capturing international brand names, access to technology, sourcing raw materials and global leadership aspirations.

1.3: Research methodology

This study has exclusively used secondary data source which have been chiefly drawn from the published records of RBI such as RBI Bulletins, RBI website source on Hand Book of Statistics on Indian Economy, world investment reports of UNCTAD etc.. The data collected has been analyzed and presented in the form of tables and pie diagrams.

There are data limitations and data is available in length from 2000 onwards. These data limitations are due to lack of properly defined outward FDI tools by the RBI. Analyzing the current data will help me to forecast the future trends of outward investments from India, suitable portfolios and sectors of investment and policy amendments required to facilitate the same.

Section 2 of this paper discusses the Outward FDI trends in both global and Indian context. In the global context, it can be observed that from the developing nations segment , BRIC cluster is growing tremendously in term of outward FDI , whereas developing nations have always invested in EMEs. India , on the other hand, has shown an upward trend in terms of outward FDI , all beginning post 1991.

Section 3 focuses on major factors and key players affecting India’s outward FDI decisions. There are several factors listed and discussed in full length based on research papers and news articles. We will also discuss the sectoral composition of investments and countries where invested.

Section 4 discusses the location factors affecting OFDI patterns and decisions in full length by India and abroad . Locational factors of the host country have additionally affected the pattern of Indian OFDI. Each factor discussed helps us to analyse and assess an economy before entering into an investment venture.

Section 5 looks at the challenges that lie ahead of the Indian economy in terms of outward FDI. We also point a few suitable policy recommendations for the same. This is inspired from the OECD report of 2009.

Section 6 provides a conclusion to the paper by making certain observations from this whole study of the India Outward foreign direct investments and factors associated with it.

Section 2 : Outward FDI Trends

2.1: Global trends

In the 19th century, the major industrializing economies of North America and Europe expanded outward FDI into natural resources around the world. Before World War II, natural resources FDI accounted to 60% of the international capital stock. Comparing with 1990, natural resources sector accounted only 10% of FDI stock. And 15% of that total was hosted by developing countries. However, 15 years later, in 2004, the share of primary sector FDI capital stock hosted by developing countries doubled to roughly 30%. Today, natural resource outward FDI from all parts of the globe, often targeting developing economies, has continued to increase from 2004 levels.

Over the last 5 and 10 years, there has been a simultaneous and significant increase in FDI flows to the natural resources sector and the sector's share of FDI outflows globally. There have been heavy investments made both inwards and outwards of industrialized and industrializing economies. Outward FDI destined for the natural resources sectors, particularly the extractive industries, increased slowly between 2000 and 2005. The increase at the early part of the new century came from new greenfield investments in oil, gas, metals, mineral exploration and extraction, and from an increasing number of large cross-border M&As. This trend has accelerated between 2005 and 2010. (UNCTAD, 2011)

The financial and economic global recovery still faces considerable challenges, and economic growth around the world remains unbalanced. It seems that FDI outflows shall remain unpredictable in the near future. It make it mandatory to assess and analyse the growing and evolving particular FDI trends that are likely to emerge and outperform throughout the ongoing global financial and economic crisis .

Developing and transition economies are many, diverse, and at completely different stages of economic development. However, in 2010 the share of the highest 21 developing and transition economies, combined accounted for $346 billion or 88% of the overall annual FDI outflows from all 174 developing and transition economies combined, and twenty sixth of the world total (UNCTAD, 2011).Of the 21 rising economy leaders, a smaller cluster of 4 countries stands out and has garnered a lot of attention for its oversize contribution to the shift in international FDI trends. The BRICs as a group are rising as robust FDI supply economies. The BRICs have inflated their outward FDI markedly since 2000, fairing particularly well throughout the monetary and slump.

 

Section 2.2 : Indian trends OFDI

From a historical perspective, it is understood that many firms from developing countries have gone to the foreign shores in 1960s, 1970s and 1980s. In fact, the first overseas Indian venture was a textile mill set up in Ethiopia in 1956 by Birla group of companies. Although this particular project remained abandoned for long years, the pace of Indian investment did not stop with that episode. Rather the spurt has been significant, so much so that the number of ventures including production and implementation had reached 133 in 1976 which further shot up to 228 in 1983 (Ministry of Commerce, 1984). Mid and late 1980s continued to register increase in India’s foreign investments. In 1990 India had become a significant investor abroad by undertaking 229 approved projects. Ample attention was drawn to this when India made a conscious decision in 1991 to open up its economy. India’s tryst with economic reforms and liberalization further solidified this objective as outward investment policy was gradually and progressively liberalized. Presently, India’s total approved OFDI is to the tune of US $16 billion in 2009 (Ministry of Finance ).

For past decade now, FDI from emerging markets has been much in focus. India’s experience also received considerable attention as not only does she have a long experience in investing abroad, but also because it has acquired a large portfolio of foreign investments. It is evident that India failed to pay for her merchandise imports through own exports of goods as the 1991 policy statement had visualized.

Post liberalisation in 1991 ,there have been significant policy amendments from time to time in India to encourage the Indian companies to invest abroad on an increasingly large scale. They can now invest up to four times their net worth under the automatic route. Earlier, Indian companies were allowed to invest up to 100% of their net worth under the automatic route in 2004. This limit was increased to 200% in May 2005, to 300% in June 2007 and finally to 400% of net worth in September 2007. (Reserve Bank of India) To facilitate the domestic investments abroad, Indian banks were allowed in June 2005 to extend financial assistance to Indian companies for acquisition of equity in overseas wholly‐owned subsidiaries and joint ventures or in other overseas companies as strategic investment. It is important to note that the RBI Committee on Fuller Capital Account Convertibility recommended the raising of the limit to 300% during 2007‐08 and 2008‐09 and to 400% during 2009‐10 to 2010‐11. Thus, most of the steps listed above form part of India’s regulated journey on the path of full capital account convertibility.

This steep rise in the outward trends of foreign investments made by Indian companies can be seen in two ways: One is that the firms need to diversify capital in the face of antagonistic investment climate. Secondly, it could be said that Indian companies are trying to acquire and expand their existing operation overseas. In the process they may acquire technology and raw material.However, seen in the context of India’s attuned approach towards fuller capital account convertibility, the perceived objectives/experience may be incidental and not primary to India’s approach towards OFDI.

It is observed that the investments made by Indian firms during the restricted era were mostly multinationals competing in sectors that require simple technology, low product differentiation and more labour intensive techniques. This model of investment has functioned smoothly in developing nations more as compared to developed nations , given the fact that developing nations are less capitalized and not technologically advances. Their pros are beneficial for labor intensive manufacturing setups.

On the other hand , post the liberalized phase there was continual industrialization in the domestic market. This was made possible and was being encouraged my reforms made in the financial and trade policies.This paved way for Indian MNEs to invest globally. They not only invested into developing countries but their OFDI share into developed countries also increased after 1990s so much so that India has been ranked 7th in UK during 2003-04 in terms of creation of job vacancies (Steven, 2006) and number of project initiated through FDI and similarly Indian OFDI is ranked 13th in France in terms of commencing projects into the country.

 

As per RBI Outward FDI Statistics, the stocks of Indian OFDI, the net value of all the productive assets held abroad by the resident of India, have increased to $92407 million from just $ 124 million in 1990. The percentage increase of Indian OFDI stocks is standing at 2nd highest position among emerging countries and this increase is even more than that of developed countries, like Austria, Greece, Ireland and some other developing countries.

Indian outward FDI has three components viz., equity, loans and guarantees. According to recent RBI data, outward FDI by Indian corporate in 2010-11 included $9.3 billion in the form of equity, $7.5 billion in loans and $27.2 billion in the form of guarantees. Indian OFDI during the crisis (2007-08) was double than the amount invested overseas before the crisis advent. Post – crisis , the OFDI was bound to dip and it did for next two years. It was only up until 2010-11 , that it again revived and rose to a record high of $43 billion mostly in the form of guarantees to offshore investment companies. The global crisis caused Indian OFDI flows to fall from their high in 2007, largely because Indian MNEs had borrowed heavily in dollars to finance mega cross-border M&As.So the U.S. economic crisis was bound to have a ripple effect on the Indian investment scenario.

Table 1: Year–wise position of actual outflows in respect of outward FDI 

& guarantees issued

(in million US Dollar)

Period

Equity

Loan

Guarantee

Invoked

Total

Guarantee

Issued

2000-2001

602.12

70.58

4.97

677.67

112.55

2001-2002

878.83

120.82

0.42

1000.07

155.86

2002-2003

1746.28

102.10

0.00

1848.38

139.63

2003-2004

1250.01

316.57

0.00

1566.58

440.53

2004-2005

1481.97

513.19

0.00

1995.16

315.96

2005-2006

6657.82

1195.33

3.34

7856.49

546.78

2006-2007

12062.92

1246.98

0.00

13309.90

2260.96

2007-2008

15431.51

3074.97

0.00

18506.48

6553.47

2008-2009

12477.14

6101.56

0.00

18578.70

3322.45

2009-2010

9392.98

4296.91

24.18

13714.07

7603.04

2010-2011

9234.58

7556.30

52.49

16843.37

27059.02

2011-12*

4031.45

4830.01

0.00

8861.46

14993.80

Total

75247.61

29425.32

85.40

104758.30

63504.05

* April 2011 to February 22, 2012

After assessing the motivational factors that drove the Indian firms to invest abroad , there can be certain observations stated. The key drivers for Indian OFDI is the increasing numbers of Indian firms and their ownership specific advantages , for example , suitable financial environment increasing competence , are among key drivers. In addition, the growing competitiveness of Indian firms involved in providing outsourced business and specially , IT services to overseas clients , has provided a thrust for these firms themselves to go offshore to operate adjacent to their customers. It initiated spreading out their escalating opportunities in markets overseas. Indian firms are investing abroad to access foreign markets, production facilities and international brand names.

For instance, Tata Tea acquired Tetley Tea for access to the Tetley brand name and market. Access to technology and skills has been a strategic consideration for Indian firms seeking to boost their competitiveness and to move up their production value chain. In 2003, WIPRO acquired Nerve Wire Inc. (United States) to secure deep domain knowledge and other IT related benefits, including access to markets. Reliance Infocomm paid money for Flag Telecom (United Kingdom) to access to the undersea cable network and connect with key regions such as Asia, Europe and the United States. Moreover, given the continuing difficulty in acquiring huge territories of land for agricultural purposes and the growing resistance to large mining projects in India, securing natural resources is becoming an important driver for Indian outward FDI.

India is now the world's 13th largest FDI host country and world's 21st largest outward investor with an investment of over US$ 75 billion across the world over the past decade, which is significant given its historically minuscule foreign direct investment (FDI) outflows. Substantial improvements in the country's economic performance and the competitiveness is a result of the liberalisation policies adopted in 1991.Libearalisation is an ongoing process ever since in economic and Outward FDI policies. Indian firms now invest across a wide variety of sectors and countries, departing from their historical focus on trading and textile investments and in labor intensive ventures in developing countries.

India’s membership in various regional integration arrangements Free Trade Agreement, South Asia Free Trade Area (SAFTA), Indian Ocean Rim Association for Regional Cooperation, Indo-Lanka Free Trade Agreement and the imminent ASEAN-India free trade agreements will also provide Indian firms with a favorable platform to strengthen their presence in these partner economies. Government of India’s role in gradually freeing the economy and removing caps on investment limits is an encouragement for investing and rapid expansion of Indian firms. Taking the case of the Indian multinationals, it is concluded that liberalization of Indian economy and globalisation has shifted the direction and location of investment such that Indian firms are investing more in the developed economies as compared to developing ones. In order to give further fillip, Government should support rather than discourage Indian firms in overseas expansion because such expansions will increase home country exports and provide parents firms’ cheaper raw material through backward FDI.

Section 3: Key players and factors affecting Ofdi in india

3.1 : Sources of funding of investments

A trend analysis shows that the level of outward FDI from India has increased manifold since 1999-2000. The level of net outward FDI flows (on BoP basis), however, recorded a sharp uptrend at US$ 74.3 billion during the second half of 2000s (2005-06 to 2009-10) as compared to US$ 8.2 billion in the first half of 2000s (2000-01 to 2004-05). Even though trend in India’s outward FDI was moderately affected during crisis year of 2009-10, a sharp rebound was seen in 2010-11. (Reserve Bank of India). It can be observed from the official data that major sources of financing outward FDI flows in India are through equity and loans. Guarantees issue have been on a rise , their invocation has been negligible during 2009-10 and 2010-11.

As far as policy regarding the funding of overseas investments is concerned, it is allowed in a number of ways. These sources mainly include

purchase of foreign exchange on-shore from an authorized dealer in India,

capitalisation of foreign currency proceeds to be received from the foreign entity on account of exports, fees, royalties or any other dues from the foreign entity for supply of technical know-how, consultancy, managerial and other services,

swapping of shares of Indian entity with those of overseas entity,

use of balances held in the Exchange Earners’ Foreign Currency (EEFC) accounts of Indian entity maintained with an authorised dealer,

foreign currency proceeds through ECBs/FCCBs, and

Exchange of ADRs/GDRs issued in accordance with the scheme for issue of Foreign Currency Convertible Bonds. (Reserve Bank of India).

Importantly, scale of overseas investment by domestic companies has also expanded as India was placed second in 2010 only after China in terms of average size of net purchase deals (US$190 million in India as compared to US$ 197 million in China). Similarly, India also figures among the top five emerging and developing economies whose state owned enterprises are increasingly becoming transnational corporations. It is not surprising as in recent years, India’s Public Sector Units (PSUs), viz.NTPC, GAIL, ONGC and NALCO have undertaken significant overseas green-field investments.

3.2: Sectoral investment trends

India began as an economy focusing on primary sector. With industrialisation shaping up the focus was shifted to manufacturing and it still rejoices a major share in the economy. Meanwhile , with the beginning of the new millennium , service sector also shot up in India. Sectoral pattern of outward FDI during 2006-07 to 2010-11 shows that it has been mainly invested in services and manufacturing sector. In 2010-11, within manufacturing, major sub-sectors which attracted outward FDI from India included agriculture machineries and equipment, basic organic chemicals, drugs, medicines & allied products, refined petroleum products, indigenous sugar, etc. Similarly, within services sector, a majority of outward FDI had gone into business services, data processing, financial services, architectural and engineering, engine architectural and other technical consultancy activities

Table 3: Major sector-wise overseas investments by Indian companies

(amounts in billion US Dollar)

Period

2008-09

2009-10

2010-11

2011-12*

Total

Manufacturing

10.18

5.35

5.04

2.74

23.31

Financial Insurance, Real Estate Business & Business Services

3.55

4.41

6.53

2.53

17.03

Wholesale & Retail Trade, Restaurants & Hotels

1.17

1.13

1.89

1.00

5.19

Agriculture & allied activities

2.38

0.95

1.21

0.41

4.94

Transport, Communication & Storage Services

0.31

0.38

0.82

1.34

2.85

Construction

0.35

0.36

0.38

0.37

1.46

Community, Social & Personal Services

0.39

0.18

0.70

0.18

1.45

Electricity, Gas & Water

0.14

0.84

0.10

0.04

1.19

Miscellaneous

0.12

0.11

0.18

0.10

0.51

Total

18.58

13.71

16.84

8.73

57.86

 * April 2011 to February 22, 2012

Investments trends for acquisition of natural & strategic resources

Sectoral pattern suggests that larger outward investment by the Indian company sector looks to possess been intended by long-run strategic concerns instead of by short profit. for example, ONGC Videsh Ltd., a fully-owned subsidiary of ONGC, presently has overseas assets in 33 projects in 14 countries of geographic area, Africa, CIS & Far East and geographical region. Oil India restricted has presence in eight countries primarily in terms of exploration blocks in Libya, Gabon, Iran, Federal Republic of Nigeria and Sudan. Similarly, Coal India restricted has shaped a subsidiary Coal Videsh Ltd. to accumulate coal assets abroad and conjointly established a venture company International Coal Ventures Ltd with different corporations to accumulate scientific discipline and thermal coal assets outside India. Overseas investments by Indian companies in extractive industries are long term ventures and its returns though huge, flow in only in the long term .These also are imperative to support fast economic process, industrialization and urbanization within the domestic sector and guarantee a long-run, stable supply of natural resources to the country against a background of rising trade goods costs.

Such tendency has conjointly been determined within the case of different major rising market economies, particularly different members of BRIC cluster. The number of corporations investing abroad from the BRIC cluster in the FT 500 list has amplified from 20 in 2006 to 62 in 2008 (Economist, 10 September 2011), replicating their growing overseas business operations. Common feature is that domestic corporations in BRIC economies are wanting forward to reinforce their access to supplies of raw materials and stepping into new segments .Nonetheless, oil and gas and different natural resource-based industries square measure comparatively less distinguished in Indian outward FDI compared thereto by Brazil and China.

Other major overseas acquisitions in recent years by Tata Steel, Hindalco, Bharti Airtel, etc have conjointly been a vicinity of their inorganic growth ways. In these cases, acquisitions were specifically undertaken to realize world size and standing, and to create new competitive benefits by combining the most effective international technology with cheap Indian labour (Raghvendra, 2010)

3.3 : Destinational investment trends 

Direction of outward FDI shows that it is getting more diversified across countries. Contradicting from the past trend (i.e. pre-1990s)of investment from India , when Indian companies were investing in countries with little technological competition, recent trend shows that Indian overseas investment is progressively flowing to developed economies (Table 4), establishing growing confidence of the Indian corporates and availability of overseas assets at competitive rates.

Table 4: Top ten country wise overseas investments by Indian companies

(amount in billions US Dollar)

Country

2008-09

2009-10

2010-11

2011-12*

Total

Singapore

4.06

4.20

3.99

1.86

14.11

Mauritius

2.08

2.15

5.08

2.27

11.57

Netherlands

2.79

1.53

1.52

0.70

6.54

United States of America

1.02

0.87

1.21

0.87

3.97

United Arab Emirates

0.63

0.64

0.86

0.38

2.51

British Virgin Islands

0.00

0.75

0.28

0.52

1.55

United Kingdom

0.35

0.34

0.40

0.44

1.53

Cayman Islands

0.00

0.04

0.44

0.14

0.62

Hong Kong

0.00

0.00

0.16

0.31

0.46

Switzerland

0.00

0.00

0.25

0.16

0.41

Other countries

7.65

3.19

2.65

1.23

14.71

Total

18.58

13.71

16.84

8.86

 

*April 2011 to February 28, 2012

Trend of using SPV or M&A route for investments abroad

Indian firms going for overseas investments have mostly used either their overseas locally-incorporated subsidiaries or have created holding firms and/or special purpose vehicles (SPVs) in offshore money centres or different regional money centres. Whereas overseas investment in developed economies goes in the main through M&As, mode of entry into developing economies is ascertained to be in the main through green-field investments. one in all the explanations for Indian firms to adopt M&As route for foreign investment in developed countries is that markets in these economies tend to be mature and saturated and, therefore, firms like better to gain market share through acquisitions instead of green-filed investments. A recent article printed in ‘The Economist’ (September ten, 2011) points out that massive acquisitions by firms like Tata were the way of reaching the specified scale quickly. Today, Tata cluster firms square measure reportedly the largest manufacturer and employment supplier within UK.

3.4 : Role of Indian banks

Although commonly banks in India aren't allowable to fund the equity contributions of the promoters, monetary help to Indian firms by the domestic banks for acquisition of equity in overseas joint ventures/wholly closely-held subsidiaries or in alternative overseas firms, new or existing, as strategic investment has been allowable. Such policy ought to embody overall limit on such finance, terms and conditions of eligibility of borrowers, security, margin, etc. whereas the Board of the bank could frame its own pointers and safeguards for such disposition, such acquisition(s) ought to be helpful to the corporate and also the country.

In order to facilitate such support of Indian business abroad, the Reserve Bank has increased the prudent limit on credit and non-credit facilities extended by banks to Indian Joint Ventures (where the holding by the Indian company is quite fifty one per cent) /Wholly closely-held Subsidiaries abroad from the present limit of ten per cent to twenty per cent of their intact capital funds (Tier I and Tier II capital). Banks in India were conjointly allowed in 2007 to increase funded and / or non-funded credit facilities to whole closely-held change of magnitude subsidiaries of subsidiaries of Indian firms (where the holding by the Indian company is 51 per cent or more) abroad. Banks, however, have to, among others, make sure that the JV/WOS is found in a very country that has no restriction on getting such foreign currency loan or homecoming of loan/interest and that they will produce legal charge on overseas securities/assets securing such exposures.

Measures taken by the Reserve Bank of India

The relaxation of the overseas investment policy since the year 2003 has been important, given the advance in macro fundamentals, and bias towards structured relaxation of the policy towards capital account rules. Corresponding with the build-up of the interchange reserves of the country, there has been a bigger gap of the overseas direct investment avenues leading to the enhancement within the quantum of overseas direct investment to 400 per cent of net worth. Similarly, the combination ceiling for overseas investment by mutual funds, registered with SEBI, was increased from US$ 4 billion to US$ 5 billion in Sept 2007. This was more raised to US$ 7 billion in Apr 2008. Except for raising the monetary limits, the banking company has additionally automatic the whole method of Unique Identification number (UIN). The automation through a web based application has enabled efficient processing which has reduced the time taken for processing the applications and also improved the management information system.

It may thus be observed that keeping in view the changes in the business environment across the world, Reserve Bank has been proactive in aligning the policies relating to foreign exchange transactions to suit the dynamic business environment .In June 2011, the Reserve Bank allowed Indian parties to disinvest their stake abroad without prior approval, where the amount repatriated on disinvestment is less than the amount of the original investment, subject to certain conditions. Since July 2011, the Reserve Bank has been disseminating the data in respect of outward FDI on a monthly basis. It is a remarkable development and will avoid future limitations of data availability in terms of Outward FDI.

3.5: Measures taken by Government of India

Honoring the needs for promoting overseas investments, the Government of India has framed strategic plans aimed at supporting smaller players. The Department of Industrial Policy and Promotion (DIPP) has identified South East Asia, Eastern Europe and Africa as zones where Indian companies would be encouraged to acquire assets as well as buy-out of companies. Also, in 2011, the Government of India sanctioned a policy to support raw material asset purchases made by select public sector undertakings (PSUs) abroad. This is done in wake of declining raw materials asset allocations and investments. Under the revised policy, the investment limit for 'Navratna' firms has been raised to ` 30 billion from`10 billion for any asset buy-out and for the ‘Maharatna’ firms, the limit has been set at `50 billion. Government approval would be needed for any additional amount beyond this limit.The government is currently evaluating proposals to facilitate acquisition of strategic assets, particularly the energy sector, through a special investment vehicle or through cash rich PSUs in the field.

Section 4 : Locational determinants of Indian OFDI (Pull factors)

The sub-theme of the present study deals with those locational factors of the host country that have additionally affected the pattern of Indian OFDI. beside others, a number of the vital pull factors square measure market size, rate of growth, inflation, physical distance, taxes and investment treaties of the host country. It ought to be noted that besides these mentioned variables, another variables and the host country previous record is additionally greatly vital. Besides government current policies, the business history of the host country makes the choice straightforward for foreign MNEs to make investment (Lall, 1996). The section below throws light-weight on the importance and influence of these variables that have attracted Indian OFDI.

Market Size : Regional integration agreements like European Union (EU) and North American Free Trade Agreement (NAFTA) have also made the most attractive regions for Third world MNEs due to their larger size, high per capita income and agglomeration economies (UNCTAD, 2006:155; Geppert et al., 2005). Such regions generate positive externalities and ultimately attract FDI inflows. After investing into one country, firms also enjoy the privilege to cover other member countries through exports. Besides the motive to take a position into most inhabited and agglomerative economies, Indian MNEs have additionally endowed into those markets that paved their approach for augmenting assets, learning new technology and management, obtaining name and native network.; same is that the case with Indian MNEs. They have exploited their Firm specific ownership advantages into larger markets providing them enough chances to establish

Real GDP Growth

It has been explained by both theory and empirical research that there exists a positive relationship between foreign direct investment and GDP growth. GDP growth is an indicator that market is progressing and it has a potential to absorb FDI for rising demands. More growing markets provide relatively more opportunities for generating profits as compared to those which are growing slowly or not at all . This means that emerging market economies or developed highly industrialised nations having high rates of growth are good avenues of diverting investments to. India has invested in both EMEs and developed nation investment drive is also on a rise.

Real Exchange Rate

To determine the precise relationship between rate and FDI could be a various development but usually, stable rate attracts more of FDI. However, things is

not continuously ideal, some times; rate is overvalued or undervalued. Depreciation or

appreciation of the currency affects not solely FDI however additionally influences exports and imports. Theoretically, overvaluation within the currency of home country encourages FDI outflows and valuation attracts FDI inflows i.e. once the currency of home country depreciates vis-à-vis currency of the host country appreciates; it makes production less costly in terms of foreign currencies and will increase FDI influx. Devaluation within the home currency additionally enhances exports due low costs of domestic merchandise in terms of foreign currencies and stimulates FDI.

Distance from the host country’s capital :

The Distance from the house country is another necessary variable that affects the choices of OFDI, as a result of which corporates would favor to take a position in those countries which are nearer to their parent firm and existing network. Theoretically, Johanson and Vahlne (1977) have explained totally different stages of internationalization of a firm: because the domestic market grows, native corporations tend to take a position into their neighboring countries nearer to the house market having social, economic and political atmosphere almost like their home. Later on, once these corporations have developed additional possession advantages, they struggle to find into advance countries. The geographical pattern of the Indian OFDI is additionally inline with the above theory because it changes throughout the 2 periods (Before 1990 and after 1990). Throughout the restricted section, principally Indian OFDI (in terms of quantity and projects) was discovered in neighboring and fewer developing countries wherever the social, economic and political state of affairs was less or additional equal as that of Republic of India whereas , throughout the post 1990s , Indian firms have invested for the most part into developed countries.

Natural Resources

The resource base country plays a very important and crucial role within the decision of

multinationals to invest in. An enormous literature explains that MNEs are motivated as a result of the availability of natural resources. Natural resources are also within the type of minerals, petroleum, timber, workplace and agricultural merchandise. MNEs try and secure the cheaper inputs (raw material, minerals, crude oil etc.) for their parent corporations through backward vertical FDI. MNEs from rising markets and principally state owned enterprises are rapidly participating in resource seeking FDI as a result of rising demands reception and augmented costs of natural resources.

Governments have completed that for continual FDI inflows, stable prices and sustained stock of inputs are necessary conditions. Several TWMNEs investment into natural resources are state-owned enterprises. It is proved through empirical observation that natural resources attract FDI in to the country. Generally, countries prevalent with natural resources attract additional FDI inflows.

Investment treaties and FDI

Countries have bilateral trade relations not solely within the variety of export and import however they additionally sign investment treaties (bilateral investment treaties and double taxation treaties), which play an equivalent role in encouraging the OFDI. If exports and imports are taken into consideration to measure the trade intensity, we may be misleading because we are not considering those investment treaties that officials of both countries made to encourage investment.

Generally, bilateral investment treaties and double taxation treaties are used to measure the role of investment treaties with OFDI. These treaties also are distinguishable from trade as a result of they entirely depend on governments and companies will simply follow.

This report further concludes that regional agreements among the Association of Southeast Asian Nations(ASEAN) countries have inspired FDI within the region. So as to spice up OFDI, Indian government has signed variety of regional and bilateral agreements that provided Indian MNEs enough prospects to become world player.

Sections 5 : Challenges and Policy Recommendations

5.1: Investment policy framework of India:

According to the first OECD Investment Policy Review of India shows great progress in building a successful policy environment to encourage investment and the resulting acceleration in FDI inflows and outflows for economic growth. It highlights progress in three areas:

First, the restrictive framework: India has created immense steps in improving its regulatory investment environment: the "license raj", which shackled industry with numerous unnecessary permits, has been largely dismantled. Crucial problems for investors have began to be tackled by the Indian Government, like IPR protection that has been reinforced. The Competition Commission has simply started work this summer and also the company governance framework has been improved.

A more open trade regime is replacing import substitution and protectionism. Much of the economy has been opened to foreign investment. Sectoral FDI restrictions are mitigated and foreign ownership caps upraised. Since 2000, the FDI regime has been an OECD-type "negative list" approach during which all sectors not on the list are open to foreign investment. In most manufaturing sectors 100% foreign ownership is currently attainable and much FDI currently comes through the "automatic route". Foreign exchange restrictions concerning investment are relaxed.

Second, public ownership of industries was substantively reduced as many sectors which were previously reserved for the public sector have been opened to private enterprises, including foreign investment.

Third, experimental economic zones have been set up to test further investment liberalisation measures. The government has concluded many bilateral investment promotion agreements and double taxation avoidance agreements since the mid-1990s.  Foreign-owned companies are now taxed the same as domestic enterprises.

 In short, the overall framework for investment, both domestic and foreign, is becoming more supportive in order to reap the full benefits of FDI for India’s growth perspectives.

5.2: Challenges for Indian Investment needs

Investment in infrastructure and manufacturing

However, India’s investment needs to stay large, particularly visible of the country’s inadequate infrastructure that imposes restraints each on enhancements in living conditions and on productivity growth. Also, whereas India’s exports of services, together with those of the IT sector, are highly successful, and also the country has continued to export labour services, its export producing is much below potential, given India’s resource endowment, particularly its large labour force. This can be a mirrored image of the underrepresentation of the producing sector within the economy as an entire. At the same time, growth rate of employment has lagged behind the economic process rate and obstacles remain to the expansion of activity and therefore employment within the formal sector. A lot of investment will promote employment growth so facilitate raise the incomes of India’s poorest families.

Investment restrictions may be holding back productivity growth

Although the policy framework for FDI in India has been greatly liberalized since 1991, it remains restrictive in comparison with a majority of OECD countries, as shown by the OECD’s FDI Restrictiveness Index. Many of the current FDI restrictions in place apply to relatively low-productivity sectors where growth could be accelerated by the enhanced productivity that would benefit from increased foreign investment, for example in banking, insurance and especially retail distribution, where the influx of FDI could help raise incomes in the agricultural sector while increasing choice and lowering living costs for consumers.

 

Implementation gaps need to be narrowed to reduce regional income disparities :

While each economic process and investment are spectacular since 1991, regional inequalities haven't solely persisted however have typically been aggravated as a results of economic reform. This trend must be reversed if the govt. is to achieve its goal of achieving pro-poor growth and reducing inequality. Poorer and slower-growth states could begin to catch up with their richer neighbors by fast implementation of policies adopted at the central level to market investment. Take an example, while the central government has reduced the amount of approvals required for brand spanking new investment, there remains a requirement to streamline administrative procedures at the state level.

 

Improve the nationwide investment Environment

At the same time, there seems to be some potential for narrowing implementation gaps at the central level. For example, while great progress has been created in IPR protection, the capability of the system to handle such cases in a very timely manner remains insufficient, and though a contest Law was passed in 2002, the ensuing Competition Commission solely became operational in mid-2009.

Improvements in FDI statistics can support effective regional analysis and informed policy decisions

Current official statistics give a lot of detail on the origin and application of FDI in India and enhancements still be enforced. However, there's still no consistent reporting and publication of FDI inflows to the states and union territories. FDI inflows are recorded at Reserve Bank of India (RBI) regional offices, however there's no record of the ultimate destination. The FDI inflows to every state are so not effectively recorded by the RBI. Many countries keep their own records of FDI inflows, however there's no guarantee that the methodology used is consistent across states, and a few states might not have the capability to take care of a daily reportage system for FDI inflows, that the offered information for cross-state comparisons are likely to be incomplete and of variable quality. This makes it challenging to analyse and assess India’s inflows and outflows of FDI and thus does not facilitate in policy making.

 

 

 5.3: Policy recommendations:

Policy options to address these challenges .The government of India may wish to consider policy options to address these challenges, including:

Relaxing the restrictions further on inward and outward FDI wherever public interest objectives will be achieved by non-discriminatory means that, as well as foreign ownership ceilings in sectors like banking, insurance and retail trade, and frequently reviewing remaining FDI restrictions to determine that their prices don't outweigh their expected advantages.

Developing a system of comparable FDI statistics for states and union territories as a basis for cross-state observation of FDI performance.

Conducting a study into the look of mechanisms that may be used by central government to induce states to contour investment approval procedures.

Conducting a study associate or establishing an inter-state forum to judge the prices and advantages of investment incentives, their transparency and their impact on alternative states, using the OECD’s listing for Foreign Direct Investment Incentive Policies as a reference.

Strengthening implementation of measures to reinforce corporate transparency and responsibility to align India a lot of closely with internationally-recognized standards and practices.

Success of outward investment comes would conjointly depend upon the business cycles within the world economy. AN outward FDI project undertaken throughout upswing phase of business cycle might not stay viable throughout downward section. as an example, MNCs in operation in sectors, viz., automotives, metals and chemicals tried to be quite sensitive to adverse shocks of recent world crisis (UNCTAD, 2009). Hence, although direct investment is mostly undertaken with lasting interest within the host economy, companies, have to be compelled to recognise the degree of sensitivity of their business activity to the global business cycle as well.

Section 6 : Concluding Remarks

The increasing engagement of the Indian corporations within the world markets is not only a sign of the maturity reached by Indian business however conjointly it expresses the extent of their participation within the overall globalisation process. Generally international investments are created in 2 forms : Merger and Acquisition (M&A) and Greenfield investments. There are four dominant ways that (Pradhan, 2006) during which overseas acquisitions will have an effect on the competitive strength of the Indian corporations.

First, it may be a method to achieve access to firm-specific assets like new product, brands, technology and skills, thus, augmenting competitive assets base of the Indian companies. Second, it will offer easy accessibility to an existing market in foreign countries like client base of an overseas company. Third, Indian companies may get access to promoting and distribution channels of the overseas entity. Fourth, the Indian company might enjoy operative synergies from overseas acquisitions. Self-grownup Indian MNEs acquired stake in overseas companies aggressively so as to unfold their wings and become the worldwide players. Indian MNEs still invest in developed-country based corporations,particularly now that they are more affordable due to the global crisis .

Greenfield investment as an internationalization strategy intends to maximise competitive gains for Indian companies. First, the role of Greenfield investment as a medium of increasing economic gains from the competitive assets of the Indian companies through overseas production. Secondly, companies undertake Greenfield investment to design trade-supporting networks aboard, which may in turn allow exploitation of competitive advantages via enhanced exports from India and last, Greenfield investment is undertaken source of quality raw materials and intermediates from aboard which can successively facilitate in rising productivity and competitive strength. Hence, there is a great merit in undertaking Greenfield investment to boost overseas marketing and trading presence of the Indian companies to support export activities. The expansion in FDI outflows in extractive industries has been due to the rising demand for oil and gas and minerals of India in to support its rapid economic growth, industrialisation and urbanization, as well as by the need of both governments and companies to guarantee a long-term, stable supply of natural resources in the wake of rising commodity prices.

 There exists a school of thought that apprehends that overseas investment by Indian company is at the value of on-shore investment. one of the apparent reasons acting as an obstacle degree for corporations to undertake on-shore investment might be the policy and procedural constraints. Any economy that follows a standardized approach to capital account convertibility may additionally impose certain controls in permitting outflows. To the extent that such obstacles are within the interest of the economy, this can need to be thought of as policy prescriptions. Since the Indian corporates are becoming progressively competitive, they will sharply explore economic process opportunities as a part of their future growth plans. Outward FDI associated with acquisition of strategic resources, enlargement of market base, leveraging new investment technologies for native markets, etc. would facilitate long term growth in India and absorption of technology by Indian corporates along with enhancements within the social control skills. At the same time, through such overseas investments, Indian corporations would play a crucial role within the developed as well as developing countries by rejuvenating the economies and providing employment.

According to a recent Report by PricewaterhouseCoopers (2010), India may well be the most important source of rising market multination enterprises (MNEs) by 2024.By this time, range of MNEs in India would be more than China by 20 per cent, and over 2,200 Indian corporations are likely to take a position overseas within the 15 years. The Report additionally expects that there'll be further shift away from intra-regional investment in alternative rising nations and towards a larger share of latest multinationals going on to the advanced countries. the Report projects that India MNEs are likely to make a niche in business services and high value manufacturing sectors.

It is, thus, imperative that everyone the stakeholders as well as the govt, the bank, and Indian corporates collect their collective expertise and knowledge to perpetually review the policies and procedures as well as Home Country Measures (HCMs) that will more facilitate our globalization efforts through outward FDI without adverse implications for immense domestic economy and its macro-economic stability.

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