The Second Wave of Indian Investments Abroad

Abstract

This article makes an assessment of the recent international expansion of Indian companies by contrasting it to the earlier – much more modest – wave of investments abroad. It also traces the evolution of the Indian government's policy towards outwards investments and makes the claim that an important reason for the rise of investments abroad is the gradual relaxation of the Indian government's restrictions on capital outflow after the economic reforms of the 1990s. The new Indian investments abroad are characterised by being dispersed over a very large number of countries and economic sectors and – most remarkable – Indian companies are now also targeting the markets in Europe and the USA through acquisitions of local companies. At the same time, Indian companies have continued to expand their presence in other developing countries, where their activities may contribute to both economic progress and a reduction of economic dependence on relations with developed countries.

Key Words:

• Transnational corporations
• Third World multinationals
• South-South relations
• India
• globalisation

Notes

The first academic attention to the new foreign investments by firms from developing countries can be traced to Lecraw (1977), several contributions in Agmon and Kindleberger (1977), to an aptly titled article by Heenan and Keegan (1979) in the Harvard Business Review, “The rise of third world multinationals,” and to O'Brien (1980). The first substantial overviews came in Kumar and McLeod (1981) and Wells (1983).

One can get a good overview of the international, political struggle of developing countries through their official documents and declarations (see Ministry of External Affairs, 1983). The theoretical debate is represented in the contributions in Khan (1986). The establishment of The South Centre in Geneva was an outcome of this process (see http://www.southcentre.org).

This comes out clearly in various documents published by the Indian Investment Centre (see IIC, 1981b).

As a consequence of this simplification, the Indian Investment Centre was later abolished.

UNCTAD (2004) provides a list of 46 treaties concluded before 1 January 2003. This list may be compared to the much shorter list of 17 treaties in the early 1980s cited in Agrawal (1984: 30) and the somewhat longer list of 37 from 1992 in NABHI (1993: 178).

The maximum for annual approvals during the first wave had been in 1977, when 49 projects were approved.

Sources differ on the date of the investment. Some say it was approved in 1955 (Morris, 1987), others in 1956 (Lall, 1986) or in 1959 (Agrawal, 1984). The mill started operating in 1960.

For example, Ranganathan (1988: 37–9) provides a list of 56 foreign investment projects not listed by the IIC in 1987.

The devaluation of the Rupee in July 1991 has probably inflated investment figures after this date, but its overall impact on investment data is difficult to determine. The Rupee went from 21.0 to 25.5 per $US, a devaluation of more than 20% and it continued to decline slowly in the following years.

Overseas investments, especially the recent acquisitions of large foreign companies, are financed through a variety of sources and they are not all captured in the balance of payment statistics. These statistics thus understate the true magnitude of foreign investments.

Some of these examples are mentioned in UNCTAD (2004). Others are from the daily press, mostly India's premier financial daily, The Economic Times (online version).

The assessment was based on investments abroad before July 1971. It is of interest to note that at the time Southeast Asia was regarded as a promising new area for investments abroad. The subsequent increase in investments happened in precisely that region.

The early studies mentioned here were largely descriptive, and did not make any attempt to assess the general validity of the potential causes behind the investments. They also mentioned many more specific causes associated with individual investment projects.

The study was based upon questionnaire responses from 12 companies and interviews with six companies in 1973.

The other forms of technology exports were: industrial project export, civil construction contracts, consultancy exports and licensing of technology.

This comes out most clearly in his detailed analysis of a sample of 17 cases of investment projects in the manufacturing sector, supplemented by extensive interviews with company managers (Lall, 1983). While outwards investments could be described usefully using Dunning's (1981) descriptive parameters of Ownership, Locational and Internalisation advantages, this did not sum up to a coherent explanation.

Companies falling under the anti-monopoly law were very active investing abroad at the time of the passing of the law, but subsequently their share of investment projects fell (see Encarnation, 1982: 45, table 2).

The investments of the companies included in the survey constituted four-fifths of the total foreign direct investment in manufacturing at the time.

Several explanations are possible for the different outcomes of the two studies. One is that answers to interview questions are influenced strongly by the interviewer in question. Another is that respondents tend to answer according to the present situation and the present problems of the company rather than according to a reliable assessment of what was the situation at the time of the investment decision. From my own experience with interviews of officials in both the private and the public sectors, I tend to believe that the last explanation comes closest to the truth.

At a more general level the theory has been applied to explain the emergence of Third World multinationals (see Dunning et al., 1998).

Parallel with this, inwards investments also change and the country may end up as a net exporter of FDI.

Kumar (1995) used detailed figures for ongoing investments projects as well as projects under implementation, but the overall destination- and industry-wide pattern is similar to the one given above on the basis of implemented projects alone.

It follows from this that the general economic policies pursued by the Indian government have indirectly, but possibly very strongly, impacted upon the outward investment flows.

These capabilities of the Indian companies are partly a result of supportive state actions (see Pedersen, 1993).