India FDI Out Flows Report

Abstract

One of the noteworthy dimensions of India’s increasing integration with the world economy has been the increase in both gross Foreign Direct Investment (FDI) inflows to and outflows from the country over the last decade. India has emerged as the world's 21st largest outward investor, with an investment of over USD 75 billion across the world over the past decade. Annual FDI outflows have jumped fifty-fold after 2000, and Indian firms have invested over USD 75 billion overseas in the past decade, in some cases to attain global status by acquiring world-leading firms. Indian firms now invest across a wide variety of sectors and countries, departing from their historical focus on trading and textile investments in developing countries. Following the 25 per cent crisis-induced drop in Indian OFDI in 2009, Indian firms are once again increasing their overseas investment, including through mergers and acquisitions (M&As) Investments by domestic companies abroad dipped by over 36 per cent to about USD 10.3 billion during 2009-10 compared the previous fiscal, with a large chunk of it going into the manufacturing sector.

Introduction

The first overseas Indian venture was a textile mill set up in Ethiopia in 1959 by the Birla Group of companies, India’s second largest business conglomerate at the time (Kudaisya 2003). The following year, the Birla Group set up an engineering unit in Kenya. Sustained growth in Indian overseas investment could be seen starting around the late 1970s when the industrial licensing system became much more stringent as part of the government’s move to control big businesses. By 1983, there were 140 foreign investment projects in operation and another 88 in various stages of implementation (Lall 1986). The total number of approved projects had reached 229 by 1990 (Kumar 2007). Most of the foreign affiliates set up during this period were small- or medium-scale ventures; total approved equity during the period 1975–1990/1991 amounted to only $220 million. The second wave of internationalization of Indian firms began from about 1995 and gathered momentum as foreign exchange restrictions on capital transfers for overseas acquisitions liberalized in successive stages from 2000 (nagaraj 2006). There was a surge in outward investment from 2005. The number of approved projects increased from 220 in 1990/1991 to 395 in 1999/2000 and to 1,595 in 2007/2008 (kumar 2008). total FDI outflow from India increased from about $25 million in the early 1990s to nearly $14 billion in 2007. India’s share in total developing economy FDI outflows remained below 0.5 percent throughout the 1990s, but increased continuously since, reaching nearly 6.0% in 2007. India remains a net FDI recipient, even though the gap between outflows and inflows has been sharply narrowing over the past few years. In 1990, annual outflows, on average, amounted to 7 percent of inflows. This increased from about 30 percent to 60 percent between 2000–2005 and 2005-2007.

A majority of India's outbound FDI flows has been as a consequence of a quest for raw materials since India is a raw material scarce country. For example, Tata Steel has been active to secure coal assets in Indonesia with superior grade coal due  to  lack  of high quality  coal  in  the  country  coupled  with  a  highly  regulated  industry  where  private players are not allowed. A  lot of  India's FDI outflows  in recent  times have been  in acquisitions  in the  IT and  IT services  sectors.
Indian enterprises  have  developed  expertise  and  capabilities  in IT services which they want to leverage and enter global markets.This  is   because  of opportunities to acquire newer clients at lower costs as a consequence  of  a booming  local stock market and low P/Es in economies abroad. For example HCL Technologies completed  the acquisition of Axon  for 440 million pounds.  India's FDI flows in recent times has been  to  acquire  crude oil  assets  in  a bid  to  secure  the  energy needs  of  the country through ONGC Videsh Ltd., a partnership between ONGC and Mittal Steel.   

Manufacturing has seen a consistent growth over the last five years. This has especially  been driven by sectors such as automotive components and machine  tools which  are export  oriented  and  acquire  firms  for  access  to  technology  and  clients,  especially  in markets such as Europe where client contracts are long term and it is otherwise difficult to get access. The Non financial services and Trading sectors have seen wide fluctuations in outward  flows. 

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