India’s Emerging Multinationals : Trends, Patterns and Determinants of outward investments by Nagesh Kumar RIS

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

6 Evolution of Indian ODI First wave pre-1990s Second wave 1990s Third Wave Motivations Market-seekingTrade supportingStrategic assets and natural resources seeking Sectors Low technology: light engg., palm oil refining, rayon, paper IT services, pharma., etc. Metals, pharma, auto, Magnitudes SmallModerateLarge Entry modes Greenfield acquisitions Destinations Asian and African low income countries Similar to exportsResource rich and strategic resource rich countries, e.g. UK, USA, Russia, S. Korea, Singapore

7 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 Steel’s 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. Thomson’s plants in China controlled by Videocon India has emerged as the 4 th 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 R&D intensity Product Differentiation (BRANDS): proxied by advertisement intensity Cost Effectiveness (COSTEFFECT): proxied by price cost margins Firm Size (SIZE and SIZE 2 ): 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

9 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

10 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

11 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

12 Thank you