The Expansion of Outward FDI: A Comparative Study of China and India

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Introduction

The past two decades have witnessed a significant rise in outward foreign direct investment (OFDI) from developing countries. According to the 2008 World Investment Report, OFDI from developing countries rose from USD6 billion between 1989 and 1991 to USD225 billion in 2007, with the share in total global outflows growing from 2.7 per cent to nearly 13 per cent during this period. OFDI from developing countries continued to rise by 3 per cent in 2008, although it began to decline in the first half of 2009. (1) OFDI from some major economies in Asia generally slowed down in early 2009, as the global financial crisis largely reduced the ability and motivation of many transnational companies (TNCs) from these economies to invest abroad. For example, FDI outflows from all Asian newly industrialised economies (NIEs) declined by 2 per cent in Hong Kong, 7 per cent in Taiwan, 18 per cent in Korea, and a massive 63 per cent in Singapore. (2)

In contrast to this, the growing OFDI from China and India is particularly notable. Their share in total East, South and Southeast Asian outflows rose from 23 per cent in 2007 to 37 per cent in 2008. Despite the global financial crisis, FDI from China, in particular, reached USD53.8 billion in 2008, an increase of over 100 per cent from USD26.5 billion in 2007, and its outflows continued to grow in 2009. The country currently ranks 13th in the world as a source of FDI and third among all developing and transition economies. (3) FDI outflow from India was USD18.8 billion in 2008, slightly less than the USD21.4 billion in 2007. Among the "BRIC" countries (Brazil, Russia, India and China), China's and India's OFDI also showed continuous growth. From 2004 to 2008, China's OFDI annual average growth rate was 81 per cent, while India's was 87 per cent, far ahead of the OFDI growth of Brazil (35 per cent) and Russia (68 per cent), although from a much lower base.

The outward FDI expansion of China and India has also been reflected in their growing levels of overseas mergers and acquisitions (M&As). In past years, firms from China and India have been actively involved in M&As, which are believed to be a less risky mode of entry into developed markets and an important means of accessing overseas assets urgently required for their global expansion. Chinese steel companies, such as state-owned Baosteel and Sinosteel and privately-owned Shagang, have been actively investing abroad in iron ore mining to secure supplies. While Indian conglomerates have been involved in mega deals, many medium-sized enterprises have also been undertaking M&As in developed regions. Thus, between 2000 and 2006, the value of cross-border M&As by Chinese firms increased greatly from USD0. (5) billion to USD15 billion, while that by Indian firms increased from USD0.91 billion to USD4.7 billion. (4)

Though the OFDI expansion by China and India has generated considerable interest and concern, few empirical studies have been conducted to compare the different incentives, structures and consequences of the OFDI. Most studies of OFDI related to these two countries have focused on the two countries as individual investors, instead of being comparative studies. For example, Buckley et al. found that "capital market imperfections" mainly account for the ease with which both natural resources-seeking FDI (typically in energy and raw materials sectors) and strategic asset-seeking FDI might be taken by Chinese TNCs. (5) Indian firms draw on the international experience of their parental and global networks to build capabilities for international operations. This support, in the form of parental networks (strategic networks) can be seen as a critical resource for a firm, as it reduces search costs, transaction costs, contracting costs, ambiguities, moral hazards and opportunism. (6)

This paper discusses the development process of China's and India's OFDI since the early 1980s, comparing the major driving factors and different investment structures of their TNCs. It uses the most recent data for both countries' actual OFDI flows. China's OFDI is mainly government-led, while India's is primarily driven by markets and private companies. As mentioned above, previous studies have found that "cheap capital" and "family networks" are the main respective determinants of China's and India's OFDI expansion. This paper tries to test and find the significant importance of the technology features of both countries' enterprises.

China's and India's Outward Investment Drive

China began its OFDI in the early 1980s. Prior to the 1990s, the development of China's OFDI fluctuated and was greatly surpassed by its net inward FDI (see Figure 1). During this period, as China's market-oriented reforms and opening-up process were accelerated, enterprises obtained greater operational autonomy. Those companies (mainly state-owned companies) which had achieved a leading edge in some sectors began to deliberately increase their investment abroad so as to expand their market space. But by this time, the OFDI behaviours of these enterprises had not yet been incorporated into their long-term production and business development strategies. They still lacked clear investment objectives and strategic intentions.

It was not until the early 2000s that China's OFDI began to grow steadily. The past industrialisation and developmental processes had substantially improved China's investment capabilities and skills (general, technical and managerial), physical and scientific infrastructure and institutions. A large number of enterprises, including private, foreign and joint-stock enterprises developed and became more mature, making OFDI a strategic need for these enterprises to expand their production and market space. Moreover, China became a WTO member in 2001, thus creating a more open and transparent international environment for its enterprises to go abroad. As shown in Figure 1, China's OFDI increased from USD2.5 billion in 2002 to USD53. (8) billion in 2008, at an average annual growth rate of 64.5 per cent, surpassing that of its net inward FDI.

Based on the nature and character of cross-border production activities undertaken by Indian enterprises, the evolution of OFDI from India can also be divided into two periods: pre-1990 and from 1991 to the present. Although Indian companies have been investing overseas for decades, India's OFDI was quite limited in the pre-1990s period. Its OFDI during those years was characterised by small volumes and being family-company driven. According to UNCTAD, India's OFDI stock in 1986 stood at USD90 million, while

China's amounted to USD1,350 million. For other developing countries like Brazil, it was USD39,583 million, Taiwan had USD13,336 million, Hong Kong had USD3,441 million, Malaysia had USD1,527 million, Singapore had USD1,473 million and South Korea had USD619 million. (7)

There are various factors that explain why the volumes of India's OFDI during this period were low. First, restrictive government policies such as the Monopolies and Restrictive Trade Practices Act, the Foreign Exchange Regulation Act, and other licensing regulation and reservation policies for public-owned and small sectors have restricted the scope and potential of overseas investment by Indian firms. For prudential reasons, the regulatory regime not only required prior permission for OFDI, but also imposed limits both on the size of an OFDI project and the percentage of Indian ownership.

Second, the low levels of export activities by Indian firms in the pre1991 period also reduced the scope of Indian OFDI. The protective policy environment pursued during that period assured Indian firms a large sheltered domestic market, thus negatively affecting their export incentives. A lower degree of export dependence implies that the need to undertake trade-related OFDI by Indian firms to support their exports is also low.

Indian firms began a new wave of OFDI expansion into developed parts of the world in 1991. The economic liberalisation process, which occurred from the early 1990s, provided strong impetus to Indian firms' advance abroad. The dismantling of tariff and non-tariff barriers to imports and provision of easier entry for foreign firms into Indian markets in the 1990s contributed to intense competition in domestic markets. These competitive pressures led to a turning point in the outward …