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. …