Academic journal article Asian Development Review

Outward Foreign Direct Investment from India

Academic journal article Asian Development Review

Outward Foreign Direct Investment from India

Article excerpt

This paper examines emerging patterns and economic implications of Indian foreign direct investment against the backdrop of the evolving role of developing country firms (emerging multinational enterprises) as an important force of economic globalization. The novelty of the analysis lies in its specific focus on the implications of changes in trade and investment policy regimes and the overall investment climate for internationalization of domestic companies and the nature of their global operations. The findings cast doubt on the popular perception of the recent surge in outward foreign direct investment from India as an unmixed economic blessing, given the remaining distortion in the domestic investment climate.

I. INTRODUCTION

Foreign direct investment (FDI) by developing country firms has evolved into an important force of economic globalization over the past three decades. From the late 1960s, when the sprouting of these new investors called emerging multinational enterprises (EMNEs) was first recognized, until about the late 1980s, the bulk of their investment was in developing countries. The competitive advantage of EMNEs came largely from managerial practices and technologies that were adapted to operate in developing countries. Since about the early 1990s, there has been a significant change in the pattern and nature of international investment by EMNEs, reflecting growing economic significance of their home countries, universal embracing of market-oriented economic policies, and the accompanying changes in world market forces. The number of EMNEs and their share in the total outward FDI, as well as the sophistication of their activities, has increased notably. Some of them have developed their own firm-specific assets and expanded their operations beyond their traditional domain-other developing countries- to developed countries. Some EMNEs have attained sales volumes and status of brand recognition on par with developed country multinational enterprises (MNEs) and their presence has begun to challenge the modus operandi of the corporate world.

Beginning with the pioneering works of Diaz- Alejandro (1977), Wells (1977), and Lecraw (1977), a sizeable body of literature has developed on this subject.1 The key focus of the "first wave" literature until about the early 1990s was the perceived "special kind of contribution" (Wells 1983, 3) that EMNEs can make to the development process in developing countries based on appropriate technology and other unique "third-world" characteristics of their operations. Given the emphasis on collective self-reliance in the South-South policy dialogue at the time, host developing countries generally favored EMNEs over developed country MNEs. The transfer of technology from developing country to developing country often highlighted in development policy circles is a concrete example of South-South cooperation (Athukorala and Jayasuriya 1988). These considerations have lost much of their policy relevance since the 1990s as most countries embraced global economic integration as the basic tenet of their development strategy. In a world of reduced political tensions, most host countries now make decisions on foreign investment based on economic grounds rather than on nationality. In this context, the focus of the recent literature has shifted from treating EMNEs as special actors of third-world development and solidarity to studying them as agents of economic globalization. Consequently, there has been a renewed emphasis on examining their operations from a "home country" perspective in place of the old focus on examining the unique features of their affiliates in host countries.

In this context, this paper examines the role of EMNEs in the growth and structural transformation of their home countries through an in-depth case study of the Indian experiences. India provides an interesting case study given the long history of involvement of Indian firms in overseas investment and significant policy shifts affecting the process over the past two decades. …

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