U.S. Corporate Investments in India:
A Study of Investors' Perceptions of
the Risk-Return Relationship
RAKESH DUGGAL AND MIKE CUDD
This study is a test of the market reaction to U.S. corporate investments in India since 1991, when the Indian government started the process of economic liberalization to attract foreign capital. The study finds that these investments are perceived by U.S. stockholders as having zero net present values. The higher perceived risk of these investments may be the reason why these investments are not considered wealth enhancing.
In 1991, the Indian government made it more attractive to do business in India. Among its other measures to attract foreign equity capital, the government raised the foreign ownership of business from 40 to 51 percent in many industries and even 100 percent in certain cases. 1 This and other measures since then have resulted in substantial U.S. corporate investments in India. For example, U.S. firms committed $1.1 billion in 1993 alone--more than they did in the previous 47 years. 2 According to a survey by Ernst and Young, an accounting and consulting firm, the number of U.S. corporate investments in India rose to 34 from 15 a year earlier, causing India to jump to fifth place in terms of U.S. business interests in 1993. 3
Economic theory predicts that, ceteris paribus, capital investments in India will initially earn positive risk-adjusted abnormal returns for the simple reason that the demand for capital exceeds the supply of capital in that country at the present time. These abnormal returns should disappear with time once the flow of capital is allowed unrestricted into the country, thereby resulting in only normal returns on capital investments.
It may, therefore, be presumed that U.S. managers must have determined these