Fdi+Abroad+By+Indian+Companies+ +Trend+&+Prospects+(Group+7)

FDI ABROAD BY INDIAN COMPANIES-TREND AND PROSPECTS
By:
AbhijeetSamal(08BSHYD0014)
AgrawalLokesh(08BSHYD0037)
Alka Sahu(08BSHYD0053)
Eeshita Desai(08BSHYD0249)
Enika Shah(08BSHYD0250)

FDI - any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor
An important role
FDI Inflows and FDI Outflows
FDI – Direct Investment & Portfolio Investment
India – Major source to South Asian Countries according to UN Conference on Trade & Development
India – BIMSTEC, South Asia Free Trade Zone, FTAs with Sri Lanka & ASEAN
Introduction

IT Sector
Pharmaceuticals Industry
Emerging Services and Products
Metal
Industrial Goods
Automotive Components
Beverages
Cosmetics Industry
Energy Sector
Mobile Communications
Software Industry
Financial Services
Major Sectors for FDI Outflow

Access to the Global Markets
Huge Cash Reserves
Natural Resources
Distribution Networks of Foreign Companies
Foreign Technologies
Strategic Assets like Brand Names

Major Factors

Strong Financial System
Good Credit Rating
Stronger Balance Sheets
Confidence shown by Global Business Communication
Competitive Business Environment
Larger Fund Supply
Favorable Regulatory Environment
Higher Margins, profits and revenues

Other Factors

Tata Motors & J-LR
Tata Steel & Corus
Hindalco Industries & Novelis
Tata Tea & Energy Brand of US
Suzlon Energy & RE Power of Germany
Subex Azure & Syndesis of Canada
Ranbaxy & Merck ( Deal did not strike )
Some Big Ticket Deals

The increasing number of home-grown Indian firms.
Indian firms are investing abroad to access foreign markets, production facilities and international brand names.
Access to technology and knowledge has been a strategic consideration for Indian firms.
Securing natural resources is becoming an important driver for Indian outward FDI.
Drivers for FDI Abroad...

Favorable Economic Conditions
Large foreign exchange reserve
Liberal policies
India Corporate Advantage
Understanding of global environment:
Consolidated domestic presence:
Large free cash reserves

Drivers for FDI Abroad...

Pros

Diversification of investments
Hedge against currency movements of the local currency vis-a-vis other currencies
Tax advantages

Cons

Exchange rate fluctuation risk especially in the short run
Higher transaction costs

Pros and Cons...

Exit risk like exchange control restrictions (repatriation of capital and income), lack of liquidity, low market depth, settlement delays
Handling and complying with the special regulatory and tax norms
Communication gaps
Need to keeping abreast with international and company specific developments
Minimum portfolio size

Global Trend of Outward Foreign Direct Investment for 1990-2007

Increase of 2 times for Developing Economies
Increase of 16 times for India from 2000-2007

Trend ofFDI inflow & outflow

Overseas acquisitions by Indian firms
Actual Indian FDI outflows: 2008 &early 2009

Sectoral Distribution of India’s Outward FDI

Determinants of Indian FDI in Developing Countries – Historical perspective
Drivers of outward FDI quite different for the pre-1990 period compared to post-1990 period
Pre-1990

Size of investment was small
Policy-led barriers (MRTP, FERA) and slow economic growth main reasons
Low firm-level specific capabilities & modest intangible advantages reasons for foray into developing nations

Lack of SME participation due to inward looking development policies
Strong FDI bias towards developing countries
Cordial attitude of host countries helped matters

Post-1990

Natural resource based companies forayed
Liberalization lifted ceilings

Determinants of Indian FDI in Developing Countries – Historical perspective

Empirical studies on Indian Outward FDI

Development Implications on Host Countries

Sectoral dimension
Traditional Manufacturing & service industries like Finance, Telecom and Software services form the major chunk
Recent FDI outflows also seen in Pharma, Chemicals and Transport Equipment industry
Nature of value-added activities
Until 1982, Indian FDI was on local production in host countries
Even now there is high volume of manufacturing FDI projects, low volume of trading outflows
Market-orientation
Indian firms have not used overseas market as export bases
Greenfield FDI projects are of local-market seeking variety

Development Implications on Host Countries

Ownership participation
Pre-1990s there was sharing of management responsibilities
Post-1990s companies preferred full ownership of overseas units
Appropriateness of technology
Intermediate technologies used in pre-1990 period well suited to capital scarce and labour-intensive conditions
Post-1990, trend shifted to in-house R&D and acquisition of foreign entities with specialized products and skills
Local knowledge creation
Limited contribution in local technology creation
Limited to training of local employees on production processes

Reasons for FDI Growth

Reasons for FDI Decline:2008 onwards

INDIA and CHINA
Innovations:
Contrasting Traditional theories

Time of FDI outflow
Type of economy In which to Invest

CHINA: Standing Strong

Greater economic size, Faster economic growth rate Larger external surpluses
Rising per capita income
Liberalization of regulations by government
“Going Abroad” and “National Champion” policy

Favorable policy changes
Hiked the overseas investment limit from 200 per cent of the net worth to 300 per cent of the net worth;
Hiked the limit on overseas portfolio investment from 25 per cent of their net worth to 35 per cent of their net worth;
Allowed Indian residents to remit up to US$ 1,00,000 per financial year, from US$ 50,000 previously, for any current or capital account transaction or a combination of both.
Allowed mutual funds to invest funds to the tune of US$ 4 billion in overseas avenues, from an earlier cap of US$ 3 billion

Revival of global and domestic growth
Improvements in Corporate Profitability
Ease of Financing
Cash-rich Indian firms, including SMEs
Cheap valuations of Foreign Assets
Prospects