Impact of FDI Flows Outflow on the Indian Economy

locomote of FDI Flows Outflow on the Indian EconomyAbstractThis composing discusses the trends in Indias superficial FDI over the last decade and attempts to identify the factors for the same. The main condition is to help policy take forrs with insights regarding levers which impart help in improving FDI come out of the closetflows and to take in however research in inappropriate decorateiture from rising economies. 287 conditions of enthronization from India by Indian companies in 17 orbits get down the stairs ones skin been taken for the analysis. The paper elaborates on the concept of analyseing the impact of ownership, location and internalization variables on Indias hostile enthronization. An analysis of domain discerning of opening strategy, reason of ingress and geographical analysis has been performed. Overall, it has been found that acquisitions was the study way of origination for Indian theaters who ar institutionalizeing unknown and ques t new markets. The paper withal describes the policy changes which had impacted FDI flow from India and the relation of outer FDI with macro-economic indicators like Fischer make Differential and GDP.Objective of the studyWe would like to study outward FDI flows from the emerging economies, particular(prenominal)ally to the Indian context.An analysis of FDI flows from different welkins of the Indian Economy go out be through with(p)To see what is the bearing of enthronisation, the way of life of entry, and the macroeconomic factors that affect FDI flow.To find out the impact of the Fischer Open Differential due to the FDI flow. debutThe first overseas Indian venture was a textile hero go under up in Ethiopia in 1959 by the Birla Group of companies, Indias secondment jumbost business conglomerate at the time (kudaisya two hundred3). The following yr, the Birla Group set up an engineering unit in Kenya. Sustained growth in Indian overseas investiture funds could be se en beginning around the new- do 1970s when the industrial licensing system became much to a greater extent(prenominal) stringent as part of the governments move to control big businesses. By 1983, there were cxl irrelevant investment projects in operation and some separate 88 in unhomogeneous st ages of implementation (lall 1986). The bring number of okay projects had r distributivelyed 229 by 1990 (kumar 2007). just just about of the hostile affiliates set up during this period were small- or medium-scale ventures total approved equity during the period 1975-1990/1991 beated to totally $220 gazillion. The second wave of internationalisation of Indian unfalterings began from about 1995 and gathered momentum as foreign supercede restrictions on with child(p) transfers for overseas acquisitions liberalized in successive stages from 2000 (nagaraj 2006). on that point was a stack in outward investment from 2005. The number of approved projects increased from 220 in 1990/1991 to 395 in 1999/2000 and to 1,595 in 2007/2008 (kumar 2008). Total FDI outflow from India increased from about $25 one thousand trillion in the early 1990s to well $14 one million million in 2007. Indias sh atomic number 18 in total developing economic system FDI outflows remained beneath 0.5 sh ar doneout the 1990s, but increased continuously since, reaching nearly 6.0% in 2007 (see table 1 and bod 1). India remains a acquit FDI recipient, even though the gap amid outflows and inflows has been sharply narrowing over the past few long time. In 1990, annual outflows, on average, amounted to 7 perpenny of inflows. This increased from about 30 percent to 60 percent between 2000-2005 and 2005-2007.The info in table 1 help in taking into custody Indias relative position in the world as a generator s rock oil of FDI. In the early 1990s, Indias sh be in FDI outflows from developing economies was the last compargond to the four large emerging market economies used as comparators (Brazil, Peoples state of china PRC, Mexico, and South Africa). Over the ensuing years, Indias sh be has grown accelerated than those of the comparators. In 2004-2005, it surpassed that of South Africa and in 2006-2007, it surpassed that of Mexico. The share of FDI outflows in gross domesticated capital formation (GDCF) in India has like keen increased much hot than the opposite four economies and the average for all developing economies during the period 1994-2007. gens 2 compares the outward FDI from the PRC and India in terms of the percentage parting to total developing economy outward FDI and relative to GDCF in each economy. During 2006-2007, on average, the PRC accounted for 7.3 percent of the total outward FDI from developing countries compared to 3.2 percent for India, although the gap has been narrowing over the years. By contrast, relative to GDCF, outward FDI from India on average is larger compared to that from the PRC. The difference widened sharp ly following the signifi erectt loosening of the outward FDI regime in India during 2004-2005. During 2005-2006, the contribution of outward FDI to GDCF in India (4.4 percent) was more than than twice as large as that of the PRC (1.7 percent).Theories of FDI flowsThe paper on FDI outflows by John Dunning in which he explains the same through the OLI (Ownership, billet and Internalization) framework.DUNNINGS ConceptOWNERSHIPAn MNC faces several disadvantages them moment they entrench the domestic firm when it assumes a external market different from its soil of origin. However, a firm chooses to enter a foreign market if it has advantages which outweigh the disadvantages outlined above. These entangle access to natural resources, intellectual property, strong domestic / global punctuate which become a competitive advantage for the companies.LOCATIONThe location specific concept involves the attractiveness of the foreign market as a finale for entry by a firm. on that point a re 3 shipway how a foreign market finish differentiate itself-1. Economic sizing of the foreign market, market concentration, growth rate, avail big businessman of talent, infrastructure, competitive approach structures and so forth2. Political These include the political risk of the country, the judicial mechanisms and their transparency, ease of doing business, drudge laws etc.3. Social These include similarities of culture, ways of doing business, social structure between the country of origin of the firm and the foreign country etc. incorporationA firm has to choose between various entries regularitys into foreign markets starting from marketing alliances, licensing and greenfield ventures and to full blown acquisitions. The decisions are do keeping in view the tradeoff of transaction be versus internalization approachs. In poorly operating markets firms prefer to avoid mellowed be of external transactions. The intensity of the order of the foreign market is anothe r parameter which determines the internalization decision.HYMERS schemeHymers theory explains that MNEs are elements of market imperfections. There are two causes for imperfections removal of competition and monopolistic powers. Hymer states that investment make overseas gives them the ability to use its worldwide operations to separate markets and bowdlerise competition. MNEs control assets to minimize risks and increase their monopolistic power by creating entry barriers. Hymers analysis is found on geomorphologic imperfections which are caused by large scale economies, having knowledge, wide dissemination boodleworks, product diversification and credit advantagesALIBERS stumperAlibers theory says that MNCs invest in foreign assets as the MNCs slang the ability to hold assets in different currencies and thus take advantage of structural and transactional imperfections in foreign exchange markets. He also outlines that the firm will face the same operational problems fore ign as in the domestic market and that is not a decision qualification criterion for firms.VERNERS THEORYVernons location theory says that a MNEs often acquire low cost resources than that of nations social club as the cost to a MNE is just the marginal cost to the system This helps the NEs acquire factor inputs and resources at a cost general in the home country tour MNEs acquire them at the beat out price worldwide having lower labor and input costs. This difference between national cost and marginal cost will be a key driver of FDI worldwide.Literature ReviewWe have come crosswise various articles and research paper related to our topicThe papers look for the uneven beginnings of FDI in India and examine the developments (economic and political) relating to the trends in two sectors Industry and stem and sub sector Telecom. The papers laid the relation between institutions in emerging markets and the entry strategies chosen by foreign subscribe to investors. The merits o f choice strategies from investors perspective as well as the impact on the server country were investigated. For this purpose FDI strategies were investigated and were compared with four important emerging markets India, Egypt, South Africa and Vietnam. The papers also enlightened the sector wise FDI inflows in India and the reasons for industrial sectors attracting the highest FDI inflows. The exceed part of the analysis was 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 favourite perception of the new- do surge in outward foreign direct investment from India as an unmixed economic b littleing, given the remaining twirl in the domestic investment climate.Foreign comport coronation in India A Critical Analysis of FDI from 1995-2005 by Kulwindar Singh (Center for Civil Society, New Delhi look Internship Programme, 2005)Survey of FDI in India by Sumon K. Bhaumik (London Business School, 2003).Foreign Direct Investment Inflows in India- Opportunities and Benefits by Syed Khaja Safiuddin (Assistant Professor, Department of Management and Commerce, 2010)Outward Foreign Direct Investment from India by Prema- Chandra Athukorala (Asian ontogenesis depository financial institution, 2009)Scope of the studyThe scope of the study was restricted to analyzing the dependence of foreign investment on ownership variables save .The scope of the study was encourage restricted owing to the lack of unattachedness of info on foreign investment by Indian firms. There was, 287 data of foreign investment from India were collected. The data spans across 17 sectors as will be discussed later. The lack of data posed several restrictions on the scope of the study much(prenominal) asIt was not possible to do trend analysis for foreign investment from IndiaThe data was available for only 99 records. The size of the investment could be found for 65 records.Indias outbound Data Trends and Empirical DataA majority FDI outflows has been for quest for lancinating materials as India is a raw material scarce country. For instance, Tata Steel was more into securing coal assets in Indonesia with better quality coal which was not available in the country where private players are not allowed and there was also much of regulation. The Pharmaceutical sector has gone on an acquisition go mainly for IP and access to markets including distribution networks.In recent clock Indias FDI have been in acquisitions in the IT and IT services sectors. Indian enterprises have certain expertise and capabilities in IT services which they leverage and enter global markets. This gives them the fortune to find newer clients at lower costs as a outlet of a booming local stock market and low P/Es in economies abroad. For example HCL Technologies acquired Axon for 440 million poun ds. Indias FDI flows in recent times has been to acquire crude oil assets in a dictation to secure the energy needs of the country through ONGC Videsh Ltd. effigy I FDI outflows are expected to double over the next 5 years with a CAGR of 16.7%Source EIU Country DataActual realisesProjected FiguresvalueRow LabelsSum of Inward FDISum of Outward FDI19962125119199725252401998361911319992633472000216880200135855092002547213972003562716692004432318792005577121792006760629782007196221284220082295013649Grand Total8802637701Indias FDI Inflows and Outflows (US $ Millions)Source UNCTAD 2008Figure II Graph demonstrate the FDI outflow in the next 5 years.Research MethodologyA large number of data on the FDI outflows have been gathered (about 300) victimisation press releases from the firms websites and annual reports, news articles and clippings, databases much(prenominal) as Thompson Reuters and groovyine, industry forums and various other sources. The variables of ownership, location and internalization were further elaborated in breaker point later. These have been filtered by virtue of their sales, with those having sales greater than one hundred crores making it to the final list of firms. This data has been gathered from Center for Monitoring of Indian Economy (CMIE). For this study, number of sectors was limited to 17 as shown in sidestep I below.Number of instancesIT36Pharmaceuticals37Auto Components20 eddy32Telecom28Petroleum Products7Oil shooter Mining24Steel20Dyes4Paints3Machinery/CapitalGoods14no(prenominal) Ferrous Metals2Auto30Cosmetics,toiletries, etc.8Tyres Tubes6Diversified1Food Products15TOTAL287 panel I Total foreign investment by each sectorWe have restricted the research to determining the impact of ownership variables on FDI outflows from India. Two types of research were qualitative and valued. Qualitative research includes the trend of FDI flows, which has been shown through different modes of entry and further was analyzed for specifi c trends within sectors. This shows why different sectors use different routes for entering into foreign markets for example, pharmaceutical companies enter through alliances tour manufacturing firms go for acquisitions and IT firms go for both routes depending on the objectives. For quantitative analysis, this is done in the broad section of determining whether there is an outward flow of foreign direct investment from India. Another analysis has been done on the lifecycle of the firm. The mode of entry might also depend on the risk taking ability of the management.The research objectives were translated into the following questions, which were then time-tested using statistical analysisQ1 Whether FDI is the preferred mode of entry for foreign investment by Indian companies?Q2 Whether the intent of foreign investment by Indian companies is market wanting, product, brand or resource desire or technology seeking?Q3 Whether foreign investment by Indian companies is more towards le ss income countries as well as in certain typefaces where FDI by Indian companies is attributed towards certain geographical aspect?Q 4 Whether FDI is related to other macroeconomic indicators such as GDP (non boorish)?Q 1 MODE OF launchingIn total 287 instances of FDI outflow was classified advertisement into the following categoriesGreenfield It refers to the opening up of a new weapon, office or setting up of a new wholly owned supplementary in the target countryAlliance Alliances are arrangements such as Memorandum of Understanding gestural with the universities for technological researchJoint jeopardizeExpansion This refers to the instance which is related to the expansion of its be operations such as opening up of a new office.Acquisition Acquisition if the Indian ac party refers to getting a majority stake in the equity of the foreign society or acquiring assets of a foreign company or acquired. minority StakeHere we can see that, the main entry mode for India firm s has been acquisitions accounting for 33.80% of the total Indian outward investment from the instances studied. This is nearly followed by joint ventures, Greenfield operations and expansion for 19.86%, 17.07% and 16.03% respectively. tabularize II presents a elaborated sectoral picture of the instances based on the way of entry.Figure III Indias outward direct investment based on mode of entry give inIISectoral break up of foreign investment depending on the mode of entryDue to limited amount of data, a sector wise analysis to identify trends within each sector in the subject of the mode of entry could not be done. However, based on the data available following trends (see Table 3) were discoveredAcquisitions were the most common modes of foreign investment in case of simple machinemobile components, pharmaceuticals, capital goods, cosmetics fare products and tyres tubes.Greenfield investments are selected mode of investment in case of IT, Petroleum Products and Oil hitm an Mining.Joint ventures accounting for around 60.71% of the entire foreign investment of telecommunication companiesConstruction companies resorted to expansion of existing foreign operationsSectors most probably show foreign direct investment include auto auto components, fast moving consumer goods, technology based companies such as pharmaceuticals, IT, and capital goods.TableIIISectoral distribution of mode of entryQ 2 goal OF INVESTMENTThe main reason for investiture abroad was identified as followsMarket Seeking This is driven by gaining access to local or regional market which would help prevent some operational costs eg distribution cost.Technology or Brand Seeking Companies also invest in order to gain access to new technology or acquisition of some brands or products.Resource Seeking This is driven by gaining access to natural resources.In each of the 287 instances of investment was evaluated based on available information. In certain cases, investment was found out t o have multiple characteristics or intents. For instance, a foreign investment could be make to both get access to a new market as well as to a new technology. Same weight age was given to each of the elements therefore, in this case both market seeking and technology seeking will get a score of 0.5. The results, are given belowTableIVForeign investment based on investmentFigure 4 below tallys the intent of entry for the instances studied. It can be seen, the foreign investments made by Indian companies have been mainly market seeking. Over 52% of the total investments made abroad were for market seeking while 32% of the investments are made to seek new technologies, brands or products. Resource seeking investments form only 16% of the total investments made by Indian companies as a whole.Figure IV Foreign investment based on investmentA sector wise analysis of the foreign investment offers more insights as follows (see Table 5)Market seeking foreign investment is the driving worl d power in case of IT, pharmaceuticals, auto components, construction, telecom, and tyres tubes.Technology or brand or new product seeking kind of foreign investment intent is predominant in case of capital goods, auto and toiletries and food products.As expected, oil and gas mining, petroleum products and non ferric metals exhibit resource seeking as their predominant intent of foreign investment.Table V Sectoral distribution for investmentQ 3 TARGET COUNTRYThe target countries of investment were classified based on two parametersIncomeContinentINCOME OF COUNTRYBased on income, the target countries were classified into ternion categories (based onUnited Nations Human Development Report 200708)High Income The high income countries are those with GNI per capita of USD 10,726 or more in 2005.Middle Income These are countries with GNI per capita of USD 876 to USD 10,275 in 2005Low Income These are countries with GNI per capita of USD 875 or less in 2005 Based on the above classifica tion India is categorized as a low income country.The target country of the 287 conditions of foreign investment was determined. The data is as shown in Table VI. The overall results are also summarized in Figure V.Table VI Investment based on countryFigure V Foreign Investment based on incomeFigure V show that most of the foreign investment from India has been to countries with high income. As seen in Table VI, high income countries account for 61.32% of the total foreign investment from India.Table VII helps us analyze the sector wise trends in terms of target country of investment.The following inferences can be bony based on the data availableThe IT, pharmaceuticals, auto auto components, toiletries food products, capital goods and construction sector had most of the foreign investment is made to high income countries include.The sectors where majority of the investment has been made to centerfield income countries include oil gas mining.Petroleum products have invested mai nly in low income countriesFor metals (ferrous nonferrous) sectors, the investment has been equally distributed between high income countries on one side and middle low income countries on the other.Table VII Table viewing foreign investment based on the countrys incomeTARGET COUNTRY CONTINENTA geographical analysis of the collated data was also done. The target countries were identified into 6 major geographies as followsNorth AmericaSouth AmericaAsiaatomic number 63Middle EastAfricaTable VIII and Figure VI summarize the inferences drawn from this data. In certain instances, the target country could not be singularly identified for instance if a JV is formed among three countries. As a result, the total no of instances is 290 instead of 287 (See Table VII)Table VIII Foreign investment based on geographyFigure VI shows that Europe and Asia together account for about 54.48% of the instances of foreign investment, while North America accounts for another 20.69%.Figure VI Foreign i nvestment based on geographyTable IX shows the sector wise percentage distribution of geography of investment.From the table it is apparent thatSectors like non ferrous metals, IT, cosmetics toiletries and pharmaceuticals have major investments in North America.South American investments mostly have oil gas miningIn Asia, paints, metals (steel and nonferrous metals), telecom and tyres tubes predominant sectors from IndiaEurope is a preferred destination for companies in sectors such as capital goods, auto and auto componentsConstruction companies target their foreign investment in Middle East.Foreign investment from Indian companies in petroleum products occurs in AfricaTable IX Sectoral distribution of foreign investment depending upon geographyQ4 CORRELATION WITH OTHER MACROECONOMIC INDICATORSIndias outward FDI was correlated against Indias non agrarian GDP and portfolio investments out of India to assess the impact of growth in the economy on Indias outward FDI.Indias outward FDI and Non agricultural GDPThe results are summarized in the table below.From the correlation results, it can be concluded that Indias outward FDI has a positive relation with the Indias non agricultural GDP. However, the negative coefficient in the equation implies that FDI out of India starts only after a certain threshold of INR 3, 59, 468 crores is crossed.Table X Indias outward FDI vs. GDP (Non-Agricultural)IMPACT OF POLICY CHANGEChanges in the regulation policies in India have also been a major contributor to the sight increase in investment outflow from India, especially the year 2000 onwards. virtually of the key policy changes which have impacted investment outflow from India are harbour lingo of India Notification No. FEMA.40/2001RB 2 work on 2001Overseas investments are allowed to be funded up to snow% by AmericanThe three years profitability condition compulsion has been removed for Indian companies making overseas investments under the instinctive routeOverseas investments are opened to registered partnership firms and companies that provide professional services. The minimum net cost of Rs. 150 million for Indian companies engaged in financial sector activities in India has been removed for investment abroad in financial sectorDepository Receipt/General Depository Receipt proceeds up from the previous ceiling of 50%.Reserve Bank of India Notification No. FEMA.49/2002RB 19 January 2002Indian companies in Special Economic Zones can freely make overseas investment up to any amount without the restriction of the $100 million ceiling under the instinctive route, provided the living is done out of the Exchange Earners Foreign Currency Account balancesReserve Bank of India Notification No. FEMA.53/2002RB 1 March 2002 and FEMA.79/2002RB10 December 2002The annual limit on overseas investment has been raised to $100 million (up from $50 million) and the limit for direct investments in South Asian Association for Regional Cooperation countries ( excluding Pakistan) and Myanmar has been raised to $150 million (up from $75 million) for Rupee investments in Nepal and Bhutan the limit has been raised to Rs. 700 crores (up from Rs. 350 crores) under the automatic routeReserve Bank of India Notification No. FEMA.49/2002RB 2 March 2001An Indian party which has exhausted the limit of $100 million in a year may apply to the Reserve Bank of India for a block allocation of foreign exchange subject to such terms and conditions as may be necessaryReserve Bank of India Notification No. 83/RB 2003 1 March 2003Indian companies can make overseas investments by market purchases of foreign exchange without prior encomium of the Reserve Bank of India up to 100% of their net deserving up from the previous limit of 50%An Indian company with a proven trackrecord is allowed to invest up to 100% of its net deserving within the overall limit of $100 million by way of market purchases for investment in a foreign entity engaged in any bona fide bus iness drill starting fiscal year 20032004. The provision restricting overseas investments in the same activity as its core activity at home of the Indian company are removed. Listed Indian companies, residents and mutual funds are permitted to invest abroad in companies listed on a recognized stock exchange and in company which has the shareholding of at least 10% in an Indian company listed on a recognized stock exchange in India.Changes brought about in fiscal year 20032004Indian firms are allowed to undertake agricultural activities, which was previously restricted, either directly or through an overseas branchInvestments in joint venture or whollyowned subsidiary abroad by way of share swap are permitted under the automatic routeIn January 2004, the Reserve Bank of India further relaxed the financial ceiling on Indian companies investment abroad. With effect from fiscal year 2003-2004, Indian companies can invest up to 100% of their net expenditure without any separate moneta ry ceiling even if the investment exceeds the $100 million ceiling previously imposed. Furthermore, Indian companies can now invest or make acquisitions abroad in areas unrelated to their business at home.In 2005, banks were permitted to lend money to Indian companies for acquisition of equity in overseas joint ventures, wholly owned subsidiaries or in other overseas companies as strategic investment.In 2006, the automatic route of disinvestments was further liberalized. Indian companies are now permitted to disinvest without prior approval of the rbi in select categories. To encourage large and important exporters, proprietary/unregistered partnership firms have been allowed to set up a JV/WOS outdoor(a) Indian with the prior approval of RBI.In 2007, the ceiling of investment by Indian entities was revised from 100 per cent of the net worth to 200 per cent of the net worth of the investing company under the automatic route of overseas investment. The limit of 200 per cent of the net worth of the Indian party was enhanced to 300 per cent of the net worth in June 2007 under automatic route (200 per cent in case of revisited partnership firms). In phratry 2007, this was further enhanced to 400 per cent of the net worth of the Indian party.The Liberalized Remittance Scheme (LRS) for Resident individuals was further liberalized by enhancing the existing limit of US$ 100.00 per financial year to US$ 200.00 per financial year (AprilMarch) in kinsfolk 2007.The limit of portfolio investment by listed Indian companies in the equity of listed foreign companies was raised in September 2007 from 35 per cent to 50 per cent of the net worth of the investing company as on the date of its last audited balance sheet. Furthermore, the requirement of reciprocal 10 per cent shareholding in Indian companies has been dispensed with.The amount of money ceiling for overseas investment by mutual funds, registered with SEBI, was enhanced from US$ 4 billion to US$ 5 billion in Sept ember 2007. This was further raised to US$ 7 billion in April 2008. The existing facility to allow a limited number of qualified Indian mutual funds to invest cumulatively up to US$ 1 billion in overseas Exchange Traded Funds, as may be permitted by the SEBI would continue. The investments would be subject to the terms and conditions and operational guidelines as issued by SEBI.Registered Trusts and Societies engaged in manufacturing/educational sector have been allowed in June 2008 to make investment in the same sector(s) in a Joint Venture or Wholly Owned Subsidiary outside India, with the prior approval of the Reserve Bank.Registered Trusts and Societies which have set up hospital(s) in India have been allowed in August 2008 to make investment in the same sector(s) in a JV/WOS outside India, with the prior approval of the Reserve Bank.As can been seen from the above chart, the outward FDI in India really picked up after Q1 2006.CONCLUSIONSThe major mode of entry for India firms i n the last 5 years has been acquisitions which are around 33.80% of the total Indian outward investment from the instances studied this is closely followed by joint ventures. This shows that Indian firms have the confidence to venture abroad and maintain operational control of the acquired company Most foreign investments made by Indian companies have been market seeking. Over 50% of the total investments made abroad are for market seeking while 33.78% of the investments are into seeking new technologies, brands or products. This is seen mainly towards the service sector showing that the required competencies are being built at home while small forei