A sneak peek at Outbound FDI of India

In 2007, Tata Steel acquired Corus for a whopping $12.9 billion. A month back, Bharti bought African’s assets of Zain for $9 billion cash. These 2 deals just go to show the vigor and intensity in the mood of modern Indian day trade. Indian Outbound FDI (OFDI) has come a long way from 1950s when Birla’s did first overseas deal.

Historically, FDI has been a major force behind globalization. Few rich nations of the world used it to get cheap natural resources and large territories of developing markets. Slowly, emerging nations empowered themselves for a role reversal. China, India and South East Asian nations took the lead and started a new phase of outbound FDIs from emerging economies of the world. Chinese have also been aggressive in looking out for foreign partners and acquiring natural resources, primarily in manufacturing sector. Besides spreading global image; access to market, natural resources, foreign technologies, distribution networks and strategic assets, like brands have been driving outflow of FDI globally.

Manufacturing dominated good part of Indian FDI outflows for several decades. The movements of funds were primarily restricted to acquiring minority stakes in foreign companies and accesses to latest technologies. Post-liberalization, Indian government has opened up doors for Indian companies to invest abroad and set up foreign bases. The focus has slowly shifted towards investing and selling more knowledge-based and other services. Indian IT majors have shown the path to this new composition of shopping spree to many other Indian companies. More and more Indian companies are setting up sales and service bases to reach out people globally. As a result, total Indian FDI outflows jumped to $14 billion in 2007. India’s share in total developing economy FDI outflows remained below 0.5 percent throughout the 1990s, but increased continuously since, reaching nearly 6.0% in 2007. Till now, US tops Indian FDI outflow basket. Recently, there has been lot of FDI outflows to Singapore, Mauritius and other smaller countries in Africa.

Now, the big question is how good is OFDI for fast growing countries like India? Should Indian government go overboard in shelling out all kind of incentives? How RBI approach the issue of fuller capital convertibility to facilitate free movements of goods and services? There is an even bigger question on the effectiveness of the whole FDI saga to country’s development. Should India follow a rather conservative, inclusive approach to build a robust domestic platform to take on spiral financial tsunamis of the future?

To my mind, Indian government should roll out aggressive inclusive growth plan with rather cautious phase wise FDI growth path. Indian companies should focus on building competencies and domestic markets. A rather long term strategic overseas buyout would eventually fetch a more sustainable model. RBI and Indian government need to closely monitor the developments and build a strategic framework to facilitate the smooth growth path.