Emerging Trends Of “Reverse” FDI from India
Introduction: Foreign Direct Investment (FDI) plays an important role in development of the economy. Government of all the countries are liberalizing the industrial policies towards FDI to attract more of foreign investment. Because the foreign investment brings advanced technology, technical know-how, foreign capital and better management practices. Major amount of FDI moves from developed economy to developing and under developed economy. But since the past few years most of the leading firms from the developing countries especially from India have started to make an investment in other countries, including developed countries.
Particularly in India the outflow of investment is going to exceed inflow of investment. Indian leading players like Tata group, Bajaj Auto, TVS group, and major players from automobile industry, Pharmaceutical industry, IT & BPO industry, Steel Industry, etc. going to global market by establishing own firm, and merger and acquisition, green field technology etc. Though developing country lack in technology, capital adequacy, technical know-how and management practices some of the factors inducing the domestic firm to go globally.
Factors for Outflow of FDI: The factor includes favourable economic condition, favourable market situation, benefits from valuation of foreign firm, some time the domestic especially the government of India as well as Reserve bank of India (RBI) liberalising policy of outflow of investment and increasing foreign reserve also encouraging domestic firms to go for global. This paper tries to analyse such factors, which will induce the Indian firms to make an investment in other country particularly in developed country like US, UK, China etc.
A mix of macro economic and financial market developments that have put the Indian firms for out bound investment, the availability of low cost funds to finance acquisition and foreign currency borrowings at over $12 billion in 2005, supplemented by $2-3 billion private equity funds have provided the ammunition to Indian business firms for Indian as well as overseas investment. In June 2005, the leading Indian VIDEOCON group acquired Thomson colour picture tube manufacturing firm for €240 million. VIDEOCON took this acquisition to supply colour picture tube. Jindal Steel & power has proposed to invest $2.3 billion over next 10 years in Bolivia, one of the south American country have abundant iron ore resources, setting up a 1.7 million tonnes per annum.
This integrated steel plant can be raised money from domestic financial institution or through foreign currency bonds. Indian steel players going global looking for minerals, but global players are here doing precisely the same thing. Korean major POSCO is already in India, planning a 12 million tonne steel plant at a total investment of $12 billion, while the world number one, the $72billion Arcelor mittal steel, is looking to make its double in India by pumping in Rs. 40000 cr. Mittal Steel group Acquired UK based Arcelor to become as a global player in steel industry and planning to enter into Chinese market to take off the opportunity. India based Oberai group is in the process of establishing a $100 Million Hotel in Dubai and also examining opportunities in London and New York for its travel and Hospitality Industry in the Global market.
The Indian IT and BPO Companies have been on an overseas stepping for faster and quicker growth, to acquire new technology and capabilities and in the process of eliminating the competition and increase market share. The following table shows their overseas stepping with deal size of acquisition.
Acquirer Acquire Location Deal Size
Wipro Saraware Oy Finland $ 32 Million.
Wipro Enabler Portugal $ 54 Million
Wipro Quantech US NA
Wipro c Mango US $ 20 Million
Subex Azure UK $ 140 Million
Trans Works Minacs Canada $ 125 Million
NIIT Tech Room Sol UK $ 25 Million
NIIT Element K US $ 40 Million
Sasken Botnia Finland $ 45 Million
Genpack Money Line US NA
Source: Economic Times 07, August 2006.
The acquisition by Domestic Company in the International Market is a part of Business strategy to establish the brand name of Indian Companies across the Globe and not limited to a few sectors but the Industry is ranging from Pharmaceuticals, Tele Com, Automobile and ancillaries to IT. To increase the Global foothold some of the Indian companies acquiring the Leading players in the Global Market, TATA steels recent announcements to buy out Anglo-Dutch steel major Corus for $ 8.04 Billion as a result the FDI outflow exceeding inflow this year. Country’s largest electronic firm VIDEOCON is planning to acquire South Korean Daewoo electronics for $ 700 Million. The India’s Largest Corporate TATA group alone acquire US based Energy Brands Inc. for $ 677 Million by TATA tea. TATA steel buy out a Singapore based Nat Steel for $ 486 Million. And TATA coffees buy out 8’O clock coffee for $ 220 Million. And TATA steels another acquisition announcement of Corus steel for $ 8.04 Billion.
The Overseas acquisition by few major Domestic Companies this year alone amounted to over $ 10 Billion. The number of Indian Companies overseas acquisition leads to exceeds of outflow of FDI over inflow. According to report by Crisil centre for Economic Research, the rising tide of Indian overseas investment reflect the importance of operating in Globalised market place. Indian firms are now driven by the need to seek the cheapest resource mix and locate operations where these are available.
Changes in the International regulatory Environment especially in the Intellectual Property Right (IPR) have also been a critical driven for Indian overseas acquisition. According to Department of Industrial policy and promotion FDI Inflow have doubled during January - July 2006 to $ 4.7 Billion as compared to the same period in 2005. FDI outflow also been on an upward climb and are said to overtake the inflow by the year-end.
The RBI has progressively relaxed the control on overseas investment and RBI’s strategy of Internationalisation of Indian Corporate sector also a important reasons for overseas investment by Indian Companies. A few of amendments to the RBI guidelines have effectively raised permissible investment limits and steam line processes. And the increasing forex Reserve (forex reserve stand at over $ 165.33 Billion) also an important factor. Globalisation induces the Indian firms to find a place in Developed market. Romanian Pharma firm Terapla had also been acquired by Indian ranbaxy for $ 324 Million earlier this year. According to Gujarat Heavy Chemicals Ltd’s (GHCL) Chairman “We have strong Management base in India and with further expansion in our Global marketing platform, our production cost go down further resulting in improved margin”. GHCL acquire UK based retail change Roseby early this year which has 300 retail outlets across the UK, now in critical price negotiation with French home textile retail chain, which currently have about 150 stores in the US and eastern Europe besides home Country. GHCL already acquire US based Dan River which has wide sales and distribution network in UK.
Petroleum biggies ONGC, GAIL and IOC are also now expanding opportunities in the oil rich land of kazakhastan. Kazakhastan targeting the investment of $ 8.6 billion between 2006-10 and $13.5 Billion in 2011 - 2015 to explore and extract Hydrocarbons. “Indian entrepreneurs have undergone a transformation of mindset and are looking at stepping outside the country to avail the benefit of Globalisation, a reason why more than 50% of the recent deals are outbound“ says Vikaram Utam Singh, Head Financial advisory KPMG.
Acquisition may be under taken with the objectives like Strengthening of the supply chain like GHCL. Large Industrial houses like Reliance and TATA looking at de-risking and diversifying revenue streams. Several forma majors looking to US and European market for distribution network acquisition. The booming stock market and tax benefit on long term Capital gain has also provided an overseas acquisition. Capital market related investment like FCCB (Foreign Currency Convertible Bonds), Equity and depositary investment also a driver for outbound dealings.
Out flow of Investment from India in 2005.
Country Investment in $ Million.
Conclusion: The Globalisation policy of Foreign Countries and market situations attract more Indians for overseas investment. A large number of companies have shifted their production facilities to the places like China, Thailand, Malaysia, Mexico, etc, to achieve internationally. Ranbaxy, Sundram fasteners, Ajanta clocks, TVS Motors, Bajaj Auto, Essel, Jindal strips have set-up manufacturing facilities in China and Suzion energy announced the setting of integrated wind turbine generator manufacturing facility in China for $ 16 Million. The other factors, US and Canadian governments have drastically reduced the shipment cost to attract more FDI.
On Tuesday the 31st of October 2006 RBI has taken the next step towards bringing in Capital Account Convertibility in India by announcing a slew of steps that relax the norms for Overseas Investments by Indian Companies that want to grow and establish themselves as truly Indian MNCs. This is indeed a positive and welcome step in making Indian Industries more competitive in the Global business environment. 11th January 2007 From India