India has been traditionally a country that has looked to FDI for supporting its investment endeavours. Comparisons are made regularly with China on how their policies are relatively more supportive of such investment flows. However, somewhere in the background we have witnessed a sudden increase in outward FDI flows, which though not displaying a continuous trend is significant. An increasing number of Indian firms are resorting to outward investment in order to access new technologies, skills and managerial expertise etc. from the developed countries.

In the last 3 years almost $ 50 bn of FDI outflows were witnessed and compared favourably with the total inflows coming in. Grant Thornton data suggests that there have been nearly 500 such outbound M & A deals valued at around $ 40 bn in the last 3 years. Clearly, Indian Inc has come of age and is looking well beyond the domestic borders for business. This also signifies that Indian companies have become power houses in the global arena where they are in a position to not just compete with their counterparts in other nations but also get assimilated into their systems.

In fact traditionally Indian corporates have been the target of international acquisitions; but things have changed in the last decade or so with reverse trends being witnessed. Industry groups like the Tatas, Suzlon, Dr Reddy's Labs etc have made some substantial outbound investments during this period. Some of the more prominent deals have been Tata-Corus, Hindalco-Novartis, Suzlon RE Power, United Spirits-Whyte and Mackay etc. Most of these overseas acquisitions have given the companies significant advantage in terms of scale, size, global reach, leadership position and better profile. The sectors that have been in the midst of such activity have been industrial goods, steel, auto components, resource extraction, beverages, cosmetics, pharmaceuticals, software, financial services etc. Overseas markets certainly bring in higher margins as revenue increases on higher volumes. Such outward FDI from India in the earlier years were more due to policies such as the Monopolies and Restrictive Trade Practices Act (MRTP), Foreign Exchange Regulation Act, and the south-south cooperation. This was very gradually replaced by motives such as the development of trade-supporting networks abroad, leveraging ownership advantages in an efficient manner, increasing the scale of production across regions, acquisition of technologies, skills, marketing opportunities, etc. Today it is more a pressure of global competitiveness which is driving such movement of funds.

Traditional theories talk of countries graduating through three stages. First, they start from a stage where inward FDI allows domestic firms to acquire technology and other manufacturing capabilities. Second, they move to one where domestic industrial capability allows these firms to export their output. Third, they look at investing overseas and that too in markets that are lower in the pecking order. India developed its industrial base through import substitution without too much support from FDI in the early stages. But outward FDI flows have emerged earlier than expected compared to the route followed by some of the industrializing nations. Also more significantly capital outflows and acquisitions have been to developed markets which is significant.

Given that the Indian domestic market is large, the motivation can definitely not be only size of market except for say niche products although there are studies that show that this has been the main motivation. Raw material access is also a benefit. But, clearly Indian companies are looking to tap simultaneously opportunities elsewhere with regulatory constraints coming down on both ends. Indian rules, including those of the RBI make it easier to make investments overseas while the recipient countries too are progressively more responsive.

There have been basically two sets of factors that have worked to making this a successful venture: push and pull factors. Within the push factors, there are five thoughts. First, the guidelines for overseas investment have been freed to a large extent which coupled with an extended regime of low interest rates in the early part of this decade enabled companies to access funds for facilitating such investments. Second, the balance sheets of companies have strengthened over time which has made them look towards inorganic growth to move forward. In this context, both domestic and global M & A activity has been pursued. The increasing number of home-grown Indian firms (e.g. Tata Group, Infosys, Ranbaxy) and their improving ownership-specific advantages, including financial capability, are among the key drivers. Third, the quest to acquire technology that is not ordinarily available in the country is another reason or companies to look overseas. By acquiring companies they can automatically have access to these technologies. More importantly one also gets access to the brand names which are a great benefit.

Fourth, there is also the attraction of obtaining resources like mining, oil exploration which provides companies that have the financial resources to seek greater access to energy products to expand overseas. For instance, Hindalco had acquired two copper mines in Australia and ONGC bought stake in a Sudan oil field from Talisman Energy (Canada) to secure the supply of resources. ONGC also acquired stake in Sakhalin oil and gas field in the Russian Federation and a gas field in Myanmar. This helps in risk diversification due to uncertainty about future supplies of raw materials. In fact, even on the agricultural front companies are looking to acquire land in countries in Africa to grow crops through contract farming agreements. Lastly, companies also look overseas in case there is excess production or better yield on assets which drives companies across domestic borders. This has partly been driven by domestic restrictions on expansion.

The pull factors on the other hand have been led by better market access. Indian pharma companies for example have the USFDA approved facilities and are looking for acquisitions in the regulated markets for ease of registration processes. Second, the global business community too has shown confidence in Indian entrepreneurial skills and prowess and been more open to collaborations and takeovers. Third, post the quota regime Indian corporates have been given an impetus to look for overseas ventures. The textile industry for example was handicapped on this score. Lastly, others industries like say the IT sector has catered to businesses in various geographies.

The large scale of outward FDI has had a varied impact at both the micro and macro levels. At the micro level firms are impacted by higher costs (especially interest in case leverage is involved), pressure on profits, higher debt levels and a certain level of uncertainty regarding future performance of this investment. However this is always assumed to be outweighed by the accompanying benefits that come along with such investment. Greater access to foreign markets, technological upgradation, realization of economies of scale and acquisition of brand names are some of the gains from such investment. The success of such investment ultimately gets reflected in the valuation of the acquiring company.

At the economy level there are the benefits like market access for exports, scale economies in production, technology acquisition and upgrading, sourcing inputs or raw materials etc. In a way this also helps to conserve domestic resources if these materials are being procured from the host nations. From the balance of payments perspective to begin with there is pressure as dollars flow out. However, the annuity like returns in the form of dividend or royalty or repatriation of profits in the long run would compensate to a large extent this outflow. Hence, the net effect would be positive in the long run..

India now has quite joined the league of China in the trend of emerging markets making inroads into developed countries. However, while Chinese overseas acquisitions are carried out by state-owned enterprises, Indian outward FDI involves mostly private-sector firms, typically the large, diversified, business houses. Chinese overseas investments have tended to be in primary sectors, notably minerals and energy, while Indian investments are more distributed across a range of sectors, including steel and pharmaceuticals at one end to information technology and business services at the other.

Outward direct investments can play an important role in enhancing the global competitiveness of firms from developing economies by providing access to strategic assets, technology, skills, natural resources and markets, and increasing resources. Perhaps most importantly, firms from these economies have been increasingly affected by global competition. They have come to realize the growing importance of accessing international markets and connecting to global production system. Knowledge networks of Indian firms are increasingly subject to the same forces that increasingly shape firm behavior: competition - through imports, inward FDI, licensing, franchising etc. - is everywhere. In the globalizing world economy, Indian firms, like their developed countries' counterparts, need to develop a portfolio of location assets, as a source of their international competitiveness. Given the success of these ventures outside, which to begin with was confined to the large conglomerates, there will be trend to movement to the medium level companies too. The challenge will of course be funding for this purpose. The belief is that the encouragement and significant liberalization of policies of the Government of India will continue to play an instrumental role in the rapid expansion of Indian firms abroad.