Going Global: What Drives Indian Manufacturing Firms to Invest Abroad?

By Jaya Prakash Pradhan December 2, 2004 1K

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Type	Journal article (empirical study)
Title	“The Determinants of Outward Foreign Direct Investment: A Firm-Level Analysis of Indian Manufacturing”
Author	Jaya Prakash Pradhan
Published	2004 · Oxford Development Studies, 32(4), pp. 619–639 · Routledge (Taylor & Francis)
Data	2,500+ overseas projects by Indian manufacturers · 1990–2000
Read	DOI: 10.1080/1360081042000293371

This is a plain-language summary of “The Determinants of Outward Foreign Direct Investment: A Firm-Level Analysis of Indian Manufacturing” (Pradhan, Oxford Development Studies, 2004).

In short:

In the 1990s, Indian manufacturers launched over 2,500 overseas projects — roughly an eleven-fold jump on previous decades.
What separated the firms that went abroad wasn’t mainly size or money: it was skill and management quality, in-house R&D, and prior export experience.
The effect of size and age was non-linear — both help, but only up to a point — and liberalisation gave the whole wave a push.

An investment boom

When India opened its economy in the 1990s, its manufacturers did something they had rarely done before: they began investing abroad in earnest. Across 1990–2000 they launched more than 2,500 overseas projects, an eleven-fold increase on earlier decades. This study asks the firm-level question behind that boom — which companies went global, and why?

It’s about capability, not just size

The headline finding is that a firm’s people mattered more than its sheer scale. Skill intensity — the calibre of a company’s workforce and management — stood out as a distinctive Indian advantage: low-cost yet genuinely skilled management gave Indian firms an edge abroad, exactly the kind of capability that older theories of developing-country multinationals had pointed to.

Around that core sat several other firm strengths. In-house R&D strongly raised the odds of investing overseas — and importantly, developing one’s own technology mattered, whereas merely importing foreign technology did not; this was especially true in knowledge-intensive sectors like electronics and pharmaceuticals. Export experience was among the strongest predictors of all. And productivity and product differentiation mattered too, though their weight varied by sector — the study is careful to note that these firm characteristics play out differently across industries.

Exports first, investment next

One pattern is worth drawing out on its own. Firms rarely leapt straight from the domestic market to foreign production; they got there by way of exporting. Companies built strength at home, learned foreign markets by selling into them, and only then set up operations abroad — a natural progression from trade to investment.

The non-linear twist

Size and age behaved less simply than one might expect. Bigger firms were more likely to invest abroad — but the advantage tapered off beyond a point rather than rising forever. Age told a similar story, with the pull of experience peaking and then fading (around the six-decade mark), and younger firms in technology-intensive sectors often defied the pattern altogether. In other words, being large and established helped, but neither guaranteed a global future.

Why it matters

The study captures a hinge moment — Indian manufacturing’s shift from a protected home market to genuine global competition — and its lesson is that the shift was powered by capability as much as by scale: innovation, skilled management, and export learning. That carries straight into policy. If R&D, exporting, and management quality are what turn domestic firms into global ones, then supporting research, promoting exports, and investing in management and skills are the levers most likely to widen the circle of Indian firms that can compete abroad.

Read the academic abstract

This paper analyses the determinants of the overseas direct investment activity of Indian manufacturing enterprises. In general, several firm-specific characteristics — age, size, R&D intensity, skill intensity, and export orientation — are found to be important explanatory factors in the outward foreign direct investment (O-FDI) activity of Indian firms. The impact of age and size on O-FDI is non-linear. Product-differentiation activities and firm productivity are other useful factors in overseas production expansion in certain industries. The study finds that the performance of these firm-specific variables is subject to sectoral dynamics, and that the internationalisation of Indian firms’ production was partly fuelled by policy liberalisation during the 1990s.

Cite this article

Pradhan, J. P. (2004). The determinants of outward foreign direct investment: A firm-level analysis of Indian manufacturing. Oxford Development Studies, 32(4), 619–639. https://doi.org/10.1080/1360081042000293371

Read the paper (DOI) →