Export Dynamics at the Firm & Regional Levels

Beyond Local Markets: The Evolution of Foreign Companies in India

By Jaya Prakash Pradhan December 4, 2011 780

Eurasian Journal of Business And Economics 4 7 2011

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Type	Journal article (empirical study)
Title	“Export-orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications”
Authors	Jaya Prakash Pradhan, Keshab Das & Mahua Paul
Published	2011 · Eurasian Journal of Business and Economics, 4(7), pp. 99–127 · International Ataturk Alatoo University
Data	Foreign firms across 17 Indian manufacturing industries · 1991–2005
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This is a plain-language summary of “Export-orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications” (Pradhan, Das & Paul, Eurasian Journal of Business and Economics, 2011).

In short:

Foreign firms usually come to India to sell to its market. This study asks what later makes some of them export — a shift that benefits the host economy more.
A counterintuitive answer: India’s large, growing domestic market actually holds foreign firms back from exporting.
They turn to exports when they see local Indian firms exporting, face import competition, and operate under more liberal policy.

The puzzle

Most foreign investment in India is market-seeking — companies come to sell to a huge and growing consumer base. But for the host country, export-oriented foreign investment is generally more valuable than purely domestic-market investment. So the question this study (with Keshab Das and Mahua Paul) asks is a practical one: what makes a foreign firm that came to sell in India start exporting from it?

There’s a real puzzle in the numbers. Foreign firms’ exports from India grew enormously — from about ₹7,536 crore in the early 1990s to ₹61,159 crore by 2005 (in study-period rupees). And yet they still accounted for only 7–9% of India’s total exports. Big growth, but a stubbornly small slice.

The market magnet

Part of the explanation is counterintuitive. You might assume a bigger Indian market would give foreign firms a stronger base from which to export. The study finds the opposite: a large, fast-growing domestic market pulls foreign firms inward, concentrating their energy on local sales rather than exports. The very thing that attracts market-seeking investment is what then discourages it from exporting.

So what pushes the other way? Three forces stood out. Demonstration effects — when foreign firms see local Indian companies succeeding at exports, they’re more likely to try it themselves. Import competition — pressure from imports in the home market pushes firms to look outward. And liberalised policy — a more open trade and investment environment makes exporting easier. There’s also a competition dynamic worth noting: when domestic rivals grow stronger, some foreign firms double down locally (investing in technology to defend market share), while others respond by turning abroad rather than ceding ground or exiting.

Patterns by industry

The shift wasn’t uniform. Basic metals and computers showed the biggest jumps in export orientation, while some traditionally export-heavy sectors like food products saw declining foreign-firm participation. Interestingly, technology-intensive industries generally showed lower export propensity among foreign affiliates — a reminder that the relationship between technology and exporting is not always straightforward.

Why it matters

Because export-oriented foreign investment tends to do more for a host economy than market-seeking investment alone, the findings carry a clear policy message: attracting FDI by waving the size of the domestic market is not enough — that same market size can entrench an inward focus. Instead, the levers that work are building local firms’ export capabilities (to create demonstration effects), continuing liberalisation, and managing competition thoughtfully — while being cautious about leaning too heavily on raw-material exports. India can be a regional export hub for foreign firms, but turning market-seekers into exporters takes the right mix of conditions, not just a big market.

Read the academic abstract

This paper addresses an important development issue in the literature on international production: what motivates market-seeking foreign direct investment (FDI) to undertake export activities. It is well recognised that export-oriented FDI is more beneficial for the host country than purely domestic-market-seeking FDI. However, the existing literature has not examined the factors that could motivate existing market-seeking FDI into export activities. This study addresses that gap and identifies the factors encouraging market-seeking FDI to take up exporting. An empirical analysis of the export orientation of foreign firms across 17 Indian manufacturing industries during 1991–2005 brings out several policy issues important for increasing the export-orientation of foreign firms in a developing country like India.

Cite this article

Pradhan, J. P., Das, K., & Paul, M. (2011). Export-orientation of foreign manufacturing affiliates in India: Factors, tendencies and implications. Eurasian Journal of Business and Economics, 4(7), 99–127.

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