Beyond Local Markets: The Evolution of Foreign Companies in India

The Big Question Imagine you’re a foreign company that came to India to sell to its massive local market. What would make you start thinking about exports? This fascinating research by Pradhan, Das, and Paul uncovers the hidden factors that transform domestic-focused foreign firms into export powerhouses.

A Changing Landscape The story starts with an interesting puzzle. Foreign companies in India have dramatically increased their exports – from ₹7,536 crore in the early 1990s to ₹61,159 crore by 2005. Yet surprisingly, they still account for only 7-9% of India’s total exports. Why this paradox?

The Market Magnet Effect Think of India’s huge domestic market as a powerful magnet. The research reveals that this magnet can actually hold foreign companies back from exporting. When the local market is large and growing, companies tend to focus their energy there rather than venture into exports.

The Competition Dance Here’s where it gets interesting. When domestic Indian companies become stronger competitors, foreign firms react in two ways:

• Some double down on the local market, investing more in technology to protect their market share
• Others start looking abroad for new opportunities, especially if they don’t want to exit India entirely

The Export Inspiration Foreign companies are more likely to start exporting when:

• They see local Indian companies successfully exporting (showing it can be done)
• They face increased competition from imports (pushing them to look beyond India)
• They operate in a more liberalized policy environment (making exports easier)

Key Industry Insights The research reveals fascinating patterns across different industries:

• Basic metals and computers showed the biggest jump in export orientation
• Traditional export-heavy sectors like food products saw declining foreign firm participation
• Technology-intensive industries generally showed lower export propensity

Practical Implications

For Foreign Companies:

• Consider export opportunities early, even if initially focused on domestic market
• Watch domestic competitors’ export success for market signals
• Use India as a regional export hub while serving the local market

For Policymakers:

• Balance attracting market-seeking FDI with export promotion
• Support domestic firms’ export capabilities to create demonstration effects
• Continue liberalization policies that encourage export orientation
• Be cautious about over-emphasis on raw material exports

The research shows that transforming market-seeking foreign investment into export-oriented operations is possible, but requires the right mix of market conditions, competitive dynamics, and policy environment.

Academic Abstract:

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

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Full citation: Pradhan, Jaya Prakash, Keshab Das and Mahua Paul (2011), ‘Export-orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications’, Eurasian Journal of Business and Economics, 4(7), pp. 99–127, Publisher: International Ataturk Alatoo University.

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