The Big Picture In the 1990s, Indian companies embarked on an unprecedented international expansion. From 1990-2000, Indian firms launched over 2,500 overseas projects – an 11-fold increase from previous decades. But what drives these companies to invest abroad? This groundbreaking study by Pradhan reveals the complex interplay of firm characteristics, industry dynamics, and policy changes that shaped India’s outward investment boom.
Key Findings: The DNA of Global Indian Firms
- Size & Experience Matter – But There’s a Twist
- Larger firms are more likely to invest abroad, but only up to a point
- Company age helps, but peaks around 60 years
- Surprisingly, younger firms in tech sectors often buck this trend
- Innovation is Key
- In-house R&D significantly boosts foreign investment
- Just importing foreign technology isn’t enough – companies need to develop their own capabilities
- This is especially true in knowledge-intensive sectors like electronics and pharmaceuticals
- The Export Connection
- Previous export experience strongly predicts foreign investment
- Companies often follow their exports with direct investment
- This creates a natural progression from domestic to international operations
- The Management Factor
- Quality of management emerges as the single most important factor
- Low-cost but skilled management gives Indian firms a unique advantage
- This supports earlier theories about developing country multinationals
Policy Impact India’s economic liberalization in the 1990s had a dramatic effect:
- Relaxed regulations on foreign investment
- Increased competitive pressure pushing firms to go global
- Greater access to international markets and capital
Practical Implications
For Business Leaders:
- Focus on building R&D capabilities
- Use exports as a stepping stone to foreign investment
- Invest in management development
- Consider size and timing carefully
For Policymakers:
- Continue liberalization policies
- Support R&D development
- Enhance export promotion
- Focus on management education
Historical Context & Future Outlook This research captures a pivotal moment in Indian business history – the transition from a protected domestic market to global competition. The findings suggest that Indian companies’ international expansion is driven not just by size and resources, but by their ability to innovate and adapt to global markets.
Published Source: Pradhan, Jaya Prakash (2004), ‘The Determinants of Outward Foreign Direct Investment: A Firm Level Analysis of Indian Manufacturing’, Oxford Development Studies, 32 (4), pp. 619–639, Publisher: Routledge, Taylor & Francis.
Academic Abstract:
This paper analyses the determinants of the overseas direct investment activity of Indian manufacturing enterprises. In general, several firm-specific characteristics such as age, size, R&D intensity, skill intensity and export orientation are observed 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 has been observed to be non-linear. The product differentiation activities and the productivity of firms are other useful factors in overseas production expansion in certain industries. The study reveals that the performance of these firm-specific variables is subject to sectoral dynamics. Internationalization of production activities of Indian firms has been observed to be partly fuelled by policy liberalization during the 1990s.
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