From Tigers to Cautious Cats: How the Global Financial Crisis Tamed Indian Companies’ International Ambitions

By Jaya Prakash Pradhan December 5, 2009 753

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Type	Journal article (note)
Title	“Indian FDI Falls in Global Economic Crisis: Indian Multinationals Tread Cautiously”
Author	Jaya Prakash Pradhan
Published	2009 · Transnational Corporations Review, 1(4), pp. 1–11 · Routledge (Taylor & Francis)
Also as	Columbia FDI Perspectives, No. 11 (Columbia University)
Read	DOI · PDF

This is a plain-language summary of “Indian FDI Falls in Global Economic Crisis: Indian Multinationals Tread Cautiously” (Pradhan, Transnational Corporations Review, 2009).

In short:

In 2004–07, Indian outward investment grew 98% a year — the fastest of any major emerging market, ahead of China, Malaysia, Russia, and Korea.
That surge was fuelled by big overseas acquisitions, which made it fragile: when the 2008 crisis made financing acquisitions hard, India’s outward investment fell 6.3% even as China’s doubled.
The pullback was uneven — oil, gas, and IT kept going abroad, while manufacturing’s overseas investment fell about 79%.

The rise before the fall

In the mid-2000s, Indian companies were the most aggressive overseas investors in the emerging world. Their outward foreign direct investment grew at an average of 98% a year between 2004 and 2007 — an unprecedented pace that put India at the front of the pack.

India’s 98% outpaced China’s 74%, Malaysia’s 70%, Russia’s 53%, and South Korea’s 51% — though, as the paper is careful to note, from a much lower base. The momentum looked unstoppable. It wasn’t.

The acquisition trap

The key to understanding why India’s expansion proved fragile lies in how it grew. Much of the surge had been fuelled by large-scale overseas acquisitions — and acquisitions need financing. When the global financial crisis froze credit markets from late 2007, that engine stalled. Indian firms that had borrowed heavily to buy companies abroad suddenly faced mounting debt, a Sensex that fell roughly 48% in a year, and a sharply swinging rupee. Global demand and commodity prices collapsed at the same time. The result was a 6.3% decline in India’s outward investment in 2008 — modest-sounding, but a striking reversal from 98% annual growth, and in sharp contrast to China, whose state-backed firms (cushioned by vast foreign-exchange reserves) actually doubled their overseas investment that year.

Uneven by sector

The retreat wasn’t uniform. Some industries kept expanding abroad while others pulled back hard.

Oil and gas firms — often state-owned and pursuing energy security — kept hunting for resources abroad; mining showed signs of revival by 2009; and IT services stayed relatively stable. On the other side, manufacturing’s overseas investment fell about 79%, hotels and tourism investment nearly disappeared, and metalworking firms that had been major overseas investors dramatically cut back. Sectors driven by strategic, resource-seeking goals weathered the storm; those dependent on debt-financed expansion did not.

Real companies, real retreats

The aggregate numbers had concrete human consequences. Suzlon Energy had to sell about 10% of its international operations; Sakthi Sugars saw its European units enter bankruptcy; and Reliance Industries watched a German subsidiary begin insolvency proceedings. Several firms had to close or sell overseas operations outright — the corporate tigers of a year earlier learning, abruptly, to tread carefully.

What recovery would take

The paper is not all gloom. It ties the eventual revival of Indian outward ambition to three conditions — a recovery in global and domestic growth, improving corporate profitability, and easier access to financing — and notes a silver lining: with assets abroad suddenly cheaper, cash-rich Indian firms could still acquire overseas businesses at attractive valuations, and resource sectors like oil and gas (notably in Africa) remained appealing. The deeper lesson it draws is about financial prudence: expansion built on cheap, abundant credit is only as durable as the credit that funds it.

Read the academic abstract

Just over a year ago, India’s outward foreign direct investment (OFDI) seemed to be on a path of rapid and sustained growth. Its average annual growth of 98% between 2004 and 2007 was unprecedented — far ahead of other emerging markets such as China (74%), Malaysia (70%), Russia (53%), and the Republic of Korea (51%), albeit from a much lower base. However, much of that recent growth had been fuelled by large-scale overseas acquisitions, and it faltered when the global financial crisis that began in late 2007 made financing acquisitions harder.

Cite this article

Pradhan, J. P. (2009). Indian FDI falls in global economic crisis: Indian multinationals tread cautiously. Transnational Corporations Review, 1(4), 1–11. https://doi.org/10.1080/19186444.2009.11658207

Also released as Columbia FDI Perspectives, No. 11 (Columbia Law School & The Earth Institute, Columbia University).

DOI → · Read the paper (PDF) →