Comment on “Internationalization of Indian Enterprises: Patterns, Strategies, Ownership Advantages, and Implications”

India's outward foreign direct investment (FDI) began to increase notably in the 21st century. The pace of the increase accelerated sharply in 2005 and its trend has been continuing. A number of Indian companies, including Tata Steel and Tata Motors, have become global corporate players by effectively utilizing FDI. Outward FDI in the world was dominated by the companies from developed countries until recently, and outward FDI from developing countries such as India is a rather new development. In the light of the paucity of studies on India's outward FDI mainly because of its relatively short history, Kumar (2008) provides an excellent analysis of India's outward FDI from various perspectives, including India's policy toward outward FDI, the motivations of outward FDI by Indian multinational enterprises (MNE), the sources of competitiveness of Indian MNEs, and the impacts of outward FDI on MNEs and Indian economy. A careful analysis of India's outward FDI by Kumar reveals a number of its interesting and important characteristics. One of the most important observations may be that the characteristics of recent outward FDI are very different from those of earlier periods. Specifically, mergers and acquisitions (M&A) rather than greenfield investment have become a major mode of outward FDI by Indian MNEs. M&As, whose importance in FDI in the world increased significantly in recent decades, especially for FDI from developed countries, enabled Indian MNEs to undertake large-scale FDI. Kumar argues that the sources of Indian MNEs’ competitiveness, which is required for undertaking FDI, are managerial expertise, low-cost production, and engineering ability. I would like to emphasize the capability of Indian MNEs to raise funds as an important factor, because without it M&As would not be possible. A changing global FDI environment, which has become increasingly conducive to M&As due to deregulation and liberalization, played a role for the expansion of India's outward FDI. Having indicated this, I should stress the capability of Indian MNEs that has enabled them to capture FDI opportunities while firms from many other countries have not been able to do so. In this regard, nonresident Indians appear to have contributed to the success of Indian MNEs’ outward investment, as they provided Indian MNEs with not only human resources, but also various networks including financial networks. According to Kumar, the strength of Indian MNEs was nurtured through the process of import substitution by restricting imports and inward FDI. On development strategy such as import substitution policy, Kumar argues that the Indian experience is similar to the Japanese and Korean tradition of infant-industry protection strategy in that the governments protected domestic enterprises/industries until they became competitive. Although I do share a view that protection may be justified to nurture domestic enterprises/industries, I would like to emphasize two important qualifying conditions. One is the temporary nature of protection. A schedule of liberalization has to be explicitly indicated and the schedule has to be strictly implemented. The second condition is to increase and maintain a high level of competition among domestic enterprises. Unless these two conditions are satisfied, efficient import substitution, or the development of competitive domestic enterprises, behind protection is not possible. These two points may be validated by the Indian experience of reforms and liberalization since the early 1990s, which contributed to the development of competitive Indian MNEs. The impacts of rapidly growing India's outward FDI on its own economy are of great importance because India is still in a low development stage. Kumar argues that although it is premature to make a judgment because of its short history, India's outward FDI seems to contribute positively to India's economic development. This assertion is based on the perception that outward FDI leads to the exploitation of synergies, the improvement of Indian enterprises, increasing remittances of profits and dividends, and other benefits. While these favorable effects are certainly possibilities, the success of Indian MNEs may result in worsening the income gap in India, possibly becoming a source of social and political instability. Successful Indian MNEs create rich Indian business persons as these business persons can capitalize on their human resources by working for MNEs, while abundant unskilled Indian workers may remain unemployed or lowly paid unless MNEs provide them with employment opportunities with reasonable wages. A contrast between successful business persons and unfortunate unskilled workers is likely to be very distinct in developing countries such as India. As Kumar correctly argues, to cope with this problem India needs to liberalize its trade and FDI regimes, so that abundant workers would be given opportunities to engage in the production of products with a comparative advantage and to increase their income. As Kumar noted, the Indian experiences of outward FDI appear to be quite unique in several aspects such as the large-scale of outward FDI for a country with a relatively low level of economic development. Despite these unique features of India as an active FDI supplier, a number of important implications may be drawn from the Indian experiences for developing countries with a potential for becoming a source of outward FDI. The most important implication may be the importance of developing capable human resources with management expertise and engineering ability. Indeed, without capable human resources, a country cannot achieve economic growth and let alone become a competitive outward FDI supplier.