THE IMPACT OF FDI ON INDIAN ECONOMY: A CASE STUDY
OFDI (Outward Foreign Direct Investment) from India has increased appreciably over the past decade following the reforms and liberalization of policies undertaken by the Government since 1991. OFDI has emerged as an important mechanism through which the Indian economy is integrated with the global economy, along with growing trade and inward FDI (Foreign Direct Investment). The OFDI behavior of Indian firms in the earlier periods of seventies and eighties was found to be limited to a small group of large-sized family-owned business houses investing mostly in a selected group of developing countries. The restrictive government policies on firm's growth followed in India seems to have pushed these firms towards OFDI. In many cases, the Ownership pattern of Indian OFDI projects was minority-owned. The joint venture nature of Indian OFDI with intermediate technologies has been found to be appropriate to the needs and requirement of fellow developing countries. The Indian OFDI policy that time was more restrictive with cumbersome approval procedures.
However, the character of OFDI has undergone significant changes since the nineties. A large number of Indian firms from increasing number of industries and services sectors have taken the route of overseas investment to expand globally. Unlike the earlier periods, Indian outward investors have gone for complete control over their overseas ventures and increasingly started investing in developed parts of the world economy. This increased quantum of OFDI from India has been led by a number of factors and policy liberalization covering OFDI has been one among them. The sharp rise in OFDI since 1991 has been accompanied by a shift in the geographical and sectoral focus. Indian companies have also diversified sectorally to focus on areas of the country's emerging comparative advantages such as in pharmaceuticals and IT software automobiles, auto-ancillary and telecom etc. Indian enterprises have also started to acquire companies abroad to obtain access to marketing. It is contended that the new wave of OFDI reflects changes in the structure of the world economy that are a result of globalization and regionalization of economic activity. These phenomena are associated with:
• Technological advances within the sectors • Liberalization of markets
• Establishment of regional trading blocks
It is also contended that the second stage of OFDI is complementary to the first stage and simply is an intermediate stage of evolution of OFDI as the home country moves along its "IDP". Such OFDI has been a result of government assisted upgrading of location specific advantages of home country, which in turn has helped upgrade the competitive advantages of their firms. Also while these Ownership specific advantages remain primarily country of origin specific they are being supplemented by FDI intended to augment rather than exploit such advantages.
In light of the foregoing analysis, regarding the outward direct investment from developing countries especially India, it can be said that there has been a distinct and comprehensive change. The evidence presented here shows that the evolution of Indian OFDI is entirely consistent with the predictions of the "IDP". Each stage has been appropriate to the extent and pattern of the country's economic development. Such a growth has been conditional on the sustained improvement of the Ownership specific advantages of the firms, resulting from a continuous up gradation of the Locational specific advantages of the home country. While improved Locational advantages are a natural consequence of economic development and restructuring as the country moves from stage 2 to stage 3, this process can be accelerated by a market oriented and a holistic government policy towards trade, industrial development and innovation. This has not only helped to upgrade its indigenous resources but has encouraged the domestic firms to augment their competitive advantages by acquiring foreign resources.