Foreign Direct Investments from India 1964-1983 (Doctoral Dissertation /Thesis of the Indian Institute of Management, Calcutta)

Doctoral dissertation for Award of the Title Fellow of the Indian Institute of Management, Calcutta

614 Pages Posted: 23 Feb 2021

Date Written: April 1, 1988


Foreign direct investments from India, although not exactly a recent phenomenon, has attracted the attention of scholars only in the recent past. Nevertheless a fairly substantial literature has emerged on the phenomenon of foreign direct investments (FDI) from the LDCs. The published literature on FDI from India has generally lacked systematic empirical basis, mainly due the inadequacy of available information.

This study is a departure from previous studies in that it has a fairly rich empirical basis. The author had access to information from the Government not generally available to scholars. It is also the first comprehensive study of the phenomenon. FDI (rather the bulk of the FDI in the form of the so called "joint ventures" abroad) from India, since 1964, is analyzed in many of its important aspects: trends and patterns, the nature of financing, control and ownership of the resulting firms abroad, and their sources of technology. The motivations underlying FDI and the competitiveness of the firms abroad are also analyzed and related to the specific nature of development in the post independence period in India.

Much of the evidence presented in support of the hypotheses and conclusions is built up from information pertaining to individual firms abroad. While most questions do start with an examination of the aggregate picture, the attempt is always to take advantage of the detailed firm level information when these were available. Fourteen case studies covering some of the most important Indian firms abroad, both large and small, bring out certain finer points and interrelationships not easily brought out in an analysis based on aggregate information alone.

In Chapter I, in a brief survey of the literature, it is argued that popular conceptualizations like the product cycle hypothesis, or the advantage concept of Kindleberger, can only inadequately or only partly, explain FDI in general, not to speak of FDI from the Less Developed Countries (LDCs). Instead, an alternative framework that recognizes the search for markets and resources as the only truly general causal factor in FDI is adopted.

In Chapter II, the trends in FDI, their geographical and industrial patterns since 1964, and the dimensions of the phenomenon in relation to other relevant phenomenon inward FDI, FDI from other LDCs and small advanced capitalist countries, and domestic investments is brought out. It is shown that FDI (despite the small size when compared to that from the advanced capitalist countries) has emerged as a significant option for the private corporate sector in India.

In Chapter III, the patterns of ownership and control of the firms abroad is established. Some of the firms in India are highly transnationalised, and houses such as the Birlas, Thapar and Jhawar are transnationalised to a level that exceeds 30%, whatever measures one adopts. Although the large business houses dominate the phenomenon, there are very many other firms which have invested abroad. Through a detailed examination of the share holding patterns, directorships, contractual arrangements and other relevant information pertaining to firms abroad, the true degree of control by Indian parents is estimated. Despite the fact that on the average Indian parents directly hold only about 30% of the equity share capital of the firm abroad, through many ways dominant share holding, dispersal of part of the stock through a stock exchange, indirect share holding, collaborations with persons and firms of Indian origin, collaborations with host country governments Indian parents, in over two thirds of the investments abroad, have ensured control. Through other measures such as long term management contracts, the hold of the Indian parent is deepened and formalised. Yet in a number of large firms abroad Indian parents have collaborated with transnational (originating in the advanced capitalist countries) capital in the equity of the firms abroad. Although transnational capital has shared control with the Indian parents in a significant way, there are hardly any cases where the Indian parent plays only the role of a junior partner. In nearly all the cases of collaboration with transnational capital, the Indian party had taken the initiative to set up the firm abroad. FDI is largely a phenomenon of indigenous Indian capital. Firms in India which are joint ventures with foreign capital have also shown the same propensity to go abroad. But foreign controlled companies be they subsidiaries or the so called foreign controlled rupee companies have shown little propensity to invest abroad.

In Chapter IV, the sources of technology of the firms abroad is uncovered. A conceptual framework suited to the task on hand and keeping in view the limitations of the source materials is arrived at. The focus is to delineate the role of transnationals from Indian parents and firms as suppliers of technology. Technology is seen as being embodied in activities such as technical consultancy, equipment manufacture, basic design and engineering, detailed design and engineering, operations, etc., in varying degrees depending upon the process and the peculiarities in the manufacture of the product. The sources of these activities is established. The information base includes project reports and collaborations pertaining to the firms abroad, correspondence of Indian parents, embassies, the firms abroad, statements by Government officials etc. The sources of technology have varied widely, yet there are systematic patterns. In the large scale process industries large paper mills, palm oil refining and fractionation units among others advanced countries have dominated as suppliers of technology. In most metal working industries, in textiles, in the viscose staple fibre plants by Gwalior Rayon, Indian sources have been dominant. Largely, dependence on advanced third country sources for technology in firms abroad reflects dependence of the Indian parents and the Indian economy for the very same competences in India.

In Chapter V the motivations underlying FDI from India are analyzed. It is not so much higher profitability abroad that has attracted investments, as much as the small and constraining markets in India. Small markets with (relatively) large firms in India have lead to their quick saturation, and firms have found it necessary to go overseas in search of markets, when the export markets were also foreclosed for various reasons. The recession in the industrial sector, which began in the mid sixties and continued till as late as the end of the seventies gave the initial push to the process . Most Indian parents show very high market shares in India for the product for which they have gone abroad and indeed there are few market oriented FDI from India from parents without a higher than "average" market share (the average being defined in the sense of the Herfindhal index). They also show very low overall export intensities and high ratios of planned sales abroad to prior total sales. In other words Indian FDI, unlike FDI from the advanced capitalist countries and from South Korea which is well on its way to industrial transformation, is largely market penetrating rather than market protecting. In going abroad Indian firms are seeking first time access (not previously served by exports) to foreign markets displacing exports from usually the advanced capitalist and the more dynamic newly industrialising countries. Another important motivation in going abroad has been to secure resources, rather similar to the resource seeking investments from the advanced capitalist countries except that the demand that India has placed on the world's natural resources is still so puny that no imperialistic tendencies are as yet evident. A functional classification of Indian FDI in terms of the role they play in the host country economy helps characterize the "niche" that Indian FDI has carved for itself.

In Chapter VI the strengths and weakness of Indian firms are examined, primarily, vis a vis transnational corporations either operating locally or what is more usual transnationals exporting to the host countries. Access to low cost skilled workers such as managers, technicians, and engineers is only one factor in the strength of Indian firms, and certainly not an important one except for some of the small firms abroad. More importantly it is the experience of operating in small markets lower costs at low volumes of output typical of most LDCs that give the Indian firm the advantage. But this advantage is realized to result in smooth functioning and achievement of high market shares only when the host country has adequately protected the markets. Indian firms are tariff dependent and their performance is closely related to the degree of protection. They are also pioneering in the sense that they have been among the first few to respond to tariff incentives and promises made by the host countries. Given the constraints of the home market, as well as their comparative advantage in small markets (itself a result of the small market at home), their propensity to invest in order to seek external markets (since it also in very many cases implies that the export option is foreclosed) is very strong and it is this weakness that gives Indian FDI its "strength". Of course there are significant exceptions ,but these are the exceptions that prove the rule: in all these cases the firm had, quite like advanced country transnationals, gone abroad to protect existing export markets, or to preempt other potential entrants (an oligopolistic reaction), or the Indian parents were unable to export not because of inherent problems of high cost but because policies acted against their exports. In all these cases either there were no significant economies of scale or the Indian markets were not too small in relation to advanced country markets.

Chapter VII collects together the case studies. Besides the issues already referred to, some of the case studies bring out the actual role of the Indian Government in aiding or acting against investment abroad. This is very important because there is much difference between the stated policy and the actual practice. Government has not acted against the export of capital and technology, and its case by case consideration of demands to remit funds abroad to "joint ventures" in the recent past have attenuated the stipulation that capital can only be exported in the form of equipment and technology. In the late sixties and early seventies inadequate or unfavorable terms of the credit offered by the Indian Government could have been a stumbling block in large scale overseas investments during this period. The slowness of decision making within the Government has also been a irritant to firms going abroad. Yet there are a few cases where the lobbying by the Indian embassies was critical for the fructification and success of the firms abroad.

Keywords: FDI, Outward FDI, India, Joint Ventures, Cross Border Investments, Multinationals, Developing Countries

JEL Classification: F2, F3, F6, L1, 03

Suggested Citation

Morris, Sebastian, Foreign Direct Investments from India 1964-1983 (Doctoral Dissertation /Thesis of the Indian Institute of Management, Calcutta) (April 1, 1988). Doctoral dissertation for Award of the Title Fellow of the Indian Institute of Management, Calcutta, Available at SSRN: or

Sebastian Morris (Contact Author)

Goa Institute of Management ( email )

Panaji, Goa 403006
09824232121 (Phone)
403505 (Fax)

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