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What explains India s surge in outward direct investment?

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  • Alicia Garcia-Herrero
  • Sumedh Deorukhkar

Abstract

India s outward direct investment (ODI) has grown very fast, especially since the global financial crisis erupted. In this paper, we analyze empirically what are the factors behind the geographical destination of India s ODI. We estimate a gravity model using weighted EGLS into a panel data of 74 ODI destinations from India during 2008 to 2012. Given the sheer size of India’s ODI which is deviated to offshore financial centers awaiting their final destination, we go beyond using the official ODI data by destination and reassign the ODI directed to 5 major offshore financial centers into its most likely final destinations. Both sets of results (with raw data and rearranging India s ODI into offshore centers) suggest that India s direct investors are attracted towards richer countries and not so much proximity with India. Furthermore, countries having a high degree of trade openness are preferred destinations for India s ODI, especially those that export technology but also, to a much lesser extent, exporters of food and fuel. Also, bilateral and/or multilateral free trade agreements with host countries are found to strengthen ODI flows from India. Finally, an efficient governance system in host countries is found to attract higher ODI flows from India. However, when controlling for the existence of off-shore centers, the host country s ability to control corruption is not a significant determinant of India s ODI.

Suggested Citation

  • Alicia Garcia-Herrero & Sumedh Deorukhkar, 2014. "What explains India s surge in outward direct investment?," Working Papers 1416, BBVA Bank, Economic Research Department.
    • Handle: RePEc:bbv:wpaper:1416
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    References listed on IDEAS

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    1. Philippe Aghion & Robin Burgess & Stephen J. Redding & Fabrizio Zilibotti, 2008. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," American Economic Review, American Economic Association, vol. 98(4), pages 1397-1412, September.
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    4. Prema-chandra Athukorala, 2009. "Outward Direct Investment from India," Departmental Working Papers 2009-14, The Australian National University, Arndt-Corden Department of Economics.
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    6. Nunnenkamp, Peter & Sosa Andrés, Maximiliano & Vadlamannati, Krishna Chaitanya & Waldkirch, Andreas, 2012. "What drives India's outward FDI?," Kiel Working Papers 1800, Kiel Institute for the World Economy (IfW Kiel).
    7. Mr. Ali J Al-Sadiq, 2013. "Outward Foreign Direct Investment and Domestic Investment: The Case of Developing Countries," IMF Working Papers 2013/052, International Monetary Fund.
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    Cited by:

    1. Wladimir Andreff, 2014. "Outward foreign direct investment by Brazilian and Indian multinational companies: comparison with Russian-Chinese multinationals," Post-Print halshs-01279896, HAL.
    2. Wladimir Andreff, 2014. "Outward foreign direct investment by Brazilian and Indian multinational companies: comparison with Russian-Chinese multinationals," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01279896, HAL.
    3. Valeria, Gattai & Rajssa, Mechelli & Piergiovanna, Natale, 2016. "FDI and Heterogeneous Firms: Evidence from BRIC Countries," Working Papers 322, University of Milano-Bicocca, Department of Economics, revised 18 Jan 2016.

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    More about this item

    Keywords

    Indian outward direct investments; Host countries;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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