Outward FDI from India - Are There Any Lessons for Other Developing Countries?

The nineties onwards has witnessed strong economic performance and outward FDI from a number of developing countries including India. Until now literature has tried to explain the factors influencing outward investment from developed countries perspective. It is difficult to construe how the factors influencing outward investment from developed countries would explain the behaviour of developing countries multinationals. Under this backdrop, this study contributes to the literature by carrying out the analysis for India, to see a) what determines the choice between joint venture (JV) and wholly-owned subsidiary (WOS) for firms from developing country; and b) whether the factors are different than the one for the developed country foreign firms. The analysis is carried out on a sample of 250 entries (88 WOS and 162 JVs) made by 142 Indian manufacturing firms during 1992 to 1999. The analysis indicates that a number of transaction specific variables explain Indian firms’ outward investment. Size, age and experience influenced entry choice in more developed countries, whereas building of both upstream and downward capabilities is found crucial for firms investing in relatively underdeveloped countries. Based on results, the paper argues that if other developing countries especially in South Asian and African region wish to increase the south-south FDI inflow, they need to focus on improving the institutional structure that would enhance the status of their country index.