What comes to your mind when I say ODI, no I am not talking about One Day Internationals. The ODI that i want to enlighten you about is, Overseas Direct Investment. Let’s take a tour of it.
Overseas Direct Investment (ODI) means investments by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity i.e. setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS)) in foreign country.
India is a developing economy and investing in India has its own benefits. It is therefore; not surprising it has been attracting investments from abroad over the past decades. However, every coin has two sides, Today India is not merely some third world economy desperate for dollars; it is becoming a FDI source to other countries as well.
Robust flow of direct investments, either inward or outward, reflects increasing integration of an economy with the world. Since the L-P-G reforms of 1991, the Indian Economy is becoming progressively interconnected with the rest of the world. While inward FDI portrays the country as an attractive destination for foreign investors, outward FDI showcases the country’s appetite and its capability to venture beyond the domestic shores.
India’s share in total developing economy FDI outflows remained below 0.5% throughout the 1990s, but increased consistently since 2005, reaching 3.8% in 2011. This expansion is not merely quantitative in nature. In fact successive governments have opened up newer sectors for investors. This year we have seen that sectors like defence and insurance have been liberalised.
A similar trend has been witnessed by Indian ODI both in terms of geographic dispersion as also in terms of sectorial diversification
The share of manufacturing sector in India’s ODI was 59.8 per cent in 2003-04, its share declined to 40.3 per cent by 2009-10 and further to 31.5 per cent in 2011-12.
The service sector can be sub-divided into two groups, first is finance, insurance, real estate and business services; and second is wholesale, retail trade, restaurants and hotels. While the former group’s share increased from 12.6 per cent in 2003-04 to 29.2 er cent in 2009-10 before tapering off to 19.7 per cent in 2011-12, the latter’s share has more or less remained stable hovering around the 9-11 per cent range.
A shift is evident in Geographical terms as well. While the first wave of Indian overseas direct investments in the pre-liberalization period was made by a handful of firms and concentrated largely in Asian and African developing countries.
Way Forward
There exists a school of thought which apprehends that overseas investment by Indian corporate is at the cost of on-shore investment. However, the policy and procedural constraints at home have become major force behind the ODI in Indian context. Investments in the natural resource sectors will surge, given the continuing difficulty in acquiring large tracts of land for agricultural purposes and the growing resistance to large mining projects in India.
India’s membership in various regional integration arrangements Free Trade Agreement, South Asia Free Trade Area (SAFTA), Indian Ocean Rim Association for Regional Cooperation, Indo-Lanka Free Trade Agreement and the imminent ASEAN-India free trade agreements will also provide Indian firms with a favourable platform to strengthen their presence in these partner economies. According a recent Report by PricewaterhouseCoopers (2010) India might be the largest source of emerging market multination enterprises (MNEs) by 2024. By this period, number of MNEs in India would be higher than China by 20 per cent, and over 2,200 Indian firms are likely to invest overseas in the next fifteen years especially in business services and high value manufacturing sectors.
To conclude, the overseas investment by Indian Entrepreneurs is set to increase in near future. The Outward investment related to acquisition of strategic resources, expansion of market base, leveraging new technologies for local markets, etc. would facilitate long-term growth in India and absorption of technology by Indian corporates along with improvements in the managerial skills.