Scope of and Strategies for OFDI: Evidence from Firm Surveys and Case Studies

The currency specification has a mixed effect. On the one hand, it may direct investment to Nepal and Bhutan when faced with foreign exchange shortages in India instead of other countries that require convertible foreign currency. On the other hand, it deprives Nepal and Bhutan of convertible foreign currency.12

Initially, India’s OFDI laws reflected positive preferences for South Asia. In legislation that came into effect in 1995, the limit on the value of automatic-route OFDI was $37 million (denominated and transacted in Indian rupees) for Bhutan and Nepal and $30 million for other South Asian Association for Regional Cooperation (SAARC) countries and Myanmar; it was lower, $15 million, for the rest of the world. In 2003, again, higher than global limits were set for OFDI to Bhutan and Nepal (albeit denominated and transacted only in Indian rupees), Myanmar, and SAARC countries; but this time Pakistan was excluded.

Specific Regional Aspects of IFDI Laws India liberalized inward investment from Sri Lanka in 2004, from Bangladesh in 2007, and from Pakistan in 2012.13 In May 2000, a notification under the new Foreign Exchange Management Act 1999 allowed foreigners—except for citizens of Bangladesh, Pakistan, and Sri Lanka, and entities from Bangladesh and Pakistan—to buy shares in Indian firms.14 Two other FDI-related notifications (on the acquisition of immovable property and the opening of branch offices) also required prior Reserve Bank of India approval for these three countries. The provisions applied to additional countries—Afghanistan, Bhutan, China, the Islamic Republic of Iran, and Nepal—for acquisition of immovable property, and Afghanistan, China, and the Islamic Republic of Iran for the opening of branch offices.15

Currently, all investments in India from a country that shares a land border with India, or where the owner of an investment into India is situated in or is a citizen of such a country, need to go the government route. In addition, a citizen of Pakistan or a company incorporated in Pakistan also needs to go the government route. Nepali and Bhutanese citizens, however, can invest in Indian companies if the payment is made in free foreign exchange through banking channels. For start-up companies, people resident outside India (other than those who are citizens of Bangladesh and Pakistan, or entities that are registered in Bangladesh or Pakistan) can invest in convertible notes.16 Many of these exceptions are reiterated in the Consolidated FDI Policy 2020.

Just as with international trade, firm-level analysis is required to gain a clear understanding of cross-border investment flows. Concerns about the available aggregate bilateral data related to the complications posed by investment hubs for South Asia, and the lack of data for small and fragile economies, were key reasons for embarking on data collection for this study. Only India has adopted the practice of allowing public

access to foreign investment approvals from the Department for Promotion of Industry and Internal Trade. Most of the precise work done on OFDI tends to use data about advanced economy multinationals. In the United States, for example, multinationals are required by law to respond to quarterly, annual, and five-year surveys conducted by the Bureau of Economic Analysis. Detailed firm data sets managed by private sector firms such as Bureau van Dijk’s Orbis database are also very useful, but the coverage for South Asia is limited. The World Bank’s Enterprise Survey, which covers developing economies, does not ask questions about outward investments, let alone questions related to information and knowledge connectivity.

Data collection was needed for many reasons. The main drivers were as follows:

• A commitment had been made to include firms from the entire region, including those in small and fragile economies.

• The survey sought responses on topics related to networks, trust, and information at the firm level that was not available in the existing data. • The share of outward investment within the region is very small (2 percent by value), and preexisting data would likely miss many of the investing firms.

• Family firms that do not typically report data were identified as outward investors in a preliminary scoping exercise.

• Large firms also needed to be captured in the sample because they were important outward investors.

• It was important to capture small investments, such as the opening of representative offices (termed trade-supporting investments), which are neglected by some policy makers but are important in a dynamic sense. The role of these low-cost capital investments in stimulating other investments deserved investigation. For example, more than half of China’s OFDI by number of investments is of the trade-supporting type, especially small representative offices and sales offices (China Council for the

Promotion of International Trade 2010).

The data that were collected captured information relating to outward investors, family firms, large and medium firms, and firms from all countries in the region; it also captured rarely included variables such as knowledge connectivity and information frictions. In addition, it enabled consideration of the connectivity-challenged NER. The downside of the survey data is the limited sample size in some countries and the limited detail obtained (in some quantitative respects) in what is a voluntary survey, particularly from firms that typically do not share data. Thus, the results are not meant to deliver precise estimates along the lines of recent academic work on US and EU multinationals that had access to firm expenditures and revenues. The results are meant to point to interesting relationships, relative magnitudes, and unique features in the data. For details of the data and sampling technique used, see the Sampling and Summary Statistics section of appendix B.

VARIETY IN INVESTMENT TYPES, INVESTOR ORIGIN, AND DESTINATION

Four Types of Investment, Dominated by Trade-Supporting and Services Investments

The data-collection exercise delivered 1,274 South Asian firms. The survey identifies 860 investments (defined by investment type, investor, source, and destination) globally made by 399 South Asian firms.17 The investments are of four types: production investments (agriculture and manufacturing), services operations investments, trade-supporting investments (representative offices for marketing and sourcing services, usually with fewer than five people), and turnkey investments with some equity finance. Turnkey investments include engineering, procurement, and construction projects as well as other forms of contracting common in the construction industry, public utilities provision, and some public asset management. Trade-supporting investments and services operations investments dominate, with 45 percent and 38 percent of all investments (by number), respectively (table 3.6). Goods production investors make up 14 percent, and turnkey investors constitute 3 percent of the data. This description underestimates the number of investments because the data do not capture the actual number of investments in a particular investment type–destination pair, but just the incidence of such an activity.18

Outward Investors Are Mainly Indian; More Than Half Are Non-Indian, with Few Women-Led Firms

India accounts for about 94 percent of the value of outward investment (on the basis of CDIS data, 2018). In the survey undertaken for this report, Indian outward investors accounted for 48 percent of investor firms, followed by Pakistan (22 percent), Afghanistan (16 percent), and Sri Lanka (8 percent). Nepal has no outward investors. All of Bhutan’s investments are trade-supporting investments, consistent with its restrictions on OFDI. The 208 non-Indian firms made 400 outward investments. There were very few women-led firms in the sample, and the share of women-led outward investor firms was smaller than the share of women-led noninvestor firms (figure 3.7).

Investors Originate from a Wide Array of Sectors—Led by Manufacturing, Wholesale and Retail Trade, and Transportation The sector breakdown illustrated in figure 3.8 shows the wide scope of activities represented in the sample. Manufacturers were the main segment that invested abroad, both in services investments to promote their products and in other manufacturing facilities. About 39 percent of the investors self-identified as manufacturers (figure 3.8), though only 20 percent of all investments were production investments. The next largest origin sectors were wholesale and retail trade and transportation and storage. About one-third of the firms are in the manufacturing sector. At a more disaggregated level, the largest sectors were (in order of size) retail, textiles and apparel manufacture, warehousing, food products manufacture, pharmaceuticals manufacture, and financial services. At the most disaggregated 4-digit level of the International Standard Industrial Classification code, the top 10 sectors, which made up 30 percent of the investments, were apparel manufacture, pharmaceuticals manufacture, travel agencies, logistics, commercial banks,