Value Chain Perspective

Outward investment also facilitates the development of a value chain or upgrading along the chain (see box 3.6 for a summary of OFDI benefits from a value chain perspective). OFDI was motivated by brand development, vertical integration, and the pursuit of higher profit margins (figure 3.10), consistent with the importance of cost considerations and encouraging for the potential to develop a regional value chain. Sri Lankan apparel manufacturers, which developed their own brands in India, were able to move into higher profit margin segments; similarly, Indian and Sri Lankan hoteliers improved their profitability by investing in the high-end Maldivian hotel resort industry.

Among the less important factors are those related to exploiting regulatory and policy differences across countries (not shown in figure 3.10), diversification and risk reduction, government incentives, global shocks, and home shocks. Still, some investments were motivated by such factors, including fruit juice manufacturing investments in Nepal, geared for reexport back to India. In addition, Indian firms invested in Sri Lanka to take advantage of the low import tariffs in Sri Lanka on crude palm oil (the principal input for manufacturing vanaspati [hydrogenated vegetable oil]) and the preferential exports of vanaspati into the Indian market based on the India–Sri Lanka Free Trade Agreement. Once India reduced its own tariffs on crude palm oil, such investments

BOX 3.6 Summary of Outward Foreign Direct Investment Benefits from a Value Chain Perspective • Capturing high–profit margin or high–valued added segments of the value chain when these activities are performed across the national border • Allowing firms to develop scale and scope of production to meet requirements of global buyers • Learning about markets and processes and building relationships with clients and suppliers • Purchasing foreign intellectual property—from technology to brands—when development at home faces capability and time constraints • Reducing markups on value chain inputs and activities provided by monopolistic suppliers • Compensating for inefficient cross-border contractual partnerships • Achieving bargaining power through ownership in difficult contracting environments • Securing stable access to foreign raw materials and other essential inputs • Diversifying locations to reduce exposure to country-specific shocks • Reducing costs by undertaking chain activities in the location where they are undertaken most efficiently • Overcoming international trade frictions, either by producing in the location of the consumer or the location with the best market access to third countries