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#9516 Changing Character of Foreign Direct Investment From Developing Countries: Case Studies from Asia Nagesh Kumar December 1995

United Nations University, Institute for New Technologies, Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands Tel: (31) (43) 350 6300, Fax: (31) (43) 350 6399, e-mail: [email protected], URL: http://www.intech.unu.edu1

1. Introduction The emergence of some developing countries as significant sources of foreign direct investment (FDI) in the 1970s has been addressed to by a considerable volume of literature [Lecraw (1977), Lall (1983), Wells (1983) among others; see Kumar (1987) for a review]. The literature highlighted the fact that most of developing country investments were essentially horizontal in nature and were generally made in neighbouring developing countries at a lower stage of development. The main ownership advantages of investing enterprises constituted local learning in the form of process and product adaptations, managerial and technical personnel, the experience of operating in a developing country setting, and sometimes, ethnic and cultural links. The buyer’s uncertainty resulting from relatively unknown brand or trade names and established reputation prevented exploitation of these intangible assets abroad through contractual means.

FDI from developing countries has grown rapidly into sizeable magnitude especially since the mid-1980s. It is argued here that this period also marks the beginning of a change in motivation of FDI flows from developing countries. Developing country enterprises have increasingly used outward FDI as a strategic tool for strengthening their international competitiveness in the more recent period. This transformation has been prompted by recent global trends of emergence of regional trading blocs and rising protectionist tendencies in the industrialised countries. Besides, the international competitiveness of a few East Asian newly industrialising economies e.g. South Korea, Taiwan had been adversely affected by currency appreciation and rising domestic wages. Enterprises from affected countries have responded by moving production abroad to maintain their international competitiveness. The developing country governments have also recognised the strategic role of outward FDI in strengthening competitiveness abroad by liberalising the policy regimes besides providing financing and other incentives. This contention is illustrated in this paper with the help of case studies of recent trends and patterns in outward FDI from select Asian developing countries.

2. Outward FDI as a Tool for Achieving International Competitiveness International competitiveness is a combination of price and non-price competitiveness. FDI has been extensively used by MNEs from industrialised countries to maintain their competitiveness in both these respects. MNEs have often relocated production to low wage locations to internalise the international factor price differences and maintain price competitiveness in the face of rising wages in their home or some host countries. This type of FDI flows have been termed as efficiency seeking investments and have accounted for a considerable proportion of 2

FDI flows over the past two decades. The rapid growth of manufactured exports recorded by the newly industrialising economies in the 1970s and 1980s was largely a result of their ability to attract export-oriented investments from MNEs. A large number of developing countries have set up export processing zones with the explicit objective of attracting efficiency seeking FDI from MNEs and also compete among themselves with other incentives etc. [Kumar, 1994a]. The price competitiveness could also be eroded by appreciation of national currencies besides rising wages. For instance, sharp appreciation of Japanese yen since the Plaza Accord in 1985 has adversely affected competitiveness of Japanese products abroad. Japanese corporations attempted to deal with it by relocating parts of production in East and Southeast Asian countries. The progressive relocation of production abroad by Japanese corporations has raised fears of ‘hollowing out’ of Japanese industry [JETRO, 1994].

FDI is also used to protect existing markets served by exports in the face of tariff or non-tariff barriers in different countries. Local production is often undertaken when exports are rendered uncompetitive by tariff and non-tariff barriers imposed on imports by host governments. The market defensive FDI as they are sometimes called, have been commonplace. Recent concentration of Japanese FDI in the EU countries is also driven by a threat of protectionist fears from the European Union [Kumar, 1994b]. The market defensive investments generally include investments made in affiliates engaged in all aspects of production ranging from just local assembling of finished product to full manufacture.

As international competitiveness is increasingly determined by non-price factors such as access to information and market presence, MNEs may set up affiliates to develop and support marketing networks in particular countries to be served by exports. These investments could be termed as trade supporting investments. In certain markets a local presence may be instrumental for entry because of cultural and other informal barriers to trade. This could be specially so for products requiring aftersales services.

Yet another type of FDI undertaken to strengthen competitiveness include those designed to acquire additional sources of ownership advantage such as brand names, marketing networks, personnel and knowledge. The strategic asset seeking investments, as these FDI are termed, include cases such as take-over of ICL, UK by Fujitsu of Japan to strengthen its presence in EC market with the help of the brand name, marketing network and knowledge of characteristics of the European market of the former [Dunning, 1993]. 3

3. Recent Trends in FDI Outflows from Developing Countries In the recent period, developing country enterprises have increasingly used FDI as a tool for strengthening their international competitiveness in much the same way as their industrialised country counterparts. Recognising the potential role of outward FDI in competitiveness, a number of developing country governments have relaxed the policy regimes governing capital outflows to facilitate outward FDI as we shall see below. This perhaps explains the sharp growth of FDI outflows from developing countries since the mid-1980s. Table 1 shows a dramatic rise in outward FDI stock of most Asian developing countries since 1985. This trend has continued and has even accentuated in the early 1990s.

Table 1 Stock of Outward Foreign Direct Investments made by Select Asian Countries, 1980-1993 ($ million) Country South Korea Taiwan Hong Kong Singapore China India

1980 142 101 1800a 652 39 149

1985 487 215 9441 1320 131 180

1990 2172 3075 18930 4277 2488 290

1993 5632 5619* n.a. 6236 7402* 707

Source: Derived from UNCTAD-DTCI data; UN-TCMD, 1993; Taiwan, MOEA,1993, for Taiwan; estimates on the basis of unpublished data reported in Kumar, 1995c, for India. * belongs to 1992; a: Lall (1984).

Table 2 highlights another marked trend notable from the 1980s viz. that of increasing concentration of FDI from developing countries among the industrialised countries. The early outflows of FDI from developing countries had been concentrated among developing countries as is clear from rather small share of industrialised countries in outward FDI stock for most of developing home countries. The increasing concentration of developing country FDI in industrialised countries which are their principal markets in more recent period tends to suggest an

increasing

orientation

of

these

investments

towards

strengthening

international

competitiveness from market seeking nature in the early years.

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Table 2 Industrialised Countries’Share in Outward FDI Stock of Developing Countries, 1980/1991

Home Country China Hong Kong India Singapore South Korea

Industrialised Countries’Share 1980 34 8 11 9 32

1991 71 18 19 21 56

Source: derived from UN-TCMD, 1993, Table II.3 and Kumar, 1995, for India.

4. Select Case Studies In what follows we review the trends and patterns in outward FDI from a few major developing country sources of FDI in Asia to examine if indeed there is an increasing resort to outward FDI as a tool for improving international competitiveness.

4.1. South Korea The Republic of Korea liberalised its policy governing outward FDI by domestic firms in mid1980s when its international debt position eased. Since 1989, investments upto $ 2 million do not require approval. Recognising the role of outward FDI in promoting international competitiveness of country’s exports, official agencies have promoted it with different measures. Korean Export-Import Bank gives subsidized loans for overseas investments financing upto 80 per cent (60 per cent since February 1991) of the investment. In the case of medium and small scale firms the EXIM Bank financing could even be upto 90 per cent (80 per cent since February 1991). The EXIM Bank and Korean Export Insurance Company also offer investment insurance covering risks from political factors such as war, expropriation or restrictions on remittance to the extent of 90 per cent of the total investment amount. An Overseas Investment Information Centre was established in 1988 primarily to assist smaller enterprises which may not have access to information. The government offers tax incentives such as the reserve for losses incurred by FDI. It also offers avoidance of double taxation and Korean enterprises can subtract the corporate tax paid abroad from their domestic corporate tax liabilities [UN-TCMD, 1993].

The early outward investments made by Korean companies were concentrated in the extractive sector designed to supplement natural resources for their local production. Since 1980 when it 5

totalled $ 142 million, it has increased rapidly to reach a total of $5.6 billion by 1993 (Table 1). The sectoral distribution of Korean FDI has changed considerably over time. Manufacturing which accounted for only 18 per cent of total stock in 1980 has increased its importance rapidly and now accounts for nearly 50 per cent of Korean FDI. Primary sector accounts for a fifth and services for the remaining.

In terms of geographical distribution, nearly 70 per cent of Korean FDI was concentrated in developing countries in 1980. Since then, however, the geographical distribution has changed in favour of industrialised countries bringing their share up to 56 per cent by the end of 1991 (Table 2). The changing sectoral and geographical distribution of Korean FDI reflects an increasing tendency of Korean enterprises to use FDI as a tool to strengthen their international competitiveness. The structural shift in strategic orientation of Korean FDI seems to have occurred since 1987 because of several developments which affected Korean international competitiveness [Jeon, 1992].

Owing to rising current account surpluses since the mid-1980s, Korea has witnessed a tendency of its currency to appreciate [Chaponniere, 1992]. The currency appreciation has affected the international competitiveness of Korean exports adversely. The Korean international competitiveness has further been affected by rising real wages. Between 1978 and 1987 alone, the South Korean production workers’ hourly wages had doubled [World Bank, 1989]. The export competitiveness was further eroded by the loss of GSP preferences in US market and exhaustion of quotas for footwear and apparel etc. by Korea. Korean enterprises attempted to make up for these developments by relocating labour intensive production in Southeast and South Asian countries to take advantage of low cost labour and also to take advantage of GSP preferences.

Of late, Korean exports to the industrialised countries have also been adversely affected by rising protectionism. For instance, most Korean electronics exports to Europe such as VCRs, colour TVs, CD players, video tapes and car stereos are currently subject to anti-dumping charges by the EC. Microwave ovens are subject to quotas. Furthermore the formation of European Union, a regional trading bloc, has brought a wide spread perception of threat of discrimination against extra-regional supplies. Exporters from Japan and the US have responded to this threat by investing within the EU and claim the access to the Single Market as an insider [see Kumar, 1994b]. Korean chaebols which dominate Korean FDI have also responded to it in the same 6

manner. As a result Korean FDI into the EC has increased rapidly since 1986, with its annual outflow in 1989 amounting to more than twenty times that of 1985. By June 1990, Korean enterprises had invested 82 million US dollars in the EC. In subsequent years, Korean FDI in the EC was expected to increase ‘even more dramatically’ given the sharp rise of approvals [Han, 1992]. Nearly half of these investments were in consumer electronics assembly. All the leading Korean MNEs have invested in the EC. Samsung has most ambitious ventures in the EC. It has invested 20 million pounds in its plant at Billingham in the UK producing 700,000 televisions per annum. It also operates a VCR and microwave oven plant in the UK, a colour TV plant in Portugal, and a VCR plant in Spain. Samsung is investing $ 723 million in a new plant at Wynyard, Cleveland (UK) to manufacture a range of electronic equipment and has decided to set up its European headquarters in London. Goldstar runs a VCR plant in Germany and a microwave plant in Northern Ireland. Daewoo Electronics has set up a VCR plant in Northern Ireland and a microwave oven plant in France. Korean companies are also setting up plants in Eastern European countries, e.g. Samsung in Hungary; Daewoo in Hungary, Romania and Uzbekistan; and in Mediterranean countries such as Turkey (Goldstar). These locations combine the benefit of relatively cheaper wages and preferential access to the EC markets. A survey of leading Korean firms investing in the EC suggests that 45.5 per cent of the investments were motivated to explore market opportunities arising from EC integration and or Eastern European markets [Han, 1992].

Korean enterprises are also making aggressive strategic asset seeking investments in the industrialised countries to complement their asset bundles to strengthen their presence abroad. An illustration is provided by recent acquisition of AST research, USA, the world’s sixth largest manufacturer of personal computers, by Samsung to strengthen its presence in the fast growing personal computer market.

The impression that Korean FDI is increasingly motivated to strengthen Korean international competitiveness is confirmed by recent surveys and analyses of their determinants. A World Bank survey conducted in autumn 1989 indicated that Korean enterprises in developing countries were motivated primarily by high domestic costs of labour and domestic labour instability. The local sales potential, incentives offered by host governments and the host’s GSP or preferential status with major trading partners were other important motivations [World Bank, 1989, p.18]. An econometric analysis of determinants of Korean FDI shows that Korean firms’ direct investments in manufacturing industries of industrialised countries are influenced by 7

industrialised countries’ non-tariff trade barriers. Korean manufacturing FDI in developing countries, on the other hand, is geared to exploit cheap labour to minimise production costs [Jeon, 1992].

4.2. Taiwan Taiwanese policy towards outward FDI has also undergone changes over time. Before 1978, outward FDI was considered unreasonable given the economic condition of the country. Therefore, ‘relatively rigid’ financial requirements were laid down for the qualification of outward FDI and virtually no incentives were offered. The government recognised the importance of outward investments by the world wide recession and energy crisis in the 1970s especially for the supply of natural resources and raw materials for industrial use and adopted a policy to encourage them since 1979. Outward investments of the extractive nature for securing supplies of natural resources for domestic use were granted a five year tax holiday since 20 June 1979. The financial requirements were relaxed and restrictions on reinvestments were loosened. A more active promotion of outward FDI began from mid 1980s when official agencies started financing outward FDI. The Export-Import Bank of the Republic of China has provided overseas investment financing to the tune of 70 per cent since 1985. The Bank started an investment insurance to cover most non-commercial risks including expropriation, war, riot, and restrictions on remittance of capital and profits imposed by host governments in 1986. The financial criteria for firms eligible to invest abroad were loosened further to cover more firms. The Industrial Development & Investment Centre of the Ministry of Economic Affairs started assisting firms with information, sponsorships of investment seminars, business group organisation seeking investment opportunities and the establishment of a databank on ROC manufacturers and enterprises interested in outward investment [Taiwan, MOEA, 1993].

Till the mid-1980s outward FDI made by Taiwanese companies was quite modest. These included 123 investments made upto 1978 with the total investment of US$ 50 million and 50 investments made between 1979- 1984 with an investment of US$ 84 million. Since the mid 1980s, Taiwan has accumulated enormous foreign exchange reserves and has enjoyed current account surpluses. This has led to appreciation of New Taiwan $ vis-à-vis US $. Between 1986 and 1992 alone NT$ had appreciated by nearly 40 per cent against US$. The sizeable foreign exchange reserves also led to inflationary tendencies within the economy. The industrial wages increased substantially between this period because of serious labour shortage, and promulgation of labour laws. Between 1990 and 1992 alone, industrial wages had moved by nearly 35 per cent 8

[Chaponniere, 1992; Van Hoesel, 1994]. All these factors put together undermined the international competitiveness of Taiwan especially in labour intensive goods which were its traditional exports.

To make up for their lost competitiveness Taiwanese enterprises started moving production to Southeast Asia and China to take advantage of cheap labour availability. The government assisted in this by further relaxing the controls on capital ouflow in 1987 allowing remittance of upto US$ 5 million a year out of the country. This explains a sudden jump in the FDI approvals since 1987. Of total approved FDI of $ 5.62 billion at the end of 1992, as much as $ 5.35 billion (i.e. 95 %) had been approved since 1987 [Taiwan, MOEA, 1993]. These figures from the Investment Commission are believed to be severely underestimating the true scale of outward FDI which according to the balance of payment data could amount to $ 19 billion in 1993. The bulk of the outward FDI made in the post 1987 period is in the manufacturing sector and in banking and insurance. The ASEAN countries account for over 35 per cent of Taiwan’s total approved FDI stock in 1992. The electronic and electrical appliances have attracted the largest share of Taiwan’s FDI in ASEAN followed by the textile industry. The assembling of electrical appliances and textiles are both highly labour intensive industries. Taiwan has been actively involved in development of a special economic zone in Subic Bay, the Philippines and special industrial zones in Vietnam to house Taiwanese companies [Van Hoesel, 1994]. Taiwanese companies have also made substantial investments in labour intensive activities in mainland China to take advantage of the vast pool of cheap labour in the country. These investments, however, are not recorded directly because of restrictions on investment by Taiwanese enterprises in mainland China and are routed mainly through Hong Kong. According to the host country estimates Taiwanese investments made in mainland China between 1979 and 1992 alone could amount to US$ 5.5 billion [Zhang and Van Den Bulcke, 1994].

In more recent years, Taiwanese enterprises have also made investments in the industrialised countries to support their existing markets. The threat of rising protectionism in the wake of NAFTA and the Single Market in the EU have induced major Taiwanese corporations e.g. Acer, Tatung and Taco Electric, to set up manufacturing bases in North America and Europe. Taiwanese corporations have also engaged themselves in strategic asset seeking investments in the industrialised world to strengthen their access to markets by acquisitions of existing enterprises giving them access to their marketing network, technology, and brand reputations. Acer Computers, for instance, acquired Counterpart Computers to get into minicomputers 9

market. President Foods, the biggest food processing company in Taiwan, acquired Wyndham Foods, one of the largest biscuit makers in the US [Van Hoesel, 1994].

The importance of improving competitiveness among the motives for investment abroad is clear from a recent survey of 53 Taiwanese overseas investors conducted by Chung-hua Institution for Economic Research. According to this survey, about 60 per cent of the firms surveyed engaged themselves in a kind of vertical integration with 48 per cent of the subsidiaries being engaged in downstream processing for the parent firms and that the ‘main fruits of outward direct investment are in the promotion of exports’ [Taiwan, MOEA, 1993]. According to the World Bank survey cited earlier, labour cost, ethnic and cultural ties, labour quality, and labour supply were the most important factors in determining the location of Taiwanese investments in Asia [World Bank, 1989]. The fact that Taiwanese firms attach importance to cultural and ethnic ties in deciding location is also clear from the MOEA survey which reveals that 40 per cent of joint ventures abroad were formed in partnership with overseas Chinese nationals.

4.3. Hong Kong Hong Kong has been one of the largest source of outward FDI among developing countries. By 1990 which happens to be the latest year of available information, Hong Kong based companies had accumulated a total outward FDI stock of US$ 14 billion compared to $ 9.4 billion in 1985. Hong Kong’s investments before the mid-1980s were spread widely across neighbouring developing countries. Since 1985 however, China has assumed an overwhelming position as a host of Hong Kong investments. This is because rising wage costs in Hong Kong and scarcity of labour forced Hong Kong enterprises to look for locations for labour intensive manufacturing abroad. The mainland China which had increasingly liberalised its economy since 1979 especially for export-oriented manufacture proved an attractive location for the relocation of production by Hong Kong firms because of abundant cheap labour. The geographical, ethnic, and cultural proximity and prospect of eventual merger in 1997 further added to the attractiveness of China for relocation. Most Hong kong investment in China is in highly labour intensive assembly operations, producing mainly travel goods, hand bags, toys, and footwear. Most of the plants are located in special economic zones in neighbouring Guangdong and Shenzhen provinces. Hong Kong accounts for over 60 per cent of all contracted FDI inflows in China which totalled US $ 110 billion between 1979 and 1992. A part of these investments, however, represent Taiwanese investment in China which are routed through Hong Kong. Hong Kong enterprises invest in China for manufacturing labour intensive goods with over 80 per cent of output is shipped back 10

to Hong Kong for re-exports. The reexport trade constitutes the main dynamic force in Hong Kong. Hong Kong’s own exports were growing at just 2-3 per cent per year in the late 1980s while re-exports of products made by Hong Kong firms in China increased by 28 per cent in 1989 [UN-TCMD,1993, p. 38].

Towards the end of 1980s, however, Hong Kong enterprises were also increasingly responding to the rising protectionism in the industrialised countries and formation of trade blocks. The World Bank Survey indicated that most Hong Kong investors were concerned about the 1992 deadline for Unification of the EC and were actively looking into investments there with English speaking Ireland and the UK the first choices and lower labour cost Spain as second [World Bank, 1989].

4.4. China Upto 1983 the outward investment by Chinese enterprises was modest and included limited investments made largely in Hong Kong by state owned foreign trade corporations and financial institutions. Since 1984, Chinese overseas investments have grown. Between 1984 and 1993, US$ 1655 million worth of outward investments had been approved. Before 1985 the Chinese government hardly paid any attention to foreign activities of Chinese enterprises. Since then however central and local institutions have been set up to regulate overseas activities of Chinese enterprises to gear them to achieve the national objectives viz. to acquire foreign technology and capital, to promote Chinese exports and to upgrade its national competitiveness in the global markets [Zhang and Van den Bulcke, 1994]. The local governments started supporting overseas expansion of their enterprises and foreign trade companies following decentralisation of foreign trade system in 1984. Chinese industrial enterprises also started making overseas investments since 1985, sometimes in co-operation with foreign trade companies. The investments made by foreign trade companies and industrial enterprises are generally of a different nature. Industrial enterprises operate abroad by establishing new plants, especially in developing countries where their ownership advantages in the form of intermediate production technology and skills could be productively employed. The foreign trade companies have tended to invest in large extractive projects to secure raw material supplies and some times have engaged in strategic asset seeking acquisitions of high technology firms in industrialised countries.

Even though Chinese enterprises have begun investing abroad relatively recently, it is already evident that outward FDI is increasingly seen by them as a means of promoting international competitiveness by increased foreign presence. A survey of Chinese enterprises with overseas 11

investment in nontrade sectors in Shanghai, Beijing and Fujian provinces conducted by the Institute of World Economy, Fudan University in 1989, indicated that opening up new markets, and acquisition of first hand information on markets were considered as motives for investing abroad by 94 per cent of enterprises. Furthermore, 83 per cent of enterprises felt that outward investment helped them in improving the customer relations and credit in overseas markets [Gang, 1992]. Unlike their counterparts from Korea, Taiwan and Hong Kong, the Chinese enterprises do not yet experience rising wages nor are they constrained considerably by trade barriers. Hence, lower cost among advantages of operating abroad and circumventing the trade barriers among motives figured rather lower in the importance for them.

4.5. India The Indian government has encouraged outward investments by Indian companies as means of promoting exports of Indian capital goods, technology and consultancy services especially since 1974 when an Inter-ministerial Committee on Joint Ventures Abroad was created within the Ministry of Commerce to approve proposals. The guidelines for approval were formulated in 1978 which encouraged the joint venture form of operation with local enterprises and required that Indian equity participation be made by way of capitalisation of export of indigenous plant, machinery, capital goods and know how from India. In view of scarcity of capital resources in the country, cash remittances of capital to overseas ventures were discouraged but could be allowed in exceptional cases. This policy governed Indian outward FDI till the end of the 1980s.

As part of a comprehensive reform of India’s industrial policies initiated in July 1991, the government also removed some of the restrictions on Indian outward FDI [see Kumar 1994c, for more details]. The modified Guidelines for Indian Direct Investment in Joint Ventures and Wholly Owned Subsidiaries Abroad issued in October 1992 provide for an automatic approval for proposals where total value of Indian investment does not exceed US$ 2 million of which upto US$ 500,000 could be in cash and the rest by capitalisation of Indian exports of plant, machinery, equipment, know how, or other services and goods. The approval for other proposals including external borrowing, use of export receipts blocked abroad etc. will be made within 90 days after a due consideration with respect to the track record of the Indian party in terms of external orientation and financial viability of proposed investments etc. The Export-Import Bank of India provides financing for outward FDI by Indian enterprises under its Overseas Investment Finance Programme.

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Indian companies started investing abroad in a significant measure in the second half of the 1970s. By the mid 1980s, Indian companies had invested US $ 180 million in 165 ventures abroad. Most of these early investments were in manufacturing sectors such light engineering, textiles, food products etc. They had been concentrated in a handful of developing countries viz. Malaysia, Indonesia, Singapore in Southeast Asia, Nepal and Sri Lanka in South Asia and Kenya and Nigeria in Africa. These investments were designed to exploit abroad the created assets of Indian enterprises in the form of adapted, and sometimes scaled down, processes and products, managerial and technical expertise, equipment fabrication capabilities, and their familiarity of operating in a developing country setting [Kumar, 1995].

In the second half of 1980s, Indian industrial and trade policies were liberalised to a certain extent with a view to strengthen international competitiveness of Indian exports. This period saw a relaxation of certain restrictions on FDI within the Indian economy and FDI inflows started to pick up from very low levels resulting from the earlier restrictive attitude. The overseas investment activity of Indian companies also picked up considerably since 1985 and FDI valued at $ 110 was approved in the second half of 1980s. The rise in magnitudes since mid-1980s coincided with a shift in geographical and sectoral pattern of Indian FDI abroad. Since the 1985 an increasing share of India’s FDI have been hosted by industrialised countries. In the second half of the 1980s, industrialised countries hosted 27 of the 91 Indian ventures with 21.6 per cent of investments. In the late 1980s, the Eastern and Central European countries which had been important markets for Indian exports also, emerged as important hosts of Indian FDI with 14 ventures accounting for 32.6 per cent of Indian FDI in the period.

The increasing geographical diversification of Indian FDI in the late 1980s coincided with sectoral diversification to cover more services and trading activities as compared to near total domination of the manufacturing sector till the mid 1980s. This is because India’s FDI in countries more industrialised than herself has been of a different type than that in developing countries at a lower stage of development. The shift in terms of sectoral composition also came about in mid-1980s since when the share of manufacturing in total FDI outflow declined from nearly 75 % in the early 1980s to about 55 % in the late 1980s. The bulk (nearly 70%) of FDI outflows to industrialised countries are in services and not in manufacturing. A significant proportion of service FDIs were in trading which usually took the form of a subsidiary set up in major export markets of the firm to support the export activity. These subsidiaries are meant to create a marketing network in the markets and also serve as exporter’s listening posts to get 13

market information. As international competitiveness is increasingly determined by the non-price factors such as access to information and market presence, these investments can be seen as strategic investments made by Indian enterprises to improve their international competitiveness. Obviously such subsidiaries would be set up in major markets and those that are growing. Besides, Indian enterprises have also developed ownership advantages in certain services that are intensive in use of human resources because of a vast pool of trained manpower available in India. These services include engineering and construction, consultancy and software, finance, and hotels and restaurants.

The trend of emergence of industrialised countries as significant hosts of Indian FDI which was visible in late 1980s gathered momentum during the 1991-3 period. 133 of the 345 ventures representing nearly 23 per cent of India’s FDI during that period, were set up in the industrialised countries. Western European (mainly EU member states) countries have hosted the bulk (nearly 58 %) of Indian FDI in industrialised world in the early 1990s. Indian enterprises appear to have followed the rush for investment in the EU countries by setting up trading subsidiaries to protect and strengthen their presence in the EU market. A considerable proportion of Indian FDI in North America has been in the engineering and consultancy services. These investments have something to do with the growing internationalisation of Indian software industry. In the software industry in fact India is fast emerging as a global player. This has attracted considerable investments by world’s largest information technology enterprises to locate software development centres in India. A number of Indian software enterprises have also set up affiliates in the United States to market their own product but also to benefit from the agglomeration economies and spillovers from more established firms in the Silicon Valley. The latter are, to some extent, examples of strategic asset seeking investments.

5. Concluding Remarks The foregoing discussion has highlighted another aspect of growing internationalisation of the world economy in the recent period viz., an increasing resort by developing country enterprises to direct investments abroad as a strategic tool for strengthening their competitiveness. The erosion of competitiveness caused by currency appreciations and rising wages has been addressed to by relocation of production to countries with lower wages. The threat of losing markets in industrialised countries because of rising protectionism in the wake of formation of regional trading blocks has been responded to by making trade supporting and strategic asset seeking investments in major markets. 14

The trend of shifting labour intensive production by newly industrialising economies to low wage developing countries helps the developing host countries to expand their manufactured exports and generates some value added although generation of local linkages in the host economies may be limited. It also enables the investing enterprises to protect their markets in the industrialised countries. Hence, it is a positive development. However, it has been concentrated in only a handful of countries and ethnic and cultural factors have evidently played an important role in determining the choice of relocation.

From the development perspective, one should not lose sight of the immense potential of market seeking inter-developing country foreign direct investments which predominated the initial round of FDI from developing countries. As demonstrated by a number of studies, these investment offered an alternative source of technology and capital to relatively lesser developed economies [e.g. Lecraw, Lall, Wells, op.cit., and others cited in Kumar, 1987]. These investment generally provided to their host countries access to intermediate and often more appropriate and cheaper technologies and skills. These intermediate range of technologies could be valuable in development of wage goods sectors in dual economies. Hence, inter-developing country foreign direct investments and technology transfers should continue to be encouraged as a part of economic and technological co-operation among developing countries.

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