The variation in Indian inward FDI patterns.
| Verfasser | Zheng, Ping |
| Posten | RESEARCH ARTICLE - Foreign direct investment |
Abstract:
* This study examines the variation in Indian inward FDI patterns, considering the impact of economic development and geographic location on the variation from both FDI home and host country perspectives.
* Employing a panel dataset at the aggregate country-level, the study is conducted using the generalised least squares (GLS) model.
* The findings suggest that Indian FDI patterns vary over time in line with Indian economic and structural transformations. The patterns also differ between the home country groups in line with their economic development and geographic location relative to India. The desirable patterns of Indian inward FDI are determined not only the development levels of both host and home countries but also the host country's factor endowment pattern.
* it is important for the Indian government to formulate selective targeting FDI policies to maximise economic impact of inward FDI by attracting more desirable efficiency-seeking FDI for higher economic growth.
Keywords: Variation * Inward FDI pattern * Host and home country * Economic development * Geographic location * India
Introduction
With increasing FDI flows into India, the number of studies of inward FDI in the Indian context has been increasing (e.g., Banga 2006; Feinberg and Majumdar 2001; Guha and Ray 2004). However, the studies have mainly focused on the impact of FDI on the economy (Palit and Nawani 2007). Little attention has been paid to detect the variation in Indian inward FDI patterns from the home country perspective or over the host country dynamic development process. However, it is important to recognize that specific FDI patterns are affected and determined by characteristics and attributes of both the FDI host and home country in question. The FDI patterns may vary over the host country economic development stages in conjunction with the changes in its investment environment (Zheng 2009). The patterns may differ between home countries owing to their differences in economic development level and geographic location (Nachum and Zaheer 2005; Zheng and Tan 2011). The examination of pooled cross-section or time-series data without distinction will hide specific country and time-period effects. As argued by Blonigen and Wang (2005), it is important to distinguish between developed and developing countries as pooling of the two is inappropriate for empirical FDI studies.
This study will fill this gap in the literature, considering the impact of both host and home country characteristics on Indian inward FDI patterns. Using the investment development path (IDP) theory (Dunning and Narula 1996) and FDI dynamic theory (Ozawa 1992) as the theoretical foundation, the main research objectives of the study are twofold: First, to examine the variation in Indian inward FDI patterns over the different stages of the host country economic and structural development; and second, to investigate Indian FDI pattern variation between home country groups classified by their economic development levels and geographic locations. The main empirical contributions of the study stem from the distinctive approach of decomposing the panel dataset employed into two dimensions: The time-series will be divided into three phases according to Indian FDI and economic transformation stages and the home countries will be categorised into two sets of groups based on their economic development level and geographic location. To our knowledge, this is the first attempt to use such a decomposition method for studying Indian FDI patterns at the aggregate country level. This approach makes not only an empirical but a theoretical contribution to the existing literature by revealing how the host and home country characteristics influence inward FDI patterns in the Indian context. Our findings have important implications for both policy-makers and business practitioners, in relation to economic policies and investment strategies.
Following this introduction, Section 2 provides a background to the development of Indian inward FDI and government FDI policies. Section 3 reviews the literature and further develops the hypotheses to be tested. Section 4 describes the research methodology of the study and Section 5 presents and discusses the empirical results. The final section summarises the findings, and discusses policy and managerial implications.
The Development of Indian Inward FDI and Government Policy
As one of the most important emerging markets and economic driving forces in the world, India has been attracting significant amounts of FDI since its economic reforms in 1991. According to UNCTAD (2011), Indian inward FDI stock increased from US$ 17 billion in 2000 to US$ 198 billion in 2010 (see Table 1) and the amount of annual inward FDI reached its peak at US$ 42 billion in 2008, the year that India continued to rank as the second most attractive FDI location in the world (Kearney 2010), having replaced the USA in 2005, rising from third in 2004, sixth in 2003 and fifteenth in 2002 (Kearney 2007, 2005, 2004). India was also ranked second by first-time investors from both developed and developing countries and, regionally, ranked first, second and third by investors from Europe, Asia and North America respectively (Kearney 2007). India slipped back to third in 2009, but "it is still a well-regarded foreign investment destination" (Kearney 2010, p. 12). However, it should be noted that the levels of Indian FDI inflows as a percentage of gross fixed capital formation (GFCF) and its FDI inward stock as a percentage of GDP are still low compared to most developed and some emerging economies (see Dunning and Lundan 2008, pp. 31-34), though the ratios were increased over the last two decades (see Table 1).
The development of Indian FDI and associated government policies has gone through three stages (see Table 2). In its early economic reform phase 1991-1994 (GDP per capita in PPP below $1000), FDI grew at a sluggish pace, with India's bureaucratic system, red tape, inflexible labour regulations, poor infrastructure and political uncertainty acting as major obstacles to inward FDI. in the second phase 1995-2000 (GDP per capita in PPP $1000-1500) FDI inflows began to show a distinct upward trend following government policy liberalisation towards inward FDI and international trade. In the third phase 2000-2008 (GDP per capita in PPP $1500-3000) FDI inflows to India increased dramatically following its more open stance and changes in attitude, law and regulations. The considerable scale of FDI expansion meant "India joins China at the centre of FDI radar screen" (Kearney 2005, p. 3).
Literature and Hypotheses
FDI theories follow the frameworks suggested by Dunning (1980, 1981, 1988, 1993, 1998, 1999), Dunning and Narula (1996, 2004), Porter (1990), and Ozawa (1992). Dunning's OLI theory (1980) lay a theoretical foundation for studying FDI determinants and motivations in international business. He disaggregates FDI motivations into four categories: Market-seeking, efficiency-seeking, resource-seeking and strategic asset-seeking.
Market-seeking FDI (for a horizontal strategy) is driven mainly by a set of factors such as market size, growth of local and regional markets, economies of scale, host country policies, political and economic stability (Streak and Dinkelman 2000). Efficiency-seeking FDI (for a vertical strategy) is motivated by the lower cost of natural resources and labour (Buckley et al. 2007), the productivity and skills of labour, technology capability, infrastructure, and the efficiency of government institutions (Streak and Dinkelman 2000). Resource-seeking FDI is spurred by the availability of immobile raw materials and inputs, unskilled and skilled labour, and physical infrastructure resources (Buckley et al. 2007). Strategic asset-seeking FDI is attracted to specific technology capabilities such as R&D and innovation, advanced technology, brands and distribution networks.
Based on OLI theory, the IDP theory was further developed by Dunning and Narula (Dunning 1981; Dunning and Narula 1996) to describe the linkage between the economic development level (measured by GDP per capita) and the pattern of FDI flows of an economy through five stages from being a net FDI recipient to being a net source of FDI. Stage one (GDP per capita below $1000) is pre-industrialization, no significant FD1 flows due to limited purchasing power and market size; Stage two (GDP per capita $ 1000-3000) is in net stocks of inward FDI, rapid economic growth and enlarged market, attracting market-seeking and resource-seeking FDI in resource and labour intensive industries; Stage three (GDP per capita $ 3000-10000) is still in net stock of inward FDI, attracting market-seeking, resource-seeking and efficiency-seeking FDI in knowledge and technology intensive industries; Stage four is in net stock of outward FDI; and finally, Stage five is in high stocks of both inward and outward FDI. Dunning and Narula (1996) further point out that the IDP pattern may be idiosyncratic and vary across individual countries owing to their differences in economic structures, natural resource endowment, and government policies in particular.
Porter's (1990) national competitive theory distinguishes four basic stages of national competitive development as: The factor-driven stage, the investment-driven stage, the innovation-driven stage and the wealth-driven stage. The first three stages are associated with and characterised by specific types of factor endowment (Wysokinska 1998). Based on Porter's theory, Ozawa (1992) developed a dynamic framework by introducing an additional variable of FDI to emphasise the linkage between FDI and dynamic economic development process. He argues that FDI affects and reflects the stages of an economy (Ozawa 1992) and FDI pattern changes in line with the stages of structural transformations in the economy (Wysokinska 1998): The first factor-driven stage...
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