A Comparative Study of FDI Inflow and Outflow From India

Volume 2, Issue 4, April 2017 International Journal of Innovative Science and Research Technology
ISSN No: - 2456 - 2165
A Comparative study of FDI Inflow and Outflow from

India
Dr. Alka Awasthi
Dr. Shekhar Upadhayay
Dr. Priyanka Rawal
Faculties, Jagran Lakecity University
Bhopal
Abstract:- In todays world of globalization, one of the investment into consumer goods, abandoning the local
most outstanding feature is the expansion in foreign content and foreign exchange balancing rules, among
investments in both developed and developing countries. others. The parallel process of virtual withdrawal of the
There has been substantial growth in FDI flows in last two Industrial Licensing System and the retreating from the
decades as compared to other economic indicators primacy given to public sector also enhanced the scope for
worldwide. FDI has been considered as one of the most FDI participation in India.
secured form of external finance as it not only supplement
home savings, foreign reserves but also expedite sharing India is now the worlds 21st largest outward investor, which
of technology and skills, increases innovative capacity and is significant given its historically miniscule foreign direct
domestic competition among member countries. These investment (FDI) outflows. Indian firms are once again
days, FDI has become an important tool of international increasing their overseas investment, including through
economic integration. India is the 7th largest, and the 2nd mergers and acquisitions (M&As). Indias OFDI should
most populated country in the world. Geographical continue its rapid upward trend overcoming its policy barriers
convergence, cultural diversity and rich human resource and emerge as a sturdy economy of the world. Outward FDI
are few important features of India which makes it can help realize India its true potential of economic growth on
attractive for global investment. Being the largest worlds arena. India has become an indispensable strategic
democracy of the world, India has grown as a global global partner for both multinational corporations and to their
resource for industry in manufacturing and services. India home countries. The inward foreign direct investments and
has emerged as a viable partner to global investors on outward investments have reached a historic high in the recent
account of its large available technical skills, English years. Indian firms are now growing globally in order to
speaking population with its growing disposable income service overseas markets. The increasing engagement of the
and expanding market. Currently, opportunities for foreign Indian companies in the world markets is not only an
investments in India are at boom. indication of the maturity reached by Indian Industry but also
the extent of their participation in the overall globalization
Keywords : Globalization, Economic indicators, Foreign process. In this context, this study pertains to outward FDI
reserves. from India. The mounting competitiveness of Indian
multinationals and their increasing desire to venture abroad to
I. INTRODUCTION expand markets, operate near to clients and acquire technology
and brand names are key drivers pushing more Indian firms to
FDI is considered to be the most attractive type of capital flow go abroad. Substantial improvements in the country's
for emerging economies as it is expected to bring latest economic performance and the competitiveness of its firms
technology and enhance production capabilities of the and their strategy, resulting from ongoing liberalization in
economy. Foreign investments mean both foreign portfolio economic and outward FDI (OFDI) policies, made these
investments and foreign direct investments (FDI). FDI brings developments possible. In fact, there has been an impressive
better technology and management, access to marketing spurt in the outward FDI activity of Indian MNEs since the
networks and offers competition, the latter helping Indian 1990s. Hence, Government should support Indian firms in
companies improve, quite apart from being good for overseas expansion because such expansions will increase
consumers. This efficiency contribution of FDI is much more home country exports and provide parents firms cheaper raw
important.The change in the sentiments towards FDI was material through backward FDI.
given effect to in the form of a series of changes in the
policies. These included removing the ceilings on foreign FDI can be largely classified into two types:
equity imposed by the FERA, lifting of restrictions on the use
(a) Inward FDIs.
of foreign brand names in the domestic market, removing
restrictions on entry and expansion of foreign direct (b) Outward FDIs
IJISRT17AP77 www.ijisrt.com 244

ISSN No: - 2456 - 2165
Table 1.1
Percentage share of Major Countries in the total global FDI Inflow
% % %
Country 1999 2009 2016
Share Share Share
United States 179045 30.7 319737 23.2 349530 13.8
China 43751 7.5 147791 10.7 72971 2.9
France 30984 5.3 96990 7 9993 0.4
United Kingdom 74349 12.8 95968 7 -14971 -0.6
Luxembourg - - 80373 5.8 4146 0.2
Russian Federation 2761 0.5 73053 5.3 70685 2.8
Spain 11798 2 65412 4.7 16588 0.7
Belgium - - 59564 4.3 17937 0.7
Australia 6003 1 46565 3.4 -3063 -0.1
Brazil 31913 5.5 45058 3.3 -3496 -0.1
Canada 22803 3.9 44689 3.2 50521 2.0
India 2635 0.5 41169 3 286721 11.3
Sweden 19843 3.4 40395 2.9 28881 1.1
Germany 24597 4.2 24891 1.8 32208 1.3
Japan 3193 0.5 24418 1.8 135745 5.4
Mexico 8612 1.5 21950 1.6 13138 0.5
Turkey 940 0.2 18171 1.3 -14971 -0.6
Switzerland 8942 1.5 17407 1.3 583455 23.0
Italy 4280 0.7 16999 1.2 29076 1.1
Chile 4628 0.8 16787 1.2 8084 0.3
Poland 6368 1.1 15980 1.2 1488 0.1
Austria 4534 0.8 13525 1 16213 0.6

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% % %
Country 1999 2009 2016
Share Share Share
Denmark 7726 1.3 10708 0.8 9534 0.4
Czech Republic 3716 0.6 10704 0.8 4021 0.2
Israel 1737 0.3 10544 0.8 4670 0.2
South Africa 550 0.1 9632 0.7 0.0
Indonesia -241 0 8340 0.6 6652 0.3
Hungary 3337 0.6 6552 0.5 -2808 -0.1
Greece 72 0 5083 0.4 -785 0.0
Portugal 3005 0.5 3525 0.3 917 0.0
Slovak Republic 707 0.1 3410 0.2 -422 0.0
Korea 5412 0.9 2200 0.2 31488 1.2
New Zealand 1826 0.3 1975 0.1 524 0.0
Estonia 581 0.1 1969 0.1 375 0.0
Slovenia 216 0 1808 0.1 -222 0.0
Norway 3935 0.7 -95 0 154558 6.1
Iceland 148 0 -379 0 460 0.0
Finland 12141 2.1 -4192 -0.3 -2686 -0.1
Netherlands 36925 6.3 -9063 -0.7 613361 24.2
Ireland 8856 1.5 -12278 -0.9 23971 0.9
1 582628 100 1377335 100 2536500 100.0
Source : OECD Factbook 2016: Economic, Environmental and Social Statistics - ISBN 92 64-08356-1 - OECD 2016
II. FDI OUTFLOW

In current years, emerging market economies (EMEs) are progressively becoming a basis of foreign investment for rest of the world. It
is not only a indicator of their progressive participation in the international economy but also of their increasing competency. The
figure below demonstrates that outward investment is increasingly being rooted from developing economies rather than developed
economy over the recent years.

ISSN No: - 2456 - 2165
Figure 1.1: Trends in World ODI flows: Developed vs. Developing Economies (US$ billion)
Source : World Investment Report, 2013; EXIM Bank Research
Figure 1.2: Drivers for Outward Direct Investments
FDI is an outcome of the internationalization process that manufacturing and transaction by enlarging overseas
initiates with exports. Through this process, nations try to production operations in nations where some ownership-
reach to markets or resources and slowly decrease the cost of specific benefits can aid in competing internationally. A

ISSN No: - 2456 - 2165
striking increase in outward FDI has been noticed in the case B. FDI Outflow
of India in recent past. with other nations of the world is
In recent years, developing economies (EMEs) are gradually
obvious not only in the form of increased scale of FDI inflows
becoming a foundation of overseas investment for rest of the
but also in way of enhanced levels of FDI outflows. world. It depicts their growing involvement in the global
economy but also of their rising capability. More importantly,
an increasing need for change is coming from developing
III. REVIEW OF LITERATURE
nations and economies in conversion, where many private as
A. FDI Inflow well as state-owned firms are increasingly involved in outward
FDI inflows to India underwent substantial decline in 2010-11 expansion through overseas direct. Chopra and Sachdeva
while other emerging market economies (EMEs) in Asia as (2014) in their study highlight that outward FDI is closely
well as Latin America received huge inflows raising a grave related to multi-layered structures. The reasons for this include
concern and caution in the light of increasing current account legitimate business/commercial issues relating to taxation
deficit in India more than the expected sustainable level of 3.0 benefits which can be availed by any global investors. It
per cent of GDP during April-December 2010. This is also further states that other hand the objective is of having multi-
important since as FDI is generally considered as the most layered structures is to create obscurity for motives not valid
stable element of capital flows needed to fund the current on commercial basis or from the perspective of home
account deficit. countrys interest. Thus, there arises a need to have a more
clarity in this regard.
Chopra & Sachdeva (2014 ) are of the view that FDI may be Sarma (2015) in her study analyse the accepted /conventional
an attractive way of investment but it may take advantage of investment models and empirical literature on India s ODI
the natural resources at increasing pace and leave the host investment flows. Besides reaffirm the literature, it also
country disadvantaged in the long run. Instead of it being a some results that can be practically seen as a global
vital contributor to economic development, it is a phenomenon. Trade is widely accepted a crucial factor for
hazard/danger/risk to the existence of domestic firms. It also boosting investments amongst countries. Indias membership
has many demerits such as, enlarged income inequalities, in various regional blocks such as ASEAN-India, Free Trade
improper consumption patterns, decline in profits of domestic Agreement (FTA) as well as bilateral FTA give a conductive
industries and also affect political decisions. It is widely /beneficial trade platform for Indian companies to
accepted that FDI inflow has many advantages for a nation. substantiate their in the host nation. Also, Singaporeand
UNCTAD (1999) reported that Transnational Corporations Mauritius are the nations which received the highest FDI from
(TNCs) can supplement domestic development plans through India which shows that India has signed Double Tax
(i) expanding/ enlarging financial resources for development; Avoidance Agreement (DTAA) with these two nations.
(ii) promoting export competiveness; (iii) generation of
employment and enhancing the skill base; (iv) protecting the
environment to realise the obligation towards social IV. RESEARCH METHODOLOGY
responsibility; and (v) improving technological efficiencies
through transmission , dissemination and generation. The present study is based on descriptive research. The nature
of the research study is longitudinal which refer to the data
According to Jain (2015), the economic policy changes have gathered over a period of time for the same subject. The
not only made India an attractive FDI destination globally but propose study depends on the secondary data have been
have also shown the way to the rest of the world by collected from various reports, periodicals, journals,
accomplishing what was anticipated. Large progressive newspapers, editorials, magazines and websites.
economy, largely unexploited domestic market, accessibility
to domestic skill sets and access to technology makes India a
favoured destination for FDI but abundance of approvals, A. Objective of the Study
administrative measures , labour regulations, legal system, etc.
To study the trend in FDI outflow from India.
are hurdles in carrying out business in India. Thus, the govt
should allow automatic route for all investments in the To know the trend in FDI inflow into India over the
sector cap; provide long term visibility and stability of policy; period of study.
enhance business environment by the reduction in the number
To explore the sectors in which FDI inflow has
of processes and approvals; make all approvals time specific
occurred.
and non-discretionary; and promote enhancement of urban
infrastructure in cities. To find out about the sectors in which FDI outflow has
occurred.

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V. INDIAS POSITION IN THE WORLD

A. Status of FDI Inflow
The table given below demonstrates the status of FDI inflows into India, China, Developing countries as a whole and the world
average as a % GFCF.
Table 1.2
FDI Inflow (as % of Gross Fixed Capital Formation)
FDI Inflow (as Percentage of Fixed Capital Formation) 2003-2016
Region/economy India China Developing economies World
2003 4.7 10.3 12.7 9.2
2004 4.6 10.0 9.4 7.8
2005 2.8 8.3 9.5 6.4
2006 2.8 7.7 10.6 6.9
2007 3.0 8.0 11.2 8.5
2008 6.9 6.6 11.5 11.6
2009 6.2 6.1 12.2 13.6
2010 12.3 5.9 11.3 9.8
2011 8.2 4.1 8.5 8.5
2012 5.2 4.2 8.9 8.7
2013 5.8 3.7 8.4 9.1
2014 4.2 3.2 7.8 7.9
2015 5.1 2.9 7.6 8.0
2016 5.9 2.7 7.4 6.5
Source: World Investment Report, 2016, United Nations Conference on Trade and Development
FDI inflow as Percentage of GFCF, for developing economies as well as China has declined significantly during the entire period
studied. For the world as a whole the FDI inflows increased between 2003 and 2008 and thereafter it declined. On the other hand, for
India, FDI as a percentage of GFCF reached a peak in 2008 at 6.9 %, on average it increased over the entire period.
B. Status of FDI Outflow

The table given below demonstrates the status of FDI outflow into India, China, Developing countries as a whole and the world
average as a % GFCF.

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Table 1.3
FDI Outflow (as % of Gross Fixed Capital Formation)
YEAR India China Developing economies World
2003 1.2 1.5 3.4 7.9
2004 1.4 0.5 2.0 6.5
2005 1.2 0.4 1.9 6.2
2006 1.0 0.7 4.5 9.0
2007 1.2 1.4 3.7 7.3
2008 4.8 1.9 5.8 11.2
2009 4.2 1.9 6.3 15.5
2010 5.5 3.0 5.3 11.2
2011 3.7 2.5 4.3 7.9
2012 3.0 2.5 5.3 9.1
2013 2.0 2.2 4.7 9.3
2014 1.5 2.3 4.4 7.3
2015 0.3 2.3 4.3 7.1
2016 1.7 2.5 5.2 7.2

Source: World Investment Report, 2016, United Nations Conference on Trade and Development
FDI outflow as Percentage of GFCF, for the entire world and developing economies as well as India has declined significantly during
the second half the period studied, after witnessing a steady growth in the first half of the period studied. On the other hand, for China,
Outward Foreign Direct Investment as a percentage of GFCF reached a peak in 2008 at 2.5%. Thereafter it was remain constant. A
decline from 3% to 1.7% was experienced in case of India over the same period.
VI. TRENDS IN FDI INFLOW TO INDIA
A. Compound Annual Growth Rate of FDI Inflow

The table below exhibits the changes in compound annual growth rate of FDI inflows before and after the Subprime Crisis of 2007-
2008

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Table 1.4
Compound Annual Growth rate of FDI Inflows from 2000-2015
Impact of the Sub Prime Crisis on FDI Inflows
Computation of Compound Annual Growth

Rate (CAGR) for the Pre Sub Prime & Post
Financial year Total FDI Inflows Sub Prime Crisis Period
S.NO.
(April-March) (in million US $ )
CAGR
(CAGR for 2001-2002

1 2001-02 6,130 21.54292
to2014-2015
2 2002-03 5,035
3 2003-04 4,322
4 2004-05 6,051
5 2005-06 8,961
6 2006-07 22,826
CAGR for 2001-02 to

7 2007-08 34,843 27.99757
2006-07
8 2008-09 41,873
9 2009-10 37,745
10 2010-11 (P) 34,847
11 2011-12(P) 46,556
12 2012-13(P) 34,298
13 2013-14(P) 36,046
CAGR for 2007-08 to

14 2014-15(P) 44,291 0.216042
2014-15
Source: -Compiled from: - FDI statistics, Dept. of Industrial policy and Promotion, Ministry of Commerce and Industry, Govt. Of
India 2015
Data relating to FDI inflows from 2000-01 to 2014-2015 indicate that there has been a significant rise in the amount of inflows from
the year 2000-01 (4029 million US $) to 2014-2015 (44291 million US $) with a CAGR of 21.54%. It can also be concluded that
during the whole time period 2011-2012 was the year when highest FDI inflows were received (46556 million US $) and after which
it fell to 44291 million US $ in 2014-2015.

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Sector-Wise Foreign Direct Investment Inflows to India

The following table depicts the sector wise distribution of FDI inflows to India.
Table 1.5
Sector-Wise Foreign Direct Investment Inflows to India
Source/Industr 2012-13 2013-14 2014-15 2015-16 2016-17 P

y
Total FDI 14,939 23,473 18,286 16,054 24,748
SECTORS FDI inflow % of FDI % of FDI % of FDI % of FDI % of total

total inflow total inflow total inflow total inflow FDI inflow
(US $
million) FDI (US $ FDI (US $ FDI (US $ FDI (US $
inflo million inflow million inflo million) inflow million)
w w
) )
Manufacturing 4,793 32 9,337 40 6,528 36 6,381 40 9,613 39
Financial Services 1,353 9 2,603 11 2,760 15 1,026 6 3,075 12
Retail & Wholesale Trade 391 3 567 2 551 3 1,139 7 2,551 10
Computer Services 843 6 736 3 247 1 934 6 2,154 9
Construction 1,599 11 2,634 11 1,319 7 1,276 8 1,640 7
Electricity and other Energy 1,338 9 1,395 6 1,653 9 1,284 8 1,284 5

Generation, Distribution &
Transmission
Communication Services 1,228 8 1,458 6 92 1 1,256 8 1,075 4
Restaurants and Hotels 218 1 870 4 3,129 17 361 2 686 3
Business Services 569 4 1,590 7 643 4 521 3 680 3
Miscellaneous Services 509 3 801 3 552 3 941 6 586 2
Transportation 344 2 410 2 213 1 311 2 482 2
Trading 156 1 6 0 140 1 0 0 228 1
Real Estate Activities 444 3 340 1 197 1 201 1 202 1

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Education, Research & 56 0 103 0 150 1 107 1 131 1

Development
Mining 592 4 204 1 69 0 24 0 129 1
Others 506 3 419 2 43 0 293 2 232 1
Source - FDI statistics, Dept. of Industrial policy and Promotion, Ministry of Commerce and Industry, Govt. of India 2015
If we will have a look at the dominant sector, manufacturing sector has played a crucial role. Manufacturing was the highest
contributing sector i.e. 39% where as mining was the least contributing sector that is 1%in 2016-17. In 2012-13, FDI inflow of this
sector was 4793 US $ million (32%), then this sector increased its dominance with 9337 US $ million (40%) in 2013-14. However it
goes down in 2014-15 with 6528 US $ million (36%), again it declined a little in 2015-16 with 6381 US $ million (40%), again it goes
up with 9613 US $ million (39%) in 2015-17.
Sector-Wise Distribution of Outward FDI Flows from India
Distribution of Outward FDI Flows from India: by economic sector, selected years
The following table shows the Distribution of Outward FDI Flows from India: by economic sector for selected years.
Table 1.6
Table Distribution of Outward FDI Flows from India: by economic sector, selected years (As % of total outflows)
Sector/ Industry 2000-2001 2001-2002 2006-2007 2011- 2016-

2012 2017
Manufacturing 27% 72% 63% 47% 24%
Financial Services 1% 0% 0.10% 1% 8%
Non-Financial Services 63% 21% 27% 6% 54%
Trade 7% 2% 4% 9% 10%
Others 2% 5% 4% 37% 4%
Source- Compiled from http://www.eximbankindia.in/sites/default/files/inidas-international-trade-and-

investment.pdf ,ccsi.columbia.edu/files/2014/03/profiles_India_OFDI_september_22_final__0.pdf
Major Sector -wise Contribution Of Overseas Investments by Indian Companies :Detailed Break-Up (2001-2016)
Table 1.7
Major Sector -wise Contribution of Overseas Investments by Indian Companies : Detailed Break-Up
(Calculation in Percentage of accumulated Investment)
S.No Name of the Sectors 2011-12 2016-17
1 Manufacturing 39.0% 26.8%
2 Financial, Insurance and Business services 32.2% 20.9%
3 Wholesale, Retail Trade, Restaurants and

Hotels 8.2% 25.2%
4 Agriculture and Mining 6.9% 11.3%
5 Transport, Storage and Communication

Services 2.8% 7.5%

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6 Construction 2.6% 4.5%
7 Community, Social and Personal Services 1.3% 2.9%
8 Electricity, Gas and Water 6.1% 0.7%
9 Miscellaneous 0.8% 0.3%
Source: RBI Report 2016

The above table and figure shows the major sectors which foreign currency reduces their worth, therefore
have been contributing to FDI Outflow in India in FY 2011- requirement of funds in foreign investment in home
2012 till 2016-2017..If we will have a look at the dominant currency decreases. Hence, there is need to strengthen
sector, manufacturing sector has played a crucial role with 39 the domestic currency in order to promote OFDI.
% share in FDI outflow from India followed by Financial & Further, the technological proficiency of an
Business Services sector (32%). The third largest contributor organization drives to its ownership-specific benefits
in outflow has been Wholesale Trade (8.2%). These three which it can capitalize to invest in other nations.
sectors contributed 81% of FDI outflow from India. The other Hence, there is a need to strengthen and encourage
major contributing sectors are Agriculture and Mining (6.9%), research and development activities leading to increase
Electricity, Gas and Water (6.1) Transport, storage and in member of patents obtained by Indian firms.
communication services (2.8%). Miscellaneous sectors were
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Volume 2, Issue 4, April 2017 International Journal of Innovative Science and Research Technology

ISSN No: - 2456 - 2165

A Comparative study of FDI Inflow and Outflow from

IJISRT17AP77 www.ijisrt.com 244

United States 179045 30.7 319737 23.2 349530 13.8

China 43751 7.5 147791 10.7 72971 2.9

France 30984 5.3 96990 7 9993 0.4

United Kingdom 74349 12.8 95968 7 -14971 -0.6

Luxembourg - - 80373 5.8 4146 0.2

Russian Federation 2761 0.5 73053 5.3 70685 2.8

Spain 11798 2 65412 4.7 16588 0.7

Belgium - - 59564 4.3 17937 0.7

Australia 6003 1 46565 3.4 -3063 -0.1

Brazil 31913 5.5 45058 3.3 -3496 -0.1

Canada 22803 3.9 44689 3.2 50521 2.0

India 2635 0.5 41169 3 286721 11.3

Sweden 19843 3.4 40395 2.9 28881 1.1

Germany 24597 4.2 24891 1.8 32208 1.3

Japan 3193 0.5 24418 1.8 135745 5.4

Mexico 8612 1.5 21950 1.6 13138 0.5

Turkey 940 0.2 18171 1.3 -14971 -0.6

Switzerland 8942 1.5 17407 1.3 583455 23.0

Italy 4280 0.7 16999 1.2 29076 1.1

Chile 4628 0.8 16787 1.2 8084 0.3

Poland 6368 1.1 15980 1.2 1488 0.1

Austria 4534 0.8 13525 1 16213 0.6

IJISRT17AP77 www.ijisrt.com 245

Denmark 7726 1.3 10708 0.8 9534 0.4

Czech Republic 3716 0.6 10704 0.8 4021 0.2

Israel 1737 0.3 10544 0.8 4670 0.2

South Africa 550 0.1 9632 0.7 0.0

Indonesia -241 0 8340 0.6 6652 0.3

Hungary 3337 0.6 6552 0.5 -2808 -0.1

Greece 72 0 5083 0.4 -785 0.0

Portugal 3005 0.5 3525 0.3 917 0.0

Slovak Republic 707 0.1 3410 0.2 -422 0.0

Korea 5412 0.9 2200 0.2 31488 1.2

New Zealand 1826 0.3 1975 0.1 524 0.0

Estonia 581 0.1 1969 0.1 375 0.0

Slovenia 216 0 1808 0.1 -222 0.0

Norway 3935 0.7 -95 0 154558 6.1

Iceland 148 0 -379 0 460 0.0

Finland 12141 2.1 -4192 -0.3 -2686 -0.1

Netherlands 36925 6.3 -9063 -0.7 613361 24.2

Ireland 8856 1.5 -12278 -0.9 23971 0.9

1 582628 100 1377335 100 2536500 100.0

II. FDI OUTFLOW

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Source : World Investment Report, 2013; EXIM Bank Research

Figure 1.2: Drivers for Outward Direct Investments

IJISRT17AP77 www.ijisrt.com 247

IJISRT17AP77 www.ijisrt.com 248

V. INDIAS POSITION IN THE WORLD

FDI Inflow (as Percentage of Fixed Capital Formation) 2003-2016

Region/economy India China Developing economies World

2003 4.7 10.3 12.7 9.2

2004 4.6 10.0 9.4 7.8

2005 2.8 8.3 9.5 6.4

2006 2.8 7.7 10.6 6.9

2007 3.0 8.0 11.2 8.5

2008 6.9 6.6 11.5 11.6

2009 6.2 6.1 12.2 13.6

2010 12.3 5.9 11.3 9.8

2011 8.2 4.1 8.5 8.5