Outward FDI from India and its impact on the performance of firms in the home country
| Pages | 1-32 |
| DOI | https://doi.org/10.1108/JABS-05-2017-0063 |
| Date | 07 January 2019 |
| Published date | 07 January 2019 |
| Author | Indrajit Roy,Narayanan K. |
| Subject Matter | Strategy,International business |
Outward FDI from India and its impact
on the performance of firms in the
home country
Indrajit Roy and Narayanan K.
Abstract
Purpose –This paper aims to analyse the changein performance of parent Indian firms (home effects)
who haveinvested in overseas locations in recenttimes.
Design/methodology/approach –Difference-in-difference (DiD) estimate of home effects using farm
level data.
Findings –Home effectsof Indian outward foreign direct investment(OFDI), in general, are insignificant.
However, in the case of OFDI directedonly to non-offshore financial centre (OFC), some firms did enjoy
beneficial home effects with respect to turnover, current ratio and leverage ratio. In the case of OFDI
directed purely to OFC locations, some of the parameters exhibited negative home effects. In the
subsample of Indian OFDI directed to combination of OFC and non-OFC locations, the results show
positive homeeffects with respect to export, operating profit marginand forex earnings; however, impact
on turnoverseems to be negative for all the quartiles.
Research limitations/implications –Estimation of home effects using data over longer horizon may
yield robustoutcome.
Practical implications –These results make a strong case to draw a distinction among OFDIs to OFC,
non-OFC and combination of OFC and non-OFC locations in studying the beneficial home effectsof OFDI.
Originality/value –To the authors’ knowledge, this is the first paper which estimates home effects of
different groups ofIndian firms (based on their investment locationsand size class) using difference-in-
differenceestimate.
Keywords Quantile regression, Outward FDI, Difference-in-difference estimate, Home effect,
Offshore financial centre
Paper type Research paper
1. Introduction
Globalisation generally starts with exports, and its natural extension is foreign direct investment
(FDI). While exports is perceived to be good for the economy, the beneficial effects of the
transfer of economic activities abroad, either through foreign investment or through arm-len gth
contracts, are widely debated issues. Therefore, a great deal of att ention has been given to
the understanding of the impact of outward foreign direct investment (OFDI) on the
performance of parent firms in the home country (country of origin). Moreover, multinational
enterprises (MNEs) of both advanced economies as well as developing economies have
shown special liking for low tax jurisdictions or offshore financial centres (OFCs) as their first
stop of overseas investment destination. OFCs are characterised by exceptionally low rates of
corporate income taxation and a high degree of secrecy law. Tax havens facilitate MNEs to
move profits out of high tax jurisdictions to low tax jurisdictions, generally through transfer
pricing (Eden, 2009). OFCs also help MNEs in their interest-stripping strategy and round
tripping investments[1][2].
Indrajit Roy is based at the
Reserve Bank of India,
Mumbai, India.
Narayanan K. is a Professor
at the Indian Institute of
Technology Bombay,
Mumbai, India.
Received 4 May 2017
Revised 27 October 2017
14 March 2018
Accepted 30 March 2018
DOI 10.1108/JABS-05-2017-0063 VOL. 13 NO. 1 2019, pp. 1-28, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 1
Home effects measure how the overseasinvestment and production decisions (i.e. OFDI) of
the MNEs affect their performance in home country. Home effects of OFDI can be
measured using average treatment effect on the treated (ATT), which is basically the
difference in the average performance of treated and the control group of firms in the post-
OFDI period. However, unobserved heterogeneity, which may be because of firm specific
characteristics (organisational structures, special market condition or management skills),
could impact ATT estimate and induce biasness in the estimate. Therefore, difference-in-
difference (DiD) estimate, which calculates change in the difference of average
performance of treated firms in the pre-OFDI and the post-OFDI periods, and difference of
average performance of control group firms in the corresponding period, improves the
performance of testing of hypothesis. Further, intensity and direction (positive or negative)
of home effects of OFDI may vary depending on the size of the OFDI firms. Quantile DiD is
useful to understand the home effects of OFDI on a performance indicator for under-
achievers (firms that are at the lower end of the probability distribution of the performance
indicator) and over-achievers(the firms at the upper end).
Integration of Indian economy with the rest of the world has strengthened in recent years,
and the same is witnessed in an uptrend of both inward and outward FDI. OFDI has
provided Indian firms with better access to technology, knowledge, markets, and natural
resource. It also helps the domestic firms improve their brand value, and enable them to be
closer to their strategic clients. Indian inward FDI (IFDI) stock as well as OFDI stock
increased substantially since 2000. According to UNCTAD (2016), the share of Indian IFDI
stock to World IFDI stock has increased from 0.22 percent in 2000 to 1.13 per cent in 2015;
whereas, the share of Indian OFDI stock to World OFDI stock has increased from 0.02 per
cent in 2000 to 0.55 per cent in 2015. Data on Indian outward FDI, as published by Reserve
Bank of India (www.rbi.org.in), shows that during the last 10 years, India’s cumulative OFDI
flow exceeded 250 billion USD and spread across 160 countries into various industries.
Further, RBI’s data alsoindicates that the majority of Indian OFDI flow (182 billionUSD in the
last 10 years) was destined to OFCs. Singapore and Mauritius together as destination of
Indian OFDI account for 62 percent share of total Indian OFDI in 2016. Domestic savingsof
such OFC are extremely insufficient to justify investment of such magnitude. These lead to
the question are the effectsof Indian firms’ OFDI decision sufficiently high and favourable to
justify its OFDI? And to answer this question, this paper analysed detailed firm-level data of
Indian OFDI firms, ignoring the quantum of OFDI or type (equity/loan or guarantee) of
investment of Indian MNESs, to investigatethe following:
1. identify the differences, if any, in the performance of OFDI and Non-OFDI firms i.e.
estimate the home effects of overall Indian OFDI as well as for different size classes of
Indian firms; and
2. estimate the home effects of OFDI and identify the differences, if any, on performance
indicators for the three different types of Indian MNEs i.e:
3. Indian MNEs which have invested only in OFC locations;
4. Indian MNEs which have invested only in non-OFC foreign locations; and
5. Indian MNEs which have invested both in OFC as well as non-OFC locations.
We observe that in the short run, home effects for Indian OFDI are mostly insignificant.
However, Indian firms which have initiated OFDI only in OFC locations, witnessed
significantly negative home effects on some of the financial parameters, and no positive
home effects were found in any of the eight parameters (profitability, operating expenses,
exports, operating profit margin, foreign exchange earnings, current ratio and financial
leverage ratio) under study. On the other hand, firms which have initiated OFDI only in the
non-OFC foreign locations witnessed positive home effects on current ratio as well as
leverage ratio, but negative home effects were observed on the operating profit margin.
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