| dc.description.abstract | The context: Policy changes initiated in July 1991, have seen the number of foreign collaboration intentions into India approved by the ministry of industry more than double every year to average 1,827 in number during 1991-97 from around 750 per year in the previous decade. Approvals for foreign equity flows, have risen sharply to an average of Rs.4,663 crores per annum in the current decade as against just Rs.4,663 crores per annum in the current decade as against just Rs.106 crores per year in the previous one. Foreign investments into the country now come from a far wider range of home countries than before. Explicit marketing collaborations, management consultancies, technical consultancies and training agreements have been on the rise.
Policy makers in India expect that foreign investments especially Foreign Direct Investment(FDI) will contribute in achieving a steady economic growth of 7 to 8% through increase in foreign savings, and large private(including foreign) investments in infrastructure projects. Besides the benefits of capital inflow associated with FDI, other benefits arising from spillovers, efficiency, better technology and new products are expected. The study covers the period from August 1991 to August 1997.
Since the initiation of these economic policy reforms, there has been an ongoing debate on the role of multinational corporation(MNC)investments in India. The debate had been initiated by a small group of businessmen in Bombay, sometime in 1994, and later within the Confederation if Indian Industries (CII)Recently, researchers (Nayar, 1998) have examined this growing discount among Indian businessmen regarding the behavior of MNCs in India . Some have alleged that foreign business is taking over existing successful Indian business in branded and consumer goods industries and also that they have an “unfair” advantage. Other have alleged that the advantage of foreign firms especially those headquartered in the US and UK arise more due to their access to cheaper capital(arising out of capital market imperfections) than in their intrinsic technological or managerial capacities. There has been a vociferous demand for a level playing field by Indian business which they claim was denied to them as a result of past government policies.
It is interesting therefore, to examine both transnational equity flows and involvement without equity, i.e. the nature of participation, in terms of the sources of advantage of the foreign firms – specifically whether the foreign firms do exhibit an advantage that arises purely from the working of the international capital markets, apart from the more usual intangible assets that they bring into the country.
Research question: The mainstream theories of FDI offer explanations for the presence and patterns of FDI, namely, the intangible assets theory and the capital markets’ imperfections theory, and which are the most relevant to this study. This study will seek to examine the relative importance of Kindleberger’s (1969) theory of the intangible assets advantage and the capital market imperfections theory of Aliber(1993) in explaining transnational activity in India in the 1990s.
The intangible assets would include any proprietary technology, brand name, patented product, managerial skills etc. which the foreign firm uses to effectively compete with the local firms in the host country. Specifically, the variable marketing expenditure to sales, advertising intensity, and distribution expenditure to sales, are used to proxy intangible assets.
The capital market imperfections theory asserts that FDI, takes place because of the sour firm’s ability to capitalize the same stream of income at a higher rate than what the host country firms are able to. This theory is operationalized through the Fischer Open Differential between the home country and India and through the price-earning differential between India and the US(proxied for the world) in the specific industry group. Several other industry characteristics such as size of the industry, concentration etc. are used as control variables.
Two somewhat different operational questions follow out of the main question mentioned earlier:
(a) What determines the volume of equity flows?
(b) What explains the patterns of participation, or more loosely ‘the degree of control’ that arise out of planned transnational activity in India
The first leads to the value of equity flows as the dependent variable. The second to the proposed percentage equity(ex post the proposal) that would be held by the transnational (non-equity cases would be zero percent), as the dependent variable. For some of the regressions, this dependent variable is further recorded into four/five groups ranging from no equity participation to folly owned subsidiaries. The explanatory variables are relevant industry and home country characteristics which operationalize the above two theories of FDI as mentioned.
Database used and methodology: A database of over 10,000 instances of investment intentions approved and at the point of approval by the Reserve Bank of India(RBI) and the Foreign Investment Promotion Board(FIPB)between August 1991 and August 1997, is used in the study. This database includes information on the product category in which the investment is planned and the identity of the home country. The product group code has been linked to the Center for Monitoring Indian Economy(CMIE) DATABASE FROM WHICH MEASURES FOR INDUSTRY SPECIFIC CHARACTERISTICS ARE DERIVED; SUCH AS LABOR INTENSITY, CAPITAL INTENSITY ETC ACROSS SEVEN YEARS FROM 1991-97 FOR 126 PRODUCT CATEGORIRES. The home country variables for the study such as the Fischer Open Differential for 35 home countries for seven years and price earning differential between the US and India across 126 product groups across seven years have been compiled from the International Monetary Fund (IMF) publications.
To explain the level of control as desired by the foreign investor or participant firms or proposed firms, the explanatory variable characterize the industry and home country> Multinomial logit analysis is employed following an initial tobit analysis to explain the entire spectrum of equity control rather than just categories. Four different levels of control categories are defined (Non-equity type of collaboration; Minority control with the foreign partner holding less than or equal to 50% equity. Majority equity control with greater than 50% but less than 100% equity holding; and wholly owned subsidiaries).
The equity flows into 126 industries from 35 home countries over seven years are sought to be explained using the same set of industry and home country related variable. A tobit(censored) regression is used.
Results and Conclusions: The study shows that the intangible assets is an important determinant of control, mainly in terms of product differentiation and foreign brands in India and countervailing power of Indian business arising out of existing distribution networks. It thus confirms other previous works on FDI into India (Kumar, 1994) a more interesting finding of this study is that capital market imperfections play a significant role in explaining control especially in the higher control categories of majority control and the wholly owned subsidiaries. This points to an advantage of cheaper capital bother because of the foreign firms nationality and its multinational nature. What it means is that the exchange rate depreciation has been less than anticipated, and/or that the interest rates have been too high in India and capital markets have not mediated enough, leaving a distinct space for the transnational to bring in funds and also to indulge in arbitrage through its own internal channels(FDI). | |
