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    MEPP Lectures 25-26-27Indias Outward Investment-

    Policy, Regulatory Regime andProspects

    Presented by

    Prof. Tarun DasIILM, New Delhi.

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    CONTENTS

    1.Outward investments bydeveloping countries

    2.Indias outward investment

    3.Modes of Indian outward

    investment4.Host / Home country policies

    5.country policies

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    1.1 Outward Investment Since 1990, a number of developing countries

    have begun exporting capital, both in the form of

    portfolio investments and FDI, According to UNCTAD, the outward FDI stock

    from developing countries increased from $60billion in 1980 to $129 billion in 1990 and further to

    $859 billion in 2003. The share of developing countries in global

    outward FDI flows reached about 10%. SouthKorea,Malaysia and Singapore have been outward

    investors for some time; Brazil, China, India andSouth Africa are now following suit.

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    1.2 Outward Investment A recent IMF report also stated that outward FDIfrom Asian emerging market countries is expanding

    rapidly. FDI flows from India, China, Korea, Malaysia,Singapore and Thailand are expanding rapidly and gobeyond the well-publicized investments by KoreasPOSCO in other countries.

    Nature of such emerging multinationals(EMNCs) also changed over the years.

    In the past, FDI flows from developing countriesresulted from political commitments rather than as anexploration of business opportunities, involved greenfield investments in other developing countries.

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    1.3 Outward Investment However, recent years witnessed emergence of

    global players from the developing countries

    facilitated by their production, marketing, financialand networking skills supplemented by a specializedknowledge of doing business in non-OECD countries.

    Growing trends of M&As by the developingcountries as evidenced by the merger between

    South African Breweries & Miller, that between TataSteel & Corus Steel, the takeover of InternationalSteel Group by Mittal of India, or the acquisition ofthe IBM-PC business by Lenovo of China, and theattempts to take over US multinationals in oil and

    domestic appliances.

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    1.4 India is emerging as a majorplayer in global outward investment Buoyed by the success of IT, ITES, biotech,

    auto ancillary, oil companies, India has becomenot only a favorable destination for foreigninvestment but also is emerging as a majorplayer in global outward investment.

    Indian overseas investments span not onlyacross the developing world, but also to the US,the UK,and Germany.

    With annual outflows averaging at $1 billionsince the turn of the century, Indias ranking in

    UNCTAD's outward FDI performance index shotup from the 107th rank in 1999 to the 61st in2003 and further to the 54th rank in 2004.

    di i i j

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    1.5 India is emerging as a majorplayer in global outward investment Indian firms have been investing abroad for

    many years. But it is only since the late 1990sthat outward FDI flows have risen rapidly.

    Indias outward FDI stock increased fromUS$600 million in 1996 to $6.6 billion in2004, taking India to the 15th rank in terms ofoutward FDI stock among the developingeconomies.

    Its outward FDI flows in 2004 at $2.2 billionexceeded that of China at $1.8 billion and thatof Malaysia at $2.1 billion (UNCTAD 2005).

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    1.6 Top 16 developing countriesoutward FDI in 2004 (US$ billion)

    Country OutwardFDI stock

    Stock as %of GDP

    OutwardFDI Flow

    1.HongKong 405.6 246.5 39.8

    2.Singapore 100.9 94.5 10.7

    3.Taiwan 91.2 29.9 7.1

    4.RussianFed.

    81.9 14.0 9.6

    5.Brazil 64.4 10.7 9.56.Korean Rep. 39.3 5.8 4.8

    7.China 38.8 2.4 1.8

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    1.7 Top 16 developing countriesoutward FDI in 2004 (US$ billion)

    Country OutwardFDI stock

    Stock as %of GDP

    OutwardFDI Flow

    9.Argentina 21.8 14.4 0.3

    10.Mexico 15.9 2.3 2.2

    11.Chile 14.5 15.4 0.9

    12.Malaysia 13.8 11.7 2.1

    13.Venezuela 9.2 8.6 0.4

    14.Turkey 7.0 2.3 0.9

    15.India 6.6 1.0 2.2

    16.Nigeria 4.8 6.8 0.3

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    2.1 Indias Outward Investment Policy It is well known that since 1991 India adopted anopen door policy for foreign investment and trade andinitiated credible reforms in industry, trade, fiscal andfinancial sectors to enhance efficiency, productivityand competitiveness of Indian industries and toinduce dynamism to the overall growth process.

    As a part of the ongoing reforms program, Indialiberalized significantly both inward and outwardforeign investment policies.

    It entered into Bilateral Investment Promotion andProtection Agreements (BIPAs) with a number ofcountries to promote and protect foreign investmenton reciprocal basis.

    2 2 R t f I di O t d

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    2.2 Routes of Indias OutwardInvestment

    (i) Automatic Route: Indian corporates/ registeredpartnership firms are allowed to invest in entitiesabroad up to 200% of their net worth in a year, withoutprior approval of Reserve Bank or Government of India.

    (ii) ADR/GDR Automatic Route: Indian companiescan freely utilize up to 100% of ADR/GDR proceeds foroverseas investments without any limit under theautomatic route subject to post facto report to the RBI.

    (iii) ADR/GDR automatic stock/ swap route: Indiancompanies can automatically swap their fresh issue ofADRs/GDRs for overseas M&As in the same core activitys.t. report to RBI.

    2 3 R t f I di O t d

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    2.3 Routes of Indias OutwardInvestment

    (iv) Normal Route: Proposals not covered underthe above routes are considered by the SpecialCommittee on Overseas investments headed by the

    RBI Deputy Governor, with members from theMinistries of Finance, Commerce, External Affairs andthe RBI.

    (b) Liberalized policies

    Corporates - Listed Indian companies are

    permitted to invest abroad in companies, (a) listed ona recognized stock exchange and (b) which has theshareholding of at least 10% in an Indian company.Such investments shall not exceed 25% of the Indiancompanys net worth.

    Individuals - Resident individuals are permitted to

    invest in overseas companies under (i) above withoutany monetary limit.

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    2.4 Liberalized Outward InvestmentPolicy

    Indian corporates/ Registeredpartnership firms up to 200% of their net

    worth. Indian corporates/ registered

    partnership firms are allowed to undertakeagricultural activities either directly or

    through a branch.Guarantees- The scope of guarantee

    has been enlarged under the AutomaticRoute. Indian entities may offer any forms

    of guarantee corporate or personal,primary or collateral, guarantee by thepromoter company, guarantee by groupcompany, sister concern or associatecompany in India.

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    2.5 Liberalized Outward InvestmentPolicy

    Disinvestment- Indian companies are permittedto disinvest without prior approval of the RBI in cases

    where (i) the JV/WOS is listed in the overseas stockexchange. (ii) Indian promoter company is listed on astock exchange in India and has a net worth of lessthan Rs.100 crore. (iii) Where the Indian promoter isan unlisted company and the investment in overseasventure does not exceed $10 million.

    Proprietorship concerns With a view toenabling recognized star exporters with a proventrack record and a consistently high exportperformance to reap the benefits of globalization andliberalization, proprietary/ unregistered partnershipfirms are allowed to set up a JV/WOS outside India

    with prior approval of RBI.

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    3.1 Approvals of Outward FDI ($ Mln)

    Year Num-

    ber

    Equity loan Guara

    ntee

    Total

    1999-00 395 1299 50 408 1757

    2000-01 714 1177 90 113 1380

    2001-02 908 2712 157 156 3026

    2002-03 1034 1299 104 142 1545

    2003-04 1214 822 230 414 1451

    2004-05 1281 2010 384 410 2804

    2005-06 1265 1324 393 322 2039

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    3.2 Actual Outward FDI ($ Mln)

    Year Equity loan Guara

    ntee

    Total Annual

    Cap

    1999-00 314 4 0 319 750

    2000-01 1138 69 5 1212 1000

    2001-02 860 121 0 982 1000

    2002-03 1699 100 -- 1799 1000

    2003-041237 260 -- 1497 1000

    2004-05 1246 388 -- 1634 No cap

    2005-06 1381 613 -- 2062 No cap

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    3.3 Inflows from JVs/WOSs ($Mln)

    Year Divide

    nd

    Others Total Exports (Rs.

    crore)1999-00 314 4 0 319

    2000-01 1138 69 5 1212

    2001-02 860 121 0 982

    2002-03 1699 100 -- 1799

    2003-04 1237 260 -- 1497

    2004-05 1246 388 -- 1634

    2005-06 1381 613 -- 2062

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    3.4 Sector-wise outward FDI ($Million)

    Year Manufacture

    Financial Non-financial

    Trading Others Total

    2000-01 371 17 877 89 29 1382

    2001-02 2211 49 565 139 61 3026

    2002-03 1057 2 280 70 62 1470

    2003-04 766 35 439 77 134 1451

    2004-05 2026 9 548 69 151 2804

    2005-06 1111 168 509 133 118 2039

    Total 8090 283 4362 635 558 13929

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    3.5 Sector-wise outward FDI (inpercent)

    Year Manufacture

    Financial Non-financial

    Trading Others Total

    2000-01 31 0 65 3 0 100

    2001-02 27 1 63 6 2 100

    2002-03 73 2 19 5 2 100

    2003-04 72 0 19 5 4 100

    2004-05 53 2 30 5 9 100

    2005-06 72 0 20 2 5 100

    Total 54 8 25 7 6 100

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    3.6 Top-10 overseas investorsInvestor Sector $million % share

    1.SBI Banking 1179 25.92.Dr.Reddy's Pharma 777 17.1

    3.Suzlon Energy 565 12.4

    4.Tata Steel Metals 554 12.25.Ranbaxy Pharma 324 7.1

    6.Videocon Cons.dur 289 6.3

    7.VSNL Telecom 254 5.68.Matrix Lab Pharma 253 5.5

    9.TCS IT 207 4.5

    10.Wipro IT 154 3.4

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    3.7 Major sectors for outwardinvestment

    Sectors O-Inv % Share

    1 Pharmaceuticals 1580 22.22 Banking 1180 16.6

    3 Infor. Tech. 786 11.0

    4 Metals 778 10.95 Energy 631 8.8

    6 Telecom 308 4.3

    7 Consumer durb 289 4.18 Tea and coffee 266 3.7

    9 Chemicals 235 3.3

    10 Automobiles 205 2.9

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    3.7 Major sectors for outwardinvestment

    Sectors O-Inv % Share

    11 Auto ancillaries 159 2.212 Fertilisers 153 2.1

    13 Petrochemicals 119 1.7

    14 Multi products 100 1.415 Hotels 78 1.1

    16 Tyres and tubes 72 1.0

    17 FMCG 62 0.918 Paints 27 0.4

    19 Textiles 20 0.3

    20 Refractory 16 0.2

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    3.7 Major sectors for outwardinvestment

    Sectors O-Inv % Share

    21 Cement 14 0.222 Electrical equipment 13 0.2

    23 Foam 12 0.2

    24 Packaging 11 0.2

    25 Media/entertainment

    5 0.1

    26 Gems and jewellery 5 0.1

    27 Abrasives 2 0.0

    28 Engineering 2 0.0

    Total 7129 100.0

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    Sl. Host Country $ Million % Share

    1 United States 1054 18.32 United Kingdom 815 14.2

    3 Belgium 800 13.9

    4 Germany 658 11.45 Thailand 487 8.5

    6 China 376 6.5

    7 Romania 344 6.08 Singapore 192 3.3

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    Sl. Host Country $ Million % Share

    9 Australia 187 3.310 Netherlands 171 3.0

    11 Canada 118 2.0

    12 Cyprus 89 1.513 Mauritius 76 1.3

    14 South Africa 74 1.3

    15 Sweden 65 1.116 Mexico 59 1.0

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    Sl. Host Country $ Million % Share

    17 Austria 56 1.018 Korea 55 1.0

    19 Morocco 37 0.6

    20 Bermuda 36 0.6Total 5751 100.0

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    4.1 Types of FDI Market seeking- to take advantage of

    huge domestic markets in host countries Resource exploiting- driven by

    availability of mineral and other resources

    Export enhancing- to shift production

    base to take advantage of low wage rates buttechnical manpower and availability ofresources

    Efficiency enhancing through technologytransfer and for infrastructure development

    Like inward FDI, most of outward FDI aremore of tariff jumping and market seekingrather than efficiency seeking.

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    4.2 Modes of Indian O-FDI Most of the Indian outward investments

    are made through mergers and acquisitions(M&As) of the existing firms, as thealternative route of setting up a newcompany or constructing a green field

    manufacturing unit would be more timeconsuming and possibly more expensive.

    Acquisition of already operationalentities also allows the overseas investor to

    benefit from the existing marketing network,clientele and the goodwill of the foreigncompany.

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    4.3 Sector-wise acquisitions 2000-2006

    Sector FocusRegion

    M&As in theregion

    Totalnumber

    1. IT/ BPO USA 51 90

    2.Pharma Europe 36 62

    3. Automotive Europe 18 274. Chemicals andFertilisers

    USA, LA,EU, Africa

    13 19

    5. Con. goods Europe 8 17

    6.Metals/ mining Australia 8 15

    7. Oil and gas Africa 6 14

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    4.4 Geographical distributionsof India Incs M&As

    Country No.of M&As

    Country No.of M&As

    1.USA 100 9.SAARC 4

    2.EU (except

    UK)

    82 10.Canada 3

    3.UK 40 11.Russia 3

    4.SE Asia 20 12.Mid.East 2

    5.Australia 14 13.Japan 16.Africa 13 14.Others 5

    7.Lat.Am 11

    8.China 8 Total 306

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    4.5 Top Indian Companies interms of number of M&As

    Company No.of M&As

    Company No.of M&As

    1.Teledata Inf. 11 9.Bharat Forg 5

    2.Ranbaxy 10 10.Essel 53.ONGC 9 11.Glen.Phar. 5

    4.Un.Phosphoros

    8 12.Nich.Piram

    5

    5.Wipro 8 13.Subex Sys 5

    6.Godrej 7 14.Sun

    Pharm

    5

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    4.6 Crucial Acquisitions by IndianMNCs

    1. Amtek Auto with Zelter GmbH

    (Germany), GWK Group (UK), Lloyds(Brierly Hill) (UK), Midwest Mfg. Co.(USA).

    2. Asian Paints with Delmege Forsyth (Sri

    Lanka), Pacific Paints (Australia),Berger International, SCIB Chemical(Egypt), Taubmans Paints (Fiji)

    3. Aurobindo Pharma with Milpharm (UK)

    4. Bharat ForgeCDP Aluminiumtechnik(Germany), Federal Forge (USA), ImaraForging Group (Sweden and Scotland)

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    4.7 Crucial Acquisitions by IndianMNCs

    5. Dr. Reddys Lab with Roches API Business Co.

    (Mexico), Beta Pharm Group (Germany)6. Glenmark Pharmaceutical Laboratories with Klinger

    (Brazil), Servycal SA (Argentina), Bouwer Bartlett(South Africa).

    7. Indian HotelsHotels in Zambia and Australia

    8. M&MJiangling Tractor Company (China)

    9. MaricoSundari LLC (USA)

    10. Motherson SumiReiner Parizision GmbH and G+SKunstofftechnik GmbH (Germany))

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    4.7 Crucial Acquisitions by IndianMNCs11. Nicholas Piramal with Rhodias IA (UK and

    India), Avecia (UK)

    12. Sanam Computer with Citisoft (UK)13. Sterlite Industries with Monte CelloCorporation (Netherlands), Holding Co. ofCopper Mines (Australia)

    14.Sundaram Fasteners with Dana Spire (UK),

    Peiner Umformtechnik GmbH (Germany)15. Tata Motors with Daewoo CommercialVehicles (Korea), Hispano Carrocera (Spain)

    16. Tata Steel with NetSteel Asia, Corus (UK,Netherlands)

    17.Tata Tea with Tetley, Good Earth. JEM-A.Glaceau

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    4.7 Crucial Acquisitions by IndianMNCs18. Tata Consultancy Services with

    Comicrom (Chile), FNS (Australia)

    19.United Phosphorus with MTMAgrochem (UK), Agrodan (Denmark),Midland Fumigants (Europe), Cequisa(Spain), Shaw Wallace Agrochem(India), Advanta (seed business)(Netherlands)

    20. VSL with Teleglobe InternationalHoldings, Tyco Global Network

    21. Wipro with Spetramind, GEs

    healthcare software arm, globalEnergy practice of AmericanManagement Systems, Nervewire(USA), Ericssons Indian R&D arm.

    5 1 D i f F i

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    5.1 Drivers of Foreign

    Investment- Host Country Policies FDI inflows are determined by a complex set of

    economic, political and social factors. Foreign investors look beyond the array of fiscal

    incentives offered by the host country.

    FDI is attracted by sound macro-economicpolicies, stable economic systems, sustained high

    growth,liberalisation of trade, investment andindustry, particularly by liberal FDI regimes. Full currency convertibility, free repatriation,

    less performance criteria, tax holidays and otherincentives, abolition of screening requirements,

    relaxation of sectoral limits on foreign equity.

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    .FDI

    Domestic market potentialsSkilled labor & reasonable wage ratesLow transactions costsHigh rates of returnLabour mobility

    Matured capital marketModern financial systemEfficient infrastructureEstablished legal and institutional set-

    upTransparent rules and regulationsAdministrative speed and efficiencySpecial economic zones, EPZs etc.

    5 3 Other Factors Attracting

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    5.3 Other Factors Attracting

    FDI National treatment to foreign investors

    Most favored nation treatment (MFN) Free transfer of profits and dividends

    International standards for laws

    International arbitration in the case of disputes

    Protection of intellectual property rights (IPR)

    Right to employ management of its choice The formation of regional trading blocks such as

    NAFTA, ASEAN, APEC, SAARC etc. had also an importantimpact on the FDI pattern

    In future, countries outside the regional blocks might

    have disadvantages in attracting FDI.

    5 4 Foreign Investors Dislike

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    5.4 Foreign Investors DislikeMost

    Any screening of investment except fornational security, public health, individual safety,

    and environmental protection. Performance requirements such as export

    orientation, local content, value addition, foreignexchange, as these distort international trade andinvestment flows, and result in diminished returns

    to both home and host countries. Since 1980, countries that guaranteed full

    repatriation of profits attracted 95% of foreigninvestment, countries adhering to Convention ofSettlement of Investment Disputes attracted 90%

    of foreign investment from USA.

    5 5 Role of Fiscal

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    5.5 Role of FiscalIncentives Fiscal and other incentives remain an

    important part of a countrys investment

    promotion package, and can tilt the balance ininvestors location choices, particularly forfootloose industries such as automobiles andfood processing industries.

    Incentives play, however, only a minor role

    for FDI and attract only those fly-by-night firms,which exist on exploitation of incentives.

    As incentives represent substantial economiccosts, a rational, efficient, equitable andinternationally competitive tax system is more

    conducive to FDI than fiscal incentives.

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    5.6 Home Country Policies

    Developing countries like India have

    paid due attention to outward FDI policiesby liberalizing outward capital flows. They are liberalizing debt, bond

    capital markets and foreign exchangeregulations to move towards full capitalaccount convertibility. They are also liberalizing policies for

    contractual savings and institutionalinvestors such as insurance, pension and

    provident funds leading to a multipleincrease of foreign investment.

    6 1 FDI Inflows as % of GDI

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    6.1FDI Inflows as % of GDI

    Country 1984-1989 1990 2004

    India 0.1 0.1 3.4

    China 1.8 2.6 8.2

    Hong Kong 12.2 8.5 92.1

    Indonesia 1.6 2.8 1.9

    Korea, Rep. 1.4 0.8 3.8Malaysia 8.8 23.8 23.4

    Philippines 5.1 5.2 3.3

    Singapore 28.3 47.1 62.7Taiwan 3.3 3.8 3.1

    Thailand 4.4 7.1 2.5

    6 2 FDI Outflows as % of GDI

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    6.2FDI Outflows as % of GDI

    Country 2002 2003 2004

    India 1.0 0.7 1.4

    China 0.5 - 0.2

    Hong Kong 47.6 15.9 107.6

    Indonesia 0.5 - 0.2

    Korea, Rep. 1.6 1.9 2.4Malaysia 8.6 6.0 8.5

    Philippines 0.4 1.5 2.9

    Singapore 18.0 16.5 41.6Taiwan 9.8 11.4 11.6

    Thailand 0.4 1.4 0.9

    6 3 FDI Inward Stock as % of GDP

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    6.3 FDI Inward Stock as % of GDP

    Country 1980 1990 2004

    India 0.7 0.6 5.9China 3 7 14.9

    Hong Kong 487 218 277.6

    Indonesia 14 34 4.4

    Korea, Rep. 2 2 8.1

    Malaysia 21 24 39.3

    Philippines 4 7 14.9

    Singapore 53 77 150.2Taiwan 6 6 12.8

    Thailand 3 10 29.7

    6 4 FDI Outward Stock as % of GDP

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    6.4 FDI Outward Stock as % of GDP

    Country 1990 2000 2004

    India 0.0 0.4 1.0China 1.3 2.6 2.4

    Hong Kong 15.9 234.9 246.5

    Indonesia 0.1 4.6 0

    Korea, Rep. 0.9 5.8 5.8

    Malaysia 6.1 23.6 11.7

    Philippines 0.3 2.1 1.9

    Singapore 21.3 62.1 94.5Taiwan 19.0 21.5 29.9

    Thailand 0.5 1.8 2.1

    6 5 C l di R k

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    6.5. Concluding Remarks As the first generation reforms take root

    and second generation reforms unfold,

    India is emerging not only as a favouritedestination for foreign investment, butalso a major player in outwardinvestment among the developingcountries.

    India should maintain its open door policyin goods and services production,investment and trade.

    Carried to their logical ends, reformswould make India as one of the most

    dynamic and fastest growing economiesof the world by 2010.

    India is an economic miracle waiting tohappen. All of you are welcome toparticipate in this process ofdevelopment.

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    8.1 Review Questions1. (a) Discuss different modes for outward

    investment.

    (b) Which one is the dominant mode forIndian overseas investment, and whatare the main reasons for that?(c) Indicate the major destinations for

    Indian overseas investment.(d) Indicate the major sectors for Indianoverseas investment.

    2. (a) Indicate the names of top Indiancompanies in terms of cross-borderM&As.(b) Indicate some of the crucial cross-border acquisitions made by Indiancompanies since 2000.

    i i

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    8.1 Review Questions

    3. (a) Discuss the general host country

    policies encouraging Indian outwardinvestment.(b) Discuss the important homecountry policies encouraging Indianoutward investment.

    4. (a) Discuss policies, strategy and

    regulatory regime for Indian overseasinvestment.

    (b) What has been their impact on theIndian overseas investment?

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    Thank you

    Have a Good Day