FDI Inflows and Outflows

This article from the Bangladesh Financial Express raises the rather interesting question as to why India is now investing abroad more in the form of FDI that it is receiving:

Despite persistent poverty and income disparities, 2006 marks the point when, 60 years after independence from colonial rule, Indians were investing more abroad than the country was receiving as foreign direct investment (FDI).

With India's foreign-currency reserves now exceeding US$160 billion and with a pro-liberalisation federal government relaxing norms for Indian firms acquiring hard currency for investments abroad, the amount of money invested by local corporate bodies outside India is expected to exceed $8 billion during the current calendar year. As of April-October, FDI flows touched $6.1 billion, compared with $2.6 billion during the first eight months of the previous fiscal year.

Now I think there is often an underlying confusion here, since Direct foreign investment is only one of the forms of capital inflow into India, since, as explained in this post, there is also institutional foreign investment (FII), and funds from non resident Indians (NRIs) to think about.The latter figure was $21 billion in 2005, that is over 3 times the level of FDI for 2006 alone (and lord knows what the level of NRI related inflows in 2006 are). On top of this domestic saving in India has been rising steadily.

So, as I keep pointing out, FDI is strategically, rather than quantitatively important, and exporting investment to make strategic acquisitions is also important.As Manoj Pant points out:

60% of world trade is intra-firm trade, and one way Indian companies are ensuring that their exports grow is to acquire firms abroad. "Through mergers and acquisitions, exporters ensure access to distribution channels as well as the latest technologies," he said, adding that this explains why Indian companies in industries such as steel, automotive components, pharmaceuticals and information technology (IT) are expanding abroad.