Strategy for FDI by Indian firms

A simple 2x2 classification for the leadership

- AJAY SHAH

Many large Indian firms have initiated overseas FDI (foreign direct investment) activities. As yet, this is a field where the playbook and the capabilities are at an early stage.

Watching global firms utilising services production in India offers insights into the role of FDI. Global firms have played all possible pathways to meet their objective of harnessing the Indian workforce. They send work through arm's-length contracting to Indian services firms. They do FDI into captives and global capability centres (GCCs). They use GCCs in India as a platform for negotiation and supervision of contracting out to Indian services firms.

Harnessing globalisation requires such a sophisticated mix of contracts and FDI.

Why might Indian firms benefit from doing FDI? Successful FDI initiatives help enhance exports, permit global optimisation of operations, including improved domestic competitiveness, give access to the vast world market, and derisk the firm in slow periods in the Indian economy.

A unique feature of the Indian environment, which is not found in global firms, is the gains obtained by reducing engagement with Indian taxation and capital controls. This is a sweetener which helps pay for the fixed costs of graduating to FDI.

It is useful to establish a 2x2 classification scheme. Indian firms come in two kinds: Those that do things which are readily sold to global customers (eg ball bearings) vs those that are wedded into the Indian landscape (firms with operational capabilities that are rooted in the Indian policy environment, into the quirks of the Indian landscape). And destination countries come in two kinds: Advanced economies and the rest.