FOREIGN DIRECT INVESTMENTS MAIN REASONS FOR FDIy y y y Huge market potential of the country FDI attractiveness Labor

competitiveness Macro- economic stability

IMPORTANCE OF FDI y It helps in the economic development of the particular country where the investment is being made. y It permits the transfer of technology of trading of goods and services as well as investment of financial resources. y y It promotes competition within the local input market of the country. Countries getting FDI from other countries can develop human capital resources by getting their employees to receive training on the operations of a particular business. y Profit generated by FDI made in that country can be used for the purpose of making contributions to the revenue of corporate taxes of the recipient country. y y y It helps in creation of jobs It helps in increasing salaries of workers. FDI assists in increasing the income that is generated through revenues realized through taxations y It plays a crucial role in the context of rise in the productivity of host countries.

INDIAN COMPANIES (OUTBOUND FDI) TO AFRICA- AN EMERGING PATTERN IN GLOBALISATION. Since the last few years increased trade and investment flows among developing countries have emerged as a key feature of international economics. On one hand we see a massive surge is regional trade agreements (RTAs) among developing countries. Equally interesting is the new phenomenon of Outward Foreign Direct Investment (OFDI) from developing countries. These new developments have significant influence on the power relationships in trade and investment negotiations across the world.

Traditionally developing countries have been dependent upon the developed countries for trade and investment. The developed countries provide the developing countries a big market for their goods and being capital rich, they also act as a source of foreign capital to the capital scarce developing countries. Developing countries compete among themselves to get a pie of market share and foreign capital from these countries. This arrangement leads to an unequal distribution of economic power where the developed countries have lot more leverage and control over the developing countries. As a direct result of this power asymmetry, developed countries generally are in a much stronger position to dictate terms in international trade and investment treaties. Therefore, it is not surprising that in most trade agreements and Bilateral investment Treaties (BITs) are loaded in favour of developed countries and against developing countries. The incipient phenomenon of South-South trade and investment co-operation can bring significant change in this power imbalance in the international economy. Moreover for capital scarce least developed countries such FDI from developing countries can be of great importance. REASONS FOR INCREASED (OFDI) FROM INDIA There has been a massive increase in outward FDI from India in the last ten years. According to data released by the Ministry of Finance, Government of India approved OFDI from India increased from USD 556 million in 1996-97 to USD 15,060 million in 2006-07. Actual OFDI growth figures are equally impressive; it increased from USD 205 million in 1996-97 to reach more than USD 11,001 in 2006-07. Increasing outward FDI from developing countries has been one of the more interesting developments in the international economics of the last few years. Developing countries like China, South Africa, Brazil and Singapore are investing heavily in other countries. India has also joined this new phenomenon though in a scale which is much lower than that of China. Some of the possible drivers for the Indian firms can be as follows: Market access: By undertaking overseas acquisition transactions, Indian corporates are gaining entry into regulated market of developed countries. The best example is pharmaceutical industry, where Indian corporates equipped with USFDA approved facilities 3are looking for acquisition in the regulated market for ease of registration processes. The manufacturing activities will still be in India entailing low cost advantage. Transfer of technology: The manufacture of certain products requires technology that is not available to the Indian companies. By acquiring companies abroad, they also acquire advanced manufacturing technologies that further help reduction in the cost of production

New Product Mix: Indian companies are also going abroad to obtain a new product mix or to acquire products that will otherwise require huge investments and a long time to manufacture indigenously Presence in a location: Certain industries have their presence across the globe by way of subsidiaries to cater to business in a particular region. The acquisitions made by these companies are primarily for value addition in their product profile. Securing access to Raw material: The rapid growth of many large developing countries, in particular China and India, is causing concerns about the availability of, and access to, key resources and inputs for continuing economic expansion; Behavioral changes among developing country TNCs: include an increasing realization that they are operating in a global economy - and this induces them to develop an international vision; Also improving ownership-specific advantages and increased financial capability also play an important role in the decision making. WHY INDIAN COMPANIES ARE FINDING AFRICA AS AN INVESTING DESTINATION? The new found Indian interest in the African economy seems to have certain similarities with the recent Chinese experience with Africa. Since the mid-1990s Beijing has taken an active interest in the African economy. Both economic and strategic factors are responsible for this. Eisenman and Kurlantzick (2006) point out that from an economic point of view China has identified Africa not only as a source for new energy and raw material supplies to meet its growing industries demand but also as a potential market for its exporters. The Chinese government has taken a number of steps to promote trade and investment links with Africa. To facilitate its investment in Africa, China has actively promoted investment in key sectors in Africa. China has given priority to sectors like a) Industrial processing which includes Electronics, machinery and garments, Agriculture, Natural resources and Infrastructure and real estate development. Among these sectors, maximum investment has gone into the extractive sectors like energy and minerals. Because of the surge in FDI in the extractive sector, total FDI into six African oil-producing countries Algeria, Chad, Egypt, Equatorial Guinea, Nigeria and Sudan amounted to $15 billion, representing about 48% of inflows into the region in 2005. China has signed no less than 28 Bilateral Investment Treaties (BITs) with the African Countries. In a recently published policy document titled China s African Policy , it says:

The Chinese Government encourages and supports Chinese enterprises' investment and business in Africa, and will continue to provide preferential loans and buyer credits to this end. The Chinese Government is ready to explore new channels and new ways for promoting investment cooperation with African countries, and will continue to formulate and improve relevant policies, provide guidance and service and offer convenience. African countries are welcome to make investment in China. The Chinese Government will continue to negotiate, conclude and implement the Agreement on Bilateral Facilitation and Protection of Investment and the Agreement on Avoidance of Double Taxation with African Countries. The two sides should work together to create a favorable environment for investment and cooperation and protect the legitimate rights and interests of investors from both sides. Consequently, Chinese trade and investment in Africa is gradually increasing since the last ten years. Trade between China and Africa has increased from USD 11 billion in 2000 to USD 40 billion in 2005. Estimates suggest that it is likely to top USD 100 billion by 2010.Similarly, Chinese investments in Africa are also growing at a very rapid pace. According to UNCTAD (2007), China has invested about USD 400 million in Africa in 2005. Close ties with African countries have ensured that Chinese companies are granted oil exploration rights in a number of African countries like Sudan, Nigeria and Gabon. These companies have also actively involved in various infrastructure and real estate related projects all across Africa. These investments not only help the African countries to improve their poor infrastructure but they also help Chinese FDI in Africa. Indian investment in Africa also seems to be guided by the same economic factors. Like China, India is also viewing Africa as a possible source of raw materials and energy for its industrial growth. This is not surprising because maintaining energy security is seen as one of the major policy challenges which is facing India currently. Currently India is the 5th largest consumer of energy in the world accounting for about 3.75 percent of global consumption. With rapid economic growth and industrialization, India is expected to double its energy consumption by 2030, overtaking Japan and Russia in the process to become the world s third largest consumer (after the United States and China) . Given stagnant oil reserve in the country, Indian oil companies are pursuing the option of

acquiring overseas oil and gas assets and have established a presence in a number of countries such as Nigeria, Russia, Sudan, Libya, Egypt, Qatar, Ivory Coast, Vietnam, Myanmar, Cuba and more recently in Brazil. As Africa has proven oil reserves of about 16 billion metric tons and gas reserves of about 500 trillion cubic feet, it makes sense for Indian oil firms to establish their presence in Africa. This emerging partnership is likely to be mutually beneficial as it will allow India to enhance its energy security while African countries can benefit from better investments, institutions, technology, environmental sustainability, local content development, human resources development and employment generation . Therefore, it is not surprising that Indian companies are queuing up to get a pie of the energy sector in Africa. The overseas division of India s state owned Oil and Natural Gas Corporation (ONGC), ONGC Videsh (OVL), has aggressively sought stakes in exploration

In 2005, teaming up with the world s largest steel maker, Mittal (now Arcelor Mittal), OVL formed a new entity, ONGC Mittal Energy Ltd. Reports indicate that (OMEL), that agreed to a $6 billion infrastructure deal with Nigeria in exchange for extensive access to some of the best production blocks in that West African country. ONGC-Mittal will invest the money in setting up a refinery, power plant and railway lines in Nigeria In 2003, OVL acquired a 25 percent stake in Sudan s Greater Nile Oil .Project, despite the resistance of the PRC s China National Petroleum Corporation (CNPC) that has a 40 percent ownership in the enterprise. OVL has subsequently acquired minority interests in three other blocks in Sudan. Recent report indicates that OVL has expressed interest in purchasing stakes in two more oil blocks in Sudan

ONGC recently obtained .permission to conduct geological studies in the exclusive economic zone of Mauritius. In Co te d Ivoire (also known as Ivory Coast) ONGC Videsh Ltd. and Oil India have drilled for oil in an off-shore well oil block with investment of US$12.5 million. These companies have identified hydro-carbon and mining at the most targeted investment area for Indian trade and industry in Ivory Coast. Recent reports indicate that Essar Oil will buy 50% of Kenya Petroleum Refineries for an undisclosed amount. The purchase is being made through a subsidiary, Essar Energy Overseas, and the shares are being bought from existing shareholders including: The Shell Petroleum Company (which

owns 17% of the business), Chevron Global Energy (16%), and BP Africa (17%). Other African countries where Indian oil companies are planning to enter include Burkina Faso, Equatorial Guinea, Ghana, GuineaBissau, and Senegal. In total, Africa currently accounts for about 20 percent of India s oil imports, a figure that will only rise in coming years. It is not surprising that energy researchers have found that India has focused development lending initiatives on the resource-rich countries of West Africa whose [national oil companies] are keen to gain deals. Hydrocarbons are not the only natural resources being sought by the growing Indian economy. Vedanta Resources, a publicly traded metals conglomerate founded in Mumbai in 1976, has invested more than $750 million in Zambian copper mines. The Liberian parliament recently ratified a 25-year deal allowing Arcelor Mittal to launch a $1 billion iron ore mining project that will eventually employ 20,000. In Senegal a joint public private Indian group has invested $250 million in exchange for a stake in a colonial era enterprise, Industries Chimiques du Senegal, with rock phosphate mines and plants to produce phosphoric acid used in agriculture. Tata Steel is in the process of finalizing a Rand 650 Million (Rs 460 crore) 120,000-tonne per annum Ferro-chrome project in Richards Bay. India s increasing presence in the extractive industries in Africa puts India in direct competition with China, the West and other Asian countries to secure West African resources. Apart from the extractive industries, Indian companies are also eyeing a broad array of industries in Africa. The Indian multinational group Tata has presence in Engineering, Chemicals, Services and IT and communication Another Indian MNC Reliance Industries .has strong presence in telecommunication and oil refining industries in Africa. Recently, a number of Indian telecommunication companies like Bharti, Tata Indicom/ VSNL and Reliance Infocom have shown strong interest in the African telecommunication sector. Dabur India announced the commissioning of its new manufacturing facility in Nigeria. The new manufacturing facility has been set up by African Consumer Care, a subsidiary of Dabur International. The plant set up with an investment of around USD 4 million will manufacture a range of toothpastes for the African markets. The production line at the new facility would be expanded to introduce newer toothpaste variants and manufacture a range of skin care, home care and household disinfectant products. Also Pharmaceutical majors like Ranbaxy, Cipla and Dr. Reddy s, consumer firms like Marico and Emami, construction firms like Punj Lloyd and Shapoorji Pallonji, and liquor maker UB Group are in various stages of building their Africa businesses.

In the banking and financial services sector, the State Bank of India acquired a 51% stake in Mauritiusbased Indian Ocean International Bank Ltd as part of its overseas expansion policy into the rest of Africa. Tata Consultancy Services (TCS) and Infosys are also increasing their investment in Africa. It must be mentioned here that certain Indian groups have been present in Africa for decades. Indian companies like the Tata group and Mahindra and Mahindra have been present in Africa for reasonably long time frame. The Indian government, till 2003, had cap on the total amount of OFDI in a year and though this ceiling has been removed, there are not too many incentives given the government to promote OFDI. UNCTAD points out that the Indian firms are more enticed by supportive host-government regulations and incentives, as well as favorable competition and inward FDI policies in the host countries. As a benchmark, it can be pointed out that compared to the 28 Bilateral Investment Treaties signed by China with the African countries, India has only 5 BITs. There is also significant difference between the Indian and Chinese companies in respect of ownership status. Boston Consulting Group (BCG) has published a report in 2006 on outward FDI of the top 100 companies from Rapidly Developing Economies (RDE in BCG terminology). This report shows that more than two-third of all such big Chinese companies are state owned or state controlled companies. The remaining companies have mixed ownership with only four privately owned firms. In contrast, the shares of Indian companies are divided among private owners, strategic investors and general public. Only one Indian company in their list was state controlled.