Int

BM & HRM 2021-23 | Session 7

Entering Foreign
Markets
APALAK KHATUA, Email: apalak@xlri.ac.in
 Liability of Foreignness

• The inherent disadvantage foreign firms experience in host countries because

of their non-native status → Foreign firms are often discriminated against,
sometimes formally and other times informally

• Differences in formal and informal institutions governing the rules of the

game in different countries → However, local firms are already well versed
in these rules, but foreign firms must learn the rules

• Thus, globalization is difficult, mistakes are costly! → So, what would be the
scale of commitment (or entry strategy)? → Different entry modes require
different amounts of financial and human capital

• Asset of Foreignness: Being foreign can be an asset, i.e., competitive

advantage

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Liability of Emergingness

• This is an additional disadvantage that EMNEs (Emerging Market MNEs)

would face in comparison to MNEs from the advanced economy “by virtue
of being from emerging economies” (Madhok and Keyhani, 2012:28)
• LOE is a function of 'where you are from’- like the “Liability of Origin”
• Consequently, EMNEs struggle to gain organizational legitimacy by
overcoming the “negative perceptions, stereotypes, or beliefs regarding
product or service quality associated with their country of origin”
(Ramachandra and Pant, 2010:244)

• Compared to MNEs, Liability of Emergingness can adversely impacts the

cost of acquiring resources of EMNEs, such as executive talent, finance, or
technology

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Going Global?

• Any firm contemplating foreign expansion must struggle

with the following decisions
– Why to enter?
– Which foreign market(s) to enter?
– When to enter?
– What scale?
– Which mode of entry?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Why Foreign Markets?

• Organizational factors
– Firm-specific factors
• Firm size, International appeal
– Decision-maker characteristics: Upper Echelons Theory
• Foreign travel and experience abroad, Foreign language
proficiency, The decision-maker background, Personal
characteristics
• External Factors
• The “bandwagon” effect, Attractiveness of the host country

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Which Foreign Market(s)?

• The choice must be based on an assessment of a nation’s long-

run profit potential
• The attractiveness of a country depends upon balancing the
benefits, costs, and risks associated with doing business in that
country
• Factors include
– Size of market
– Present wealth of the consumers in the market
– Likely future wealth of consumers
– Economic growth rates

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Which Foreign Market(s)?

• Market seeking - firms go after countries that offer strong

demand for their products and services
• Efficiency seeking - firms single out the most efficient locations
featuring a combination of scale economies and low-cost factors
• Natural resource seeking - resources are tied to a particular
foreign location
• Innovation seeking - firms target countries and regions
renowned for generating world-class innovations

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Which Foreign Market(s)?
• OLI Paradigm offers a holistic approach by integrating traditional trade
theories with internalization theory (Dunning, 1977; 1979; 2000)
– It asserts that the presence of ownership-specific competitive
advantages (O) in a transnational corporation to overcome LoF, the
presence of locational advantages (L) in the host country, and the
presence of superior commercial benefits internally (according to
TCE) in a firm (I) are three important determinants that influence FDI
decisions

• Let’s not ignore the proximity-concentration tradeoff (Brainard, 1993)

– Firms can either export or set up a local subsidiary, i.e., FDI
– A trade-off between achieving proximity to local markets
(circumventing transport costs) and concentrating production to
exploit economies of scale

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
2012 FDI Confidence Index

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
2017 FDI Confidence Index

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 2022 FDI Confidence Index

India continued to stay

out of the Kearney FDI
Confidence Index for
the third year in a row
... India was ranked
16th in the 2019 list,
while it occupied 11th
spot the year prior. In
2017, India made the
top ten and was ranked
eighth.

… investors are “likely monitoring closely” India’s data privacy bill with implications for
data rules … investors in Asia are particularly concerned about data protection regulations
Source: The Economic Times

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Timing of the Entry: When?
• How to define early entry?
• Advantages frequently associated with entering a market early are
commonly known as first-mover advantages
– The ability to preempt rivals and capture demand by establishing
a strong brand name
– Ability to build sales volume – learning curve effects on others
– Ability of early entrants to create switching costs

• Disadvantages associated with entering a foreign market before other

international businesses are referred to as first-mover disadvantages
– Liability of being foreigner
– Pioneering costs are costs that an early entrant must bear
– Possibility that regulations may change

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Mode of Entry: Trade or FDI?

• Firms can use multiple modes to enter a market

– Exporting – Trade?
– Non-equity collaborations or Equity collaboration with
partners?
• Licensing
• Franchising
• Joint Ventures
– Wholly Owned Subsidiaries – FDI? Fully owned or
partially owned FDI?
• Building a new operation - The Greenfield Strategy?
• Taking over an existing one through M&As?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Export: Trade
• Most manufacturing firms begin their global expansion as exporters

• Advantages:
– Avoids cost of establishing manufacturing operations
– Global sales volume may help achieve experience curve and
location economies. For instance, Sony in TV market, Japanese
automakers, Samsung in memory chip industry etc.

• Disadvantages:
– May compete with low-cost location manufacturers
– Possible high transportation costs
– Tariff barriers
– Possible lack of control over marketing representatives

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Licensing

• Agreement where licensor grants rights to intangible property (such as

patents, inventions, formulas, processes, designs, copyrights etc.) to
another entity for a specified time period in return for royalties
• Advantages
– Reduces development costs
– Reduce risks of establishing foreign enterprise in a politically
volatile market
– Overcomes restrictive investment barriers
• Disadvantages
– Lack of control over process
– Only royalty payments
– Risk of licensing technological know-how – Cross-licensing
agreement

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Franchising

• A specialized form of licensing

• Franchiser sells intangible property (such as trademark or
brand name) and insists on rules for operating business
• Franchiser typically receives a royalty payment
• The best-cases would-be McDonald, Pizza Hut, Dominos etc.
• Advantages:
– Reduces costs and risk of establishing enterprise
• Disadvantages:
– May prohibit movement of profits from one country to
support operations in another country
– Quality control

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Equity Joint Ventures

• Establishing a firm that is jointly owned by two or more

otherwise independent firms
• Advantages:
– Benefit from local partner’s knowledge
– Shared costs/risks with partner
– Reduced political risk
• Disadvantages:
– Risk giving control of technology to partner
– May not realize experience curve or location economies
– Shared ownership can lead to conflict

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Wholly Owned Subsidiary: FDI

• The firm owns 100% of the stock

• Subsidiaries could be Greenfield investments or acquisitions
• Advantages:
– No risk of losing technical competence to a competitor
– Tight control of operations
– Realize learning curve and location economies
• Disadvantage:
– Bear full cost and risk

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI: ‘Build versus Buy’ dilemma

• Why build a new entity?

– Impossible to find a suitable target
– Technological capabilities are lacking
– Greenfield better suited when exploiting
technological know-how – preserve intellectual
property
– Can build subsidiary if it wants, easy to establish
operating routines
– Slow to establish,
– Risky - Preemption by aggressive competitors
– Attractive if: There are no competitors, Competitors
have a competitive advantage that consists of
embedded competencies, skills, routines, and
culture

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI: ‘Build versus Buy’ dilemma

• Why buy an existing entity?

– Avoid problems inherent to all start-ups
– Benefit from existing capabilities - quicker
– Avoid sectorial over-supply
– Brownfield better suited when servicing a local
market – take advantage of target company’s brand
name/networks
– Quick to execute, Preempt competitors
– However, issues such as Overpaying (due to
Managerial hubris), Culture clash, Problems with
proposed synergies
– Attractive in scenarios: well established firms already
in operation, Competitors want to enter the region

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Scale of Entry: Large or Small?

• Large scale involves the strategic commitment of significant resources

• Large scale entry
– A decision that has a long-term impact and is difficult to reverse
– May cause rivals to rethink market entry
– May lead to indigenous competitive response

• Small scale entry

– Reduces exposure risk
– Time to learn about market
– It is a step towards the gather information about a foreign market
before deciding whether to enter on a significant scale and how to
enter
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 The Uppsala Model

• Scholars from Uppsala University focused on the process of globalization and

proposed that it is a staged process, where MNEs incrementally increase their
resource commitment as they learn more about the foreign market (Johanson
and Vahlne, 1977). In other words, MNEs operate on a step-by-step, incremental
basis, often starting with familiar neighbouring countries/cultures

• Stage 1: no regular export activities

• Stage 2: export activities via
independent representatives or agents
• Stage 3: the establishment of an
overseas subsidiary
• Stage 4: overseas production and
manufacturing units

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Resource Commitment: Low or High?

TRADE/TRANSACTIONS DIRECT INVESTMENTS

Exporting Joint venture Wholly owned

Licensing - Marketing, S&D
- Spot sales
- Licensing Patents Subsidiary
- Contract - Fully Integrated
- Franchising - Marketing, S&D
- Distributor - Fully Integrated

Low Resource Commitment High

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
The Hierarchical Model of Market Entry Modes
(Pan & Tse, 2000, JIBS)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Entry Modes: Merits & Demerits

Low Resource Commitment/ High Resource

Trade Commitment/ FDI
Merits • Easier to manage from home • Control
country • Increase knowledge/
• Engage lower capital, thus lower comfort level with foreign
risk markets
• Keep B/S smaller and flexible, • Potentially higher profit in
thus more responsive to changing the long run
scenarios
Demerits • Develops less overseas experience • Harder to manage
• Core competence might have to be • Harder to finance
shared with other players • Greater repercussion in
• Vulnerable to partner’s case of failures
opportunistic behavior

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 How to decide the Entry Mode?

• Is the firm’s competitive advantage based on firm-specific or

country-specific resources?

• What are the barriers to trade?

• Does the firm possess full range of resources and capabilities

for establishing a competitive advantage in overseas market?

• What transaction costs are involved?

• Can the firm directly appropriate the return to its resources?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Case:
Ethiopia: An Emerging
Market Opportunity?
 Int
BM & HRM 2021-23 | Sessions 8 & 9
CAGE: Challenges of
Entering Foreign Markets
APALAK KHATUA, Email: apalak@xlri.ac.in
 Mattel Inc.

The world's largest toy company. Known for

the product Barbie - bright blond hair, big blue
eyes, white toothy smile and long legs, stunning
figure, heavy eyeliner, a bare shouldered dress
and a pearl choker
Source: The New York Times
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Japan: Second Largest Toy Market

• Licca - a smaller doll with big eyes and

a plain, knee length dress
• Machi Nishiyama, a six year old
Japanese Girl, said “I want Licca”
• Why not Barbie? “Because her eyes
are scary.”
• Barbie is simply ‘too beautiful for the
Japanese’
• Mattel Inc. is not even in the top 20
suppliers in Japan

Source: The New York Times

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Cultural Adaptation!

Anti-Barbie campaigns: Corporates like Body Shop, Dove,

Nike etc. challenged Barbie’s concept of ideal beauty;
Lammily - the anti-Barbie doll.
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Goodbye, Bing. Hello, Baidu!

Microsoft had dumped its own

search engine for users of the
Microsoft Edge browser in China,
offering them local rival Baidu
instead. Baidu would become the
default search and homepage.
Bing never quite caught on in
China. The name sounds similar to
the Chinese word for "sickness."

Source: CNN Money

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Connect The Dots!

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Why the World Isn’t Flat
• What about Google's operation in Russia
(cofounder Sergey Brin’s native country) ?

• Yandex and Rambler - two local competitors

account for 91 percent of the Russian market
for online ads linked to Web searches
(However, this was the situation in 2007)

• What has stymied Google's expansion into the

Russian market?
‾ Linguistic complexities of the Russian language

Foreign Policy, 2007

Desktop search traffic originating from Google
(Data: April 2021| Source: Statista)

Worldwide desktop market share of leading

search engines from January 2010 to Sept 2021

Market share of Google as of April 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
We're more wired, but no
more ‘global’
Web traffic within countries and regions has
increased far faster than traffic between them…
People across the world may be getting more
connected, but they aren't connecting with each
other. The average South Korean Web user may be
spending several hours a day online -- connected
to the rest of the world in theory -- but he is
probably chatting with friends across town and e-
mailing family across the country rather than
meeting a fellow surfer in Los Angeles.

Foreign Policy, 2007

 Global Trade Pattern

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Intraregional Goods Trade Flows, 2017

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Intraregional Trade in Asia, 2000

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Intraregional Trade in Asia, 2017

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 US-Canada Relationship!
• "No two nations match up more closely together, or are woven together more deeply,
economically, culturally, than the United States and Canada." - Barack Obama
• Throughout his campaign, Trump vowed to renegotiate the deal with Canada and
Mexico to “get a better deal for our workers … And I don't mean just a little bit better, I
mean a lot better”
• “No other neighbours in the world are as fundamentally linked as we are" Trudeau
sought to emphasize his country's historical economic ties with the USA

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Global Capital Flows

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Intraregional share of FDI

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Flows of Student, Travelers, Migrants

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Intraregional People Flows

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Gravity Model of Trade flow

• Tinbergen (1962) - Drew on analogy with Newton's Law of

Gravitation

• Broadly it proposes
– there is a positive relationship between economic size (mostly
captured by GDP of the countries) and trade
– and negative relationship between distance and trade

• This theory explains two-thirds of the observed variations in

trade flows between pair of countries

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Other Dimensions of Distance!
Conventional wisdom from globalization: Death of distance!
Change in
Distance Attribute International Trade (%)

Source: Ghemawat (2001)

Challenge the conventional wisdom

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Effects of similarities on bilateral trade

• Ghemawat and his

colleague regressed trade
between every possible
pair of countries in the
world in each of 70
industries on each
dimensions of distance

• They found effects of

different dimensions of
distance are different for
different industry

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
The Effects of Five Commonalities on Trade

© 2011Pankaj Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
CAGE Distance Framework

© 2011Pankaj Ghemawat
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Distance Still Matters

• Canada and UK share a

common language
• Canada and Mexico are
part of NAFTA and also
share common land border
• Puerto Rico is officially an
unincorporated territory of
US
• Capital city of 4 profitable
countries are closer to
Bentonville
• Economic differences seem
to matter
Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 CAGE Framework

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 CAGE Framework for different industries
Cultural Administrative Geographic Economic

Attributes
creating
distance

Industries
or Products
effected by
distance

Source: Ghemawat (2001)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Android Sessions by Game Category

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Applications of CAGE Framework

1. Making differences visible

2. Understanding the liability of foreignness

3. Assessing natural owners and comparing foreign competitors

4. Comparing markets

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Case:
Walmart around the
World
Case:
Grolsch: Growing
Globally
 Int

BM & HRM 2021-23 | Session 10

Foreign Direct Investment
APALAK KHATUA, Email: apalak@xlri.ac.in
 Investment Decisions of MNEs

• Earlier view: Lower return on capital in a domestic country motivates an

MNE to move capital to countries that yield a higher return on capital

• However, Hymer (1960) argued that the firm-specific advantages of MNEs

enable them to offset the inherent disadvantages of market imperfections –
according to Transaction Cost Theory

• Scholars fine-tuned this market imperfection theory and proposed

internalization theory (Buckley and Casson,1976; Hennart, 1977; 1982; Rugman, 1981; 1982)
– Information asymmetry, high uncertainty and market risks lead to higher
transaction costs, and it makes sense for an MNE to internalize its
operations within the boundary of the firm in case of high transaction
costs

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Investment Decisions of MNEs
• Scholars from Uppsala University focused on the process of
globalization and proposed that it is a staged process, where MNEs
incrementally increase their resource commitment as they learn more
about the foreign market (Johanson and Vahlne, 1977)
– firms operate on a step-by-step, incremental basis, often starting
with familiar neighbouring countries/cultures

• Eclectic Paradigm offers a holistic approach by integrating traditional

trade theories with internalization theory (Dunning, 1977; 1979; 2000)
– It asserts that the presence of ownership-specific competitive
advantages (O) in a transnational corporation, the presence of
locational advantages (L) in a host country, and the presence of
superior commercial benefits internally in a firm (I) are three
important determinants that influence FDI decisions.

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 What is FDI?

• OECD definition: FDI refers to cross-border investment made by

a resident in one economy with the objective of establishing a
lasting interest in an enterprise that is resident in a country other
than that of the direct investor

• Technical Definition of FDI: If a foreign investor holds at least

10% of the local firm’s equity (UNCTAD) – Arbitrary threshold?
Power of large stockholders?

• FDI comprises activities that are controlled and organized by

firms (or groups of firms) outside the nation in which they are
headquartered and where their principal decision makers are
locate

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Why is FDI important? Conventional view

• Plays an important role in the long-term economic development of a

country
• Non-debt creating external source of capital
• Enhances competitiveness of the domestic economy through transfer
of technological know-how
• Contributes to international trade integration
• Increase tax revenues from corporate profits generated by FDI
• Raising productivity of domestic sector !
• Generating new employment opportunities
• Human capital development

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Perceptions of Home and Host Countries

• Home country:
– Investing aboard will lower domestic wages, destroy local jobs, and
erode technology leadership
– Investing aboard is must to remain competitive in an increasingly global
world
• Host country:
– FDI accelerates economic development by bringing new capital and
technologies. In other words, FDI plays a complementary role in overall
capital formation by filling the gap between domestic savings and
investment
– The effects of foreign control of local factors and assets and expect
MNCs to exploit their size and power to destroy local firms, create
economic dependence, and threaten local culture and sovereignty.
Source: Alfaro – 2009 – HBR Note
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
2012 Survey: How has your portfolio changed
in geography in last two years?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI inflows: 1995 to 2014
(Billions of dollars)

Emerging Market Economies: 51 developing countries in Asia, Latin America, Africa and the Middle
east (IFC, 1999) + 13 transition economies (changing from central planning to free markets) in the
former Soviet Union and China (EBRD, 1988)
Source: World Investment Report 2015
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI inflows: 2008 – 2021
(Billions of dollars and per cent)

Source: World Investment Report 2022

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Inward FDI rates of return, 2012–2017
(Per cent)

A significant decline in rates of return on FDI over the past five years. In 2017,
the global rate of return on inward FDI was down to 6.7 per cent, extending the
steady decline recorded over the preceding five years. Rates of return remain
higher on average in developing and transition economies

Source: World Investment Report 2018

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Global rates of returns on Inward FDI

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Types of FDI

• Brownfield/Cross-border M&As involve the partial or full

takeover or the merging of capital, assets and liabilities of
existing enterprises in a country by TNCs from other countries.

• Greenfield FDI refers to investment projects that entail the

establishment of new production facilities such as offices,
buildings, plants and factories, as well as the movement of
intangible capital (mainly in services)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Greenfield vis-à-vis M&As

Source: World Investment Report 2022

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Cross-border M&As

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 What type of FDIs are Preferred by
policymakers of emerging economies like India?
• The objective is to maximize the developmental impact and spin-
offs of FDI

• Therefore, preferences are given to:

– large FDI inflows in the development of infrastructure
– technological up-gradation of Indian industry through
‘greenfield’ Investments
– projects having the potential for creating employment
opportunities on a large scale

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Greenfield vis-à-vis M&As

Characteristics Greenfield Brownfield/M&As

Adds to productive capital of Initially change of ownership,
Capital
host country later there might be investments

Likely to transfer better May bring in technology but less

Technology Transfer
technology likely
May lead to divest of non-
Existing Assets No direct effect
performing assets
Does not generate initially rather
Employment Creates new employment
it might downsize
Increases the number of firms
Market Structure Can lead to consolidation
in an industry

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
If your share of FDI in emerging markets has
increased in the last two years, why?
(Survey by A. T. Kearney in 2021)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI inflows & COVID-19

• Global FDI flows fell by 35 per cent in 2020, reaching $1 trillion, from $1.5
trillion in 2019
• This is the lowest level since 2005 and almost 20 per cent lower than the
2009 trough after the global financial crisis
• The lockdowns around the world in response to the COVID-19 pandemic
slowed down existing investment projects, and the prospects of a recession
led MNEs to re-assess new projects
• The fall in FDI was significantly sharper than the fall in GDP and trade
• FDI plummeted in developed and transition economies, falling by 58 % in
both. It decreased by a more moderate 8% in developing economies
• As a result, developing economies accounted for two thirds of global FDI,
up from just under half in 2019

Source: World Investment Report 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Impact of the COVID on FDI

Source: World Investment Report 2020

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Impact of the COVID on FDI

Source: World Investment Report 2020

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Leading Host Economies

Source: World Investment Reports

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI flows recovered strongly in 2021

Source: World Investment Report 2022

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI flows: Concentrated?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Developed Economies

Source: World Investment Report 2020 & 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Developing Economies

Source: World Investment Report 2020 & 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Developing Economies

Source: World Investment Report 2020 & 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Developing Economies

Source: World Investment Report 2020 & 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
FDI Inflows: Transition Economies

Source: World Investment Report 2020

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI Inflows: Equitable?

Source: World Investment Report 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI Inflows: Equitable?

Source: World Investment Report 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Inward FDI Performance Index

Developing countries
increased their
performance index in
the period 2005–2010,
and they all have
indices above unity

Source: Past World Investment Report

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Global FDI flows and projections for 2011-2013

Openness: Attitude of host countries

regarding FDI’s potential costs and
benefits

Source: World Investment Report 2011

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Forecasting of Global FDI flows: 2021-22

Source: World Investment Report 2021

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Int
BM & HRM 2021-23 | Session 11
FDI outflows & Impacts of
FDI on Host Economy
APALAK KHATUA, Email: apalak@xlri.ac.in
Case:
Haier’s U. S.
Refrigerator Strategy
FDI Outflows: Leading Home Economies

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI Outflows
(Per cent)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Indian EMNCs: Motivations for Outbound FDI

• Gaining market access of developed countries - The manufacturing

activities will still be in India entailing low-cost advantage
• Technology transfer - Acquire advanced manufacturing
technologies, not available to the Indian companies, that further
help reduction in the cost of production
• New Product Mix - to acquire products that will otherwise require
huge investments and a long time to manufacture indigenously
• Presence in developed countries - Certain industries have their
presence across the globe by way of subsidiaries to cater to business
in a particular region

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Transnationality Index

UNCTD defines Transnationality Index (TNI) as the arithmetic mean of the

following three ratios where "foreign" means outside of the corporation's
home country: the ratio of foreign assets to total assets, the ratio of foreign
sales to total sales, the ratio of foreign employment to total employment

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Transnationality Index: 2010-20

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Internationalization of the largest MNEs

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Let’s recap: Trade Interventions

Source: https://www.globaltradealert.org/global_dynamics Accessed on September 15, 2022

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Negative Aspects of FDI

• Market power of large MNCs

– If FDI comes in sectors in which the domestic firms are themselves
contemplating investment, the very act of foreign investment may take
away the investment opportunities that were open to domestic enterprises.
– If the MNEs raised funds for their expansion programs from the host
country, this might out-compete the domestic firms in the financial markets
– Impact on SMEs?

• There are also apprehensions that the initial inflow of direct investment
would be followed by large and persistent outflows on account of imports,
royalties, technical fees and dividends, with adverse balance of payments –
“For every dollar invested by MNCs in the Third world more than one
dollar returned to the metropolis in the form of repatriated profits and
royalties” (Roxborough, 1979)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
MNC versus domestic firms

Source: Kumar – 2005 - EPW

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Negative Aspects of FDI

• Ability to generate high profits ?

• Political interference to pursue rent-seeking attitudes
– Fiscal incentives – to reduce the tax burden of foreign investors
– Financial incentives such as government grants, credit at
subsidized rates, government guarantees
– Bargaining relationship exists between a firm and host country
→ race to the bottom → net loss for the ‘winning’ country?
– Does FDI warrant special treatment over other forms of
investment?
• Tariff jumping - May not always be export enhancing - a high
proportion of FDI came into India during the early 1990s not to use
the country as an export hub, but to jump the ‘tariff wall’ and service
the Indian market

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI: Concluding Observations

• Mere openness to FDI inflows may be a necessary but insufficient

condition
– Host country must ensure that it creates absorptive capability
• It is difficult to say whether FDI is good or bad for a developing
country
• It may or may not have the desired and expected growth-enhancing
impact → Most importantly, does it bring equity along with growth
effects?
– Top 10 developing countries (including China, HK, Brazil and
Mexico) account for close to 70% of FDI inflows to developing
countries, while the 50 least developed countries account for less
than 0.5% of global FDI
• Monopolists, regardless of its origin, would maximize profits
Source: Alfaro – 2009 – HBR Note
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Int

BM & HRM 2021-23 | Session 12

Global Value Creation
APALAK KHATUA, Email: apalak@xlri.ac.in
 Let’s revisit: Why Globalize?

• Cross-border Value Creation!

• But, how? Standard response:
– The world is a big place, with lots of volume out there or on the way, and
we need to scoop up our share!
– We’ll cut our costs by chasing volume across borders.
• They are only a subset!
• So, we need to understand – how crossing border might add value?
• Value-creation is crucial even in a single-country strategic decision
• Your margin = Industry margin (from Porter’s five-forces framework)
+ your competitive advantage
• Your competitive advantage = [willingness to pay –cost] for your
company - [willingness to pay –cost] for your competitor

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Levers of Value Creation

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Types of Competitive Advantage
Recap from the core SM course

Willingness to pay

Supplier opportunity cost

Industry Successful Successful low-

Average Differentiated Cost Competitor
Competitor Competitor
Levers of ‘Global’ Value Creation

Captures the differences

across countries

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 How to ensure Global Value Creation?

• ADDING Value Scorecard of Pankaj Ghemawat

– Adding volume or growth
– Decreasing costs
– Differentiating or increasing willingness-to-pay
– Improving industry attractiveness or bargaining
power
– Normalizing (for optimizing) risk
– Generating knowledge and other resources and
capabilities

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Adding Volume: Better-off Tests!

• Look at the true economic profitability: accounting profit –

capital recovery costs

• Probe the level at which additional volume yields economies of

scale (or scope): globally, nationally, at the plant or customer
level…

• Strength of economies of scale or scope

• Assess the other effects of incremental volume – negative

effects?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Decreasing Costs

• Unbundle price effects and cost-effects – not as a percentage of

revenues

• Unbundle costs into subcategories

• Consider cost increases (e.g., due to complexity, adaptation etc.)

as well as decreases

• Look at cost drivers other than scale/scope – location, capacity

utilization, institutional factors etc.

• Look at labor costs/sales ratios for your industry (or company)

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Differentiating/Increasing Willingness-to-Pay
• Look at the R&D/sales and Advertising/sales ratios for your
industry – Proxy?

• Willingness-to-pay? Or prices paid?

• Effects of globalization on willingness-to-pay?

• Analyze how cross-country (CAGE) heterogeneity in preferences

affects willingness-to-pay for products on offer

• Segment the market appropriately

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Improving Industry Attractiveness or
Bargaining Power
• Account for international differences in industry profitability
• Understand the structural dynamics of your industry → Look
broadly at changes in industry structure
• How you can deescalate/escalate rivalry – multimarket contact!
• Recognize the implications of what you do for rivals’ costs or
willingness-to-pay for their products (Worsening their positions
can do as much for added value as improving one’s own)
• Attend to regulatory/nonmarket restraints (tacit coordination,
lobbying, incumbency, tax loopholes, intermediaries) —and
ethics.

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Normalizing Risk

• Characterize the extent and key sources of risk in your business

– Supply-and-demand-side risk; Financial risks such as foreign
exchange volatility; Competitive risks (allowing a competitor
a profit sanctuary in its home market); Nonmarket risks

• Assess how much cross-border operations reduce or increase risk

• Any benefits that might accrue from increasing risk?

• Consider multiple modes of managing risk – resource

commitment?

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Generating Knowledge (and Other
Resources/Capabilities)
• Assess how location-specific versus mobile knowledge is, and
what to do about it

• Consider multiple modes of generating (and diffusing)

knowledge – personal interactions, working with various
stakeholders, open innovation, imitation, contracting for the use
of knowledge (next module will exhaustively explore this)

• Think of other resources/capabilities in similar terms –

relationship, local partners’ domestic knowledge

• Finally, AVOID double-counting!

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Int
BM & HRM 2021 - 23 | Session 12
FDI in India: Facts and
Figures
APALAK KHATUA, Email: apalak@xlri.ac.in
 Evolution of FDI Policy in India
• New Industrial Policy announced on July 24, 1991, was a
major departure in the Indian Economy
– Abolition of industrial licensing system, commonly known as License
Raj, except where it is required for strategic or environmental grounds
• Controversial FERA (1973) to less stringent FEMA (1999)
• Automatic clearance of FDI proposals fulfilling the conditions
laid down
• Foreign ownership up to 100% is permitted in most sectors
– 49% cap in a few sectors like insurance, pension, petroleum refining by
PSUs, infrastructure companies in the securities market
– Prohibited sectors are lottery business, chit funds, manufacturing of
tobacco or tobacco substitutes, gambling and betting sectors
• Export obligation were withdrawn in 2000
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI Policy Framework

Three primary institutions in India that handle FDI-related issues:

1. Foreign Investment Promotion Board (FIPB)
– nodal single-window agency for all matters relating to FDI as well as
promoting investment in the country
2. Secretariat for Industrial Assistance (SIA)
– entrepreneurial assistance, investor facilitation, receiving and
processing all applications, conveying government decisions,
assisting entrepreneurs and investors in setting up projects and
monitoring the implementation
3. Foreign Investment Implementation Authority (FIIA)
– facilitates quick translation of FDI approvals into implementation,
helps to obtain necessary approvals, sort out operational problems
and meet with various government agencies
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Foreign Investment Policy

• The Indian government has provided many incentives for attracting

FDI, such as establishing Special Economic Zones (SEZs) where
companies are entitled to certain benefits, exemption from duty on
import, income tax exemptions, value added tax (VAT) rebate on
export, opening up of many sectors for FDI, etc.

• Indian Finance Minister in his 2017-18 budget speech noted:

– Our Government has already undertaken substantive reforms in
FDI policy in the last two years. More than 90 per cent of the total
FDI inflows are now through the automatic route ... Further
liberalisation of FDI policy is under consideration and necessary
announcements will be made in due course

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Foreign Investment Policy
• FDI is permitted in virtually every sector, except those of
strategic concern such as atomic energy or railway operations
• FDI can come into India in two ways.
• Automatic route
– FDI in sectors/activities to the extent permitted under the
automatic route does not require any prior approval from the
Government of India
– The investors are only required to communicate with RBI within
30 days after receipt of inward remittances or issue of shares to
foreign investors
• Prior Government Approval route
– Few sectors require prior government approval
– Proposals are considered in a time-bound and transparent manner
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Economic Reforms & Route-wise FDI inflows
(in US$ million)

Introduction of
FEMA

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Why China attracts more FDI than India?

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Same story with other Asian economies

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Is it India's failure to attract FDIs?

• India yet to build the critical mass of FDI as it is a late

starter
– 1991 as compared to China’s 1979

• The figures of FDI inflows in India and China are not

comparable
– Indian figures of inflows did not follow the IMF’s
manual that was followed internationally during this
period

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Revised Indian FDI data

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 FDI inflows by component

Source: World Investment Reports

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Foreign Investment in India
A. Direct investment B. Portfolio investment Total (A+B)
Year
Rs. crore US $ million Rs. crore US $ million Rs. crore US $ million
1990-91 174 97 11 6 185 103
1991-92 316 129 10 4 326 133
1992-93 965 315 748 244 1713 559
1993-94 1838 586 11188 3567 13026 4153
1994-95 4126 1314 12007 3824 16133 5138
1995-96 7172 2144 9192 2748 16364 4892
1996-97 10015 2821 11758 3312 21773 6133
1997-98 13220 3557 6794 1828 20014 5385
1998-99 10358 2462 -257 -61 10101 2401
1999-00 9338 2155 13112 3026 22450 5181
2000-01 18406 4029 12609 2760 31015 6789
2001-02 29235 6130 9639 2021 38874 8151
2002-03 24367 5035 4738 979 29105 6014
2003-04 19860 4322 52279 11377 72139 15699
2004-05 27188 6051 41854 9315 69042 15366
2005-06 39674 8961 55307 12492 94981 21453
2006-07 103367 22826 31713 7003 135080 29829
2007-08 140180 34835 109741 27271 249921 62106
2008-09 173741 37838 -63618 -13855 110123 23983
2009-10 179059 37763 153516 32376 332575 70139
2010-11 138462 30380 143435 31471 281897 61851

Note : 1) Data for 2009-10 and 2010-11 are provisional.

2) Data from 1995-96 onwards include acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999. Data on such
acquisitions are included as part of FDI since January 1996.
3) Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are
not comparable with FDI data for earlier years.
4) Negative (-) sign indicates outflow.
5) Direct Investment data for 2006-07 include swap of shares of 3.1 billion.
Also see Notes on Tables.
Source: Reserve Bank of India
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Financial Year-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Financial Year-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
China and India: A Comparative Perspective

After controlling
China’s ‘Round-
Tripping’ and
adjusting India’s
FDI calculation
according to IFC
guideline

Can you recall the A.T. Kearney FDI Confidence Index?

Source: Kumar (2005), EPW
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Sector-wise FDI Inflows in India

August 1991 – Dec 1999

Jan 2000 – March 2009

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Sector-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 State-wise Distribution of FDI in India
(Jan 2000 – March 2009)

• FDI equity flows are concentrated in a few states

• Of the total approved FDI flow, Maharashtra accounted for the
largest proportion with 46 per cent, followed by Gujarat with
15 per cent, and Delhi with 7.7 per cent.
• Other significant states are AP, Karnataka and TN.
• Among these states, only a few cities attract FDIs.
– These included Ahmedabad, Bangalore, Kolkata, Chennai, Coimbatore,
Goa, Hyderabad, Jamnagar, Kancheepuram, Mumbai, Pune and
Raigarh.
• Only seven states accounted for over 97 per cent of the total
amount of export-oriented FDI and 83 per cent of total FDI
approvals during 1991-2001.
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
RBI’s Region-wise Break-up of FDI inflows
(Jan 2000 – March 2009)

Software hub
Strong industrial base

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Country-wise FDI Inflows in India

August 1991 – Dec 1999

Followed by Japan (2.9), Cyprus (2.5),

Germany (2.4), France (1.4), U.A.E.(1.0)

Jan 2000 – March 2009

Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Country-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Double Taxation Avoidance Agreement
• Armenia • Jordan • Mozambique • Sweden
• Australia • Hungary • Myanmar • Swiss Confederation
• Austria • Iceland • Namibia • Syrian Arab
• Bangladesh • Indonesia • Nepal Republic
• Belarus • Ireland • Netherlands • Tajikistan
• Belgium • Israel • New Zealand • Tanzania
• Botswana • Italy • Norway • Thailand
• Brazil • Japan • Oman • Trinidad and Tobago
• Bulgaria • Kazakstan • Philippines • Turkey
• Canada • Kenya • Poland • Turkmenistan
• China • Korea • Portuguese Republic • UAE
• Cyprus • Kuwait • Qatar • UAR (Egypt)
• Czech Republic • Kyrgyz Republic • Romania • UGANDA
• Denmark • Libya • Russia • UK
• Egypt • Lithuania • Saudi Arabia • Ukraine
• Estonia • Luxembourg • Serbia • United Mexican
• Ethiopia • Malaysia • Singapore States
• Finland • Malta • Slovenia • USA
• France • Mauritius • South Africa • Uzbekistan
• Georgia • Mongolia • Spain • Vietnam
• Germany • Montenegro • Sri Lanka • Zambia
• Greece • Morocco • Sudan
Source: http://law.incometaxindia.gov.in/DIT/intDtaa.aspx#

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• Indian government has provided many incentives for attracting

FDI

• For instance, DTAA is mainly aimed at promoting trade and

investment by eliminating double taxation and making tax
regulations more consistent

• India adopted this policy quite early and signed the first such
agreement in 1969 with Egypt

• Currently, India is party to 90+ DTAAs with various countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• While the stated goals of DTAAs are promoting trade and

investment, among others
• DTAAs have come under criticism for facilitating treaty shopping
and round-tripping – especially due to the disproportionately huge
FDI inflows from jurisdictions like Mauritius, Singapore and
Cyprus, which are regarded as tax havens
• Along with their role in tax avoidance, there are concerns that
these jurisdictions are also being used for tax evasion and black
money
• This has been highlighted in various reports including by
government agencies and news outlets

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 Why Mauritius?

• India-Mauritius DTAA was signed in 1982

• According to the DTAA, capital gains arising from the sale of shares
are taxable in the country of residence of the shareholder and not in the
country of residence of the company whose shares have been sold:
– Therefore, a Company resident in Mauritius selling shares of an
Indian company will not pay tax in India.
– Since there is no capital gains tax in Mauritius, the gain will escape
tax altogether
• After several years of negotiations, India in 2016 finally succeeded in
amending the treaties with Mauritius, Singapore and Cyprus.
• India’s finance ministry said the amendment of the treaty would “help
curb tax evasion and tax avoidance” and “double non-taxation” as well
as round-tripping

I N T E R N AT I O N A L M A N A G E M E N T. A PA L A K K H AT U A
 What are the Determinants of FDI inflows in a
country like India?

• India’s strengths as an investment destination depends

on
– Large and growing domestic market with increasing
purchasing power parity
– World-class scientific, technical and managerial institutes
– Cost-effective and highly skilled manpower
– An abundance of natural resources
– A large English-speaking population
– Institutional transitions in terms of openness to international
trade, economic reforms etc.
– An independent judiciary
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 Outbound FDI from India
• There is a growing realization that the future growth of Indian
companies will be influenced by the share that they can garner in
the world market, not only by producing in the country and
exporting, but also by acquiring overseas assets

• RBI allows Indian firms to invest in entities abroad up to 200%

(it is not constant) of their net worth in a year
– But money raised abroad does not come under this law

• The actual acquisition values are higher as a significant amount

of fund has been raised abroad.
– For instance, a significant portion of the capital was raised in Singapore for
The Tata Steel/Corus deal

Source: https://www.bis.org/review/r070122c.pdf

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 To sum up…

• Global outlook about India as FDI destination is positive

• However, FDI still plays a relatively small role in domestic
capital formation
• Broadly, MNEs are more export oriented than domestic firms
• Only a few states of India receive FDIs and mostly FDIs are
concentrated in a few sectors
• Regulating FDI inflows to maximize their impact on domestic
sector might not be a bad idea for India → Governments should
ensure efficient, competitive and regulatory regime to provide
level playing fields to both domestic and foreign firms

Source: NCAER Report 2009

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