For last few years, with more of India Inc venturing abroad in software, biotechnology, automotive and oil sectors, India is fast dropping its tag of being a FDI destination and is emerging as a major foreign direct investor. The value of actual Indian investments abroad has increased from US$ 319 million to more than US$ 1450 million between 1999 to March 2004. In 2003, there were 1229 approved overseas investments by Indian firms, up from 395 deals in 1999. Between April-November 2004 the total number of such deals done by Indian companies abroad were 793. According to UN Conference on Trade & Development (UNCTAD), India’s ranking improved from 80 to 54 during 1990 to 2004 in terms of outward FDI performance index covering 132 economies.

While initially most of the Indian FDI is in manufacturing (such as pharmaceuticals), the IT services have begun to catch up. In 2004, India’s outgoing approved investments topped in the field of non-financial services (US$437 million) followed by manufacturing (US$432 million). The scale of investments has also grown bigger. For the past few years, Indian enterprises have been investing about US$1 billion annually on average, which is about 1 percent of country’s gross fixed capital formation.

However, a considerable proportion of Indian overseas investment has taken the form of mergers and acquisitions (M&As) rather than Greenfield investments (around 1-2% of total). During 2000-2003, Indian companies were involved in 182 overseas M&A transactions as compared to just 60 in 1996-1999. While the acquisition of foreign companies started off in the IT and related services sector, it has now spread to other areas.

Although most of these overseas deals are happening in the US, Russia and the UK, some are also coming to ASEAN and lesser developed countries. For example, there are 1441 Indian companies operating in Singapore, of which more than 450 are technology enterprises. Ranbaxy, a leading Indian Pharma company, already has a plant in Thailand, Malaysia and Vietnam while Bajaj Motors is on its way to open a plant in Indonesia. Other than that, there are over a dozen Indian manufacturing joint ventures (in the fields of Synthetic Fibres, Handicrafts, Garments, Steel and Textiles) in Indonesia. India's private investment in Malaysia is spread across areas like oil refining, power generation and supply, development of railway tracks etc. More recently, the acquisition of NatSteel and Daewoo Commercial Vehicle Company by Tata Group demonstrate the interests of Indian firms in the high-growth economies of South East and East Asia.

There are several reasons for this greater sense of confidence amongst Indian companies. Firstly, the restructuring process that many companies underwent in the mid-1990s gave them more confidence to meet the global challenge. India Inc, plagued by excess capacity in early nineties, used the opportunity provided by the demand recession to cut costs, streamline operations and reduce debts (thanks to low interest rates). And as the business cycle turned around in early 2000s, it pursued competitiveness through international expansion and outward FDI.

Secondly, there are a large number of Indian firms with the financial capabilities to invest abroad. A study suggested that the top 25 companies in India have spare funds of US$10 billion, much of which would be invested abroad.

Thirdly, the success of India as an outsourcing destination also exposed the country to knowledge and methods for conducting business in foreign countries. Companies in India realized that investing abroad would not only give them access to foreign markets but also to production facilities and international brand names.

Fourthly, in the face of high commodity prices, there is an increasing desire by countries like India to secure long-term supplies of natural resources to meet domestic industrial demand.

Fifth, Indian banks are also encouraged to give loans to companies for their overseas investments. For example, Export-Import Bank has financed 122 ventures worth US$ 420 million set up by over 100 companies in 43 countries. During 2004-05, the Bank supported 11 overseas investments including the acquisition of a stainless steel plant in Indonesia.

Finally, the government’s changing attitude has also helped in the process. While the initial liberalization of Indian policy towards outward FDI was started in early 1990s, significant steps in this direction were undertaken only in 1995. In January 2004, the Government finally removed the US$100 million cap on foreign investment by Indian companies and raised it to the net worth of the company.

Given this existing desire to venture abroad, acquire manufacturing firms and position themselves near clients, it seems that the trend of Indian companies going overseas is on the rise and is definitely sustainable in the future. The country will rapidly emerge as an important source of FDI outflows for the Asian region. While investment in IT services is expected to grow more rapidly, other sectors would not be left far behind. Further liberalization of government policies will continue to play an important role in the expansion of Indian firms abroad. Moreover, India’s proactive steps to form regional groupings – BIMSTEC, SAFTA, India-Singapore CECA, India-Sri Lanka FTA and the imminent ASEAN-India FTA - will also provide Indian firms with a favorable platform to strengthen their presence in these partner countries.