What drives the boom in outward FDI from India?

Abstract

Purpose The Indian economy has experienced a boom in outward FDI (OFDI) in 2006. The study aims at exploring the factors that drive the boom in OFDI of Indian firms. Design/methodology/approach The participation of a firm in OFDI is a two-stage process -first, the decision to internationalization and second, how much to invest. We employ a two-stage model to decompose the effects on the decision to internationalization from effects on how much to invest. The two-stage model has the advantage of allowing us to estimate separately the probability of internationalization by a firm – Pr(OFDI > 0) – and the expected volume of investment, E(OFDI|OFDI > 0). The former is estimated by the probit model and the latter is estimated by the ordinary least square model. Findings The study finds that prior experience and institutional advantage can strongly drive the internationalization of Indian multinationals. The study also examines the relative importance of two aspects of prior knowledge – length of prior knowledge and depth of prior knowledge on OFDI of Indian firms. The study finds that the depth of prior knowledge is a must influential driver of OFDI in comparison to its length. Originality/value The present study is a novel attempt to investigate, ‘What drives the boom in OFDI from India?’

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