Since the start of the 21st century, fast globalising corporations from China and India have shown a growing appetite for foreign direct investments (FDI) not just in the developed but also developing world, especially Africa. India’s outbound FDI was as much as $14.9 billion while that of China was three times larger at $48 billion in 2009, according to the UNCTAD’s World Investment Report 2010. What explains this surge in investments from these emerging economies? What are the similarities and differences in outward flows from China and India?
Professor R Nagaraj of the Mumbai-based Indira Gandhi Institute of Development Research in a recent paper “Outward FDI from China and India: an Exploratory Note” observed common motivations for outward FDI: “both the countries are (relative to their size) natural resource poor, for their industrial requirements and national ambitions. Both the countries have a mature industrial base, acquired over five decades of rapid industrialisation.” To rapidly expand their capabilities, they require access to advanced technology markets.
Outward FDI from both these countries also appears to be leveraging their country-specific advantages of cheap and skilled labour and comparative advantages in using standardised technologies to acquire firm-specific advantages like technology and managerial skills. However, most of the large enterprises in China are state-owned. Globalising Indian firms, in sharp contrast, are privately owned with the experience of working under the rule of law, competitive domestic markets and have access to a deep financial sector and market-based institutions.
Sharper differences in the two countries’ outward FDI strategies may be discerned if one focuses on their recent expansion in Africa. This push into the world’s poorest continent has been motivated in part by their desire to secure access to raw materials for their rapidly growing economies. China’s investments were of the order of $2.5 billion in 2006-2008 while those of India were $332 million, according to the United Nations Conference on Trade and Development (UNCTAD). With big-ticket M&A deals like Bharti Airtel’s $10.7 billion acquisition of Zain, India is now one of the largest investors in Africa.
Though both China and India fight for Africa’s oil, significant Indian investments, of late, have been made in a much wider range of industries than China like automobiles, pharmaceuticals, tourism and telecom. India’s biggest auto manufacturer, Tata Motors, is preparing to launch its people’s car, the Nano, in the continent. Today, there are over 35 top Indian companies that have set up shop in South Africa such as Mahindra, Ranbaxy, Cipla, Ashok Leyland, Apollo Tyres, Godrej and so on.
Why did Bharti go to Africa? The telecom market, especially in sub-Saharan Africa, is the most underdeveloped and spread over a vast geographical area. The global market, in sharp contrast, is showing signs of saturation. In India, most of the global players are already present in the industry and the market has become highly competitive. Sub-Saharan Africa, thus, is a new frontier since it has relatively low penetration rates with only three or four operators. This provides huge growth opportunities for Bharti.
The sheer diversity of India’s recent foray into Africa defies simple generalisations of being resource-seeking in nature. In fact, “some of these investments are propelling African trade into cutting-edge multinational corporate networks, which are increasingly altering the “international division of labour”, argued Harry Broadman in his book Africa’s Silk Road: China and India’s New Economic Frontier. The author surveyed as many as 450 firms, including Chinese and Indian companies, operating in four African countries for his study.
India Inc’s investments in Africa also include acquiring arable land in countries like Ethiopia to produce food and grow flowers. Karuturi Global Ltd, ranked as one of the top 25 transnationals in agribusiness and headquartered in India, is a global leader in the production and export of roses. In 2007, it acquired Sher Agencies, the world’s largest rose farm in Kenya for $69 million. It is also engaged in large-scale agricultural farming in Ethiopia — in 2008, it acquired more land to produce rice, palm oil and sugarcane for sugar and ethanol.
China’s biggest strength in its outward FDI drive is the unlimited state support for its enterprises. In head-to-head competition for oil, gas and other raw materials, Chinese giants have trumped their Indian counterparts, not just in Africa but also Myanmar and Kazakhstan. But state control is also a weakness. The non-transparent nature of the companies’ power structure does trigger political resistance in host countries. Nagaraj mentions the case of Rio Tinto. Five years ago, Chinese oil giant CNOOC was thwarted in its bid to take over US’ Unocal.
On balance, however, Indian firms have a slighter edge in their globalisation drive through M&As due to their long experience of dealing with institutions of a market economy. They can also leverage their firm-specific advantages like low-cost manufacture of generics and unique business models of IT service delivery — like Bharti’s Minutes factory that enables it to expand the subscriber base of its prepaid customers. For such reasons, it is reasonable to expect India will steadily narrow the massive Chinese advantage in outward FDI.
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