The growth of outward FDI and the competitiveness of the underlying economy: the case of India

Rajneesh Narula & Tiju Prasad Kodiyat


There has been an impressive spurt in the outward FDI activity of Indian MNEs since the 1990s. However, despite the rhetoric, this growth has not been exceptional, when compared to other similarly developed countries. Received economic arguments propose that successful outward investors tend to be the most competitive domestic firms in their home economy. Their firm-specific assets tend to be a function of the political economy and economic structure of the home economy. In IB terms, this means that the ownership-specific assets of Indian multinationals are a subset of the ownership assets of their parent companies, which in turn are largely determined by the location-specific assets of the home economy.

The evidence suggests that the strengths and weaknesses in the location assets of India have caused pockets of excellence to emerge, but that these conditions do not lend themselves to a broader growth in competitiveness, meaning that further rapid growth is ultimately not sustainable. Systematic upgrading and radical policy changes are needed to build up India's knowledge infrastructure and institutions to support a shift in India's competitive advantages to new sectors outside these pockets. This ultimately means a policy emphasis on the manufacturing sector, and within that, promoting a shift from low-tech to higher technology manufacturing sectors, and a strengthening of the formal sector.

Keywords: India, innovation systems, comparative advantage, competitiveness, MNEs, infrastructure, globalization, location advantages

JEL: F23, F68, O32

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