There has been an impressive spurt in the outward foreign direct investment (FDI) activity of Indian Multinational Enterprises since the 1990s, says a recent working paper from UNU-MERIT. But despite the rhetoric, this growth has not been exceptional compared to other similarly developed countries, argues co-author Professor Rajneesh Narula. He recommends a policy emphasis on the manufacturing sector, and within that, promoting a shift from low-tech to higher technology. In answering the questions that follow, Rajneesh provides further details about his area of research and explains the significance of FDI in developing policy.
1. Is India a special case among developing countries in terms of competitiveness and outward FDI?
In absolute terms, India has considerably more outward FDI than many other developing countries. Similar to Chinese MNEs, Indian firms have been engaged in a number of high visibility acquisitions over the last 15 years. Another reason Indian outward FDI has attracted a lot of attention has to do with their significant presence in the ICT sector, which is considered a high-tech industry. It has led to speculation that developing countries can ‘leapfrog’ the traditional development ‘path’, skipping directly ahead to knowledge intensive activities. Our paper suggests that India’s underlying economy remains mired in labour-intensive and resource-intensive activity, aside from a few “pockets of excellence”. Thus, we do not find much scope for a more widespread move towards other knowledge intensive sectors.
2. What new policies would help to expand India’s competitive advantages to sectors outside its current “pockets of excellence”?
The biggest challenge ahead is to build up 
knowledge infrastructure, and principally within that to overcome what is a looming shortage of skilled manpower. It seems paradoxical that this is so, in a country of more than a billion people! The educational system remains highly uneven in quality. Universities and technical colleges are understaffed and underfunded. Changes are required in labour laws and industrial regulation that will encourage smaller firms to expand. India has perverse incentives that discourage firm growth. This is especially significant for the manufacturing sector, which must expand if India is to grow further.
3. Why should policymakers in India strengthen the formal sector in general and high-tech manufacturing in particular?
As the economy moves away from agriculture, large scale employment expansion is only really possible in manufacturing. This means growing the formal sector, and this means creating incentives for entrepreneurs to expand legally, and into new areas. There are opportunities for Indian firms to move from supplying the software aspects of ICT towards the hardware side, given the important clusters of this activity, and the ease with which linkages can be created. Likewise, there is potential for the bioinformatics sector to grow, given the policy framework that has promoted biotechnology in India.
4. Could your findings provide lessons for other developing countries, not only across Asia but also Africa and Latin America?
I think that the important lesson here is for developing countries not to rest on their laurels. Export dependency upon a few sectors that have become competitive (by design or by accident) can be fleeting, as costs rise over time and greater competition erodes margins. It is essential that governments identify and promote opportunities for cross-fertilization to related sectors to which the same skill sets / competences can be applied. Most of all, the really critical thing underlying every economy is people – and most importantly, skilled people – and incentives for private firms to exploit opportunities to expand in new directions.
Professor Rajneesh Narula acts regularly as a consultant for UNCTAD, UNIDO, the European Commission, the Inter-American Development Bank and the OECD. He has travelled widely, having undertaken research and consultancy projects or taught in Tanzania, Uganda, Thailand, China, Vietnam, Russia, India, Qatar, UAE, in addition to almost all the countries of the EU. Image: Flickr / I. Bildarkiv.
