The Internationalization of Chinese and Indian Firms: Trends, Motivations and Policy Implications

The last two decades have seen a significant rise in the internationalization of firms from developing economies. In addition to their growing participation in international trade, a number of leading emerging economies are contributing to growing outflows of foreign direct investment (FDI) and cross-border mergers and acquisitions. According to the 2008 World Investment Report, outward flows of FDI from developing countries rose from about US$6 billion between 1989 and 1991 to US$225 billion in 2007. As a percentage of total global outflows, the share of developing countries grew from 2.7% to nearly 13.0% during this period. Within this widespread trend, the growing internationalization of firms from two fast-growing developing countries, China and India, is particularly notable. Table 1 illustrates the size of outward FDI flows from China and India in 2007. Firms from China and India have also been involved in significant and growing levels of mergers and acquisitions abroad. The recent high-profile overseas acquisitions by India’s Tata group and China’s Lenovo and Haier groups stand out as examples. Between 2005 and 2007, cross-border purchases by Chinese firms averaged about US$3.5 billion per annum, while those by Indian firms averaged US$1.5 billion per annum. As some of these acquisitions were financed through raising money in international markets or in the host economies, measures of outward FDI flows probably underestimate the extent of internationalization of firms from these two countries. However, the quantitative significance of these trends needs to be kept in perspective. Although outward FDI from both countries has increased in recent years, the levels remain paltry relative to the size of these economies and relative to global FDI flows. Both countries also rank quite low in terms of UNCTAD’s outward FDI performance index, which measures a country’s outward FDI relative to its GDP. So why have these fledgling flows commanded so much attention? For one, both China and India are large and populous developing countries and their recent growth number 1, 2009