Internationalization of Firms from China and India: Theory, Evidence and Policy

India and China have emerged as important sources of outward foreign direct investment (OFDI) in the global economy. The increasing presence of their enterprises in the advanced countries has posed a challenge both to theory of internationalization of firms and public policy alike to explain why this has happened. In this paper, an attempt is made to examine, in a comparative framework, the trends, patterns and determinants of OFDI from India and China. The critical review of theory and empirical evidence related to internationalization of firms clearly brings out that unlike firms of advanced countries, there are multiple sources of the strength of Chinese and Indian firms that drives overseas investment. The study covers the period from 1990 to 2010. The major finding that emerged from the analysis is the dramatic rise of stocks and flows of OFDI from India compared to that from China. The outward to inward FDI ratio for India has increased at a higher rate during 2000-2007 but this ratio was much higher for China between 2008 and 2010. China’s OFDI was more concentrated in financial services and Asian countries, whereas in case of India, it was predominantly in manufacturing sector and advanced countries. Internationalization of firms from China and India has been driven by push factors that enable firms to acquire resources, markets and technologies. The public policy regarding OFDI has undergone substantial transformation from merely permissive to encouraging in both the countries. The pattern of investment abroad and internationalization of firms from both India and China seems to have been largely determined and guided by the state policy.