What Explains India's Surge in Outward Direct Investment?

Abstract

India's outward direct investment (ODI) has grown very fast, especially since the global financial crisis erupted. In this paper, we analyze empirically what are the factors behind the geographical destination of India's ODI. We estimate a gravity model using weighted EGLS into a panel data of 74 ODI destinations from India during 2008 to 2012. Given the sheer size of India's ODI which is deviated to offshore financial centers awaiting their final destination, we go beyond using the official ODI data by destination and reassign the ODI directed to 5 major offshore financial centers into its most likely final destinations. Both sets of results (with raw data and rearranging India's ODI into offshore centers) suggest that India's direct investors are attracted towards richer countries and not so much proximity with India. Furthermore, countries having a high degree of trade openness are preferred destinations for India's ODI, especially those that export technology but also, to a much lesser extent, exporters of food and fuel. Also, bilateral and/or multilateral free trade agreements with host countries are found to strengthen ODI flows from India. Finally, an efficient governance system in host countries is found to attract higher ODI flows from India. However, when controlling for the existence of offshore centers, the host country's ability to control corruption is not a significant determinant of India's ODI.