The United States is one of India’s largest trade and investment partners. This column discusses the impact of American FDI in India in terms of direct effects such as job creation, exports and technology transfers, as well as indirect effects like spillovers from R&D and adoption of best practices. It also highlights challenges faced by American firms while investing in India.
topics have been as intensely debated as the impact of foreign direct
investment (FDI) in a developing country. The impact of FDI inflows in a host
country could be direct or indirect. The direct impacts can be felt through
employment, exports and Research & Development (R&D) etc. The indirect impacts
occur through spillovers or the impact of affiliates of Multinational
Enterprises (MNE) on operations of local firms through channels such as skill
and knowledge transfers.
In this column, we
examine the direct and indirect effect of American FDI in India1,
using secondary data2 and detailed firm-level primary surveys (Ray et al. 2015). We analysed
the secondary data to identify sectors where the overall impact of American FDI
was high. A primary survey3 was conducted in the selected sectors in Delhi national capital region (NCR),
Mumbai, Bengaluru and Hyderabad during April to September 2013. The sectors of
focus are finance/ banking, fast-moving consumer goods (FMCG), Information Technology
(IT), pharmaceuticals, consulting, and automobiles.
The impact of FDI on human development can be
analysed through new employment generation, and improvement in wages and
working conditions. In India, the American FDI in the IT sector has not only
provided a technological boost but has also had a significant impact in other
areas such as employment generation4 and improved HR (human resource) skills. Microsoft Corporation (India) Private Limited
was one of the first foreign companies to set up base in India’s IT space. It
set up its operations in 1990 and employed 5,800 persons in 2012-13. Companies such as Dell India have set up an assembling and R&D
centre in India in addition to captive Business Process Outsourcing (BPO)5,
sales and marketing, financial services and analytics, and software services. Dell India employed
27,000 persons in India, which was the largest outside of the US in 2012.
the banking sector, both the banking and the non-banking segments
provide employment. In case of American banks, employment has been particularly
high in sourcing operations6, and one-third of the global workforce of an American offshoring7 unit is employed in India. For example, Bank of America (BoA) employed 700 persons in
banking and 20,000 persons in offshore facilities in 2012-13. Similarly,
Citibank India employed 7,500 persons in India in 2012-13.
Consulting firms, namely, PricewaterhouseCoopers
Private Limited (PwC), KPMG India, Ernst &Young Private Limited (E&Y) and
Deloitte Touche Tomhatsu India Private Limited, together account for
approximately 37,000 employees across India. They operate under a slew of
verticals such as accountancy, auditing and tax. In this sector, there has been
significant knowledge transmission from the home to the host country in the
form of advanced software, and internal training programmes on research and
Companies in the FMCG segment have also
invested in supply chain management to reach deeper into the rural market. Such
companies provide employment to several thousand people.
American Tower Corporation (ATC) India, a
leading wireless infrastructure provider was established in 2007 in India and
is mainly into construction of telecom towers. As majority of its activities
takes place at the non-urban level, hence, the impact is the most at the
village level through creation of bulk jobs.
FDI can lead to vertical export expansion as
well as horizontal export diversification8 in a country. US consulting firms such as Deloitte and E&Y have their
sourcing entities (export units)9 in India. The export unit of Deloitte accounts for almost 10% of the
revenue of the global business. GE India operates in several segments such as
energy, healthcare, aviation and transportation. It manages its healthcare
manufacturing and renewable energy segment via joint ventures with Indian
entities. 10-15% of the products manufactured in India are exported.
Huber India Private Limited is in the business
of chemicals and additives in India, and supplies to the oral care, paints and
coatings, beverage (fruit juices and jams) and paper industries. About 55% of
its products manufactured in India are exported to South East Asia, Middle
East, Egypt, Thailand, Vietnam and Turkey.
Systems Private Limited, in the automobile components segment, provides
original equipment quality parts and services to the Indian aftermarket10.
It supplies products to major original equipment manufacturers in India and
also exports to North America.
In the pharmaceutical
segment, India is serving as a manufacturing location
for over-the-counter (OTC) products for exports to other markets. In 2009,
US-based Mylan Pharmaceuticals Private Limited signed a deal with India’s
Biocon to develop, manufacture, supply and commercialise many high-value
generic biological compounds for global markets.
Many American firms
have set up their R&D centres in India. For example, Texas Instruments set
up its R&D facility in 1985. In 1998, Microsoft
set up Microsoft India Development Center (MSIDC) in Hyderabad, its second
software development centre outside the US, leading the way for other such
companies in the city. This has expanded to become one of Microsoft
Corporation’s largest R&D centres outside its headquarters in Redmond.
Of the 15,000 persons employed by GE in India, 4000-5000 persons are
in the R&D centre. They cater to the global R&D needs of the company and
are involved in developing cutting-edge products.
General Motors India has a technical centre
in Bangalore which is one of the few such centres around the world. It is
actively involved in research, design, analysis and development of vehicles and
power trains, both globally and for the Indian market.
In the pharmaceutical segment, US companies
are engaged in R&D and clinical trials. Perrigo India
initially focused on supporting global sourcing of active pharmaceutical
ingredients. Gradually, they entered into the areas of formulation R&D,
analytical R&D, quality assurance, external auditing and sourcing.11 US pharmaceutical companies have also made forays into the niche segment of
stem cell research. For instance, StemCyte India Therapeutics Private Limited
(SCITPL) is a joint venture between StemCyte Inc. (US), Apollo Hospital
Enterprises Limited and Cadila Pharmaceuticals Limited. US pharmaceutical
research organisations such as Quintiles India, Omnicare Inc. and Pharma-Olam
International are conducting clinical trials in India.
investment has been critical to the IT industry. It has provided tremendous
technological boost as American MNEs have brought in capital and technology. American companies in the auto-component
sector have manufacturing plants at various places such as Tamil Nadu, Gujarat,
Maharashtra and the NCR. These companies manufacture
components such as viscous fan drives,
fans and a few other thermal management products. Companies have their own assembly units and also
serve as original equipment manufacturers (OEMs) for other automobile
manufacturing companies. The companies have brought in latest technologies
promoting conditions such as optimum cooling of engines, lowering noise levels
and increasing fuel economy.
Operations of American banks have also
facilitated transmission of technology. They have helped in laying the
foundation for the Indian software industry. The 2-in-1 transit Credit Card was
first launched by Citibank in partnership with the Delhi Metro in 2008. It was
also the first brokerage house to launch Financial Information Exchange (FIX) protocol - the industry-driven international
messaging standard - adopted by National Stock Exchange of India.
Other direct effects
Both banking as well as non-banking entities
have generated liquidity in the money as well as stock/ capital markets. For
example, Citibank generates liquidity through its transient funds. It is the
first (pan-India) bank to start Small and Medium Enterprises (SME) banking,
which has helped such firms manage their business with ease.
American banks like Citibank and the BoA have
also spurred technological development and facilitated additional employment
through their bank-end operations (such as advisory services and asset management
In the pulp and paper industry, International
Paper (India) Private Limited, which manufactures paper and packaging products,
entered the Indian market in 2011. Some benefits of their investment have been
in the form of significant technology spillover from the US parent company in
terms of improving the strength and quality of paper.
In the banking sector, some offshoring units
have led to significant spillovers with respect to high-end skills. There has
also been continuous skill upgradation due to interactions with the parent
Some of the companies have made considerable
spillovers in the form of increased investment in R&D centres (such as
Monsanto India Limited) as well as cluster development and employment
generation in rural areas (such as American Tower Corporation).
FMCG companies have introduced product customisation
(in industries such as cosmetics, healthcare, food and beverages) to attract a
wider segment of Indian consumers. The products match global quality standards.
They have brought in corporate best practices.
practices of Deloitte introduced in India include streamlining career and HR
management, knowledge transmission (from the parent company) in the form of
in-person connects, leadership programmes etc.
Based on the above analysis, it can be
concluded that the impact of American investment in India has been significant
both in terms of the direct and the indirect impacts.
During the survey, the firms were also asked about
the problems they faced while investing in India. While firms in the IT sector
pointed out problems related to taxation and arbitrariness in procedures, there
were regulatory concerns in the financial and pharmaceutical sectors. Weak intellectual
property rights regime was also a concern in the latter. In the automotive
sector, there were infrastructure-related issues. Reforms suggested by
the companies include stricter implementation of anti-piracy laws for the
product segments, constancy of taxation laws, uniformity of accounting
standards and procedures in transfer pricing, and greater synergy between the
central and state governments. Removing these barriers could help in attracting
more FDI to the country.
- American FDI in India in terms of equity flows was US$11,842 million between April 2000 and January 2014, accounting for 6% of total inflows. Although Mauritius is the largest investor in terms of the value of FDI inflows, US surpasses other leading investors in terms of the number of FDI projects, and is engaged with India at various levels of economic cooperation.
- Data sources: Department of Industrial Policy and Promotion (DIPP), 2006-07 to 2013-14 and US Bureau of Economic Analysis 2006 to 2012.
- 40 American firms operating in India in 2013 were surveyed. The survey involved in-depth personal interviews based on a semi-structured questionnaire and consultation meetings with relevant stakeholders in each sector. The purpose of the survey was to gather specific details on the economic impact of the investment (both direct and spillover effects) such as employment statistics, R&D generation, best practices and skill enhancement, since such information is not available by country and by sector in secondary data. Firms were also asked about the problems they faced while investing in India.
- While the employment provided by MNEs is small in comparison with that of Indian firms, had such investment not occurred, this additional employment would have been zero.
- This is also known as captive service; it occurs when a company sends out its business to an owned subsidiary. The subsidiary is wholly owned, and may be stationed domestically or in another region or country.
- Banking business process outsourcing or banking BPO is a highly specialised sourcing strategy used by banks and lending institutions to support the business acquisition and account servicing activities associated with the customer lending life cycle.
- Offshoring involves a firm’s activities being geographically relocated from domestic country to lower-cost foreign country. This is different from outsourcing which occurs when a firm decide to buy products or services from external vendors (domestic or foreign) as opposed to making them in-house.
- Diversification of exports can take place through either vertical or horizontal diversification. Vertical export expansion refers to a country’s exports moving from primary exports to manufactured exports, while horizontal export diversification refers to expansion of exports into completely new products within the same sector, primary or manufactured.
- These are referred to as export units since they has been set up as 100% Export Oriented Units (EOU) for developing computer software for exports.
- The aftermarket is the secondary market of the automotive industry concerned with the manufacturing, remanufacturing, distribution, sales and installation of vehicle parts, equipment, and accessories, after the sale of automobiles by original equipment manufacturer (OEM) to the consumer.
- Sourcing here refers to the procurement strategy of the firm aimed at exploiting global efficiencies in production.
- Ray, S, S Miglani and
N Malik (2015), ‘Impact of American
Investment in India’,
ICRIER Working Paper 296.
- Ray, S, S Miglani and
N Malik (2014), Impact of American
Investment in India: A Socioeconomic Assessment, Academic Foundation and
ICRIER, New Delhi, ISBN: 9789332701458.