Indian Direct Investment in Europe: A Study of Patterns Motives and the Applicability of Existing Theoretical Frameworks

Abstract

Emerging market multinational enterprises (EMNEs) are becoming ever more important to the global economy with developed regions such as Europe being one of the top recipients of emerging markets’ foreign direct investment (FDI). This development has generated a heated discussion within the International Business (IB) literature. Scholars disagree over whether conventional theoretical frameworks are sufficient to explain FDI from EMNEs in developed regions. This thesis utilizes data on 1,123 Indian-owned companies located in Europe to assess the FDI motives of Indian MNEs and the applicability of existing theoretical frameworks to the phenomenon of Indian direct investment in Europe. In this context, a fully integrated mixed method research study is conducted, using a descriptive analysis, a regression analysis, and a case study. First, two distinct FDI groups, differing in specific characteristics, are identified. The first FDI group consists of small subsidiaries fulfilling a service function which are wholly owned by a very large owner with a risk-averse market selection. The second FDI group comprises larger subsidiaries, which execute manufacturing or R&D for a smaller, partial owner with an aggressive, and thus less risk-averse, market selection. Moreover, Indian investors are shown to prefer countries with large market size, a good trade relationship with India, low R&D expenditures, high educational attainment, and a stable institutional environment. In contrast, the size of the Indian population within a host country, as a proxy for psychic distance to India, appears to have no significant influence on Indian direct investment in Europe. In addition, three motives underlying Indian direct investment in Europe are discovered, with market-seeking as the predominant motivation and strategic asset-seeking as well as seeking for stable institutions being subordinate drivers. Furthermore, a considerable number of Indian companies investing in Europe are shown not to possess firm-specific advantages (FSAs) over their foreign competitors prior to internationalization and Indian companies directly invest in psychically distant countries using high-commitment entry modes in order to gain advantages. Finally, it is found that most established theoretical frameworks for FDI cannot fully explain the presented data on Indian FDI in Europe. Only the springboard perspective of Luo and Tung (2007, 2018) can be confirmed, while Dunning and Lundan’s (2008) extended OLI paradigm and Mathews’ Linkage-Leverage-Learning (LLL) framework (2006) require further research to be fully assessed