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Factors Influencing MNCs Investment Choice in India

The Asian economies have been the main focus of global investors for last few years because of their growth nature and the way they facilitate the establishments of new businesses. Within these economies, India, China, Thailand, Malaysia, Japan and many other countries are included – the essence of these countries is that they promote overall development in terms of more and more investments from domestic as well as foreign investors for the improvement in their gross domestic product and standard of living. All of these countries have their own core strengths to attract investors, for China it is their abundant & cheap labour resource, for India it is the quality of available talent that has created a mark in the global space in the software, services industries. India possesses one of the greatest potential – the Democratic government that formulates various policies to benefit the common people of the country. To improve the livelihood, provide better facilities for the citizens the GOI is always committed to invest more and more. Therefore all these factors have actually made India a place full of opportunities not only in the services sector but also in the manufacturing domain. As more private and government funded institutes are coming up with better facilities for learning and development in the both professional and personal fields, students are getting the feel of the corporate world and the criticalities involved therein.

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Indian economy has been the major centre of attraction for all of the developed nations. More and more MNCs are looking forward to build a long term comprehensive and sustainable relationship with Indian companies to enter the lucrative Indian market. FDI has been one of the major sources of investments in the sunrise industries as well as core industries that need a revamp in terms of innovative practices and management policies. The proportion of FDI and economic growth are positively correlated and combination of both is actually driving the overall GDP of the country. India is poised to be one of the biggest economies, thus it needs more and more collaboration with global organizations that would lead towards more employment that can actually move up the consumption pattern of the citizens to sustain growth trajectory even in time of economic recession. Whether India possesses any geographical locational advantages or not, or whether MNCs believe that owning the establishments in any foreign location would help them grab the market more quickly – these are few issues which would be analyzed in detail.

This thesis report outlines the factors pertaining to India, those attract foreign companies to invest in India through direct and indirect path and how it has been the core strength of the country to grow depending on the investments made by both domestic as well International business houses. Finding out those elements whose impact has been significant in the Indian growth story would be of utmost importance from the purview of this study. Concepts from various models have been undertaken to understand the underlying theory and analyze from the point of view of an investor as well as the foreign location of investment.


The coverage of the study includes finding out the opportunities and potential hindrances for investment in various sectors in India. Now a days India is being compared with China, Russia in terms of their economic growth and also market strength to sustain any kind of global economic disaster and also to keep moving the wheel of growth. We would analyze the critical scenarios of already present in the economy based on few models and understand the potential of future investments and try to match whether there are any opportunities for even smaller Indian players to become a part of the growth story. We would keep a track of the sectors which are very small now but showing a good promise for investors and how the GOI should take care of the rules and regulations so as to make the entry path very easy. Exports have been India’s major strength and its actually shortening the gap between import and export. That is a very good sign of improvement of overall market sentiments.


To find out the factors which drive various sectors of the Indian economy and analyze the outcomes of investments already made. The project would specifically concentrate on the potential of the country in attracting investors from different geographies. We would use the Dunning’s OLI model, Uppsala model, Transaction cost theory etc and many more to find out what drives the foreign MNCs to look for Indian markets. Which are the major domestic player as well as International players those are operating in India presently and which are the pockets or zones that are giving them a major boost in their business growth?

Also we would understand the market operating challenges faced by them and what are the measures that they implement to overcome those.


We would go through the movements of export goods and how the final products or services have changed its form considering the two different eras – pre and post economic liberalization. We would design a questionnaire and administer it among a particular target group to find out their psychology or their opinion about the suitable direction for the investment portfolio of various organizations and according to them where the growth potential lies and where the country is lacking as compared to other economies. We would implement the concept from different models and find out what are the elements which are the main catalyst behind India’s growth saga.



The research would incorporate these questions during the research and try to analyze from various point of views.

Q1. What are the ownership advantages that a MNC can possess?

Q2. Whether is it better to own or outsource the operations for a particular foreign location?

Q3. What elements form the locational advantages for a foreign country for any investor?

Q4. Does Internalization really give an edge over other methods of investments?

Q5. Is Internalization a step by step process or it can be achieved directly?

Q6. What is the implication of culture/geographical proximity for the case of foreign investments?

So these are the broad areas which would be discussed in this thesis report to understand the driving factors for foreign investments.


The kind of growth potential the Indian market is promising is full of hopes even for the younger generation because it would provide job opportunities in a huge volume. There has been birth of a bread of young entrepreneurs who want to make their mark by doing something for their own as well as benefit the overall economy. So the transaction cost theory would be used to analyze the initial set up costs, various commission based charges that any business need to incur. The basic hypothesis would be build upon the fact to find out the several factors those influence foreign investors to choose India as one of their major investment destination.

Transaction Cost Theory shows us that any MNC would like to optimize its transaction cost of initiating any business process in any new geography. Uppsala model shows the direction towards an efficient process followed by MNCs while making the investment decision in a foreign location.

H1. Do OLI advantages make a country favourable for investments?

H2. Step by step internalization process makes MNCs more efficient as compared to the direct internalization process

H3. Transaction costs are basically sunk costs for a MNC

H4. Gaining experience of domestic markets facilitates the decision making process for investment in foreign location

H5.Geographical and Cultural factors significantly impact the investment decision


India’s major advantages are its availability of good quality talents hugely required for the software and services industry, cheap labour wages facilitating operational issues at a very lower cost as compared to other developing nations. Its strategic location and the kind of international border it shares with its neighbouring nations give it an edge over other Asian economies in terms of accessibility of raw materials and markets to export produced goods. The GOI has taken several measures to make investments in India simpler by means of promoting SEZs, STPs with lower tax regime. The kind of growth potential it promises is immense in terms of volume of business as well as value. Being the largest democracy in the world, the laws would actually become more and more citizen friendly and thus leading towards sustainable business environment. Transaction cost theory states that when the internal transaction costs are higher than external costs then the company would outsource some of its jobs to other agencies and downsize. And when the reverse is true the organization would grow. Both the situations are understandable from the figure given below.

(SOURCE: http://en.wikipedia.org/wiki/Transaction_costs)

The literature review would focus on the following points –

OLI ADVANTAGES – The ownership, locational and Internationalization are the major factors that drive the investment decision for any MNC. India in a way possesses one of the most important resources – the pool of available talent. Geographically also India has an advantage over Russia and many other countries – the climatic conditions are also is suitable for any kind of businesses. Many foreign MNCs are entering the Indian market by means of joint venture and many are initiating in the SEZs to get tax benefits.

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TRANSACTION COSTS: HOW TO GET THE MAXIMUM OUT OF IT – Transaction costs are generally the cost of participating in a market; this may vary from market to market as well as category to category of products or services. The bargaining cost is the most important one because it decides the capabilities of the investors, like how well can they manage their channel partners?

UPPSALA MODEL – This model determines the step by step procedures those are followed by MNCs in order to get the feel of the market. Any organization would not mind to have few orders from foreign clients to find out their own prospect in that market and if they feel that they have the required potential, it may lead to full fledged investments in terms of machinery, labors etc.


H1. PRIMARY – The primary data would be collected by means of administering the research questionnaire among a specific target group.

The target group may be – People from various background working in several industries with market knowledge for more than 3 years

H2. SECONDARY – The sources of secondary information would mainly be journals, magazines.


The data output from the questionnaire would be analyzed using statistical tools and applying the present market conditions. We would find out the factors those drive the export growth and what the GI needs to perform to attract more investment both from domestic as well as International players.


The upshot of the study would provide us with an understanding about the factors those drive the investment decision for any MNC considering the Indian market. Various models would help us to analyze the pros and cons of the market conditions and find out the flexibility, accessibility of the market. More and more foreign MNCs are trying to grab the growing Indian market, because within the next 15-20 years India is poised to become one of the global super powers. And that means it would need overall support from various spheres of the geography – manufacturing, agriculture, services etc. So it is better for the MNCs to start finding out their core competencies specifically for India and look for suitable options for investments. So from investment choice point of view this report would give us insights that might help any MNC planning to enter the Indian market


This report would entail few models that can define the potential of the market; it would clearly distinguish between various factors which influence the investment decision. So it would not be possible to consider the strength and weaknesses of every company to find out their core competencies before investing; it would not encompass the criticalities involved for all the industries in India. But overall it would generate sufficient idea that would guide any investor while choosing the lucrative Indian market.


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