India Considers Raising the Limit on Foreign Direct Investment for DefenseJuly 17, 2009

 

The Indian government is considering increasing the limit of foreign direct investment (FDI) for its defense industry to 49% from 26%, according to an article in Defense News.

The increase was recommended in the Economic Survey 2008-2009, an annual evaluation of the Indian Government's financial stewardship presented by the finance minister to the parliament.

The survey also recommended that the allowed foreign equity in defense production be increased to 100% for high-technology defense equipment, Defense News reported.

India opened its defense sector in 2001, and while there are some joint ventures between foreign and Indian defense companies, the 26% FDI limit has not encouraged major production centers.

Raising the FDI limit in the defense industry to 49% would definitely spark interest among foreign companies in more investment and strategic alliances, says Wharton management professor Lawrence G. Hrebiniak, but that is unlikely to be enough to guarantee increased investment. Other factors will come into play as companies weigh the risks and benefits likely to flow if the FDI limit is raised for the industry.

Some key questions to consider include the following, Hrebiniak says:

Who are the existing players and what strategic or short-term steps will they take, if any, to create entry difficulties and discourage additional investment in their market?

What industry forces are at work – for example, existing relationships with customers and suppliers, the level of competition for existing products and services, opportunities for new product development, market projections, the level of technological capabilities, and the like.

How will these forces impact the ability of a new entrant to gain traction and generate profit?

The relative attractiveness of investment in other markets and products will also affect decisions about increased participation in India, Hrebiniak says.

"Changing the limit of allowable FDI would be a positive step," he adds. "But strategic analysis of other industry and competitive forces is necessary before additional funds would be dedicated by foreign companies for investment in India."