Title: Upgrading through direct investment

Aim: How do successful outsourcing-companies upgrade through Foreign Direct Investments (FDI) in OECD and other developing countries?

Countries: India

Project brief: The study concerns the question of the relationship between Third World Multinationals (TWMs) and outsourcing. Growing outward investment from developing countries may be driven partly by companies that are based on successful outsourcing collaborations that have achieved a certain size and capability that enables them to become investors themselves. In order to upgrade, they undertake investment in OECD countries in order to access customers and access assets possessed by OECD-based companies. TWMs may also undertake direct investment in even less advanced developing countries to offset the growing pressure from low cost locations. The question to be examined in this project is: what are the dynamics behind such FDI-based upgrading strategies and how sustainable are they? The key hypothesis is that successful outsourcing companies engage in FDI in order to stay competitive and upgrade, partly by investing in low cost locations, partly by making assets seeking investments in OECD countries.

Theoretically, the study will draw on the literature on Third World Multinationals (Wells, Beausang, Lall, Dunning). Also the Investment Development Path (IDP) theory (Narula, Dunning) may be relevant to understand outward investment sequences in developing countries. Also institutional strategy theory (Peng) may help us understand the particular characteristics of outward investment from developing countries. Nevertheless, the general impression is that the literature on outward investment of TWMs is dated in the sense that investors from developing countries are seen as less advanced companies investing backward in the IDP. We will thus develop a theoretical framework that can help us understand the development of advanced skills and advantages through inter-firm linkages that propel developing country companies into FDI forward in the IDP as a logical progression in their development.

Methodologically, the project will undertake case studies of Indian foreign investors, possibly within the IT industry, possibly investors that at some stage have worked with Danish companies.

Participants: Michael W. Hansen, CBS.

Time for field trips: Autumn 2007