India in the United States: Economic Engagement in the 21st Century
An Interview with Vinod K. Jain
By Sonia Luthra
April 23, 2014
The last decade has seen growing momentum in U.S.-India engagement in several areas. This includes bilateral economic relations, where the impact of Indian firms’ investments and operations in the United States has been increasing. According to a 2013 survey conducted by the Confederation of Indian Industry, Indian firms have cumulatively invested $17 billion in the United States—across sectors such as IT, manufacturing, and pharmaceuticals—and created employment for over 81,000 people. With hundreds of Indian companies now operating in the United States, their overall economic impact is substantially greater. To learn more, NBR spoke with Vinod Jain, President and CEO of the India-U.S. World Affairs Institute, about the nature of India’s economic engagement with the United States, the contributions of Indian Americans and the Indian diaspora, and prospects for economic engagement to continue its upward trajectory.
How has Indian investment in the United States changed over the past decade?
Indian companies’ foreign direct investment (FDI) in the United States has fluctuated over the last decade, partly as a result of the global financial crisis of 2008-10, though it has generally followed an upward trajectory. While India provides only a small portion of the total direct investment in the United States, it is one of the ten fastest-growing sources of inward FDI. According to the Reserve Bank of India, which approves foreign investments by Indian companies, the United States is among their top five FDI destinations.
Firms typically make investments through greenfield projects or through mergers and acquisitions (M&A). Making a greenfield investment involves constructing new operational facilities from the ground up and creating new jobs, whereas investment via M&A is when a firm takes a controlling stake in an existing enterprise, which can involve saving jobs or even creating new ones.
Indian firms made an average of $800 million in greenfield investments in United States each year during the last decade, with peak dollar investments occurring in 2008 and 2011. These investments created about 38,500 jobs in United States. The number of greenfield projects ranged from a low of 10 in 2005 to a high of 48 in 2013.
The number of M&As by Indian firms in the United States rose from 17 in 2004 to 31 in 2005 and 63 in 2007, just before the global financial crisis hit. Indian firms made 34 M&A deals in the United States in 2010, 26 in 2011, 18 in 2012, and only 14 in 2013—reflecting a general slowdown in the India economy and the falling value of the rupee.
Historically, many investments by Indian firms in the United States have been through M&As rather than through the greenfield route. Why is that the case?
For emerging-market firms with global aspirations, the greenfield route is much too long, too costly, and too risky. Greenfield investments typically take years to mature and begin delivering returns to investors. In an era of accelerating globalization and breathtaking technological change, many firms simply do not have the luxury of time to build their businesses and brands in foreign markets. Therefore, multinational enterprises from India, often flush with cash earned from a huge domestic market, tend to prefer the M&A route—acquiring talent, technologies, brands, and markets outright. Due to growing expectations, Indian multinationals are likely to continue and even increase their acquisition activity in foreign markets over the coming years.
What are some of the most common challenges that Indian companies face when looking to invest and operate in the United States?
The typical challenges Indian companies face are lack of market familiarity, inadequate financial resources (now exacerbated by the precipitous fall in the value of the rupee over the last two years), and the higher cost of doing business, among others.
There is the cliche: when in Rome, do as Romans do. At the start of their journey toward internationalization, Indian firms typically lack the competitive advantages of their Western competitors, such as proprietary technology, powerful brands, and marketing and managerial expertise. Many Indian firms have been able to quickly learn the craft of doing business in the United States and develop some of the competitive advantages of their Western counterparts through M&As, capability building, innovation, and sheer perseverance. Indian firms, and Indians generally, are reasonably well-informed about the United States. However, doing business in a country requires much greater in-depth understanding of the business environment and rules of the game, which can only be acquired through immersive experience in a foreign country or by hiring individuals who have such understanding.
Some of the best assistance Indian companies investing in the United States can receive is from U.S. economic development organizations at the national, state, county, and local levels. Almost every jurisdiction encourages inward FDI and will go out of its way to make investment happen. This is a little-known secret among foreign small and medium-sized enterprises (SME). They can also seek assistance from the U.S. Commercial Service, housed at U.S. embassies and consulates worldwide (and a number of domestic locations), as well as from the overseas offices that many states maintain, which provide valuable information and advice on investing in the United States. The U.S. Commerce Department’s SelectUSA initiative is another great resource available to foreign enterprises. SelectUSA works one-on-one with businesses to identify and utilize available federal programs and services, connect them to partners and resources at the state and local levels, and offer helpful tools and information.
In the past, most Indian investments in the United States came from large companies. What opportunities are there for Indian SMEs?
The United States is welcoming to FDI from both large and small enterprises. While many major multinationals from India have achieved great success in the United States, SMEs have generally achieved much less. SMEs from India face many of the same obstacles abroad that larger firms do. The biggest obstacles facing SMEs planning an internationalization journey are lack of familiarity with foreign markets and inadequate in-house resources, particularly financial and managerial. Familiarizing themselves with the U.S. market is the easy part, especially with assistance available from SelectUSA and many other sources. Building resources and capabilities takes much longer, however, especially for firms new to internationalization.
Given these challenges, such firms should attempt to enter market segments where they can leverage their home-based advantages, such as frugal engineering; i.e., they should seek out market segments that do not require upscale, feature-rich products and services. They should seek niche markets that may be underserved or neglected by large incumbents and use an arbitrage strategy—making high value-added products in the United States and low value-added products at home. Indian SMEs can be low-cost partners for major U.S. firms in areas such as IT support, bespoke software development, and R&D. They can also attempt to enter mature mid-tech industries that may be in decline in the United States but are on an upward trajectory in India, and for which a late-mover from India may have an advantage over U.S. first-movers.
In what U.S. sectors have Indian companies been investing?
According to the Bureau of Economic Analysis, manufacturing accounted for 45% of all foreign firms’ investments in the United States (not just India’s) during 2010-12, wholesale trade accounted for 11.1%, mining 10.7%, nonbank holding companies 10.6%, finance and insurance (other than banking) 7.8%, and banking 6.4%. As the following examples show, the picture for FDI from India is quite different.
In terms of greenfield investments during the last decade (2004-13), Indian firms’ investments by value were the highest in metals (28.8% of all greenfield investments), followed by software and IT services (24.5%), plastics (7.9%), communications (5.7%), and business services (4.8%). However, in terms of number of greenfield investments, software and IT services accounted for 32% of all greenfield projects by Indian firms, followed by business services (16%), financial services (8%), plastics (6%), and metals (5%).
The 2013 CII survey found that the 68 Indian companies had collectively invested over $17 billion in the United States and had established a presence in 40 states across the country. Approximately 30% of the surveyed companies were in the IT and business process outsourcing sectors; 11% in healthcare, pharmaceuticals, and life sciences; 18% in manufacturing; 7% in financial services; and 5% in travel and hospitality.
Much of India’s impact on the U.S. economy and society has arguably come through the contributions of Indian students and entrepreneurs as well as the Indian-American diaspora community. Could you speak to this?
Indian Americans, totaling about 3.2 million people, constitute less than 1% of the U.S. population. Compared with all other ethnic groups, they are the most educated and have the highest income. About 71% of Indian Americans have a bachelor’s degree or higher, almost three times the national average of 27%. Approximately 66% of Indian Americans are in management, business, science, and arts occupations, compared with 34% for the overall U.S. population. It is no surprise, therefore, that they make a significantly higher contribution to the U.S. economy and society than their numbers might suggest.
A 2007 study by Duke University and the University of California-Berkeley found that Indian Americans had established more engineering and technology companies in the United States during 1995-2005 than the immigrants from Britain, China, Japan, and Taiwan combined. This does not include just high-tech businesses. For example, according to a study sponsored by the Asian American Hotel Owners Association (AAHOA) in 2010, Indian Americans own 40% of all hotels in the United States and 39% of all guest rooms. They employ 578,600 workers, generating huge ripple effects in their communities through operating expenses and capital investments. AAHOA members, 95% of whom are Indian Americans, spend $31 billion annually in operating expenses, such as employee wages and benefits ($11.9 billion), utilities ($2.3 billion), property taxes ($2 billion), food and beverage ($1.3 billion), and supplies ($1.2 billion).
The American Association of Physicians of Indian Origin (AAPI) is the largest ethnic medical organization in the United States and represents the interests of over 50,000 physicians and about 15,000 medical students. These members contribute to the communities in which they practice, to health care, and to the medical profession—with many practicing in inner cities, rural areas, and peripheral communities—and as well as to top medical schools and research centers. It may be noted that Representative Ami Bera of California, the only Indian American in Congress, is a physician by training.
With the implementation of the Affordable Care Act, health insurance coverage is likely to expand to an additional 34 million people in the United States. According to projections of the Association of American Medical Colleges, the United States will need an additional 90,000 physicians by 2020 and 130,000 by 2025. Organizations like AAPI will play a role. The nation also needs complementary actions by Congress to make sure that the existing and new population covered by healthcare insurance is adequately served by the medical profession.
Indian students who come to the United States for higher education not only bring talent but also contribute to the U.S. economy in many ways. According to the Open Doors 2013 report by the Institute of International Education, of the 819,644 international students in the United States in 2012-13, the second-largest contingent, or about 12% (96,754), was from India. Indian students also constitute the largest numbers studying in STEM fields—35.6% in engineering, 23.1% in computer science and math, and another 11.2% in physical and life sciences. They contributed $3.27 billion to the U.S. economy in 2012-13 through living expenses for themselves and accompanying family members, as well as through tuition, books, fees, and other education-related expenses (excluding support received from U.S. sources).
A 2013 study by the National Foundation for American Policy highlights a little-known fact about international students in the United States. International students account for 70% of the full-time graduate students (in both master’s and PhD programs) in electrical engineering, 63% in computer science, 60% in industrial engineering, and more than 50% in economics, chemical engineering, materials engineering, and mechanical engineering. A large number of these students are from India. Furthermore, international students make up over 50% of graduate students at 87% of U.S. universities with graduate programs in electrical engineering and at 76% of universities with graduate programs in computer science. International students thus represent a vital source of talented professionals, researchers, and innovators. Without them, most U.S. universities offering graduate programs in STEM fields would not be able to sustain half to two-thirds of their faculty and research facilities in fields critical to the United States’ global competitiveness. This is another obvious and urgent action point for Congress.
To address these needs, Congress should adjust policies related to visas for international students and other highly qualified professionals as part of addressing immigration reform, improve financial assistance for foreign students to alleviate the rising cost of higher education, and extend optional practical training for graduates. Immigration reform needs to include changes to the H-1B visa program. While Indian citizens hold the highest number of these visas for highly skilled workers, it is not as well known that big Indian companies operating in the United States and contributing to the U.S. economy are also large recipients. Positive reform would only further strengthen the United States’ competitiveness and economic outlook.
Any concluding thoughts on the future prospects of India’s FDI in the United States?
Indian investments in the United States over the past decade are a result of the welcoming business environment Indian firms find here, as well as their ability to take advantage of costs and human capital, their business acumen from established entrepreneurial traditions, their lengthy exposure to Western and Japanese multinationals and management practices, and their continuing success in a huge domestic market filled with cutthroat competition. India’s government has also progressively relaxed regulations for foreign investment. Barring a global calamity, these conditions are likely to persist. Therefore, we should expect the growth trajectory of India’s FDI into the United States to continue for at least the coming decade.
Sonia Luthra is Assistant Director for Outreach at NBR.