The 40th anniversary of Korea-India Amity: Evaluation and Prospects for Investment Cooperation

Choong Jae Cho and Yoon Jung Choi

Korea-India diplomatic relations is entering its 40th year in 2013, and while the two countries have engaged in economic cooperation throughout the period, there has been an upsurge in bilateral economic cooperation, including Korea investment into India. This study evaluates the investment performance of Korean firms in India as part of a review of the trends and characteristics of investment flows, in addition to conducting a factor analysis of investment determinants. The results of the study will provide policy recommendations for the Korean government and enterprises to deepen the partnership between Korea and India.

As of June 2013, the cumulative investment to India from Korea has reached 30 billion dollars according to statistics by the Export-Import Bank of Korea. India has thus become the 17th largest foreign investment destination for Korea: the amount of investment has increased significantly since the Investment Promotion and Protection Agreement between the two countries went into effect in 1996. In 2006, Korean investment to India surpassed 100 million dollars, and then soared to 450 million dollars only 5 years after that.

It should be noted that 206 Korean firms out of the 696 companies that have entered India are large corporations whose investments add up to 81 percent of total investment by Korean firms. Manufacturing appears to be the primary sector of Korean investment, accounting for 85 percent of the total investment. The concentration of investment in manufacturing is in fact a stylized pattern of Korea’s outward investment flows, as seen in the case of China (78%). However, only two sub-areas of manufacturing, namely vehicles & trailers (45.4%) and primary metal (24.9%), account for over 70% of total investments. Meanwhile, electronic components, computer, video, television and the communication equipment sector, accounting for 26% of total outward investments, does not reach even 3% in Korea’s investments to India. Investment in non-manufacturing sectors is also concentrated in a few sectors, in spite of gradual diversification since 2000. For instance, wholesale & retail trade accounted for more than 40% of non-manufacturing sector investment.

Most Korean companies in the Indian market (98%) appear to have local subsidiaries in India; yet 60 percent are wholly-owned subsidiaries. Regardless of the sectoral distinction, manufacturing or non-manufacturing, 'penetrating the local market' appears to be the most important motivation for investment.

The performance of Korean investments in India has been good compared to those in China, U.S or Vietnam. The net income of local subsidiaries has consistently ranked between the fourth and fifth since 2009, when the Export-Import Bank of Korea started publishing such statistics. In addition, net exports and trade balance improvement through subsidiaries was higher than other countries. The return on investment was four times larger than the average return on all outward investment of Korea.

Taking the above facts into account, the study analyzes the determinants of Korean investment in India through a regression analysis. The test results imply that there exists a positive relationship between the size of the Indian economy and the amount of Korean investment flows toward India. They also provide confirmation for past survey results, where the majority of Korean companies answered ‘potential gains from large market size’ as the reason for investing in India. On the contrary, the export amount and the income gap between the two countries have a negative relationship with investment inflows. Such a relationship between exports and investments suggests that the degree of inter-industry division between the two countries is still very low.

Meanwhile, the effect of Korea-specific factors such as the sheer presence of voluminous investments by large Korean conglomerates in India, specifically manufacturing-centered firms based in the country, proved rather uncertain. This implies that current investment patterns dominated by conglomerates and manufacturing should be changed, in order to improve investment performance.

With these findings, the paper presents an overall assessment of past investments and future policy recommendations to further expand bilateral investment between the two nations. Through pre-emptive investment in the 1990s, Korean enterprises in India became top market players in consumer durables, such as cars and appliances, thereby enhancing the overall image of Korea in India- its products, brands, companies, and even the country itself. Subsequently, these Korean enterprises largely benefited from their strong investment performance in India, reaping incomparable gains relative to other investment destinations.

In the 2000s, however, competition with other major investors in India has presented Korean companies with the urgent task of reinvigorating investment activity, to quickly close the broadening gap vis-à-vis other foreign competitors. Once ranked fifth among the top foreign investment sources in India, Korea plummeted to 13th place as of July 2013. For instance, Korea’s investment stock in India now stands at a mere tenth of that of Japan.

The weakening of Korean investment inflows to India calls for further involvement from industries and sector-specific private committees. The Government and investment-related agencies should support private entities in this regard. Government support should also be strengthened in areas other than manufacturing as in the case of Japan and Singapore. Location of investments should be diversified, away from existing investment hubs in Delhi and Chennai, and towards regional centers in the western and eastern regions. Likewise, financial support should be intensified. This is particularly important in order for Korea to take a more active role in burgeoning infrastructure development in the country. Furthermore, creation of more direct flights connecting major hubs of Korea and India must also come to pass.

Early realization of these goals requires a more efficient bilateral governmental consultative mechanism. In detail, summits, ministerial and private committee meetings need to be held on a regular basis and must be interconnected. In consideration of India's political and government structure, the government of Korea should gradually establish a cooperative system with state governments as well as the central government of India.