For decades, the key assumption behind globalization was that capital would flow to where production was most efficient, technology would diffuse across borders, and economic integration would produce mutual gains. However, this assumption is now being challenged.

Governments around the world are evaluating foreign investment through a broader lens which includes, among other things, economic security, technological competitiveness, industrial resilience, critical infrastructure, data governance and supply-chain dependencies. Today, capital is being assessed in conjunction with concerns related to technology, innovation and strategic capability. India occupies an important position with respect to such global reassessment.

As one of the world’s fastest-growing major economies, India requires substantial amounts of foreign capital to support infrastructure expansion, energy transition objectives, digital transformation and the development of advanced technologies. At the same time, India continues to present itself as a strategic alternative in terms of being a viable manufacturing hub within evolving global supply chains.

This dual reality has placed India in a complex position: it must remain open to capital and trade while simultaneously strengthening domestic capabilities and reducing vulnerabilities arising from excessive dependence on any single external ecosystem. The result is a policy environment that is neither fully protectionist nor fully liberalized, but focused on strategic selectivity.

Foreign Investment and Industrial Strategy

Recent years have witnessed a fundamental shift in the way countries think about cross-border investment. The United States has expanded outbound and inbound investment screening in sensitive technologies. The European Union has strengthened foreign investment review mechanisms across member states. Japan, South Korea, Australia, Canada and the United Kingdom have broadened their ability to scrutinize investments involving critical technologies, infrastructure and national security interests. Such measures tend to focus on access as much as ownership.

Today, governments seek to address new questions such as:

1. Who gains access to advanced technologies?
2. Where does research and development (“R&D”) ultimately occur?
3. How is data and intellectual property (“IP”) being governed?
4. Which countries capture the long-term benefits of innovation?
5. How resilient are critical supply chains during geopolitical disruption?

For India, such questions have become particularly significant in relation to China, whose role in the global economy has changed considerably over the past two decades. Other than being the world’s manufacturing hub, China is a major source of capital, technology, industrial capacity and outbound investment. Chinese companies occupy leading positions across sectors ranging from batteries and electric vehicles (“EVs”) to solar energy, advanced manufacturing equipment, telecommunications infrastructure, e-commerce, fintech and artificial intelligence (“AI”). Accordingly, economic engagement with China involves strategic considerations that extend beyond regular trade and investment metrics.

Beyond FDI Metrics

Foreign investment structures routinely involve multiple layers of intermediate holding companies, special purpose vehicles, regional headquarters, private equity structures, sovereign investment vehicles and offshore financial centers. As a result, the jurisdiction from which investment enters a country may not easily reveal the ultimate source of control or strategic direction. Growing policy focus on beneficial ownership and look-through investment structures reflects a broader recognition that FDI statistics and legal ownership chains often fail to provide a complete picture of economic or political influence.

The Objectives of Foreign Capital

All foreign capital may not seek the same outcomes. While general investment analysis tends to assume that investors are primarily motivated by financial returns, investment decisions may also reflect industrial policy objectives, supply-chain resilience considerations, technological upgrading strategies, market access goals, geopolitical priorities or long-term strategic positioning.

Traditionally peripheral considerations – such as relationships with state institutions and industrial policy alignment – have emerged as material issues, and understanding an investor’s strategic incentives has become increasingly important.

India’s Evolving Approach to China

India’s approach to China has witnessed major change since 2020. Following increased geopolitical concerns related to national security, India introduced a more restrictive investment framework through Press Note 3, requiring government approval for investments originating from countries sharing a land border with India. The policy reflected broader tension regarding opportunistic acquisitions, strategic dependencies and the protection of sensitive sectors.

The immediate impact was substantial. A large number of transactions involving Chinese investors faced delays and greater scrutiny, or were effectively paused. Venture capital investments slowed significantly. Existing investors encountered challenges in participating in follow-on funding rounds. Cross-border acquisitions became more complex, and investment activity declined sharply relative to previous periods.

However, the policy environment has continued to evolve. Recent developments suggest a growing recognition that economic decoupling from China is neither practical nor necessarily desirable across all sectors. Policymakers appear to be distinguishing between strategic dependence, on the one hand, and economic engagement, on the other.

It appears that India’s manufacturing ambitions will be difficult to be achieve without significant interaction with Chinese supply chains at present – whether in electronics, renewable energy, EVs, pharmaceuticals, chemicals, industrial machinery or consumer products. In several such sectors, China remains the dominant global supplier of intermediate goods, industrial equipment, components, raw materials and manufacturing know-how. The practical challenge has moved beyond the question of whether India should engage with China to how India should engage with China while preserving strategic autonomy and fostering domestic capability development.

The Limits of Decoupling

Much of the global discussion since the pandemic has focused on concepts such as decoupling, friend-shoring, reshoring, near-shoring and China-plus-one. However, for many businesses operating in India, complete decoupling remains a challenge. Even when manufacturing activity shifts out of China, upstream dependencies frequently persist.

For instance, an electronics manufacturer may assemble products in India while sourcing critical components from China. An EV manufacturer may localize final production while continuing to rely on Chinese battery materials, equipment and supply chains. A pharmaceutical company may reduce direct imports but remain dependent on Chinese intermediates or active pharmaceutical ingredients.

As a result, many multinational companies (“MNCs”) are not able to pursue a complete decoupling strategy. Instead, MNCs are seeking to diversify. This distinction is important: diversification seeks resilience without severing economic ties, with the aim of reducing concentration risk while preserving access to efficient production ecosystems. For companies operating in India, this dynamic is likely to remain the dominant model for the foreseeable future.

Technology as a Critical Variable

A significant trend in contemporary cross-border investment is the growing importance of intangible assets. While foreign investment has typically focused on physical assets such as factories, equipment, real estate and infrastructure in the past, competitive advantage in the present era derives from elements such as the following:

1. Software and algorithms;
2. AI systems;
3. Proprietary manufacturing processes;
4. Engineering expertise;
5. Industrial design capabilities;
6. Data assets;
7. R&D pipelines;
8. Trade secrets;
9. Organizational know-how.

Such assets are often more valuable than, or as valuable as, the physical businesses through which they are deployed. As a result, ownership structures, joint ventures (“JVs”), supply arrangements, technology partnerships and investment relationships are now being evaluated as mechanisms through which knowledge and capabilities can move across borders. This reality creates new considerations for boards, management teams, investors and policymakers.

For Indian companies, particularly those operating in knowledge-intensive sectors, there are both opportunities and risks. On the one hand, foreign capital can accelerate growth, commercialization and global expansion. On the other hand, companies need to recognize that valuable competitive advantages may reside in organizational capabilities that are difficult to patent but relatively easy to diffuse through long-term commercial relationships.

The Role of Technology: From Spillovers to Competition

Foreign investment has historically been viewed through the lens of technology spillovers. The expectation is that companies from advanced economies will bring superior technology and management practices, which may diffuse into the host country through labor mobility, supplier relationships, demonstration effects and competitive pressures.

While this logic still remains valid, the emerging reality is more complex. As countries such as India move up the technological value chain, knowledge flows are increasingly becoming multidirectional. Since innovation is no longer concentrated in a handful of advanced economies, valuable intellectual capital is being created across jurisdictions, including in India. Accordingly, even while India seeks to attract foreign capital and integrate into global supply chains, its future competitiveness may depend on ensuring that technological capabilities created within the country continue to generate value within its broader economic ecosystem.

Implications for M&A and Strategic Transactions

This changing environment has important implications for transaction planning and execution. While M&A diligence remains essential – where financial performance, regulatory compliance, material contracts, litigation exposure, tax liabilities and corporate governance continue to be critical considerations – intangible asset diligence has become equally important.

Some of the most valuable assets in the global economy today are intangible. These include proprietary engineering capabilities, industrial processes, software architectures, AI training methodologies, semiconductor design expertise, battery chemistry know-how, advanced materials research and specialized scientific talent.

In this regard, companies are now addressing questions such as:

1. Where does critical know-how reside within the organization?
2. Who (i.e., which employees) holds key institutional / organizational knowledge?
3. How are proprietary technologies being protected?
4. Are trade secrets adequately documented?
5. How is data stored, processed and accessed?
6. Which counterparties participate in product development?

In many sectors, the most valuable assets may be both registered IP rights and capabilities embedded within organizations. Certain such capabilities can be more difficult to identify, value and/or protect compared to traditional forms of IP. Accordingly, transaction structures are being evaluated through the prism of technology governance, over and above financial and regulatory perspectives.

Supply Chains as Strategic Relationships

The long-established view of supply chains as logistical arrangements has become outdated. Modern supply chains frequently function as ecosystems for knowledge sharing, process optimization, technology transfer and innovation collaboration. For example, suppliers may gain visibility into manufacturing processes, product specifications, technical requirements, quality standards and future development plans. Contract manufacturers may acquire significant operational expertise. Equipment suppliers may gain insights into production methods. Technology partners may become deeply integrated into core business functions.

While such relationships are unavoidable, companies are recognizing that supply-chain relationships require the same strategic attention that is traditionally reserved for M&A transactions and JVs. Corporate boards should understand which relationships are (i) operationally important, (ii) strategically necessary and (iii) creating long-term dependencies, respectively.

Tracking Trends

For international investors operating in India, several trends deserve attention:

First, India’s policy framework is unlikely to involve either unrestricted liberalization or comprehensive restriction. Instead, policymakers appear to be focused on sector-specific risk assessments and differentiated treatment across industries.

Second, manufacturing investments will likely continue to be encouraged, particularly where they contribute to domestic capability creation, employment generation, technology development and export competitiveness.

Third, investors can expect heightened attention to technology governance, data management, cybersecurity, supply-chain resilience and critical infrastructure exposure.

Fourth, the commercial impact of geopolitical considerations continues to expand. Transaction planning cannot ignore geopolitical risk assessment.

Looking Ahead

The emerging model of the India-China relationship appears to involve selective engagement: i.e., maintaining economic connectivity where commercially beneficial, while strengthening domestic capabilities and reducing strategic vulnerabilities.

India’s growing role in global manufacturing and technology ecosystems will create significant investment opportunities. At the same time, the intersection of capital, technology, supply chains and geopolitics requires continuous risk assessment. In a global economy driven by technology and intangible assets, questions of ownership, access, capability development and strategic dependence have become key business considerations. Boards, investors and management teams that understand this shift, and adapt their investment, M&A and supply-chain strategies accordingly, will be best positioned to navigate the next phase of India’s economic integration with the world.

This insight has been authored by Rajat Sethi and Dr. Deborshi Barat from S&R Associates. They can be reached at [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.