Address by Mr. P. Chidambaram, Finance Minister at the Wharton School, University of Pennsylvania on "INDIA BUSINESS FROM LOCAL TO GLOBAL"
September 26, 2007
There is a nice feeling when one is at a University. More so, when one is at this University’s best known school, the Wharton School. I am grateful to the Dean, the faculty and the students for inviting me to deliver a talk as part of the Wharton Leadership Lectures.
I noticed that in recent years you had invited the CEOs of some of the best known companies in the United States – Xerox and Starbucks, Microsoft and PepsiCo, and Tyco and McKinsey. What do these companies have in common that have made them successful as well as household names? Each one of them is the child of an innovative idea and a leader in its business. There are many Indian business leaders who would qualify on the grounds of innovation and leadership to take a place in this series. I am here to speak on their behalf but I hope that, in due course, you will invite one of the true business leaders of India to deliver a lecture.
The India story is now too well known to you. What is not known is the fact that innovation and leadership in Indian business go back over a hundred years. India’s most famous business house, the Tatas, started their steel mill exactly one hundred years ago. Even before that, Indian business leaders had ventured into cotton textiles, jute and banking.
All the factors of production – land, capital, labour and organization – were present in India. Yet India missed the industrial revolution. The few who dared to cross over from trading to manufacturing were perforce constrained to remain local – producing locally for the local market.
Why local? Before independence in 1947, the levers of the economy were in the hands of the British and they did not allow any Indian entrepreneur to grow except under the shadow of a British company. After 1947, the Indian preference for Fabian socialism expressed itself in the form of myriad controls. The first controls on foreign exchange were imposed in 1947. In 1955, export and import trade was severely restricted. Practically, nothing could go out and nothing could come in, unless one was willing to violate the law. There was an extensive licensing regime in the manufacturing sector that restricted capacity, production, product mix, marketing and prices. The regime also deprived Indian business of capital and technology – but it gave the “entrepreneur” a captive market and protected his business against competition. In such an atmosphere, it was not surprising that most businesses preferred to remain local.
Nevertheless, under the surface, there was latent creative, innovative and entrepreneurial energy. Dani Rodrik and Arvind Subramanian have, in an IMF Working Paper, observed that the growth in the Indian economy (witnessed in recent years) has been in some measure an outcome of important cumulative elements that were being built up even before the reforms got underway.
What changed everything for Indian business was the shock of liberalization. In 1991, in the space of six weeks, exports and imports were, by and large, made free; exchange controls were relaxed; licensing of manufacture was virtually abolished; and Indian business was put on notice that the earlier dirigiste model would make way for an open and competitive economy. Before the financial year was over, further measures were announced that marked the completion of the initial phase of reforms.
Indian business responded in three different ways.
In the first category, an entrenched group of largely family-owned businesses got together to oppose the policies of liberalization. While some quickly realized their folly and withdrew from the group, others persisted. They refused or were unable to change, and as a result many of them have been dethroned from their pedestals. They now operate as small players, and they are in diverse industries such as automobiles, textiles, jute, bicycles, sugar and cement.
In the second category, many businesses quickly restructured and, in many cases, shed some businesses and focused on their core competence. They became lean and competitive. Younger family members took over the reins, engaged consultants, brought in professional managers, boldly accessed the capital market, introduced new products and services, and learned to operate in a competitive environment.
In the third category, new kids turned up on the block. They were first generation entrepreneurs. Or they were Indians who had migrated abroad and built successful businesses: for example, software or other hi-tech companies in the Silicon Valley. More than anyone else, they foresaw quite early the opportunity in India and were willing to take risks. Many companies currently in the list of the top 10 or top 50 did not exist 15 years ago.
Meanwhile, more policy changes were underway. Between 1991 and 1996 and again between 1996 and 1998, the laws and regulations governing the economy were completely overhauled. After some initial hesitation, more reform measures were undertaken between 1999 and 2002. The present government that assumed office in May 2004 has continued the process of reforms, especially in the infrastructure sector, capital market, the financial sector and taxation.
Indian business has responded to these changes with remarkable agility and speed.
One of the consequences of a fiercely competitive market economy is the need to remain close to the market and to retain market share. There is no room for sloth or inefficiency. Growing the market share and remaining close to the market are the principal factors driving Indian business to go from local to global. The other factors that encourage Indian business to go global are the need to procure natural resources like minerals and ores; ensure energy security; access new technology; seek patents; leverage R & D capabilities; obtain a new product mix; find a strategic partner; build complementary businesses; establish forward and backward linkages; and enlarge the balance sheet and raise cheaper global capital.
Besides, many Indian companies are led by technocrats. They are driven by innovation. Any business driven by innovation, in order to keep its competitive edge, has to secure a global presence. Indian companies in the fields of information technology and biotechnology are taking that road.
There is also the desire to be the best or among the best in the world. Some Indian firms are already there: one of our companies is the largest producer in the world of rayon fibre and another is the largest producer of PTA. The second largest producer of paraxylene and the third largest producer of two wheelers are Indian companies. Indian companies are also racing to the top in sectors such as pharmaceuticals, castings and forgings, paints, digital recording devices and wind energy equipment. It is but natural that a world-class or a world-size company seeks a world presence.
A recent report in BusinessWeek said that India’s moment is evident and that Indian outfits dominate this year’s list of Asia’s top 50 companies. There are a dozen companies in the list ranging from automakers to a mortgage lender to pharmaceutical producers. The report concluded that the Indian companies represented have plenty in common: smart management, low costs and – increasingly – aspirations to join the elite ranks of multinationals. The list is, according to the report, a testament to the remarkable resilience and endurance of Indian companies. Three of the 12 companies belong to a reputed conglomerate, two are drug makers born around the time of India’s independence in 1947, the baby of the bunch is a producer of wind turbines, and the list is completed by the subsidiary of a multinational and a state owned electrical equipment company.
Forbes magazine has included 7 home grown Indian companies in its list of the top 200 most respected companies. Fortune’s Global 500, published in July 2007, includes six Indian companies.
The India growth story has also helped. As you know, India’s GDP has been growing, on average, at the rate of 8.6 per cent since 2003-04. In particular, 2006-07 was a splendid year that returned a growth rate of 9.4 per cent. The manufacturing sector grew by 10.9 per cent and the services sector by 11.0 per cent.
Corporate balance sheets are larger and corporate profits are higher, giving Indian businesses the financial muscle to take on new challenges. Valuations have soared, enabling companies to raise large amounts of equity capital. The reforms in the Indian financial markets have led to efficiency gains in financial intermediation, and leading business houses are able to borrow cheaply in the Indian market. We have also allowed corporates to borrow abroad, and there is a rush to raise funds through the external commercial borrowing route.
I am aware of the so-called Investment Development Path (IDP) theory. According to that theory, in the initial stages of development, a country receives FDI flows. Once a country reaches a certain level of development, outward investment takes place. I do not know if India’s current level of development and Indian companies’ outward orientation fit in with that theory. Till 2005-06, Indian firms’ outward investment was very modest. In that year, the outward investment was US $ 2.9 billion. In the next year, 2006-07, it shot up to US $ 11.0 billion. FDI flows into India also shot up to a new high of nearly US $ 20.0 billion in 2006-07. The two stages of accelerated FDI inflows and accelerated FDI outflows appear to have converged in India, marking a break with the conventional IDP theory. In my view, this is not unusual if we recall Michael Porter’s principle that it is not nations that compete, it is companies that compete.
The Federation of Indian Chambers of Commerce and Industry (FICCI) has conducted a study of 307 overseas acquisitions by Indian companies between 2000 and 2006. Their total value is estimated at US $ 20 billion. 28 per cent of the acquisitions were in the IT/software/BPO sector. This was followed by healthcare and pharmaceuticals, automobiles and chemical fertilizers. 32 per cent of the acquisitions were in the United States, followed by acquisitions in the United Kingdom and Europe.
The acquisition urge has seized both big and small Indian companies. Not only manufacturing companies and service providers, but also smaller firms doing contract research have coveted overseas opportunities in areas such as clinical research, bio-equivalence and data management.
The Confederation of Indian Industry (CII) has launched a portal that will create an ecosystem of emerging Indian multinationals. It will assist in sharing knowledge and providing credible information on exploring new markets abroad. Companies will have a platform to discuss common themes and the challenges they face in the context of globalization.
Ladies and Gentlemen! This is the new face of Indian business – mature, confident, strong, responsible, hungry for growth, and ready and willing to be among the best in the world. Hence they are going from local to global. Ask any businessperson, and he or she will tell you that this is the best time to have a business in India and also find your way to do business in other countries of the world.