BUSINESS SPECIAL
How India Inc is Going Global
The rapid emergence of MNCs from India is
intriguing to pundits of international business
The past decade and a half has marked the rapid
emergence of a number of firms from developing countries as significant players
in global markets.Labeled as `emerging market multinationals', these firms have
exhibited rapid and aggressive internationalisation trajectories. China and
India are the two countries that have been home to the largest number of such
emerging multinationals. Indian multinationals were distinctive as they hailed
from both private and public sectors, whereas a majority of the Chinese global
companies were state-owned.The rapid emergence of multinationals from countries
such as India was intriguing to the pundits of international business as they
had many disadvantages when compared to the established multinationals from
developed countries, whether it is in technology, financial resources or brand
equity.
Inward and Outward Internationalisation
The origins of internationalisation journeys of
many Indian companies began with the opening up of the Indian economy and
liberalization.By international expansion, we typically mean `outward'
internationalisation such as exports, outward FDI. But there is also an
opposite side to this, namely, `inward' internationalisation. Inward
internationalisation involves sourcing activities from foreign markets ranging
from import of technology, raw materials, and capital goods, to import of
financial capital in the form of debt or equity, and induction of
internationally trained or experienced managers all of which may be viewed as
a mirror image of the outward process.
In my research, I found that there are strong
linkages between inward and outward internationalisation. Indian companies can
leverage inward internationalisation to upgrade their technological, financial
and managerial resources so as to be able to offer products or services that
are able to meet the more advanced needs of the international markets.
Inward-outward linkages are particularly important in the context of
knowledge-intensive firms and countries such as India which were under
protectionist policy regime and cut off from the rest of the world until
recently.
Acquisitions for Expansion
Indian multinationals have been found to
internationalise faster and prefer higher risk entry modes such as acquisitions
compared to other modes. Firms could undertake acquisitions overseas for four
broad reasons. Some acquire overseas companies to penetrate new markets or
maintain existing ones (market seeking motivation). Another motivation could be
to acquire factors of production, primarily natural resources (resource
seeking).The third broad rationale is efficiency seeking, where companies make
investments aimed at increasing efficiency.
Lastly, firms can also make overseas investments
to acquire knowledge assets such as brands, patents and relationships with
clients (strategic asset seeking).While every acquisition will have some
component of all these four motivations, I found that acquisitions by Indian
companies are predominantly driven by asset seeking motivations. They have used
the overseas acquisition route to move up the value chain by acquiring tangible
and intangible assets in a much shorter time than what it takes to build them
in-house. Large acquisitions by Tata Motors, Hindalco, Tata Steel and Mahindra
& Mahindra exemplify this.
But this strategy is a double-edged sword and
has its pitfalls too, as it is riskier if not planned and managed well. While
many overseas acquisitions created value, there are also examples of Indian
acquisitions losing significant value such as the Betapharm acquisition by Dr.
Reddy's Labs and the Corus acquisition by Tata Steel.
Business Group Effect
Business groups such as Chaebols of Korea or
Grupos in Latin America or the Tata group and the Godrej group in India are a
unique characteristic of many economies. A number of studies have investigated
whether firms that belong to business groups perform better or worse compared
to stand-alone firms and the results have been mixed.
Business groups (BGs)
have been found to confer both benefits and
costs on the firms affiliated to them.
I studied how affiliation to business groups
affects the internationalisation of Indian companies, whether it is through
exports or outward FDI, including green field ventures or overseas
acquisitions. I found a consistently positive effect of business group
affiliation.
Business groups confer some advantages which
help their firms internationalise better compared to stand-alone
firms.Resources that are relatively scarcer in developing economies, especially
technological and financial resources, are more easily accessible to BG firms.
BG firms benefit from access to group resources including capital, technology,
human resources and complementary products and services and hence are better
placed than independent firms in terms of their resource needs.Group-affiliated
firms are in a position to leverage linkages with other companies within the
group to attain technological partners, suppliers, and other intermediaries to
access inputs. Business groups can thus be viewed as a strategic network
providing member firms with access to information, resources, markets, and
technologies. Stand-alone firms need to make additional efforts to form such
networks to access the knowledge and resources need for
internationalisation.Role of Owner-CEOs Firms owned and controlled by business
families constitute a majority of the firm population in India. Also a large
number of these family firms in India are headed and managed by members of the
owner family (“owner-managers“). Over 60% of the Indian companies in BSE-500
index have CEOs who are also members of the promoterowner families.
These owner managers play a key role in ensuring
their firm's rapid internationalisation, and their role can probably be even
more crucial in situations where the firm expands through overseas
acquisitions.Compared to other internationalisation modes such as licensing,
exports, joint ventures or greenfield projects, FDIs through overseas
acquisitions is considered a high involvement and high risk mode of
internationalisation.
Overseas acquisitions constitute a high risk
strategic decision that requires approval and buy-in of all the shareholders.
Having the owner (or one of the owners) also acting as the CEO seems to
facilitate finalising such strategic decisions better. This is just an
indicative, and not an exhaustive, list of some of the mechanisms used by
Indian companies to internationalize rapidly. Companies that are freshly
embarking on their internationalisation journeys would do well to learn from
these.
The overall takeaway from the experience of
Indian multinationals seems to be that, despite severe constraints and a lower
position on the scale of economic development, developing economies can throw
up a few companies that are globally competitive and capable of posing stiff
competition to the established multinationals from the developed economies.
Armed with nimble capabilities, these emerging multinationals may adopt various
strategies, taking advantage of increasingly liberalised economies and may
catch up with the established MNCs sooner than later.
by Raveendra Chittoor CDET27FEB15
No comments:
Post a Comment