The Rise of Indian Multinationals: Perspectives on Indian Outward Foreign Direct Investment

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The Rise of Indian Multinationals

Brian Harley

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Brian Harley

The Rise of Indian Multinationals Perspectives on Indian Outward Foreign Direct Investment Edited by

Karl P. Sauvant and Jaya Prakash Pradhan, with Ayesha Chatterjee and Brian Harley

Brian Harley

THE RISE OF INDIAN MULTINATIONALS

Copyright © Karl P. Sauvant and Jaya Prakash Pradhan, with Ayesha Chatterjee and Brian Harley, 2010. All rights reserved. First published in 2010 by PALGRAVE MACMILLAN® in the United States—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–10844–8 Library of Congress Cataloging-in-Publication Data The rise of Indian multinationals : perspectives on Indian outward foreign direct investment / edited by Karl P. Sauvant and Jaya Prakash Pradhan, with Ayesha Chatterjee and Brian Harley. p. cm. Includes bibliographical references and index. ISBN 978–0–230–10844–8 1. International business enterprises—India. 2. Investments, Foreign—India. I. Sauvant, Karl P. II. Pradhan, Jaya Prakash. HD62.4.R57 2010 338.8⬘8954—dc22

2010018349

A catalogue record of the book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: November 2010 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

Brian Harley

To Howard V. Perlmutter, who sparked my interest in foreign direct investment and multinational enterprises —Karl P. Sauvant To my dear teacher, Swami Somabeshji; to my parents, Rama Chandra Pradhan and Tapaswini Pradhan; to Sradhalaxmi Sahoo, my wife; and to my daughter: Gargi Pradhan —Jaya Prakash Pradhan To Kaushik and Sumita Chatterjee, for inspiring me to reach higher —Ayesha Chatterjee To Matthew and Pauline Harley —Brian Harley

Brian Harley

Vale Columbia Center on Sustainable International Investment—The Vale Columbia Center on Sustainable International Investment (VCC) seeks to be a leader on issues related to foreign direct investment (FDI) in the global economy, paying special attention to the sustainability dimension of this investment. It focuses on the analysis and teaching of the implications of FDI for public policy and international investment law. Its objectives are to analyze important topical policy-oriented issues related to FDI, develop and disseminate practical approaches and solutions, and provide students with a challenging learning environment. For more information, please see http://www.vcc.columbia.edu. SPIESR—The Sardar Patel Institute of Economic and Social Research (SPIESR) is among the leading national-level research and academic institutions in India. Established in 1969, SPIESR has made an immense contribution in the field of economic and social research, covering a wide spectrum of issues like trade and foreign investment, industrial and agricultural development, consumption and poverty, deprived social groups, education, regional development, natural resources, common property, and infrastructure development. Supported jointly by the Gujarat government and the government of India through the Indian Council of Social Science Research, its geographical focus of research encompasses development issues of local, regional, national, and global economies. Beside research, the Institute has been playing an important role in imparting training to research scholars, guiding Ph.D. students, and participating in government committees to provide policy inputs on economic and social issues.

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Contents

List of Figures and Tables

xv

List of Contributors

xix

Foreword Ravi Ramamurti

xxiii

Acknowledgments

xxvii

1

2

Introduction: The Rise of Indian Multinational Enterprises: Revisiting Key Issues Jaya Prakash Pradhan and Karl P. Sauvant Introduction A. Origin and Growth: A Brief History B. Why Do Indian Firms Go it Alone Now? C. Why Do Indian Firms Acquire Overseas Companies? D. What Explains the Distinct Regional Specialization of Indian Firms? E. Why do Knowledge-based Industries Dominate Indian Outward Foreign Direct Investment? F. This Volume and Its Contribution 1. Analytical Perspectives on the Rise of Indian MNEs 2. Industry Analysis of Indian Outward FDI 3. Regional Studies on Indian MNEs Conclusions Notes References

14 15 15 17 18 19 20 21

In Search of the “Indianness” of Indian Multinational Enterprises: Is There Anything Special about the Indian Path to Outward Foreign Direct Investment?

25

Michael W. Hansen Introduction A. The Rise of Indian Multinational Enterprises B. Explaining the Indian OFDI Path 1. The Investment Development Path Theory

25 26 30 31

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1 1 4 9 12 13

viii

Contents a. Main Propositions of the IDP Theory b. Relevance to India 2. The Latecomer Theory a. Main Propositions of the Latecomer Theory b. Relevance to India 3. The “India Inc.” Country-Specific Theory a. Country-Specific Explanations for OFDI b. Relevance to India C. Summary and Discussion 1. The Speed and Direction of FDI 2. The Role of Home Country Context in Shaping Ownership Advantages 3. Motives for Investment 4. Assessment of Theory Conclusions Notes References

3

4

Political Factors Behind the Rise of Indian Multinational Enterprises: An Essay in Political Economy Jørgen Dige Pedersen Introduction A. The Debate on Foreign Direct Investment and Multinational Enterprises 1. Conventional MNE Theory 2. The Political Economy Perspective B. The Rise of Indian Multinational Enterprises: The Role of Home Country Government Activities 1. Creating a Supportive Environment and Institutional Facilities 2. Shaping the Domestic Development of Ownership Advantages 3. Direct Regulation 4. Direct Participation in OFDI 5. Summing Up: The Role of the State in the Outward Investment Process C. A Theoretical Reinterpretation Conclusions Notes References When a Great Industry Globalizes: Indian Conglomerates Pioneering New Trends in Industrial Globalization Joël Ruet Introduction: Not Just Followers; Indian Multinationals are Changing the Global Business Model

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31 33 34 35 37 39 40 40 43 43 44 45 45 48 48 51 57 57 58 58 60 63 64 65 66 68 69 70 73 73 75 79

79

Contents A. Indian Multinational Enterprises Out to Conquer the World? Going Global Because of Domestic Challenges as well as Global Opportunities 1. Technology-Focused Geographic Patterns in OFDI Distribution 2. The Imperatives of Globalization and Internal Transformations in the Indian Economy: Financial Advantages and Growing Domestic Competition 3. The Need to Scale up Technology and Build Brand Names B. Indian Groups on the Global Stage: Firm-Level Bridging of Low National Integration into Global Trade 1. Changing Regime, Changing Business Models: From Licenses to Production Efficiency C. Integration of Multinational Enterprises into Global Ties the Indian Way: Industry Trajectories, Schematic Models, and Cases of Conglomerate Synergies 1. Towards Models or Diversity? a. Three Key Business Models for MNEs within the IT Industry b. Three Key Business Models in the Biotechnology Industry: A Sector Halfway into its Multinationalization c. Summarizing India’s Business Models 2. An Indian Specificity: The Synergetic, Innovative Conglomerate 3. Summing up Industrial Trajectories, Modes of Entry, Technological Emancipation, Value Chains, and Internationalization D. On Building New Models: From Constraints to Partnerships? 1. Overall Global Competition 2. From All-out Competition to Partnerships 3. Partnerships and New Value Chains 4. Partnerships and Technological Innovation 5. Business Recomposition: Globalization and Concentration of Suppliers Conclusions: From Indian Multinational Enterprises to a Mixed Developed-Emerging Model of Capitalism? Notes References 5

Acquisition of Technologies and Multinational Enterprise Growth in the Automotive and the Pharmaceutical Industries: Drivers and Strategies Giovanni Balcet and Silvia Bruschieri Introduction

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ix

82 82

84 85 85 87

89 91 91 93 95 96

97 99 99 100 101 102 103 104 107 108

111 111

x

Contents A. Theoretical Frameworks on Emerging Market Multinationals 1. The Imbalance and the Springboard Approaches 2. The Linkage, Leverage, and Learning Theory 3. An Alternative Approach: Alliances, Acquisitions, Leverage, and Learning B. Empirical Evidence on Indian MNEs: Two Case Studies from the Pharmaceutical Industry 1. Nicholas Piramal and Sun Pharmaceutical Industries: Structure and Evolution 2. Competitive Advantages: Technological Innovation 3. Competitive Advantages: Differentiation 4. Competitive Advantages: Financial Resources and Managerial Skills 5. Linkage and Leverage: The External Network 6. The Internationalization Process: Exports 7. Internationalization through OFDI: The Internal Network 8. Conclusions From the Case Studies on Nicholas Piramal and Sun Pharmaceutical Industries C. Empirical Evidence on Indian Multinational Enterprises: Two Case Studies from the Automotive Industry 1. Mahindra & Mahindra and Bharat Forge: Structure and Evolution 2. Competitive Advantages: Technological Innovation 3. Competitive Advantages: Financial Resources 4. Competitive Advantages: Management Skills and Differentiation 5. Alliances and Leverage: The External Network 6. Internationalization Process: Exports 7. Internationalization Through FDI: Can We Talk about an “Internal Network”? 8. Conclusions from the Case Studies on Mahindra & Mahindra and Bharat Forge Conclusions: From Learning and Acquisition of Capabilities to Multinational Growth 1. A Two-stage Pattern of Multinational Growth 2. Firm-Specific Competitive Advantages 3. Country-Specific Competitive Advantages 4. Specialization, Diversification, and Trajectories Notes References

6

Outward Investment by Indian Pharmaceutical and Software Multinational Enterprises: Are the Factors Different? Vinish Kathuria

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112 112 113 113 116 118 121 125 127 129 131 132 134 136 137 140 142 143 145 148 149 152 154 154 155 156 157 157 161 167

Contents Introduction A. Outward Foreign Direct Investment Policy Regime in India: Evolution 1. Policy Evolution Facilitating OFDI in the Software Industry 2. Policy Evolution Facilitating OFDI from the Pharmaceutical Industry B. Determinants of the Extent of Outward Foreign Direct Investment: An Analytical Framework 1. OFDI from the Pharmaceutical and Software Industries a. MNE Size (GFA or SIZE) b. Accumulated Learning and Managerial Skills (AGE) c. Profitability (PAT or ROA) 2. Empirical Estimations C. Features and Performance of the Two Selected Industries 1. The Indian Pharmaceutical Industry 2. The Indian Software Industry D. Outward Foreign Direct Investment by Pharmaceuticals and Software Multinational Enterprises E. Factors Influencing Outward Foreign Direct Investment: Econometric Results 1. Comparison between MNEs in the Software and Pharmaceutical Industries a. Econometric Results Conclusions Notes References 7

Indian Companies Investing in the United States: An Inquiry into Recent Patterns and Trends Nandita Dasgupta Introduction A. Pattern of Indian Outward Foreign Direct Investment Flows to the United States 1. Volume of Indian OFDI Flows to the United States 2. Composition of Indian OFDI in the United States by Industry 3. The Age of Indian MNEs Investing in the United States 4. Size Distribution of Indian MNEs Investing in the United States B. Entry Routes for Indian OFDI into the United States 1. Greenfield OFDI from India 2. The Indian M&A Scenario C. Factors Driving OFDI from India to the United States 1. Push Factors Driving OFDI from India a. Changes in Indian OFDI Policies

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xi 167 168 170 171 172 172 173 173 173 174 174 174 176 178 180 180 180 182 183 184 187 187 190 192 194 195 197 200 200 200 203 204 204

xii

Contents b. Attitudinal or Behavioral Change among Indian Firms c. The Impact of FDI Inflows into India d. Generation of Corporate Funds e. Capacity to Raise Funds through Domestic and Foreign Borrowings 2. Pull Factors Driving OFDI from India a. The IFDI Policy Regime in the United States b. Size of the Host Country Market c. Access to New Markets through the United States d. Low Value of the U.S. Dollar e. Proximity to Client Base f. Technology, Knowledge, and R&D g. Search for Natural Resources D. Indian OFDI Projects in the United States 1. Agriculture 2. Automotive 3. Banking 4. Chemicals 5. Computer Peripherals 6. Fast-Moving Consumer Goods 7. Food and Beverages 8. Hotels 9. Information Technology 10. Irrigation Components 11. Jewelry 12. Life Sciences 13. Media and Entertainment 14. Metals 15. Packaging 16. Pharmaceuticals 17. Printing/Publishing 18. Telecommunications 19. Textiles 20. Travel 21. Observations from the Case Studies Conclusions Notes References

8

The Emergence of Indian Multinationals: An Empirical Study of Motives, Current Status, and Trends of Indian Investment in Germany Rajnish Tiwari and Cornelius Herstatt Introduction A. Indian Outward Foreign Direct Investment in Germany

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204 205 206 206 207 207 209 210 210 210 211 212 212 213 213 213 213 214 214 215 216 216 217 218 218 219 219 220 220 221 221 222 222 222 223 225 228

233 233 234

Contents B. Survey of Indian Subsidiaries in Germany 1. Characteristics of Respondents 2. Activities in Germany 3. Characteristics of the Parent MNE 4. Size and Modes of Investment 5. Investment Motives 6. Realization of Investment Objectives 7. Criteria of Location Selection 8. Job Shifts 9. Indian Expatriates 10. Technology Transfer 11. Investment and Operational Challenges in Germany 12. Performance of Indian Subsidiaries in Germany 13. Planned Investments 14. Summary of Survey Results Conclusions Notes References 9

The Surge in Indian Outbound Foreign Direct Investment to Africa: A New Form of South-South Cooperation? Parthapratim Pal Introduction A. Indian Investment in Africa B. Why Chinese and Indian MNEs Are Investing in African Host Countries C. The Benefit to Africa Conclusions Notes References

Index

xiii 237 238 239 239 241 241 242 243 244 245 245 246 247 247 248 249 250 251 255 255 256 261 267 270 271 272 277

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Figures and Tables

Figures 1.1 1.2 2.1 2.2 2.3 2.4 2.5 3.1

4.1 5.1 5.2

5.3 5.4

5.5 5.6 5.7

OFDI stock of the top 15 emerging markets (2008), in US$ billions and percents Indian OFDI flows (1961–2007), in US$ millions and numbers The surge in Indian OFDI (1980–2008), in US$ millions Closing the gap: Indian IFDI and OFDI (1980–2008), in US$ millions, logarithmic Industrial composition of Indian OFDI (1975–2008), in percents Host countries of Indian OFDI (1996–2005), in percents Net outward investment measured as a ratio of OFDI flows to IFDI flows (1980–2008), in numbers International reserves minus short-term debt obligations (1970–2008) in US$ billions, and annual outflow of FDI (1994–2009) in US$ millions Generalized competition Total sales (standalone): Nicholas Piramal and Sun Pharmaceutical (1994–2008), in US$ millions The ratio of R&D expenses to sales: Nicholas Piramal, Sun Pharmaceutical, large Indian pharmaceutical companies, and Italian pharmaceutical companies (1994–2008), in (%) The ratio of advertising and marketing expenses to sales: Nicholas Piramal and Sun Pharmaceutical (1996–2008), in % The ratio of profit after tax to sales: Nicholas Piramal, Sun Pharmaceutical, and a pool of large Indian pharmaceutical units (1994–2008), in % The ratio of current assets to current liabilities: Nicholas Piramal and Sun Pharmaceutical (1994–2008), in numbers The ratio of exports to sales: Nicholas Piramal and Sun Pharmaceutical (2000–2008), in % Sales (standalone): Mahindra & Mahindra and Bharat Forge (1990–2008), in US$ millions

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4 5 27 28 28 29 33

67 99 119

122 125

127 128 132 139

xvi

Figures and Tables

5.8 The ratio of R&D expenses to sales: Mahindra & Mahindra and Bharat Forge (1992–2008), in % 5.9 The ratio of retained profit to sales: Mahindra & Mahindra and Bharat Forge (1989–2008) (%) 5.10 The ratio of current assets to current liabilities: Mahindra & Mahindra and Bharat Forge (1989–2008), in numbers 5.11 The ratio of advertising and marketing expenses to sales: Mahindra & Mahindra and Bharat Forge (1990–2008), in % 5.12 The ratio of exports to sales: Mahindra & Mahindra and Bharat Forge (1990–2008), in % 6.1 Revenue from software & software services (1990–1991 to 2005–2006), in US$ millions 8.1 Germany’s trade volume with India (2000–2009), in € millions 8.2 Active Indian MNEs (majority stakeholders) in Germany as of October 2008 8.3 Subsidiaries of Indian MNEs in Germany’s federal states as of October 2008 8.4 Annual turnover of survey respondents in fiscal year 2007 in Germany, in € millions 8.5 Business activities of Indian MNEs in Germany as of July 2008 8.6 Group turnover of the whole MNE in fiscal year 2007, in € millions 8.7 Total investment by the Indian MNE in the Germanbased subsidiary through July 2008, in € millions 8.8 Share of Indian expatriates in the workforce of Germanbased subsidiaries as of July 2008 8.9 Compound annual growth rate of the subsidiary in Germany (2005–2007), in terms of sales 8.10 Short-to-medium term further investments plans as of July 2008, in € millions

140 142 143 144 148 177 235 236 237 239 240 240 241 245 247 248

Tables 1.1 Average OFDI flows from selected emerging markets (1970–2008), in US$ millions and percent 1.2 Regional distribution of Indian OFDI flows (1961–1989, 1990–2007), in US$ millions and percent 1.3 Sector and industry composition of Indian OFDI flows (1961–1989, 1990–2007), in US$ millions and percents 1.4 The ownership structure of Indian OFDI projects (1961–1969, 2000–2007), in numbers and percents 1.5 Overseas acquisitions by Indian firms (2000−2009), in US$ millions and numbers

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2 7 8 10 12

Figures and Tables 2.1 Phases in Indian OFDI 2.2 Summary of argument 5.1 Nicholas Piramal’s web of linkages with incumbents and institutions 5.2 Mahindra & Mahindra’s external network 5.3 Bharat Forge’s external network 6.1 Patents filed and R&D expenditure by Indian pharmaceutical firms (1990–2005), in numbers and US$ millions 6.2 Outward investors and their research orientation in the pharmaceutical industry (1990–2005), in numbers and percents 6.3 Distribution of the instances of OFDI (NOFDI) by MNEs in the pharmaceutical and software industries (1991–2006), in numbers of instances and percent frequencies 6.4 Differences between pharmaceutical and software MNEs (1991–2006) 6.5 Factors influencing the number of times an MNE has invested abroad (NOFDI) (1991–2006) 7.1 Indian OFDI flows by host region and host country (1975–1990 and 1991–2001) 7.2 Indian OFDI by host region and host country (1970–2007), in US$ millions 7.3 Approved Indian OFDI in JVs and wholly-owned subsidiaries to the United Kingdom and the United States (1996–2005), in US$ millions 7.4 Actual FDI flows from India to the United States on a historical cost basis, by industry (North American Industry Classification System) (2002–2007), in US$ millions 7.5 Distribution of Indian MNEs engaged in U.S.-bound OFDI by sector and industry (2000–2008) 7.6 Number of companies, percentage and industry distribution of Indian MNEs engaged in OFDI in the United States by age group (2000–2008) 7.7 Indian OFDI to the United States by SMEs and large-sized enterprises (March 31, 2001), in US$ millions 7.8 M&A deals in the United States by Indian MNEs (2000–2008) 8.1 Top investment motives for Indian MNEs in Germany (with industry breakdown) 8.2 Criteria influencing the location decision within Germany 8.3 Shift in full-time, regular jobs between India and Germany as of July 2008 8.4 Challenges encountered in the investment process and day-to-day operations in Germany (with industry breakdown)

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xvii 30 46 130 146 147

175

176

179 181 182 188 189

193

193 195

196 198 202 242 243 244

246

xviii 9.1 9.2 9.3 9.4 9.5

Figures and Tables Trends in Indian OFDI flows into Africa (1961–2007) Breakdown of Indian OFDI to Africa by sector and industry (2000–2007), in US$ millions Some major Indian investments in the oil and gas industry in Africa (2002–2008) Form of ownership of Indian MNE investments in Africa (1961–2007) Indian acquisitions in Africa (2000–2009)

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257 258 259 260 261

Contributors

GIOVANNI BALCET is a full professor of International Economics and International Business at the University of Turin, Italy. He has undertaken extensive research and published in the areas of multinational enterprises, international joint ventures, the globalization of innovation processes, and the global automotive industry. He has been a visiting fellow and visiting professor at several European, Asian, and American universities and research institutions, including Yale University, Sorbonne University, and Seoul National University. SILVIA BRUSCHIERI has been working at the Italian Institute for Foreign Trade (ICE) since 2000. She studied political sciences at the University of Turin (1994), where she also obtained her PhD from the Dipartimento di Economia Cognetti De Martiis in 2009, with a thesis on Indian multinational enterprises. AYESHA CHATTERJEE is a J.D. candidate at Columbia Law School, where she is a Harlan Fiske Stone Scholar and a Public Affairs Editor for the Columbia Journal of Transnational Law. She previously worked as a financial analyst in securitization at Deutsche Bank Securities, Inc. She is a graduate of the University of Pennsylvania’s Huntsman Program for International Studies and Business, through which she received a B.S. in Economics, with concentrations in Finance and Business & Public Policy from the Wharton School, and a B.A. in International Studies. NANDITA DASGUPTA is a member of the faculty of economics at the University of Maryland, Baltimore County (UMBC). She is also a visiting faculty to Johns Hopkins University. She was a consultant with The Earth Institute at Columbia University. A Ph.D. in Economics from Calcutta University, India, she has published extensively in the area of foreign direct investment. Her current research interests include international trade and business, in particular the implications of foreign direct investment outflows from developing countries. With her extensive teaching experience both in India and USA, she has four times been awarded the Best Teacher Award in Economics at UMBC since her service in that university from 2003.

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M ICHAEL W. H ANSEN is an Associate Professor at the Centre for Business and Development Studies, Copenhagen Business School. Since 1994, he has done research on various aspects of firm strategy in developing countries, including environmental management strategy, subsidiary mandate evolution, multinational enterprises (MNEs) and outsourcing, the rise of MNEs from developing countries, and MNEs’ role in private sector development. Prior to his employment at CBS, he worked at the United Nations Centre on Transnational Corporations in New York. Currently, his research is focusing on linkages between MNEs and local firms in Asian developing countries, especially of Danish MNEs in India. BRIAN H ARLEY is a graduate of London School of Economics (LL.B.), the University of Sussex (M.A.), and Columbia Law School (LL.M., James Kent Scholar). He has worked as a lawyer on investment-related matters with Mason Hayes + Curran in Dublin, Ireland, and King & Wood P.R.C. Lawyers in Beijing, China. CORNELIUS HERSTATT is a Director and Professor at the Institute for Technology and Innovation Management, Hamburg University of Technology, Germany. He is also a founding partner at the European Institute for Technology and Innovation Management. He has published extensively on innovation and technology management. VINISH K ATHURIA is an Associate Professor at the Shailesh J. Mehta School of Management (SJM SOM) of the Indian Institute of Technology, Bombay, since August 2007. His teaching and research activities relate to economics, mainly in the fields of industrial economics and economics of industrial and urban pollution. Before joining SJM SOM, he was Fulbright Senior Researcher fellowship to the University of Colorado, Boulder (United States). He has several publications in international journals, including Oxford Economic Papers, Ecological Economics, Applied Economics, Journal of International Development, Transnational Corporations, Transportation Research, Technological Forecasting, and Social Change. He has pursued his postdoctoral work at the University of Gothenburg, Sweden, in the area of environmental economics, and had a Ph.D. internship from the United Nations University Institute for New Technologies (UNU/INTECH), Maastricht, the Netherlands. His thesis was short-listed by UNESCO for its Management of Social Transformation (MOST) award in the years 2000–2001. PARTHAPRATIM PAL is an Associate Professor at the Indian Institute of Management (IIM), Calcutta. He has a Ph.D. from Jawaharlal Nehru University in New Delhi. He has worked in the areas of financial markets and international economics. Before joining IIM, he worked with the Indian Council for Research in International Economic Relations (ICRIER) and the Indian Institute of Foreign Trade (IIFT). His recent areas of interest include global financial crises, regional trade agreements, WTO-related issues, and international capital flows. He has a number of publications in national and international journals and books. Brian Harley

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JØRGEN DIGE P EDERSEN is a lecturer at the Department of Political Science, University of Aarhus. His research has concentrated on development and international political economy, with a special focus on India. Recent publications include Globalization, Development and the State: The Performance of India and Brazil since 1990 (Palgrave Macmillan 2008). JAYA PRAKASH PRADHAN is an Associate Professor at the Sardar Patel Institute of Economic and Social Research, Ahmedabad. He has served on the faculties of the Institute for Studies in Industrial Development, New Delhi, and the Gujarat Institute of Development Research, Ahmadabad, and also worked as a consultant to the Research and Information System for Developing Countries, New Delhi. He has been involved in research projects sponsored by the Department of Scientific and Industrial Research under the Ministry of Science and Technology, government of India, and the United Nations Conference on Trade and Development, Geneva. Having published three books on the internationalization of Indian firms and regional development, and over 30 research papers in different journals, his current research interests include issues concerning Indian multinational enterprises and the internationalization of India’s knowledge-based industries. JOËL RUET is an economist with the National Centre of Scientific Research in France (CNRS), affiliated to LATTS (ENPC-ParisTech) at the Université Paris-Est. He is a visiting scholar at CEFC, Hong-Kong (China). The writer or editor of six books, he teaches at HEC-Paris, Ecole des Mines-ParisTech. He was Visiting Fellow at the London School of Economics, directed the Centre for Human Sciences in New Delhi, and has taught at Jawaharlal Nehru University, New Delhi. His current research focuses on the political economy of reforms in India and China and on global business models of firms from emerging markets, for which his team was a laureate in 2007 of the International Program for Advanced Studies, Columbia University & MSH-Paris. K ARL P. SAUVANT is the Founding Executive Director of the Vale Columbia Center on Sustainable International Investment, Senior Research Scholar, and Lecturer in Law at Columbia Law School, Co-Director of the Millennium Cities Initiative, and Guest Professor at Nankai University, China. Before that, he was Director of UNCTAD’s Investment Division. He is the author of, or responsible for, a substantial number of publications. In 2006 he was elected an Honorary Fellow of the European International Business Academy. He received his Ph.D. from the University of Pennsylvania in 1975. R AJNISH TIWARI is a Research Associate at the Institute for Technology and Innovation Management, Hamburg University of Technology, Germany. Currently pursuing his doctoral degree, he is engaged in research on market-driven globalization of innovation. Indian investments in Germany are a focal point of his work. He was awarded the “Market and Customer Orientation” prize by the Vodafone Foundation for Research in 2006. Brian Harley


Brian Harley

Foreword Ravi Ramamurti

The surge in outward foreign direct investment (FDI) by Indian firms in the past ten to fifteen years raises a host of interesting questions. This edited volume by Karl P. Sauvant and Jaya Prakash Pradhan takes us several steps closer to finding answers to those intriguing questions. It will be a valuable resource for all scholars interested in India’s emerging multinational enterprises. One such question is why a poor country like India is the source of outward FDI. According to standard economic theory, poor countries are supposed to be capital short and, therefore, importers of capital. According to international business theory, outward FDI is supposed to rise only after per capita income exceeds $5,000 or $10,000, whereas India’s was only $1,000 in 2008. India is one of the few low-income countries that appear in the top-ten list of outward investors in the developing world. As Pradhan and Sauvant note in their introduction, India ranked eighth in outward FDI in 2000–2007 among Asia’s emerging economies. With the exception of China, all other outward investing countries in Asia have significantly higher per capita incomes than India: Hong Kong (Special Administrative Region of China), the Republic of Korea, Malaysia, the Philippines, Singapore, and Taiwan Province of China. So what accounts for the premature and surprisingly high outward FDI of Indian (and Chinese) firms? The answer to this puzzle, it would appear, is that being a large and diverse country, India has pockets—regions and industries—in which its firms are quite sophisticated, in terms of technology, operations, and management. In what they do, these firms are capable of competing with the best in the world, be it software services or engineered goods. The contrast in economic development between parts of Bihar, on the one hand, and parts of Maharashtra or Tamil Nadu, on the other hand, is striking. In other words, the level of economic development and per capita income in India’s more developed parts are comparable to those of middle-income developing countries that are major outward investors. If Mumbai or Bengaluru were city-states like Singapore, their per capita incomes would be several times India’s average. Viewed this way, the puzzle we began with is readily

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resolved. The lesson one takes away is that large developing countries like India are properly viewed as collections of highly developed and highly underdeveloped parts, and it should be no surprise if the former regions spawn global firms. With this correction, India does not present a challenge to conventional theory. But there is a deeper puzzle in the Indian case, which is why total outward FDI by India is almost as large as total inward FDI into India. It is not just that some firms are net overseas investors, but that India as a whole is close to being a net outward investor. In this regard, India is significantly different even from China, which received about $500 billion in inward FDI before its firms began to make outward investments. Even as late as 2007, China’s inward FDI was five times its outward FDI, whereas in India’s case, both inward FDI and outward FDI began to surge at about the same time—around 2005; in 2007, the two flows may have been nearly equal, if measured by deal value (official statistics define FDI inflows and outflows somewhat narrowly, but total deal value looks at the size of cross-border investments, regardless of how they are financed). In the recent past, this has also been true of the other BRIC countries, but the puzzle in India’s case is more intriguing for two reasons. In China, state-owned enterprises have been at the forefront of outward FDI; given China’s exchange rate policy and the resulting foreign exchange reserves, it is easier to understand why the country’s state-owned firms may be on a shopping spree abroad. In the case of Russia and Brazil, a large part of the outward FDI is in the natural resource sector, consisting of either downstream integration (Russia) or upstream integration (China). Indian outward FDI is neither state-led nor predominantly in natural resource industries, but rather in knowledge-intensive industries, as Pradhan and Sauvant note in their introductory chapter. How is one to explain the volume and industry composition of Indian outward FDI? I suspect the answer has two parts, one of which has to do with the capabilities of India’s private sector, while the other stems from weaknesses in the Indian business environment, as we have argued in an earlier work (Ramamurti and Singh 2009). On the positive side, India’s outward FDI is led by highly entrepreneurial private firms that have capabilities in design, production, branding, and distribution, and are innovative at providing products and services of “good enough” quality at ultra-low prices (Govindarajan and Ramamurti 2010). These capabilities transfer well to foreign markets, including other emerging markets. It is often noted that India’s economic reforms lagged China’s by more than a decade; but what is often overlooked is that India’s private sector is a decade or two ahead of China’s. I am inclined to agree with Yasheng Huang’s view that China’s large inward FDI flows reflect the weaknesses of its private sector, while India’s low inward FDI flows (until very recently) reflect the strengths of its private sector (2003). It is for this reason that Indian firms are showing

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more dynamism internationally than Chinese firms do. As for the higher skill- or knowledge-intensity of India’s outward FDI, I think it merely reflects the high cost of doing business in India, notably the infrastructure and logistical penalty of getting goods in and out of the country. As a result, the internal efficiency of Indian firms is offset by external inefficiencies, making them unable to compete in foreign markets in businesses where cost is paramount. This not only skews Indian exports in the direction of skill-intensity (where margins are high enough to overcome the India penalties), but also makes FDI the next best alternative to exports—unlike in the Chinese case, where efficient firms can compete globally with production inside China (for more along these lines, see Ramamurti 2008). A final puzzle in the Indian case is why so much of the outward FDI is directed at rich countries. As Pradhan and Sauvant note in their introduction, during 1961–1989, 82% of Indian outward FDI went to other developing countries; but in 1990–2007, almost 62% went to developed countries. Why is a poor country like India investing such a large proportion of its outward FDI in rich countries? Several answers have been provided for this puzzle, including the view that Indian firms are seeking Western technology and brands in areas in which they are weak. But one does not see the same concentration on rich host countries in Chinese outward FDI. I think this again reflects the greater willingness of Indian private firms to venture into advanced countries in search of ideas, technologies, and markets. Not being state-owned is a double advantage for Indian firms compared to Chinese firms, because it allows them to move more boldly and swiftly (Vernon 1979), and it raises fewer red flags among Western policy makers and the public than when state-owned firms from a Communist country are the acquirers. I hope the above discussion illustrates the many intriguing issues raised by the Indian case for scholars interested in how and why firms internationalize. The analysis assembled so ably in this volume by Sauvant and Pradhan, and grounded so well in evidence rather than conjecture, sheds light on several such puzzling questions. It will surely provoke many more fruitful studies of Indian multinational enterprises, including comparative studies with similar firms from other major emerging markets.

References Govindarajan, Vijay and Ravi Ramamurti (2010), “Reverse innovation, emerging markets, and global strategy,” paper prepared for inaugural issue of Global Strategy Journal and GSJ Conference, Chicago, July 2010. Huang, Yasheng (2003), Selling China: Foreign direct investment during the reform era (Cambridge: Cambridge University Press). Ramamurti, Ravi (2008), “Made-in-India Multinationals,” University of Pennsylvania Center for Advanced Study of India (CASI) Transition Series, Oct. 9, 2008, available at http://casi.ssc.upenn.edu/iit/Ramamurti.

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Foreword

Ramamurti, Ravi and Jitendra V. Singh (2009), “Indian multinationals: Generic internationalization strategies,” in Ravi Ramamurti and Jitendra V. Singh, eds., Emerging multinationals in emerging markets (Cambridge: Cambridge University Press), pp. 110–165. Vernon, Raymond (1979), “The international aspects of state-owned enterprises,” 10(3) Journal of International Business Studies, pp. 7–15.

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Acknowledgments

The geography of global outward foreign direct investment is changing as firms from such emerging markets as India, China, Russia, and Brazil are increasingly venturing abroad. Indian multinational enterprises contribute to the growing importance of emerging markets’ outward foreign direct investment. Many Indian firms, which were hitherto national players, have become international players in recent years by increasingly investing abroad. The present volume is intended to provide new perspectives on the rise of Indian multinational enterprises. The Vale Columbia Center on Sustainable International Investment and the Institute for Studies in Industrial Development, both having considerable expertise and research interests in the areas of foreign direct investment and public policy, have drawn together leading experts working on issues related to Indian foreign direct investment to shed light on this development. All contributions by the authors have been peer-reviewed. We are grateful to the experts—Christian Milelli, Emin Akcaoglu, Glauco Arbix, Jean-François Huchet, Ling Liu, Peter Gammeltof, and Ravi Ramamurti— for providing their useful views and suggestions during the review process. The assistance of Wouter Schmit Jongbloed in editing this volume is greatly appreciated, as is the help of Lisa Sachs and Zehra Gulay Kavame in bringing this volume to fruition. New York City and Ahmedabad, March 2010 Karl P. Sauvant Jaya Prakash Pradhan Ayesha Chatterjee Brian Harley

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Brian Harley

1 Introduction: The Rise of Indian Multinational Enterprises: Revisiting Key Issues Jaya Prakash Pradhan and Karl P. Sauvant*

Introduction The internationalization of firms from emerging markets by means of foreign direct investment (FDI) has undergone a rapid transformation in recent years. Starting from humble beginnings around the 1960s, a number of emerging markets1 have become leading outward investors during the first decade of the twenty-first century. Average outward FDI (OFDI) flows from these new sources of direct investment have grown from just US$348 million in the 1970s to over US$170 billion in the first decade of the twentyfirst century; in 2008, OFDI flows from emerging markets reached US$350 billion (United Nations Conference on Trade and Development 2009). The OFDI growth rates of emerging markets are not just high (although starting from a low base); they have even outpaced the OFDI growth rates of developed countries in each consecutive decade since the 1980s. Emerging markets recorded a 57% growth rate of OFDI flows in the period 2000–2008, which is about double the OFDI growth rate of developed countries, as set out in Table 1.1. 2 This constitutes a sharp increase in the growth gap of OFDI between emerging markets and developed countries beginning in the 1990s, when the growth rate of emerging markets was merely 1.2 times the growth rate of developed countries, compared to two times the growth rate during the 2000s. This expansion of OFDI from emerging markets is driven by the rise of firms from Asian developing economies. During the 1970s, when FDI outflows from emerging markets were modest, Latin American3 and African4 firms were ahead of their Asian counterparts in terms of average OFDI values and their percentage share of total outflows from emerging markets (Table 1.1). The subsequent decades saw a substantial rise in OFDI by Asian

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Table 1.1 Average OFDI flows from selected emerging markets (1970–2008), in US$ millions and percent Average OFDI flowsa

Region and Economy

Emerging economies Africa Latin America Asia CIS and Southeast Europe Oceania

1970/79

1980/89

1990/99

348 (100)

5,912 (100)

45,904 (100)

120 (34.4) 493 (8.3) 1,952 (4.3) 143 (41.2) 1,112 (18.8) 9,878 (21.5) 84 (24.2) 4,305 (72.8) 32,891 (71.7) N/A N/A 1,452 (2.5) 1 (0.2)

Selected emerging economies Argentina –9 (–2.0) Brazil 86 (24.9) Chile 2 (0.6) China N/A Egypt 3 (0.9) Hong Kong, N/A China SAR India N/A Korea, Republic 11 (2.8) of Malaysia N/A Mexico 0 (0.1) Philippines 1 (0.0) Russian N/A Federation Singapore 53 (15.1) South Africa 71 (20.3) Taiwan Province 3 (0.7) of China United Arab N/A Emirates World 28,276 Developed 27,928 economies As a percent of 98.8 global OFDI

3 (0.1)

21 (0.0)

–6 (–0.1) 1,377 (3.0) 224 (3.8) 925 (2.0) 13 (0.2) 926 (2.0) 453 (6.1) 2,323 (5.1) 12 (0.2) 45 (0.1) 1173 (19.8) 16,497 (35.9)

Compound growth rateb 2000/08

1990/99 2000/08

170,325 (100)

58

57

3,497 (2.1) 40,224 (23.6) 106,178 (62.3) 20,381 (12.0)

32 127 49 38

137 25 61 151

53

69

943 (0.6) 7,867 (4.6) 2,659 (1.6) 14,079 (8.3) 344 (0.2) 36,954 (21.7)

168 51 201 15 34 70

57 123 39 165 232 39

45 (0.0)

4 (0.1) 398 (6.7)

70 (0.2) 2,911 (6.3)

6,659 (3.9) 6,551 (3.8)

144 55

176 58

237 (4.0) 82 (1.4) 38 (0.6) 0 (0.0)

1,503 (3.3) 614 (1.3) 154 (0.3) 1,382 (2.4)

4,648 (2.7) 3,613 (2.1) 555 (0.3) 18,553 (10.9)

108 49 45 36

133 46 65 151

215 (3.6) 221 (3.7) 1,215 (20.5)

4,641 (10.1) 1,296 (2.8) 3,484 (7.6)

11,068 (6.5) 559 (0.3) 7,191 (4.2)

68 121 13

32 152 20

144 (0.3)

5,476 (3.2)

138

281

48 47

32 28

7 (0.1) 93,018 87,106

417,630 371,727

93.6

89.0

1,141,025 970,701 84.8

Source: Based on the United Nations Conference on Trade and Development’s online database, available at http://stats.unctad.org/fdi/. a

Percentage shares are in parentheses. The growth rate is the annual compound growth rate obtained from a semi-log regression model. The classification of countries as “developing” and “CIS and South-East Europe” is as per (United Nations Conference on Trade and Development 2009). b c

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Rise of Indian Multinational Enterprises

3

firms: their share in emerging market OFDI flows jumped above 70% during the 1980s and 1990s, and then leveled out at 62% in the 2000–2008 period (Table 1.1). Conversely, Africa’s share in OFDI flows from emerging markets declined from 37% to 3% between 1970 and 2008, and the share of Latin America dropped from 61% to 18% during the same period. 5 Clearly, the geographic concentration of OFDI flows from emerging markets has risen, with developing Asia emerging as, by far, the dominant home region for OFDI by emerging market multinational enterprises (MNEs). Among the emerging Asian economies, the overseas expansion of Indian firms has been quite noticeable. Although firms from China, Hong Kong (Special Administrative Region of China), the Republic of Korea, Malaysia, the Philippines, Singapore, and Taiwan Province of China, continue to lead in terms of OFDI flows from emerging Asia, the growth of OFDI from India has been the third highest after the United Arab Emirates and Egypt during 2000–2008 (Table 1.1). In terms of the absolute annual value of outflows, India ranked among the top ten outward-investing Asian emerging economies during 2000–2008, and was the seventh-largest outwardinvesting Asian emerging economy in 2008. In terms of OFDI stock, India, with US$62 billion of accumulated investment at the end of 2008,6 was the tenth-largest outward-investing economy among all emerging markets, as shown in Figure 1.1. Despite having a much smaller OFDI stock, India outperformed China in OFDI intensity (defined as OFDI stock normalized by the size of the home country economy) in 2008. This growth in the volume of OFDI flows has been accompanied by a rapid increase in the number of Indian firms undertaking OFDI. Between 1991 and 2003, the growth rate in the number of outward-investing firms in India was 809%—higher than the corresponding growth in countries like China (805%), the Republic of Korea (611%), Brazil (116%), and Hong Kong (90%) over comparable periods (United Nations Conference on Trade and Development 2006: 122, Table III.13). Recently, a number of Indian firms were catapulted into listings of top global firms as a result of their large-scale overseas acquisitions. In the history of the overseas expansion of Indian MNEs, the current volume of OFDI and the number of firms undertaking OFDI are entirely unprecedented. The new global presence of Indian firms has justifiably emerged as the subject matter of a growing international literature (Ramamurti and Singh 2009; Pedersen 2008; Taylor 2008; Jonsson 2008; Tiwari and Mani 2008; Pradhan 2004, 2008a, 2008b; Hansen 2007; Palit 2007; Pradhan and Abraham 2005; Sauvant 2005; Sauvant et. al. 2008, 2010; United Nations Conference on Trade and Development 2004, 2005, 2006). This research has addressed a number of issues covering the changes in industrial, regional and ownership characteristics of Indian overseas investment over time, the motivations of Indian firms for investing abroad, the nature of their sources of competitiveness for outward investment, and the influence of the home country policy regime. While these issues are considered in the literature, our understanding of them is still incomplete and evolving.

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4

Jaya Prakash Pradhan and Karl P. Sauvant Indonesia

$27,5%

Argentina

$29,9%

Chile Mexico United Arab Emirates India

$32,19% $45,5% $51,18% $62,5%

South Africa

$62,23%

Malaysia

$68,30%

Korea, Republic of

$96,11%

China

$148,3%

Brazil

$162,10%

Taiwan Province of China

$175,45%

Singapore

$189,108%

Russian Federation

$203,12%

Hong Kong, China SAR Figure 1.1 percents.

$776,360%

OFDI stock of the top 15 emerging markets (2008), in US$ billions and

Source: Based on the United Nations Conference on Trade and Development’s online database, available at http://stats.unctad.org/fdi/. a

OFDI stocks in percentages of gross domestic product are in parentheses.

Moreover, many aspects of Indian OFDI have yet to be investigated and incorporated into the literature. The present volume seeks to make a contribution to the literature by offering new insights into the rise of Indian OFDI and by analyzing its evolving features. The perspectives of economists, political scientists, researchers, and policy makers on the rise of Indian OFDI will hopefully help to unravel the broader analytical dynamics of emerging market MNEs. Before presenting an overview of this volume and outlining its contribution, we briefly summarize the growth path of Indian OFDI and discuss certain issues that are specific to it but have yet to be critically addressed in the literature.

A. Origin and Growth: A Brief History The emergence of Indian firms investing abroad can be traced back to the early 1960s. The setting up of a textile factory by the Birla Group in Addis

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5

Ababa, Ethiopia, in 1960, as well as a wholly owned trading subsidiary by the Tata Group in Zug, Switzerland, in 1961, marked the beginning of OFDI from India. Other industrial houses like Thapar, JK Singhania, Maftlala, and Godrej joined in later. Indian firms were pioneers among developing countries in undertaking OFDI, with essentially a small group of family-owned business groups engaging in modest investments in selected developing countries from the 1960s to the 1980s. Public-sector companies largely remained outside the process of OFDI in this period, except in a small number of cases.7 Host developing countries—led by Southeast Asia, East Africa, the Commonwealth of Independent States (CIS), and West Africa—accounted for about 82% of cumulative Indian OFDI flows during the period 1960– 1989. The number of outward-investing Indian firms rose from 11 in the 1960s to 146 in the 1980s, as set out in Figure 1.2. During this phase, public policy, development levels, geopolitical alliances, and evolving corporate strategies shaped and determined the nature of Indian OFDI (Pradhan 2008c, United Nations Conference on Trade and Development 2007, Aggarwal and Weekly 1982). State regulation of the growth of large industrial houses motivated, for the most part, the OFDI decisions of Indian firms. These business groups had enjoyed rapid expansion at home. The scope for further growth was

40,000

FDI Outflows (US$ Million) Number of Outward Investing Firms

35,000

$37,224

2,500

2,104 2,000

25,000

1,500 1,257

20,000

1,000

15,000

(In Number)

(In US$ Millions)

30,000

10,000 500 5,000 0

Figure 1.2

146

11

60

1961–69

1970–79

$32

$87

$3,351

$152 1980–89

0 1990–99

2000–07

Indian OFDI flows (1961–2007), in US$ millions and numbers.

Source: Data on OFDI flows for 2001, 2002, and 2007 are from the United Nations Conference on Trade and Development (2008), available at http://stats.unctad.org/fdi/; the remaining information is based on a dataset compiled from unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre, and unpublished firm-level information from the Ministry of Commerce.

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6

Jaya Prakash Pradhan and Karl P. Sauvant

limited due to the slow expansion of the domestic market and the existence of restrictive regulatory measures like the Monopolies and Restrictive Trade Practices Act, 1969 (MRTPA), the Foreign Exchange Regulation Act, 1973 (FERA), and industrial licensing. Indian policy makers, acknowledging the potential of OFDI for promoting national exports and for strengthening development cooperation with other developing countries, selectively allowed overseas operations of Indian firms. Inadequate foreign exchange reserves, together with the weak expertise and knowledge of Indian firms, led to an OFDI policy regime that permitted overseas investments only through exports of Indian-made machinery, and through know-how against cash transfers (and in the shape of ownership control through joint ventures [JVs]). Developing regions that had cultural, geographical, and ethnic proximity to India became the primary destinations for outward investment for Indian firms that intended to capitalize their limited knowledge and simple ownership advantages, as shown in Table 1.2. The manufacturing sector, mostly confined to a few select industries like chemicals, paper, and textiles, dominated the sectoral distribution of Indian OFDI during 1961–1989, as set out in Table 1.3. Indian OFDI flows have grown dramatically since the 1990s (Figure 1.2). The volume of OFDI flows increased from just US$152 million in the period 1980–1989 to US$3.4 billion in the period 1990–1999, and further to US$37 billion between 2000 and 2007. The corporate picture of Indian OFDI became more complex, with the number of outward-investing Indian MNEs jumping from 146 in the period 1980–1989 to 1,257 and 2,104, respectively, in the periods 1990–1999 and 2000–2007. Unlike in the past, a large number of Indian MNEs are not traditional Indian business houses, and many are small- and medium-sized enterprises. The rapid growth of Indian OFDI flows during the 1990s and the first decade of the twentyfirst century has been associated with a broadening of the industry and the geographical profile of investments. Current OFDI flows from India reflect a broad industry composition, including the rise of new players from industries as diverse as gas and petroleum, software, and pharmaceuticals, as shown in Table 1.3. The phase during which Indian OFDI was concentrated within the developing world is now over; developed countries received more than 60% of Indian OFDI flows during 2000–2007, as shown in Table 1.2. Developed countries like the United Kingdom, the United States, and the Netherlands claimed around 33%, 10%, and 6%, respectively, of total outflows during this period. Indian OFDI has also become more geographically diversified, with the number of host countries totaling 117 in the period 1990–2007 (see Table 1.2). Another striking change is that the wholly owned subsidiary form of OFDI has become, by far, the dominant mode of Indian equity participation abroad (Table 1.4). The surge in Indian OFDI since the 1990s, and its various new features, appear to be a result of the interactions among changes in national policy, corporate behavior, and international developments in trade and

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Table 1.2 Regional distribution of Indian OFDI flows (1961–1989, 1990–2007), in US$ millions and percent Host region/economy

Developed economies Europe European Union Other developed Europe North America Other developed countries Emerging Markets Africa North Africa West Africa Central Africa East Africa South Africa Latin America and Caribbean South America Central America Caribbean Asia and Oceania West Asia East Asia South Asia Southeast Asia Oceania Southeast Europe and CIS Southeast Europe CIS World No. of host countries

1961–1989

1990–2007a

OFDI flows (US$ millions)

Percent

49 32 23 8 18 0 221 74 1 26 0 46 0 0.18

18.2 11.7 8.6 3.1 6.5 0.0 81.8 27.2 0.4 9.8 0.0 17.0 0.0 0.1

17,112 13,264 13,081 183 3,203 645 10,678 3,285 549 232 63 2,396 45 1,179

61.6 47.7 47.1 0.7 11.5 2.3 38.4 11.8 2.0 0.8 0.2 8.6 0.2 4.2

1,866 887 857 49 1,156 104 1,674 398 23 49 2 295 50 61

0 0.2 0 116 9 0.1 20 87 0.2 32 2 29 271

0.0 0.1 0.0 42.7 3.3 0.0 7.2 32.1 0.1 11.8 0.9 10.9 100

533 95 551 4,852 1,223 1,018 322 2,287 3 1,362 11 1,351 27,791

1.9 0.3 2.0 17.5 4.4 3.7 1.2 8.2 0.0 4.9 0.0 4.9 100

27 22 18 1,298 413 181 297 563 2 112 8 105 3,149

41

OFDI flows (US$ millions)

Percent

No. of outwardinvesting firms

117

Source: Calculation based on a dataset compiled from unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre and from unpublished firm-level information from the Ministry of Commerce. a Data for 2001 are only from January to March, data for 2002 are from October to December, and data for 2007 are from January to March.

investment. The removal of the restrictive measures on the growth of firms (like FERA), the removal of the licensing regime, the dismantling of product reservation systems for public-owned and small- and medium-sized enterprises, facilitative measures for foreign firms, and a massive reduction in import duties all led to intense competition in Indian markets. Most of the large Indian firms were seriously affected by growing competition, and were restructured to emphasize product specialization, increase productivity, and improve product quality. These domestic firms had inherited reasonable but inefficient industrial expertise, skills, and traditions from an

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Table 1.3 Sector and industry composition of Indian OFDI flows (1961–1989, 1990–2007), in US$ millions and percents Sector and industry

1990–2007a

1961–89

OFDI Percent OFDI Percent flows (US$ flows (US$ millions) millions)b


Primary Agriculture and allied products Ores and minerals Gas, petroleum, and related products

4 1 4 0

1.6 0.2 1.4 0

5,282 73 222 4,988

22.51 0.31 0.95 21.25

135 71 21 44

Secondary (manufacturing) Food, beverages, and tobacco Textiles and wearing apparel Paper and paper products Printing and publication Gems and jewelry Leather and related products Rubber and plastic products Nonmetallic mineral products Basic metals and fabricated metal products Machinery and equipment Electrical machinery and equipment Transport equipment Computer, electronic, medical, precision Chemicals Pharmaceuticals Other manufacturing

170 10 27 32 0 0 0 1 7 12

62.7 3.7 9.8 11.7 0 0 0.1 0.3 2.8 4.3

9,870 625 365 51 28 237 78 375 144 904

42.06 2.66 1.55 0.22 0.12 1.01 0.33 1.60 0.61 3.85

1,620 161 273 24 36 105 61 104 76 148

5 5

1.9 1.7

348 431

1.48 1.84

136 136

6 0

2.1 0.1

812 842

3.46 3.59

89 129

55 4 7

20.2 1.5 2.5

1,699 2,874 59

7.24 12.25 0.25

212 158 51

Tertiary (services) Construction and engineering services Trading Advertising and market research Consultancy and business advisory service Event management Film, entertainment, and broadcasting Hospitality and tourism Hospital and health services Financial and insurance services Telecommunication services

95 15

35 5.5

8,255 480

35.18 2.05

1,546 121

14 0

5.1 0

47 30

0.20 0.13

93 44

1

0.2

63

0.27

106

0 0

0 0

2 1,048

0.01 4.47

7 58

16 0 32

6 0 11.8

250 191 1301

1.07 0.81 5.55

90 34 144

0

0

689

2.94

22 Continued

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Table 1.3 Continued Sector and industry

OFDI flows (US$ millions) Transportation services Software development, packages, and ITES Other services Others Total

1990–2007a

1961–89

Percent OFDI Percent flows (US$ millions)b


3 5

0.9 1.9

359 3633

1.53 15.48

88 848

10

3.6

162

0.69

45

2

0.7

60

0.26

271

100

23,467

100

76 3,149

Source: Calculation based on a dataset compiled from unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre, and from unpublished firmlevel information from the Ministry of Commerce. a

Data for 2001 are only from January to March, data for 2002 are from October to December, and data for 2007 are from January to March. b The US $4,323 million investment undertaken by Cairn India Ltd. for oil exploration in the Channel Islands has not been included as this is a round-tripping investment made by a U.K.-based parent company, Cairn Energy Group, through its Indian subsidiary.

inward-looking policy regime that encouraged localization of production and import substitution. By implementing new corporate measures—to beat the competition in the 1990s—Indian firms appear to have improved their competitive strength, leading to improved bottom lines and higher levels of liquidity. In anticipation of the introduction of stricter protection of intellectual property, many Indian firms gravitated toward higher in-house research and development (R&D) activities in the late 1990s, and toward external acquisitions of technologies in the first decade of the twenty-first century. Other new developments in global markets, such as the liberalization of trade and investment regimes in overseas markets, attracted Indian firms to global markets. Favorable liquidity positions in-house, combined with the adoption of a favorable OFDI policy regime, provided the crucial push for Indian OFDI. Overseas investment became the preferred strategy for Indian firms to survive in the new global economic environment by accessing new markets, skills, and technologies, and by enlarging the global scale and scope of their operations.

B. Why Do Indian Firms Go it Alone Now? For many years, starting in the early 1960s, outward-investing Indian firms had overwhelmingly chosen strategic alliances and JVs over wholly owned subsidiaries in their overseas expansion. Initially, the policy regime of India, as a home country, required Indian firms to only have minority ownership participation in their overseas projects, but preference for JVs continued even after this policy was relaxed in the late 1970s and throughout

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the 1980s. In fact, the share of JVs in the total number of OFDI projects increased, from almost 62% in the 1960s to 70% in the 1980s, as shown in Table 1.4. Presumably, JV participation was a sensible strategy for minimizing the risks and uncertainty of global business for Indian firms that had little experience in cross-border investments at that time. Indian parent companies shared their modest level of adaptive and incremental technological advantages with local partners in return for access to the latter’s local resources, information, and networks. Wholly owned subsidiaries have been the clear preference of Indian MNEs since the 1990s. Their share in the total number of OFDI projects increased to 54% in the 1990s, and then to 70% in the first decade of the twenty-first century. Clearly, subsidiaries have emerged as the new paradigm of ownership control by Indian firms in their overseas investments. What explains this change in the ownership preference of Indian firms? Did early internationalization experiences from the 1960s to the 1980s lead Indian firms to be more confident in undertaking overseas investments alone? In the stage theory of internationalization, such as the Uppsala model (Johanson and Wiedersheim-Paul 1975, Johanson and Vahlne 1977), firms learn from their internationalization process and eventually accumulate sufficient expertise and knowledge, so that they feel confident in making their overseas moves independently. However, this reasoning applies only to a small group of Indian companies that undertook OFDI between the 1960s and the 1980s, not to the majority of Indian firms that only began to undertake international investments more recently. Most importantly, it would be a mistake to assume that the choice of wholly owned subsidiaries by Indian firms is a result of their investment in low technology industries. Evidence shows that Indian companies that originate in different industries and that focus on different technological classifications, including in the services sector, have opted for wholly Table 1.4 The ownership structure of Indian OFDI projects (1961–1969, 2000–2007), in numbers and percents Period

Developed region

Developing region

World

JV

WOS a

JV

WOS

JV

WOS

Total

1961–69 1970–79 1980–89 1990–99 2000–07

1 5 25 309 838

5 6 27 635 2,985

7 58 80 579 809

0 3 18 404 2,110

8 63 105 888 1,647

5 9 45 1,039 5,095

13 72 150 1,927 6,742

61.5 87.5 70.0 46.1 24.4

All years

1,178

3,658

1,533

2,535

2,711

6,193

8,904

30.4

JV as a percent of total

Source: Calculation based on a dataset compiled from unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre, and from unpublished firm-level information from the Ministry of Commerce. a

WOS, wholly-owned subsidiaries.

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11

owned subsidiaries more than JVs since the 1990s. From the 1990s to the first decade of the twenty-first century, a significant expansion in the share of wholly owned subsidiaries in the total number of OFDI projects took place in technology-intensive manufacturing activities like machinery and equipment, electrical machinery, pharmaceuticals, transport equipment, and chemicals. In the past, Indian companies have competed in these industries on price and process innovation; but of late, Indian companies are making serious efforts to upgrade their firm-specific technological assets in order to better take on the tough competition. It is possible that in industries such as the automotive industry and pharmaceuticals, Indian MNEs have developed such high levels of intangible assets that they are motivated to go it alone. The choice of wholly owned subsidiaries may also reflect a wish of capable Indian MNEs to protect their ownership advantages, and to have more flexibility and autonomy in their global businesses. The strong preference for wholly owned subsidiaries may also indicate that, in entering foreign markets, Indian MNEs are relying less on local networking and resource-sharing by means of JVs. The relative attraction of wholly owned subsidiaries for Indian MNEs is a distinct regional feature. From the 1960s to the first decade of the twenty-first century, Indian firms overwhelmingly preferred wholly owned subsidiaries over JVs when entering into developed markets. The average share of wholly owned subsidiaries in OFDI projects directed at developed regions was as high as 76% in the period 1961–2007. This stands in contrast to Indian OFDI flows to developing regions, where JVs were generally preferred as a means of market entry by investing Indian firms over wholly owned subsidiaries. Such subsidiaries accounted for a mere 18% of Indian OFDI projects in developing regions in the 1980s. This share grew to 41% in the 1990s, and then to 72% in the first decade of the twenty-first century. The preference of Indian firms for market entry by means of JVs in developing countries, and by means of wholly owned subsidiaries in developed countries, is intriguing, given the modest ownership advantages and limited experience with international investments of the MNEs concerned. Further inquiry shows that this preference is rooted primarily in the differences in economic activities undertaken by Indian MNEs in developed and developing regions. Early Indian OFDI projects in developed regions were largely service activities like trading, consultancy, and engineering services, rather than manufacturing, whereas projects in developing regions were mostly concerned with manufacturing activities (Pradhan 2008d). Most of these service activities, such as trading, require relatively few resources (their capital intensity is relatively low), unlike manufacturing operations, and this is a persuasive factor behind the preference of Indian parent companies for full ownership of their overseas ventures in developed region. It is not just the declining tendency of Indian firms to opt for overseas JVs that needs analysis; the very nature of these alliances is also rather curious. What are the characteristics of the JVs undertaken by Indian firms

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in the past, compared to those undertaken more recently? The old JV paradigm, in the majority of cases, involved equity participation by Indian parent firms in order to secure access to local markets. In most of these cases, equity participation was through Indian firms transferring technical knowledge abroad and the foreign partner sharing the financial burden of establishing production units. Clearly, this type of JV arrangement serves the limited purpose of accessing the host country market. Of late, the nature of the strategic alliances of Indian companies, as reflected in strategic acquisitions of stakes in foreign companies, has undergone noticeable changes. Strategic alliances by Indian firms are no longer merely aimed at securing access to new markets, but are increasingly aimed at accessing new products, gaining marketing and distribution channels, and acquiring other intangible skills. This issue begs further exploration.

C. Why Do Indian Firms Acquire Overseas Companies? Since the early 2000s, Indian MNEs seem to have increasingly chosen acquisitions as a mode of international expansion. A total of 437 Indian MNEs are estimated to have spent more than US$70 billion on 976 acquisitions from 2000 to June 2009 (Table 1.5). The number of overseas acquisitions, as well as the number of acquiring Indian firms, has been rising consistently throughout the period 2002−2009. Recent research on Indian overseas acquisitions (Pradhan and Abraham 2005; Pradhan 2008b; Buckley, Table 1.5 Overseas acquisitions by Indian firms (2000−2009), in US$ millions and numbers Year

Overseas acquisition

No. of acquiring Indian parent firms

Value

No. of deals

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009a

908 194 2,602 616 3,011 3,577 7,712 35,827 12,954 2,814

39 22 27 41 60 143 189 192 235 28

29 21 16 37 48 97 139 150 164 24

All above years

70,215

976

437

Source: Based on dataset constructed from different reports from newspapers, magazines, and financial consulting firms including Hindu Business Line, Economic Times, Financial Express, Business World, Grant Thornton India, and ISI Emerging Market. a

Data for 2009 are through June.

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Forsans, and Munjal 2009) reveals that a combination of firm-specific factors is driving Indian acquisitions abroad. Indian acquiring MNEs seek to access overseas markets, acquire intangible assets like new technologies and skills, reap operating synergies, and, in special cases, secure natural resources like oil, gas, and minerals. The competitive pressure of opening up the home country economy to inward FDI and cheap imports appears to have driven Indian MNEs to resort to an inorganic path for global growth. An important feature of Indian acquisitions that needs explanation is their concentration in developed regions. Nearly 83% of the value of Indian acquisitions during the period 2000–June 2009 went to acquisitions in developed countries. Emerging markets attracted just 17% of the total value of Indian overseas acquisitions in this period. While the large size of the markets in developed regions is likely to be an important factor, the desire of Indian firms to access new technologies and skills, and to enhance their firm-specific competitive advantages may be an equally important consideration. The perceived importance of building after-sales distribution and service centers in highly competitive markets of developed countries may also be a factor in the regional concentration of Indian OFDI in developed countries. In contrast, Indian acquisitions in emerging markets tend to focus more on gaining access to natural resources like oil, gas, and minerals. As overseas acquisitions are a recent phenomenon for Indian MNEs, several aspects of this issue are yet to be investigated. For example, an empirical evaluation of the economic success of Indian MNEs’ acquisitions abroad would be particularly helpful. To what extent are Indian acquiring firms successful in achieving their acquisition objectives, and at what cost? After the completion of an acquisition, the challenge is to minimize the time spent integrating the acquired enterprise. Several questions need to be examined, for example: what has been the pre- and postacquisition preparedness of Indian MNEs, and what are the issues faced by Indian firms in the actual process of implementing overseas mergers and acquisitions? Are Indian firms, given their relative inexperience of international acquisitions, underestimating the political, legal, and cultural complexities of the processes involved?

D. What Explains the Distinct Regional Specialization of Indian Firms? The evolution of Indian OFDI has been accompanied by a mostly unnoticed but interesting regional specialization of Indian firms. A group of 1,283 Indian firms exclusively confined their OFDI presence to emerging markets in the period 1961–2007, whereas another group of 1,475 Indian firms operated entirely in developed countries. These two groups of Indian firms can be termed “emerging market-specific Indian MNEs” and “developed region-specific Indian MNEs,” respectively, together representing

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“region-specific Indian MNEs.” In addition to these region-specific, outward-investing Indian MNEs, another group of 391 Indian firms has undertaken OFDI activities in both developed and emerging markets. Since these Indian MNEs do not confine their OFDI activities to any one region, but are rather present in both developed and emerging markets, they will be labeled “region-free Indian MNEs.” The fact that different groups of Indian MNEs reveal different regional preferences in undertaking OFDI is, in itself, an interesting issue worthy of investigation. Why do national firms of a particular home country, facing a uniform macro environment (including industrial and technological policies), exhibit a distinct regional specialization in their OFDI operations? One possible reason for such a distinct regional specialization could be the differences in the nature and content of monopolistic advantages of region-specific and region-free outward-investing Indian MNEs. One would expect developed region-specific and region-free Indian MNEs to possess higher and more sophisticated levels of ownership advantages, as compared to developing region-specific Indian MNEs. The reason is that regions with higher stages of development play host to firms that are based on powerful and broad-based monopolistic advantages originating from Schumpeterian frontier innovation, sophisticated product differentiation, and specialized management and managerial skills. There appears to be a sectoral dimension to this geographic specialization. As Indian MNEs’ entry into developed regions is spearheaded by the services sector, while their entry into developing regions is led by the manufacturing sector, the probability of an Indian firm being a developed region-specific Indian MNE is higher if it is from the services sector. In the case of the software and information technology (IT) industry, Indian MNEs are overwhelmingly developed-region specific, because developed countries are the primary source of demand for these services. This issue could also gain from a rigorous empirical analysis that the existing literature on Indian MNEs is still lacking.

E. Why do Knowledge-based Industries Dominate Indian Outward Foreign Direct Investment? Over the years, Indian OFDI has become diversified over different industries, and is increasingly being led by knowledge-based industries in the manufacturing and service sectors. For a developing country with a labor surplus, to have a greater share of its OFDI in technology- and skill-intensive industries is a truly interesting phenomenon that deserves to be further investigated: is this recent surge in knowledge-intensive OFDI reflective of some competitive advantage of India in the industries concerned? India has been successful in promoting an indigenous capability through strategic, industrial, and technology policies in industries such as pharmaceuticals, the automotive industry, and IT. There exists ample documentation to show how the Indian government has used an active industrial policy

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and a liberal patent system to encourage domestic investments in pharmaceuticals (Pradhan and Alakshendra 2006, Athreye and Godley 2009), and in the automotive industry (Pradhan and Singh 2009). The growth of the Indian IT industry has been explained by the creation of the required domestic skills, initial demand from the public sector, and a liberal policy regime for inward foreign investment (Pradhan 2010). The depth and competitiveness of Indian firms in these industries increased substantially, with India moving away from a protected regime to economic openness in the 1990s. This improved competitiveness may be partly responsible for facilitating the knowledge-based OFDI of the last decade. Growing competitive pressures, due to openness to trade and inward FDI, may also be causing Indian firms to seek complementary intangible assets abroad (Pradhan 2008b; Athreye and Godley 2009; Buckley, Forsans, and Munjal 2009; Balasubramanyam and Forsans 2009). More research on the factors leading to knowledge-based OFDI from India is, of course, central to improving our understanding of this issue.

F. This Volume and Its Contribution As indicated previously, the rise of Indian MNEs is a recent phenomenon, and various aspects of their growth are yet to be properly understood. There are a number of features that have characterized Indian MNEs in recent years: they are active in both emerging markets and in developed countries, but increasingly prefer the latter; they are inclined to have complete ownership control of their overseas ventures, undertaking acquisitions more than greenfield investments; and they are emerging in a number of industries, including service industries. It has yet to be resolved whether these evolutionary features of Indian OFDI are in some sense unique to India, or whether they are the result of the generic process of firms’ internationalization. The existing academic and popular debate on Indian FDI will remain incomplete unless we situate our analysis in this broader context.

1. Analytical Perspectives on the Rise of Indian MNEs Indian OFDI, in its evolutionary process, has passed from an essentially slow and incremental phase of expansion during the 1960s–the 1990s, to a phase of sudden and rapid growth since 2000. This recent, sudden, and rapid growth includes features that break with past practice. The abrupt jump in OFDI flows and emerging patterns (such as an increasing shift toward developed host countries, a distinct preference for complete control of overseas units, and a significant surge of OFDI in knowledge-based industries) offers an opportunity to evaluate alternative theories of FDI that are concerned with explaining the rise of emerging market MNEs. Chapter 2, by Michael W. Hansen, summarizes the different distinct patterns of Indian OFDI across regions, industries, and types of motivations.

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He lucidly analyzes these patterns against conventional, as well as current, theoretical frameworks. Hansen’s comprehensive analysis of the rise of Indian MNEs and their recent idiosyncratic features suggests that there is something distinct in Indian OFDI growth. Indian OFDI has grown along a unique path, with the initial and incremental phases of growth (from the 1960s –the 1990s) reflecting the predictions of traditional theories of FDI (such as the investment development path). The current phase of growth (post-1999) is marked by the speed and suddenness of changes in the quantity and quality of OFDI. This, in turn, supports the arguments of latecomer theories. The ingredients of the India Inc. model are discernible throughout the history of Indian overseas investment. Consequently, it seems fair to state that, in order to understand the long-term development of MNEs from India, various FDI theories are required. Scholars have exhibited less appreciation for the role of the state and of political factors (compared to other factors) in the internationalization of firms from emerging markets in general. While this issue has been the topic of extensive study in the case of China, it remains underexplored in other emerging markets like India. Chapter 3, by Jørgen Dige Pedersen, provides insights into the significance of political factors that influence the trend and direction of Indian OFDI. The growth of Indian OFDI flows is found to be closely integrated with state policies on the growth of large business groups and shifting policy attitudes toward OFDI. The rise in recent years of Indian OFDI in the energy sector appears to be, in part, a result of a growing direct engagement of the Indian state. This direct involvement should be seen as distinct from the effort to promote overseas investment in other industries by means of creating favorable institutional mechanisms, including access to finance and risk-mitigation tools. The importance of the role of the state in understanding the changing forms of OFDI from emerging markets like India should be understood in this context. As the leading Indian MNEs are essentially conglomerate business groups, it is interesting for both academics and policy makers to understand the role of conglomerate business structures in India’s OFDI flows. The evolution of Indian global business houses and their internationalization strategies need to be understood in the context of the varieties of market-oriented systems that have developed over the past decades of policy making and development experience. In Chapter 4, Joël Ruet traces the growth of conglomerate Indian MNEs that survived and flourished under the India-specific, state-created restrictive policy regime in the past. These firms are now reinventing themselves under a liberalized policy regime, showing, since the 1990s, a strong inclination to globalize in order to gain access to global markets and additional intangible assets. The message conveyed by Ruet is that rising conglomerate firms from India reflect the growth of a new business model of industrial globalization, by way of catching up through low-cost innovation, and the rapid use of capital to acquire new overseas units to enhance their global

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competitiveness. The internationalization of conglomerate firms is one of the most interesting conceptual aspects in the literature on emerging MNEs.

2. Industry Analysis of Indian Outward FDI The 1990s and the first decade of the twenty-first century saw the remarkable diversification of Indian investment abroad, with a significant participation of the three economic sectors. Developments in these sectors are significantly driven by sector-specific industrial factors and public policy. A better understanding of these drivers has great relevance and significance for theories of, and policy making on, emerging market OFDI. While industry diversification is an established trend in the internationalization of Indian firms, the kinds of ownership advantages that drive emerging MNEs, their ability to benefit from forging external linkages, and the additional leverage they create (including acquired additional resources) have yet to be identified and analyzed. Chapter 5, by Giovanni Balcet and Silvia Bruschieri, is based on case studies of selected Indian MNEs from the automotive and pharmaceutical industries, and it highlights these issues effectively. The authors stress that the growth of selected Indian MNEs is critically linked to the previous era of domestic capability formation, promoted by public policy. The domestic capability formation was mainly achieved through the creative assimilation and adaptation of imported technologies and alliances with western MNEs (in the pharmaceutical industry) and Japanese MNEs (in the automotive industry). In the period since 2000, Indian MNEs have progressed to another development stage, learning from and leveraging acquisitions in order to grow rapidly in global markets. However, these firm-specific trajectories of internationalization are by no means uniform across firms, and they vary considerably in terms of heterogeneity in corporate practices, competitive asset bundling, and in terms of the strength of their linkages and leverage. Consequently, the authors recognize that the wide diversity that exists among emerging MNEs, even from within the same home country, are often obscured in the literature by general characterizations of emerging market OFDI. In Chapter 6, Vinish Kathuria suggests that the drivers of OFDI from India’s two most prominent knowledge-based industries, the pharmaceutical and software industries, could be different. This difference could be due to the disparity of economic activities (i.e., manufacturing versus services), the different industry histories (old versus new), and the uneven focus of public policy and firm-specific diversity. The descriptive analysis of a sample of outward-investing Indian pharmaceutical and software companies shows that the former are relatively older, hold a larger asset base, and foster higher-cost R&D than the latter. These results tend to confirm the historical realities of the Indian OFDI path, since the Indian pharmaceutical industry is much older than the software industry, and has pioneered Indian OFDI since the 1970s.

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3. Regional Studies on Indian MNEs The rise of emerging market MNEs was associated with a high level of anxiety in developed host countries, but in developing host countries, a receptive attitude seems to prevail. Emerging Indian MNEs are not only focusing on developed country markets (now more than in the past), but are also increasingly using acquisitions significantly to expand their presence in those countries. Historically, developing countries preferred FDI from fellow developing countries, as developing country MNEs were seen to be different from developed country firms. The different contributions in this section of the current volume shed light on the analysis of Indian FDI from the perspective of the host country or region. These studies present groundbreaking research on the topic, as there are hardly any host countryspecific studies on the trends, patterns, and motives of Indian OFDI. Among developed countries, the United States has emerged as the preferred host country for Indian investment in the first decade of the twenty-first century. In Chapter 7, Nandita Dasgupta examines the growth and related patterns of Indian investment flows into the United States and analyzes different macroeconomic factors influencing them. Her comprehensive analysis shows that Indian FDI into the United States took off in the post-1999 period to assume greater significance for both the home country and host country. The majority of the Indian MNEs operating in the United States identified by Dasgupta are in knowledge-based industries like software and IT, pharmaceuticals, chemicals, and the automotive industry, and more than half of these are relatively young companies (i.e., established within the past 20 years). These companies increasingly prefer acquisitions to greenfield investments as their primary means of market entry. The list of Indian firms investing in the United States also includes a significant number of small firms, in both manufacturing and services. A liberalized OFDI policy, high domestic growth, competitive capability formation under an open-policy regime, increased corporate profitability, access to global financial markets, knowledge spillovers, and heightened competition from inward FDI are all important home country factors that drive Indian OFDI, and OFDI to the United States in particular. The large size of the U.S. market, a business-friendly policy regime (including a liberal, inward FDI policy and low taxes), a high level of physical and institutional infrastructure, and the availability of strategic resources have attracted Indian investment to the United States. It is important to note that Indian investments are not only bringing in an India-specific set of business knowledge to the host country, but are also contributing to local employment generation and capital formation. Chapter 8, by Rajnish Tiwari and Cornelius Herstatt, deals with recent Indian investments in Germany. The growing number of Indian acquisitions in Germany has resulted in the Indian FDI stock in Germany exceeding the stock of German FDI in India. More than half of the Indian parent companies that have affiliates in Germany are in the software and IT industry. A significant number of Indian parent companies are also in pharmaceuticals

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and the automotive industry. Indian MNEs tend to hold full or majority stakes in their German subsidiaries. The study suggests that the 167 Indian subsidiaries it has identified provide employment to about 20,000 people. The managerial survey of a sample of Indian subsidiaries suggests that satisfactory sales performance and, for many of them, R&D are important considerations. Major drivers of Indian investment in Germany include proximity to their customers and suppliers, direct adaptation or development of products to cater to host demand, and enhanced access to the large German market. It is interesting to note that Indian investment has been net job-creating in Germany, as job creation exceeds job offshoring to India. This net positive employment effect is particularly strong in R&D activities. This study provides useful insights into the nature of host country effects of Indian investment, which leads to a better appreciation of the consequences of hosting OFDI from emerging market MNEs. The OFDI operations of developing country firms, including Indian MNEs, in other developing regions have attracted academic interests in recent years (Aykut and Rath 2004; Aykut and Goldstein 2007; United Nations Conference on Trade and Development 2006; Pradhan 2008c, 2009). In the literature, South-South FDI (i.e., developing country firms investing in fellow developing countries) is often characterized as contributing more to the development of host countries than North-South FDI (investments by developed country firms in developing countries). Chapter 9, by Parthapratim Pal, examines Indian investment in developing Africa as a case of South-South cooperation, while also addressing recent trends such as increased involvement in energy and mineral industries. The author shows that Indian MNEs significantly lag behind their Chinese counterparts in terms of scale of investment. Chinese investments have been more coordinated and promoted by proactive Chinese state policies, while Indian investments remain largely private initiatives—until recently. The most distinctive feature of Indian FDI in Africa is its sectoral diversification, especially as compared to the concentration of Chinese investment in the primary sector. However, growing investments from Indian stateowned oil and gas companies have become an established trend. Indian and Chinese investments in Africa are rapidly building an increased presence in natural resource-based activities, which are essentially low technology and have few linkages with the host country economy. However, African countries appear to have leveraged these investments in order to achieve more rapid development than they could have achieved by simply relying on natural resource-seeking investments from developed countries.

Conclusions The present volume provides a systematic analysis of the rise of Indian OFDI. In doing so, it presents several new perspectives on Indian MNEs. The changing trends and patterns of Indian OFDI cannot be understood by isolating traditional theories from new approaches. What is needed is

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the joint use of the two generations of theories to understand the entire, long-term, path of Indian OFDI. In particular, the prominence of business groups in the process of OFDI, reflecting the typical nature of Indian entrepreneurship and business practices, calls for the modification and expansion of the existing theoretical framework of emerging market MNEs. One should also be mindful of the central role of political factors in explaining the rise of such MNEs. The growth of Indian OFDI from knowledge-based industries ultimately reflects the rapidly improving competitive capabilities of firms in these industries. Indian firms in the automotive and pharmaceutical industries have, in the past, leveraged linkages with foreign firms as a means of gaining technology. Given the current liberal environment, Indian companies are turning to acquisitions to upgrade on the path of technological advancement. However, among emerging Indian MNEs, there exists interindustry differences in the nature of their firm-specific characteristics. The need to access overseas natural resources has also been one prominent driver of India’s OFDI path in recent years. These reflections on the important question of how Indian FDI is faring and how it is affecting host countries deliver new insights that are worthy of further analysis. Indian investment in both the United States and Germany shows a growing bias toward knowledge-intensive industries like software, pharmaceuticals, and the automotive industry. These are the industries in which India has succeeded in building unique capabilities, sometimes pursuing a strategy of low-cost innovation. Indian OFDI could potentially lead to a more competitive market structure, and to inflows of additional innovative assets. Indian MNEs are increasingly contributing to local R&D (e.g., in the case of Germany), supported by developed countries’ strong innovatory infrastructure and skills. Overall, Indian MNEs are net positive contributors to local employment and to development in general.

Notes * Jaya Prakash Pradhan is an Associate Professor at the Sardar Patel Institute of Economic & Social Research (SPIESR), Ahmedabad. Karl P. Sauvant is the founding Executive Director of the Vale Columbia Center on Sustainable International Investment, Senior Research Scholar and Lecturer in Law at Columbia Law School, Co-Director of the Millennium Cities Initiative, and Guest Professor at Nankai University, China. 1. “Emerging markets” are all economies that are not members of the European Union and the Organization of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe. For the individual members of each group, see United Nations Conference on Trade and Development (2009). 2. See United Nations Conference on Trade and Development’s online database available at http://stats.unctad.org/fdi/. 3. Latin American firms mainly from Brazil, Panama, and Colombia were active in investing abroad during this period.

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4. Outward-investing African firms in this period were based in South Africa, Libyan Arab Jamahiriya, Gabon, and Algeria. 5. See United Nations Conference on Trade and Development’s online database available at http://stats.unctad.org/fdi/. 6. Given that Indian OFDI values haves been grossly underestimated for a number of reasons (Pradhan 2008), this reported figure may not be capturing the full depth of the foreign operations of Indian firms. 7. Public-sector companies like the Indian Railway Construction Co., LIC, GIC, Mecon (India), Telecommunications Consultants India, and India Tourism Development Corp., undertook small OFDI projects.

References Aggarwal, R. and J. K. Weekly (1982), “Foreign Operations of Third World Multinationals: A Literature Review and Analysis of Indian Companies,” 17(1) Journal of Developing Areas, pp. 13–30. Athreye, S. and A. Godley (2009), “Internationalization and technological leapfrogging in the pharmaceutical industry,” 18(2) Industrial and Corporate Change, pp. 295–323. Aykut, D. and A. Goldstein (2007), “Developing country multinationals: South-South investment comes of age,” in United Nations, ed., Industrial Development for the 21st Century: Sustainable Development Perspectives (New York: United Nations), pp. 85–116. Aykut, D. and D. Rath (2004), “South-South FDI flows: how big are they?,” 13 Transnational Corporations, pp. 149–176. Balasubramanyam, V.N. and N. Forsans (2009), “Science, technology and development: the case of India’s investments abroad,” paper presented at the International Conference in Science, Technology and Economy: Emerging and Developed Countries, Forum for Global Knowledge Sharing and Tata Institute of Social Sciences, Mumbai, October 9–10, 2009. Buckley, P.J., N. Forsans, and S. Munjal (2009), “Foreign acquisitions by Indian multinational enterprises: a test of the eclectic paradigm,” paper presented at the 2009 Cambridge Symposium on International Manufacturing, Møller Centre, Cambridge, Sept. 24–25, 2009. Hansen, Michael W. (2007), “Outward foreign direct investment from India: theory and evidence,” Centre for Business and Development Studies Working Paper, No. 8 (Copenhagen: Copenhagen Business School). Johanson, J. and J-E. Vahlne (1977), “The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments,” 8 Journal of International Business Studies, pp. 23–32. Johanson, J. and F. Wiedersheim-Paul (1975), “The internationalization of the firmfour Swedish case,” 12 Journal of Management Studies, pp. 305–322. Jonsson, S. (2008), “Indian multinational corporations–low-cost, high-tech or both?,” Swedish Institute for Growth Policy Studies, Sweden. Palit, A. (2007), “Outward investment from India: features and drivers,” 2(3) Indian Foreign Affairs Journal, pp. 91–104. Pedersen, J.D. (2008), “The second wave of Indian investments abroad,” 38(4) Journal of Contemporary Asia, pp.613–637. Pradhan, J.P. (2004), “The determinants of outward foreign direct investment: a firm level analysis of Indian manufacturing,” 32(4) Oxford Development Studies, pp. 619–639.

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Pradhan, J.P. (2008a), “The evolution of Indian outward foreign direct investment: changing trends and patterns,” 4 International Journal of Technology and Globalization, pp. 70–86. ——— (2008b), Indian Multinationals in the World Economy: Implications for Development (New Delhi: Bookwell Publisher). ——— (2008c), “Rise of Indian outward FDI: what implications does it hold for host developing countries?,” 29 Revista Economía: Teoría y Práctica, pp. 9–49. ——— (2008d), “India’s Emerging Multinationals in Developed Region”, MPRA Paper, No. 12361, University of Munich Library, Germany. ——— (2009), “South-South investment in infrastructure: the operation of Indian firms in developing countries,” XLIII(4) Foreign Trade Review, pp. 3–31. ——— (2010), “Multinationals from the Indian software industry,” in N.S. Siddharthan and K. Narayanan, eds., Indian and Chinese Enterprises: Global Trade, Technology and Investment Regimes (London and New Delhi: Routledge), pp. 180–210. Pradhan, J.P. and A. Alakshendra (2006), “Overseas Acquisition versus Greenfield Foreign Investment: Which Internationalization Strategy is better for Indian Pharmaceutical Enterprises?,” ISID Working Paper, No. WP2006/07, Institute for Studies in Industrial Development, New Delhi. Pradhan, J.P. and V. Abraham (2005), “Overseas mergers and acquisitions by Indian enterprises: patterns and motivations,” 85 Indian Journal of Economics, pp. 365–386. Pradhan, J.P. and N. Singh (2009), “Outward FDI and Knowledge Flows: A Study of the Indian Automotive Sector,” 1(1) International Journal of Institutions and Economies, pp. 156–187. Ramamurti, R. and J.V. Singh (2009), “Indian multinationals: generic internationalization strategies,” in Ravi Ramamurti and Jitendra V. Singh, eds., Emerging Multinationals in Emerging Markets (Cambridge: Cambridge University Press), pp. 110–165. Sauvant, Karl P. (2005), “New sources of FDI: the BRICs,” 6(5) Journal of World Investment and Trade, pp. 639–709. Sauvant, Karl P., with Kristin Mendoza and Irmak Ince, eds., The Rise of Transnational Corporations from Emerging Markets (Cheltenham: Edward Elgar, 2008). Sauvant, Karl P., with Wolfgang Maschek and Geraldine McAllister, eds., Foreign Direct Investment from Emerging Markets: The Challenges Ahead (New York: Pergamon, 2010). Taylor, H. (2008), “Regulatory governance and the rise of non-triad multinational companies: a modified ‘varieties of capitalism’—perspective on Indian multinationals,” paper for the ECPR Standing Group on Regulatory Governance Conference “(Re)regulation in the wake of neo-liberalism: consequences of Three Decades of Privatization and Market Liberalization,” Utrecht, June 5–7, 2008. Tiwari, R. and J. K. Mani (2008), The Emergence of Indian Multinationals: An Empirical Study Of Motives, Status-Quo and Trends of Indian Investments in Germany, Project Report, Institute of Technology and Innovation Management, Hamburg University of Technology, Germany. United Nations Conference on Trade and Development (2004), “India’s Outward FDI: A Giant Awakening?,” U.N. Doc. UNCTAD/DITE/IIAB/2004/1 (UNCTAD, October 20, 2004), available at http://www.unctad.org/sections/dite_iiab/docs/ diteiiab20041_en.pdf. ——— (2005), “Case study on outward foreign direct investment by Indian small and medium-sized enterprises,” U.N. Doc. TD/B/COM.3/EM.26/2/Add.2 (Geneva: UNCTAD, October 31, 2005).

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——— (2006), World Investment Report 2006: FDI from Developing and Transition Economies. Implications for Development (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/wir2006_en.pdf. ——— (2007), Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment, prepared by Fiorina Mugione and Kee Hwee Wee (Geneva and New York: United Nations). ——— (2009), World Investment Report 2009: Transnational Corporations, Agricultural Production and Development (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/wir2009_en.pdf.

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2 In Search of the “Indianness” of Indian Multinational Enterprises: Is There Anything Special about the Indian Path to Outward Foreign Direct Investment? Michael W. Hansen*

Introduction A new breed of multinational enterprises (MNEs) has risen in recent years, namely MNEs from developing countries.1 These MNEs are emerging primarily out of the rapidly growing developing economies of Latin America and Asia. They are not content with taking the backseat in globalization, but rather seek to exploit the opportunities of globalization to their full extent. These MNEs have succeeded in becoming global leaders in industries such as electronics, advanced services, building materials, financial services, farm equipment, steel production, hotels and hospitality, and contract manufacturing. Meanwhile, MNEs like Cemex, Samsung, Hyundai, Infosys, CNPC, Lenovo, Mittal, Tata Group, and Flextronics are rapidly becoming household names in global industries. The rise of MNEs from developing countries is reflected in recent outward foreign direct investment (OFDI) statistics. OFDI from developing countries increased from an annual average of US$45 billion in the 1990s to an annual average of US$150 billion in the 2000–2008 period, and as share of global foreign direct investment (FDI), FDI from these countries rose from an average level of around 11% in the 1990s to 16% by 2008 (United Nations Conference on Trade and Development [UNCTAD] 2010) This surge is mainly due to investment from Asian developing countries; in the early stages, Hong Kong (Special Administrative Region of China), Singapore, Taiwan Province of China, and the Republic of Korea were leading, but more recently India and China have become the leading Asian outward investors, accounting for almost one-third of OFDI from this

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Michael W. Hansen

region in 2008 (United Nations Conference on Trade and Development 2010). In this chapter, we will focus on OFDI from India. In the last few years, India has experienced astounding growth in OFDI. While inward foreign direct investment (IFDI) stock in India tripled between 2004 and 2008, Indian OFDI stock grew by eight times. During the same period, OFDI stock from developing countries as a whole only doubled (United Nations Conference on Trade and Development 2010). World-class newcomer Indian MNEs are moving into information technology (IT) and services in developed countries, and Indian firms are both diversifying into the knowledge industry and acquiring the crown jewels of European and U.S. manufacturing. In industries such as pharmaceuticals, software, IT, telecommunications, and transportation, Indian MNEs base their strategies on advanced technologies, high knowledge intensity, and cutting-edge strategies and organizational modes (Pradhan 2005, Huang and Khanna 2003).2 Even within the previously highly protected Indian manufacturing industry, we have seen a range of Indian manufacturing MNEs moving beyond their shielded home markets to become global leaders in their respective industries.3 Recent years have seen an explosion in the volume of literature dealing with developing country MNEs. One of the key debates in this literature is whether the rise of MNEs from developing home countries is a phenomenon that requires new analytical tools and theories, or whether it can be captured within conventional theories of MNEs. Some argue that conventional theories of FDI adequately explain MNEs from developing countries (Gomez 1999, Buckley and Ghauri 2004). Others argue that developing country MNEs are special because of the particular development path and experience of their home countries, and that they therefore require new analytical tools (Hobday 1998, Li 2003, Mathews 2006). Finally, some argue that the rise of these MNEs is explained by the particularities of individual countries, for example, certain national business systems, institutions, and cultures (Whitley 1990, Khanna 2005, Kumar and Chadha 2007). The ambition of this chapter is both empirical and theoretical. First, it aims to provide a better understanding of the dramatic increase in Indian OFDI in recent years. Second, in light of the empirical analysis, it will discuss the relative strengths and weaknesses of the different theoretical interpretations of developing country OFDI.

A. The Rise of Indian Multinational Enterprises In characterizing the Indian OFDI path, it is common to distinguish between two major phases (see, e.g., Pradhan 2005, Sauvant 2005). The first phase, or the “early phase,” spans the early investment of the mid-1970s to the adoption of the new industrial policy in 1991. Modest investments were made in joint ventures (JVs) in developing countries in Africa and Asia, shaped, to a large extent, by political and regulatory constraints and the policies of the Indian government. The second phase, or the “start-up

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phase,” runs from 1991 to the early 2000s, when a more liberal government stance on FDI led to higher OFDI. This chapter will argue that a third phase, a “take-off phase” in the Indian OFDI path, began in the early 2000s (Hansen 2008). The current Indian OFDI phase departs from previous OFDI phases in at least four respects. First, while Indian OFDI increased incrementally from the early 1990s, it has grown exponentially since the early 2000s, as shown in Figure 2.1. From 2000 to 2008, Indian OFDI stock grew by more than 30 times, while IFDI in the same period grew by seven times, rapidly narrowing the gap between inward and outward investment. (United Nations Conference on Trade and Development 2010). It is interesting to note that by 2007, Indian OFDI flows as a share of all developing country OFDI stood at 6% compared to 8%–9% for the 2.5 times larger Chinese economy, and that Indian OFDI as a share of gross fixed capital formation had become similar to that of China (Kumar and Chadha 2007). Figure 2.2 shows how the difference in volumes of Indian IFDI and OFDI has narrowed. Second, the industry composition of Indian OFDI changed significantly in the 2000s, as shown in Figure 2.3. During the early phase, manufacturing dominated OFDI. With the start-up phase, a significant movement from manufacturing to services took place. During the take-off phase, services stagnated relative to manufacturing, possibly due to significant merger and acquisition (M&A) activity by Indian manufacturing MNEs. However more recent data suggests that services are becoming dominant once again (Reserve Bank of India). The service-focused MNEs include old firms that have diversified into software and IT (e.g., Tata Consulting Services, Satyam, and Wipro Technologies), start-ups within the software industry (e.g., Infosys and PCS), and companies that moved from being business process and back office service outsourcing providers to outward investors (e.g., Daksh 70,000

Outward stock Outward flow

60,000

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Figure 2.1

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The surge in Indian OFDI (1980–2008), in US$ millions.

Source: United Nations Conference on Trade and Development (2010), FDI Database, online database found at http://www.unctad.org/Templates/Page.asp?intItemID=1923 (accessed Feb. 2010).

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Michael W. Hansen 100,000

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10,000 1000 100 10 1

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Figure 2.2 Closing the gap: Indian IFDI and OFDI (1980–2008), in US$ millions, logarithmic. Source: United Nations Conference on Trade and Development (2010), FDI Database, online database found at http://www.unctad.org/Templates/Page.asp?intItemID=1923 (accessed Feb. 2010).

100 90

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44

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60

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) 08

6 7– 00 (2

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Industrial composition of Indian OFDI (1975–2008), in percents.

Source: Reserve Bank of India (various years), Annual Reports, http://www.rbi.org.in/scripts/ AnnualReportPublications.aspx.

Services, MsourcE, Datamatics Technologies, and Hinduja TMT Ltd.). In the take-off phase, natural resource-focused investors also internationalized more, for example, chemical and steel MNEs acquired upstream activities in Canada and Australia, and energy MNEs acquired assets in exploration, refining, and retailing in countries including Russia, Iran, and Sudan.

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Third, the motives behind OFDI changed during the early 2000s. In the early phase of OFDI, Indian MNEs invested abroad due to various pull factors (e.g., market and natural resource seeking) and push factors (e.g., to escape restrictive domestic regulations such as labor laws, licensing requirements, and antitrust regulation, and to circumvent the limited market demand in India) (Pradhan 2007). However, in the take-off phase, Indian MNEs have moved into complex types of investments. Thus, current Indian OFDI is, to a large extent, aimed at accessing strategic assets in foreign locations through M&A. The group of strategic asset-seeking MNEs is made up of both MNEs that seek complementary assets abroad, and MNEs that want to circumvent entry barriers in marketing and distribution in developed countries by acquiring brands, distribution, and marketing systems (Pradhan 2007). Moreover, some Indian MNEs have become so strong that they are capable of taking on market-seeking investment in developed countries, aimed, for example, at getting closer to customers (IT) and networks (pharmaceuticals and engineering), or at consolidating global oligopolistic expansion (steel and automotive). Indeed, two-thirds of Indian OFDI is market seeking (usually, upmarket), compared to one-third for other emerging economies (Ramamurti and Singh 2008). Fourth, the host countries for Indian OFDI have changed. Early Indian OFDI was directed towards developing countries, such as Sri Lanka, Malaysia, and Nepal. Soon after liberalization in 1991, Indian MNEs began to look outside their region, and developed countries became the main OFDI host countries. Apart from a brief surge in developing countries as host countries in the early 2000s, it appears that developed countries have become dominant as host countries for Indian OFDI, as shown in Figure 2.4. Moreover, 80

Developed Developing

70

Offshore centers 60 50 40 30 20 10 0 1996–2000 2000–2001 2001–2002 2002–2003 2003–2004 2004–2005 Figure 2.4

Host countries of Indian OFDI (1996–2005), in percents.

Source: Reserve Bank of India (various years), Annual Reports, http://www.rbi.org.in/scripts/ AnnualReportPublications.aspx.

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Table 2.1

Phases in Indian OFDI Early phase

Amount

Start-up phase

Take-off phase

Low OFDI

Incremental rise in Surge in OFDI OFDI Location Neighboring developing Advanced developing Developed countries, but also countries countries and resource-seeking investments developed countries in developing countries Mode Minority JVs Fully owned and Acquisitions and greenfield majority JVs investments

among those investments that target developing countries as host countries, Indian OFDI has increasingly converged on the more advanced developing countries such as Hong Kong (Special Administrative Region of China) and Singapore. Table 2.1 summarizes the main differences in the three phases of Indian OFDI discussed above.

B. Explaining the Indian OFDI Path From the above, it is evident that the recent Indian OFDI path appears peculiar in several respects. Indian OFDI has expanded dramatically within a brief period of time, moved into advanced countries, and become surprisingly advanced. It is this peculiar path that has triggered observers (see e.g., India Brand Equity Foundation 2007) to talk about a new Indian model of international business and a renaissance of Indian business. Let us turn to theory for an interpretation of the Indian OFDI path. According to conventional FDI theory, FDI is closely related to the ownership advantages and competitive advantages of the investing MNEs (Hymer 1976, Dunning 1981a, Dunning 1988a). Ownership advantages play two roles. First, they can be the reason why MNEs invest abroad in the first place. These MNEs must possess some unique advantages (technological, managerial, reputational, etc.) that they can exploit in foreign locations. Second, the possession of ownership advantages explains why some MNEs are able to overcome the disadvantages of foreignness visà-vis indigenous firms. These disadvantages stem from problems with obtaining market intelligence, access to authorities, and access to factor markets, as well as to the costs of managing across borders. While some theories understand FDI as a result of oligopolistic competition (Hymer 1976, Kindleberger 1969, Caves 1996), others focused more on external market failures. Thus, the internalization theory of FDI (Buckley and Casson 1976, Hennart 1991) argues that when firms extend their activity to foreign locations, it is not mainly because they are monopolistic rent seekers, as argued by the Hymer-Caves-Kindleberger tradition, but actually because they are efficiency seekers that want to reduce the transaction costs of cross-border activity. The ideas described above are bridged by

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the ownership-location-internalization (OLI) framework (Dunning 1981a, 1988b). The framework essentially holds that FDI is a result of MNEs possessing ownership advantages that they want to exploit in foreign locations, which they cannot do (profitably) except through internalization, by establishing themselves within the host country. From the conventional FDI perspective, OFDI from developing countries is comparable to any kind of OFDI (Lecraw 1993). MNEs internalize to exploit their firm specific advantages in locations where factor cost and demand conditions make it profitable. Thus, MNEs from developing countries are essentially subject to the same dynamics and analytical tools as Western MNEs (Giddy and Young 1982). However, several authors question whether conventional theory is adequate to explain developing country MNEs. Thus, it is argued that there are gaps in the conventional FDI literature when it comes to explaining OFDI from developing countries (Buckley et al. 2007). Because conventional FDI theory has its origins in economic theories of organization, it tends to overemphasize firm specifics and industry factors, and underemphasize how firm advantages interact with location factors of the home country (Tolentino 2008b). Treating home country contextual factors as exogenous may have made sense in a situation where most FDI originated from countries with fairly similar industrial structures and development experiences. However, in a situation where MNEs increasingly have developing countries as home countries, this treatment may no longer be adequate. Thus, it can be expected that fundamentally different market structures and dynamics, as well as distinct formal and informal institutions, may have significant implications for the strategies of MNEs (Khanna 2005, Buckley et al. 2007).4 Therefore, we need to account for the influence of the home country context on FDI strategy. We need to look for theories that take their point of departure in the distinctiveness of the MNE, due to its historical, institutional, political, cultural, and economic context. In this chapter, we will take up three such theories: the investment development path (IDP) theory, the latecomer theory, and the “India Inc.” country-specific theory. In the following subsections, we will go through these three theories, and discuss the extent to which they help us understand the Indian OFDI path.

1. The Investment Development Path Theory The limitations of conventional FDI theory in explaining FDI from various countries are acknowledged by one of the founding fathers of that theory, John Dunning. In the late 1970s, Dunning proposed the IDP theory, which is an attempt to infuse dynamism into the OLI framework by arguing that the OLI configuration of MNEs in a given country changes as the country develops its industrial and market structure. a. Main Propositions of the IDP Theory The IDP theory of FDI (Dunning1981b; Dunning and Narula 1996, 2004) can be seen as an attempt to build a specific theory of the relationship

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between location factors on the one hand, and ownership and internalization factors on the other. The idea is that FDI patterns interact with location factors in a dynamic fashion. The model makes distinctions among five stages of economic development, each of which will produce a particular FDI pattern. 5 At Stage 1, with the least developed countries, very little FDI takes place, and where it takes place, it is mainly inward investment aimed at exploiting revealed comparative advantages, typically natural resources. At Stage 2, the host country has developed certain advantages that make it desirable for MNEs to move in and exploit these advantages. The advantages will typically be “undifferentiated,” such as natural resources and cheap but unskilled labor. Moreover, the start of economic development at this stage creates a domestic market that foreign investors may wish to access. As the ownership advantages of local firms are still relatively weak, there is little basis for OFDI. Stage 3 countries have created more sophisticated and differentiated advantages through industrial policy, education, and infrastructure development. These advantages are exploited by efficiency-seeking foreign investors. Moreover, rapidly growing markets make market-seeking foreign investors converge on the larger of these countries. While IFDI is dominant, OFDI is starting at this stage, mainly aimed at countries that are either less developed or at similar stages in the IDP.6 At Stage 4, a strong domestic industry has evolved. This industry engages in increasingly significant amounts of OFDI, and OFDI surpasses IFDI. At Stage 5, with the most advanced countries, we see a convergence of inward and outward flows (Dunning and Narula 1996, 2004). A weakness of the IDP is that it fails to provide an account of how ownership advantages are formed, a problem it shares with its theoretical sibling, the OLI framework. Joanna Scott-Kennel and Peter Enderwick seek to fill in this blind spot of the IDP theory by demonstrating how IFDI may help build the ownership advantages of local industry, which, in turn, may provide the basis for OFDI (2005). Thus, IFDI may foster the development of ownership advantages of local firms through demonstration and competition effects, as well as through linkages of a more or less reciprocal nature. The IDP essentially depicts an incremental path to OFDI, where OFDI is a consequence of the gradual upgrading of the ownership advantages of domestic industry with economic development. This macrolevel sequential model is mirrored by the microlevel Uppsala sequential model (Johanson and Vahlne 1977). According to the Uppsala model, MNEs internationalize in small steps, starting in neighboring countries with a low commitment, and then gradually extending their geographical reach and resource commitment as the MNE gains experience from internationalization. In line with the IDP theory, the implication of the Uppsala model is that MNEs from developing countries are expected to first invest in other developing countries, and then, after building experiential knowledge about internationalization, they will move into more advanced countries.

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b. Relevance to India Figure 2.5 presents the Indian IDP path, using a ratio of OFDI relative to IFDI as a measure of the country’s IDP position.7 Between 1980 and 1991, India was a Stage 2 country, attracting growing amounts of IFDI as the country developed a sizable home market. In the early 1980s, there was a brief barrage of OFDI from India. This early wave focused on Stage 1 or 2 host countries (e.g., other South Asian countries, as well as certain East African countries) and was based on technologies adapted to developing country conditions (Lall 1983). After liberalization in 1991, India has increasingly developed more differentiated advantages in industries including IT, software, pharmaceuticals, engineering, and manufacturing. As a consequence, both IFDI and OFDI increased, and, especially from around 2000 and onwards, OFDI grew rapidly, relative to IFDI. These patterns are consistent with a country in the late part of Stage 3. In accordance with the IDP theory, part of Indian OFDI takes place to exploit Indian technology, products, and know-how in other developing countries, or to prevent cost advantages from eroding with economic development. Thus, Indian business-process and back office service outsourcing providers began investing in other developing countries, such as the Philippines and Mexico, in order to preserve their cost advantage,8 while Indian textile and garment producers began investing in other Asian and African countries for similar reasons. Moreover, many Indian MNEs are conquering markets of less developed countries. For example, Indian MNEs dominate in many industries in Africa, including the pharmaceutical industry (e.g., Ranbaxy, Cipla, and Dr. Reddy’s), the telecommunications industry (e.g., Bharti, Tata

1

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Figure 2.5 Net outward investment measured as a ratio of OFDI flows to IFDI flows (1980–2008), in numbers. Source: United Nations Conference on Trade and Development (2010), FDI Database, online database found at http://www.unctad.org/Templates/Page.asp?intItemID=1923 (accessed Feb. 2010).

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Indicom/VSNL, and Reliance Infocom), the consumer products industry (e.g., Marico and Emami), and the construction industry (e.g., Punj Lloyd and Shapoorji Pallonji) (Pal 2008). However, there are a number of particularities in the Indian case that the IDP fails to explain. First, according to the IDP theory, increases in OFDI should be incremental and gradual, reflecting gradual improvement in home country industries. In the case of India, OFDI grew exponentially from the early 2000s onwards. Second, according to the expected IDP sequence of investments, India should have experienced an increase in IFDI before the increase in OFDI. According to the theory, the initial increase in IFDI will allow home country industries to build their ownership advantages, partially with the help of foreign investor spillover effects, so that OFDI can begin to grow (Scott-Kennel and Enderwick 2005). In contrast with that prediction, Indian IFDI and OFDI takeoff has been more or less simultaneous, starting in the early 2000s.9 Thus, India has clearly been a relatively strong OFDI performer. This is reflected in UNCTAD’s 2006 performance indices, which rank India 56th for OFDI and 113th for IFDI (United Nations Conference on Trade and Development 2007). Furthermore, the ratio of OFDI relative to IFDI has been consistently larger in India than in China since 2000, even though the latter is normally considered a more developed economy, according to the IDP theory (United Nations Conference on Trade and Development 2010). Given that India’s level of development in industry makes it a Stage 3 country, a third particularity in the Indian case lies in the choice of host countries for Indian OFDI. Indian OFDI mainly takes place in advanced host countries, and not in similarly situated or less developed countries, as predicted by the IDP theory. Fourth, the motives of Indian OFDI also appear to defy the logic of the IDP. The great importance of strategic assetseeking investments in Indian OFDI is especially puzzling. According to the IDP, such motives are predominant in Stages 4 and 5 and unlikely to take place in Stages 1, 2, and 3 (Lee and Slater 2007). Moreover, where we would expect market-seeking investment to take place in similarly situated or less developed countries, Indian MNEs are investing to get market access in advanced countries. In fact, a number of Indian MNEs are fast becoming global MNEs by being first movers in new industries (e.g., wind power), by quickly moving to the technological frontier in existing industries (e.g., pharmaceuticals), or by inventing new business models in existing industries (e.g., low-cost production in advanced technology industries) (Ramamurti and Singh 2008).

2. The Latecomer Theory The latecomer literature may help us understand some of the abovementioned unexplained aspects of the Indian OFDI path. Spurred by the surge in OFDI from developing countries in the 1990s and early 2000s, and echoing Alexander Gerschenkron’s notion of a latecomer advantage of “backwardness” (1962), a broad literature has evolved that tries to explain

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why growing numbers of MNEs from developing countries are successful in competing with Western firms in Western markets. This literature argues that, in light of the rapidly growing presence of MNEs from developing countries in global industries, we need to revisit and revise our theoretical tools and conceptions (Hobday 1998, Ernst 2000, Li 2003, Mathews 2006). While previous theories of FDI focused on transaction costs and oligopolistic competition, the latecomer theory is rooted in resource and knowledge-based theory (Barney 1991, Grant et al. 2000), network theory (Anderson et al. 1997), theories of learning (Cohen and Levinthal 1990), and dynamic capabilities theory (Teece 2000). a. Main Propositions of the Latecomer Theory The key idea of the latecomer theory is that a new breed of MNEs has arisen that is exceptionally effective in exploiting the opportunities offered by globalization. The internationalization of these MNEs is happening in an accelerated manner that contradicts the earlier trend of gradual internationalization. These MNEs are not constrained by Western management orthodoxies, and they are, therefore, positioned to incorporate new ideas and innovations much more effectively than incumbents. The developing country context gives these MNEs a number of advantages, including flexibility, low overheads, cost effectiveness, and network-based business models (Buckley et al. 2007). The literature on latecomer MNEs dates back to the late 1980s, when the success of Asian original equipment manufacturers in upgrading technology and moving into more advanced activities generated growing interest among economists (Vernon-Wortzel and Wortzel 1988, Cantwell and Tolentino 1990). A handful of developing countries had moved through a rapid transformation of their industrial structures, which, inter alia, had led to the emergence of powerful MNEs. While clearly inspired by the developing country MNE literature from the early 1980s, in particular Sanjaya Lall’s localized technological change theory (1983), the latecomer literature diverged from those works by stressing the ability of latecomer MNEs to compete on par with developed country firms (Beausang 2003). Four particular aspects of these latecomer MNEs that are emphasized by the literature will be discussed in turn: first, their ability to access complementary assets through internationalization; second, their ability to undertake organizational and strategic innovation; third, their ability to combine advanced technology with a low-cost base; and fourth, as a consequence of the above, their ability to embark on accelerated paths of internationalization. i. Asset Augmentation through Internationalization Traditionally, FDI literature has argued that MNEs from developing countries have been seriously constrained in their capacity to pursue OFDI, due to a lack of resources in areas such as know-how, technology, marketing knowledge, and working capital. However, latecomer MNEs may

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circumvent these disadvantages by acquiring complementary assets. This can be done by fostering linkages to foreign MNEs, for example, by becoming suppliers to Western MNEs or engaging in JV partnerships. Western MNEs will typically be willing to transfer technology and knowledge to linkage partners in order to ensure the quality and reliability of inputs (Altenburg 2000). However, as argued in Gary Gereffi and Miguel Korzeneiewicz’s book, Western MNEs will be reluctant to share technology and know-how that concerns assets that will enable the suppliers to move downstream into new activities and functions (1994). An alternative way for latecomer MNEs to acquire complementary assets is to buy them in the market. Traditionally, it has been believed that it is difficult for developing country MNEs to acquire such assets due to market failures in technology and intermediary service markets (Hennart 1991). However, as pointed out by David Teece, complementary assets are increasingly accessible in the market due to the removal of trade and investment barriers, and due to improvements in markets for intermediary products and services (such as distribution channels and technology) (2000). As complementary assets become accessible in the market, the differentiating factors in the competition with incumbents will be the latecomer MNEs’ organizational capabilities and strategies, and their freedom from managerial and organizational orthodoxies (id.). ii. Organizational and Strategic Innovation The strength of latecomer MNEs’ organizational capabilities and strategies is exactly what John Mathews stresses in a widely cited (and debated) article from 2006. Mathews tries to explain how it can be that some MNEs from developing countries, in spite of their disadvantageous initial position, succeed in challenging and even displacing incumbent MNEs in the incumbents’ core markets. Mathews argues that these MNEs share three characteristics: their ability to internationalize very rapidly (accelerated internationalization), their ability to undertake organizational innovation (e.g., using network strategies in their internationalization), and their ability to innovate strategically (e.g., by exploiting the opportunities offered by globalization). Mathews calls these organizational and strategic innovations “linkage,” “leverage,” and “learning.” International linkages are a luxury for the incumbent firm, but a necessity for the latecomer firm, as they provide the only way in which latecomer MNEs overcome their initial internal and external constraints. Through linkages, the latecomer MNE can access technology and know-how that is developed elsewhere (Li 2007), and can use them as a sort of springboard towards internationalization (Luo and Thung 2007). Various avenues for linkages to foreign MNEs can be envisioned: some will be strategic alliances (e.g., outsourcing collaborations, original equipment manufacturer (OEM) contracts, license agreements, or franchising), while others will be equity-based (e.g., JVs). The second level in Mathews’s argument is that latecomer MNEs are particularly skilled at leveraging, that is, diffusing

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acquired knowledge and technology internally. For instance, the assets acquired through linkages can be combined with existing assets of the MNE to enhance productivity. Mathews’s final observation is that latecomer MNEs presumably have a strong ability (and incentive) to learn and build new advantages from experiences with previous linkage and leveraging processes. This type of organizational learning ability is akin to Teece’s notion of dynamic capabilities (Teece et al. 1998). iii. Low-cost Innovation Another distinct aspect of the latecomer literature is its focus on latecomer MNEs’ low-cost base. The argument is that latecomer MNEs are particularly skilled in combining their low-cost base with assets that are acquired internationally. This skill has been labeled low-cost innovation and scarcity-induced innovation (Srinivas and Sutz 2008). Thus, developing country MNEs appear to be capable of innovating along different paths than Western MNEs by doing less research, producing at less advanced levels, or substituting capital-intensive production techniques with labor-intensive ones (Tolentino 2008a). iv. Accelerated Internationalization In order to acquire assets, and, as a consequence of their ability to innovate organizationally and strategically, latecomer MNEs embark on a process of accelerated internationalization, where they grow from local firms into global players within a very short time span. Thus, the internationalization of latecomer MNEs is far from gradual and sequential, as predicted by the IDP theory and the Uppsala model, but rather resembles so-called “bornglobal” paths (Madsen and Servais 1997). The accelerated path is directed by the opportunities and pressures of globalization. On the one hand, globalization offers opportunities for rapid internationalization, including access to markets and technologies. Thus, we see asset-seeking investments at an early stage in the life cycle of an MNE. On the other hand, globalization creates competitive pressures that push latecomer MNEs into internationalization at an earlier stage of corporate development than what we would normally expect (Zeng and Williamson 2003, Sim and Pandian 2003). b. Relevance to India The above arguments by the latecomer literature may assist us in understanding the peculiar Indian OFDI path. i. Accelerated Internationalization As described above, a key characteristic of Indian OFDI is its accelerated path and its quick movement into advanced countries. This is seen at the country, industry, and firm levels in India. As shown in Figures 2.1 and 2.4 in Section A, the Indian OFDI level increased fivefold from 2001 to 2006, and advanced host countries became dominant. At the industry level, we

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have seen the emergence of globally focused Indian industries, such as steel, automobiles, IT, and pharmaceuticals. At the firm level, a number of Indian MNEs have displayed born global tendencies, becoming international very quickly after their inception, including Ranbaxy (est. 1977), Dr. Reddy’s (est. 1984), Videocon (est. 1988), Wipro (est. 1982), Infosys (est. 1981), Moser Baer (est. 1983), KPIT (est. 1990), Satyam (est. 1987), and HCL Technologies (est.1976) (Hay 2006). Even within the traditionally highly protected Indian manufacturing industry, we have seen a range of MNEs become global leaders, including Reliance Industries, Hindalco Metals (part of the Aditya Birla Group), Welspun, Jubilant Organosys, Tata Motors, Bajaj Auto, and Bharat Forge (India Brand Equity Foundation 2007). A good firm-level example of accelerated internationalization is the wind turbine company Suzlon. This former textile company acquired its first mill in 1995. Through licensing of the German firm Südwin’s technology, vertically integrating through the acquisition of the Hansen (a Belgian producer of gear boxes), acquiring advanced wind turbine technology through the acquisition of the German firm Repower, and establishing subsidiaries in strategic clusters within the wind turbine industry (e.g., the establishment of the global sales and marketing headquarters in the Danish wind power cluster), this MNE clearly displayed an accelerated internationalization path. In 2001, Suzlon was selling only in the Indian market; by 2008 it was the world’s third-largest wind turbine producer (Suzlon 2008). ii. International Asset Acquisition Indian MNEs have often focused on acquiring complementary assets through FDI. Therefore, the acquisitions that have been driving much of the growth in Indian OFDI are largely asset seeking. The list of Indian MNEs that acquire assets abroad through FDI is virtually unending, including MNEs in the IT industry (e.g., Wipro and Infosys), the auto supply industry (e.g., Sundaram Fasteners and BharatForge), the pharmaceutical industry (e.g., Dr. Reddy’s Labs and Ranbaxy), and the steel industry (e.g., Tata Steel and Mittal). The nature of the acquired assets varies from industry to industry. In engineering industries, acquisitions are motivated by the wish to access specific technologies and clusters of research and development (R&D). Meanwhile, MNEs in global oligopolistic industries aim to acquire assets before their competitors, and MNEs wishing to break into end markets aim to acquire brands and distribution networks. iii. Organizational and Strategic Innovation There is ample evidence from other Asian countries to suggest that linkages to MNEs played an essential role in building ownership advantages within local industry. However, in the case of India, there was never a large amount of IFDI, which could have helped build internationally competitive Indian MNEs. One explanation of this anomaly could be that Indian MNEs had already built advantages themselves, without the direct or indirect assistance of foreign MNEs. An alternative explanation could be that

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Indian MNEs have, indeed, had close linkages to foreign MNEs, but these linkages have been to foreign outsourcers rather than foreign investors. Through outsourcing collaborations, Indian IT, engineering, and consultancy MNEs have built ownership advantages that have quickly become platforms for internationalization (Elango and Pattnaik 2007). As argued by UNCTAD, “the success of Indian firms as service providers in the outsourcing of IT services, [business process outsourcing] and call centers by developed-country companies has exposed them to knowledge and methods for conducting international business, and induced OFDI through demonstration and spillover effects” (2004a). iv. Low-cost Innovation In line with the predictions of the latecomer theory, it appears that several Indian MNEs have been able to combine advanced technologies with a low-cost structure, thus gaining advantages in developed markets. Kumar argues that a main source of advantage for Indian MNEs is their ability to develop cost-effective products and processes within technologically advanced industries (2007). Meanwhile, Ravi Ramamurti and Jitendra Singh identify five generic strategies adopted by Indian latecomer MNEs, namely, becoming natural resource vertical integrators, local optimizers, low-cost partners, global consolidators, or global first movers (2008). In all but the natural resource integrator strategy, low-cost orientation is crucial. The local optimizer adapts products to a host country’s developing country conditions, for instance, through a low-cost business model. The low-cost partner offers arbitrage between high-cost locations of the global North and low-cost locations of the global South. The global consolidator creates economies of scale and scope by consolidating mature technologies at a global scale. And finally, the global first mover combines advanced technology with a low-cost base. The aforementioned Suzlon case illustrates this last strategy. It appears that Suzlon became the third-largest global player in wind turbines based on its ability to combine acquisitions of key technologies and competencies (such as gear boxes, technology licenses, high-end wind turbines, and sales and marketing skills) with a value chain configuration that allows the company to maintain a cost level significantly below those of its competitors (Suzlon 2008). More generally, the successful Indian IT industry is an example of an industry that has built a global competitive advantage by combining advanced knowledge and capabilities (e.g., in software engineering) with a low-cost production model.

3. The “India Inc.” Country-Specific Theory Buckley et al. argue that when analyzing MNEs from developing countries, we need to pay special attention to particularities of the home country institutions and context (2007). In line with this idea, several authors have argued that the above theories of OFDI are overstating their case. There may be subpatterns of structural changes within the general development patterns depicted by the IDP or latecomer theories (Lall 1996). Indeed, the

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diversity among MNEs from developing countries may be greater than the diversity vis-à-vis MNEs from developed countries (Yeung 1994, Tolentino 2008a). Thus, to generalize about developing countries or even Asian MNEs is a perilous undertaking. a. Country-Specific Explanations for OFDI According to Dunning, OFDI is shaped by economic, political, and institutional factors that originate in the particular history and development path of the home country (2003). Among those factors are the presence of natural resources, geographical and cultural distance to major markets, size of the country, economic system and development model (e.g., industrialization strategy), and government policy (Dunning 1988b). As pointed out by institutional strategy literature, the particular institutional fabric of developing countries has especially important implications for MNE strategy (Khanna and Palepu 1997, Peng 2002, Hoskisson et al. 2000). The home country national institutional context affects corporate strategy by shaping the task environment, the value systems of MNEs, and the quality of resources available to them (Li 1993). Also, cultural factors such as mores, traditions, and historical experiences may significantly influence MNE strategy. Paz Estrella Tolentino advocates a sociology-based perspective on MNEs from developing countries (2008a: 25). She emphasizes the “societal construction of business organizations from an institutional perspective [which] thereby explains that business organizations are very strongly linked to the environment in which they are embedded.” Along the same lines, the Business System theory argues that business organization and strategy, and, thereby, also OFDI, are largely shaped by the institutions, cultures, and historical legacies of the specific country in which they are embedded (Whitley 1990, 2001). Thus, MNEs from developing countries have had to develop specific coping strategies as they internationalize, such as “the use of networks and relationships, organizational structures, the leveraging of cultural ties or institutional affinity and other heterogeneous sources of potential advantage” (United Nations Conference on Trade and Development 2006). Several authors have analyzed country and region-specific patterns in OFDI, in host countries such as Japan (Kojima 1978), the Republic of Korea (Evans 1998), the countries of Latin America (Cuervo-Cazurra 2008), Thailand (Pananond and Zeithaml 1998), and China (Lim 1996a, 1996b). Buckley et al. found that several aspects of Chinese OFDI were unique to China, due to the relatively easy access to credit and foreign exchange for Chinese investors, the business-supportive Chinese institutional environment with strong government intervention, and the strong Chinese tradition for networking (2007). b. Relevance to India Several authors have identified idiosyncratic features of Indian OFDI (see, e.g., Ramamurti and Singh 2008, Kumar 2007, Khanna 2005). Among the specific factors emphasized are regulations and industrial development

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policies (United Nations Conference on Trade and Development 2006), cultural and linguistic specificities (Kumar 2007), the role of the expatriate community (Saxenian 2006), and long-standing entrepreneurial traditions (Ramamurti and Singh 2008). Here, we will emphasize four separate categories of factors that may explain the distinctiveness of the Indian OFDI path, namely, the particular industries that dominate India, the specific Indian government policies toward FDI, the particularities of the Indian business system, and the nature of Indian capital markets. i. The Industries that Dominate India According to the IDP, we would expect OFDI from developing countries to start in manufacturing, and only later move into service industries. This is partly because service industries are correlated with economic progress, and partly because service industries are typically late internationalizers (United Nations Conference on Trade and Development 2004b). However, in the case of India, we find that nonfinancial service MNEs became the dominant outward investors at an early stage in the IDP, surpassing manufacturing in the second half of the 1990s. This is due to the relative size of different industries in India, with services playing a relatively large role.10 Even if services MNEs are generally late internationalizers, the particular service industries that dominate in India may actually be early internationalizers. For example, the IT industry is a born-global industry because of its global markets, global factor inputs, and relatively small need for capital, in comparison to most other global industries (Khanna and Palepu 2004). Some of the knowledge-intensive Indian manufacturing industries, such as engineering-based manufacturing and pharmaceuticals, may also be early internationalizers (Ramamurti and Singh 2008). ii. Indian OFDI Regulation11 The profound changes in the Indian OFDI path in the past decade appear to have taken place largely in conjunction with changes in the Indian OFDI regulation (United Nations Conference on Trade and Development 2006, Sauvant 2005, Pradhan 2005). Originally, the government of India viewed deployment of human, physical, and financial assets abroad as a drainage of domestic resources. Consequently, the government introduced severe restrictions on OFDI, something that prevented a typical IDP sequence from playing out. For instance, Indian MNEs were either barred from OFDI, or were forced to severely limit the value of investments abroad. When the vast majority of these restrictions were lifted by the early 2000s, pent-up demand for OFDI was unleashed. The Indian government also created institutions to facilitate OFDI, such as the Export-Import Bank of India, and, starting in 2003, Indian banks were allowed to fund OFDI (Kumar and Chadha 2007). Indian FDI regulation may help explain why India experienced a roughly simultaneous OFDI and IFDI takeoff. While the Indian government has been effective in removing formal and informal barriers to OFDI, it has

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made far less progress in removing de facto barriers to IFDI. The notorious Indian bureaucracy, and the complexities of the Indian polity with its levels of overlapping jurisdictions, remain serious impediments to both foreign and domestic investment, and may, therefore, bias the Indian IDP toward OFDI. Indeed, the investment barriers of India may be a contributing factor behind the OFDI surge, because an increasingly liberal OFDI regime increases the opportunity costs of investing in India, relative to investing abroad for Indian MNEs. iii. The Indian Business System If we are to identify a particular Indian business system, we would have to consider the strong position of private Indian firms or conglomerates in Indian industry.12 Firms such as Tata Group, Birla Kirloskar, Mahindra, T.V. Sundaram Group, Mafatlal, Mahindra, Bajaj, Singhania, Walchand, and Mittal play a pivotal role in Indian OFDI, and have been behind much of the M&A activity in India. What are the advantages of such firms in conducting OFDI? First, it can be hypothesized that large firms function as effective self-contained capital markets that can be used to subsidize OFDI (Khanna and Palepu 2004, Buckley et al. 2007). Second, large conglomerates offer opportunities to move people between different divisions, increasing the transferability of employee skills sets. Third, as the fixed costs of access to government officials needed to support OFDI may be very high, conglomerates have an edge vis-à-vis small- and medium-sized enterprises (SMEs), and, in general, conglomerates may enjoy government patronage and support. Finally, as the Indian economy has opened up, the need to internationalize in order to acquire assets abroad may have been particularly pressing for conglomerates, as these companies, having grown out of decades of import-substitution industrialization policies, were ridden with uncompetitive technologies, products, structures, and practices (United Nations Conference on Trade and Development 2006). iv. The Nature of Indian Capital Markets It is sometimes argued that Indian capital markets are relatively efficient, and that this may help explain the Indian OFDI path. The typical Indian MNE, contrary to the typical Chinese MNE, is publicly traded, often listed on Western stock markets, and privately managed (Kumar and Chadha 2007). Moreover, “having operated under a system of prudential financial regulations and corporate governance, Indian companies generally enjoy healthy balance sheets and robust credit ratings” (Kumar and Chadha 2007: 10). Therefore, Indian MNEs have found it relatively easy to attract international banks, institutions, and private investors to fund their acquisitions abroad (Kumar and Chadha 2007). Finally the huge increases in the market capitalizations of publicly traded Indian MNEs in the middle of the first decade of the twenty-first century have enabled them to raise large amounts of equity capital, and to borrow money easily at home and abroad. This capital has, inter alia, been used for a foreign spending spree.

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For India, a less favorable interpretation of capital market drivers behind OFDI could be that Indian OFDI is a consequence of dysfunctional rather than functional Indian capital markets, given outdated internal flows of capital in conglomerates, a lack of effective shareholder scrutiny of listed companies, ineffective accounting systems, etc. As a consequence, Indian MNEs may have acquired foreign assets that may be a bad match with the existing organization of the Indian MNEs and/or have been purchased at an unwarranted high price. All of this may lead to serious problems in the operation phase of the investment (Rugman and Li 2007).

C. Summary and Discussion In this chapter, we have examined three theoretical models that explain the Indian OFDI path. The three models differ on their analysis of three important dimensions: the speed and direction of OFDI, the role of home country context in shaping ownership advantages, and the motives behind OFDI.

1. The Speed and Direction of FDI The IDP model views internationalization processes as gradual and incremental, moved by changes in the economic fundamentals and industry structure of the home country. OFDI begins as domestic firms develop increasingly advanced ownership advantages, partly due to their collaborations with foreign MNEs engaging in IFDI in India. The gradual FDI path at the country level is reflective of a gradual path at the firm level. Thus, we expect to see developing country MNEs initially investing in similarly situated host countries, and only slowly expanding into developmentally and geographically more distant countries as they upgrade their ownership advantages and gain internationalization experience. While the gradualist interpretation explains Indian OFDI until the early 2000s well, the OFDI surge after 2000 and the rapid movement of Indian MNEs into global industries is inconsistent with the IDP interpretation. Thus, the accelerated OFDI path is probably better captured by the latecomer theory. According to this theory, latecomer MNEs have the ability to embark on accelerated internationalization paths and move directly into advanced markets to access assets and markets. Latecomer MNEs are, in many respects, born global. As argued by Mathews, the latecomer MNEs are the true protagonists of globalization, in that they are not “burdened with existing commitments and attitudes born of domestic self-sufficiency and regard the world market as their home” (2006). However, the latecomer theory fails to explain why the pace of internationalization in India has been much higher than in other developing countries and why there has been a simultaneous IFDI and OFDI takeoff. To explain this, we have to look into the idiosyncrasies of the Indian development experience. In particular, it appears that changes in Indian government policies, such as the late opening of the OFDI regime, released pent-up demand for OFDI. Moreover, the fact that

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India is relatively strong in born-global industries such as IT could help further explain the Indian OFDI surge.

2. The Role of Home Country Context in Shaping Ownership Advantages Conventional FDI theory understands FDI in terms of industry factors (such as the level of competition within an industry) or in terms of firm-specific factors (such as a firm’s competitive advantages and firm-specific resource configurations). In contrast to this universalistic conception of FDI, the theories reviewed in this chapter all emphasize the extent to which MNEs are embedded in their home countries. All three theories argue that when we study MNEs from developing countries, we need an explicit theory of the interaction between ownership and location factors, because “the relative lack of firm-specific ownership advantages among developing country MNEs suggests the relative importance of country specific ownership advantages in determining the scope and pattern of their FDI” (Dunning et al. 2004). We offered three interpretations of how the organization and capabilities, and therefore the ownership advantages, of Indian MNEs are shaped by the country context in which they are played out. First, we looked at the IDP theory, which is essentially an extension of the OLI framework that relates ownership advantages to a home country’s level of development, and which argues that MNEs gradually enhance their ownership advantages as home country economies mature. Second, the latecomer theory argues that MNEs from developing countries, in general, have developed new organizational and strategic ownership advantages based on their particular developing country origins that, in combination with opportunities created by globalization, enable these MNEs to undertake accelerated internationalization. And finally, the “India Inc.” countryspecific interpretation posits that the Indian OFDI path is largely related to advantages furnished by the idiosyncratic nature of the Indian development path. While many aspects of Indian OFDI are consistent with a gradual development of ownership advantages, as predicted by the IDP, we also find evidence that Indian MNEs are developing ownership advantages surprisingly fast. Indian MNEs are rapidly becoming leaders in many industries, including advanced services, steel, pharmaceuticals, and wind turbines, and are increasingly competing with Western MNEs in Western core markets. Some of these advanced MNEs are, indeed, latecomer MNEs that are exceptionally adept at exploiting the opportunities offered by globalization, and investing abroad to complement their existing ownership advantages. But we also argued that many Indian latecomer MNEs have ownership advantages that originate in the particular Indian development experience. Thus, many Indian MNEs have a strong initial asset base provided by the idiosyncrasies of an Indian home country, including a protected home

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market position, government patronage of conglomerates, lax protection of property rights, and ample access to capital.

3. Motives for Investment A third dimension on which the three interpretations of the Indian OFDI path differ relates to whether “ownership advantages or firm-specific capabilities precede or are a consequence of multinationality” (Aulakh 2007: 239), that is, whether ownership advantages are the reason why MNEs undertake FDI as a means of asset exploitation, or whether they are a consequence of FDI, through asset augmentation. The asset-exploiting view is present in the conventional FDI literature, including Stephen Hymer’s market power view (1976) and the internalization theory, but is also evident in the IDP theory literature, where OFDI by MNEs from developing home countries is explained by the enhancement of their ownership advantages with home country economic development. In contrast, the asset-augmenting view, which is embedded in the latecomer theory literature, argues that internationalization strategies are aimed at acquiring assets abroad that can complement a weak initial asset base. Finally, the country-specific interpretation focuses on asset exploitation, with a distinct emphasis on highly location-specific ownership advantages related to the cultural, historical, and political specificities of the home country. Contrasting the theories with the Indian experience, we find that the main challenge to the IDP comes from the fact that strategic asset-seeking and market-seeking motives became very important by Stage 3 of the IDP. This, we argued, was partially consistent with the latecomer argument that latecomer MNEs are skilled at exploiting globalization to build new advantages through linkage, leverage, and learning. Moreover, consistent with the country-specific theory, the Indian government was pivotal in opening the spigot for OFDI by the early 2000s, and it allowed the increasingly capital-rich Indian MNEs to embark on a spending spree abroad. Table 2.2 shows a summary of the arguments made above.

4. Assessment of Theory All of the explanations offered in this chapter question the conventional theory’s focus on industry- and firm-specific factors by emphasizing the importance of home country context. The dominant explanation of different countries’ paths to OFDI is based on the logic of the IDP theory. The IDP essentially infuses dynamism into the OLI framework by arguing that the framework’s configuration changes with home country economic development. This logic seems plausible; as MNEs from developing countries will typically be disadvantaged in terms of ownership advantages, they will have great difficulty in overcoming the barriers to investment in advanced countries, and will, therefore, focus their FDI on similarly situated or less developed countries. Only when these countries develop advanced industrial structures toward Stage 4 will their MNEs be able to embark on large-scale

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Table 2.2. Summary of argument Investment Development Path Path to OFDI Gradual change toward internationalization with economic development and experiential learning Nature of ownership advantages

Conventional ownership advantages related to stage of economic development

Dominant investment motives

Depends on stage of development, initially resource and market seeking, eventually also efficiency and asset seeking Early Indian FDI backward in the IDP; gradual growth in OFDI with economic development in the 1990s

Indicative evidence from India

Latecomer theory

India Inc. countryspecific theory

Accelerated internationalization toward developed countries undertaken by born global MNEs Effective at asset acquisition; organizational and strategic innovation; combining low cost base and advanced technology and organization Asset-augmenting investments key; also market-seeking investments

Varies based on the country’s distinct business system and development path

Accelerated internationalization in the 2000s; assetseeking M&A; FDI in advanced economies; Indian MNEs in global industries

Government of India lifting of OFDI inhibiting regulations; the relative large Indian service sector; the strong position of Indian conglomerates; the relatively effective Indian capital markets

Country-specific ownership advantages related to the country business system and culture

Country-specific push and pull factors related to particular industrial policies and development paths

Source: The author.

OFDI in advanced countries. However, it is clear that the IDP theory could not explain the simultaneous surge in IFDI and OFDI in India, as well as the rapid movement of OFDI into advanced markets. The lack of predictive power of the IDP could partially be related to problems with the indicators on which the model is based, and partially to problems with the underlying causal theory. In terms of indicators, the IDP argues that the characterization of a given country’s development stage rests on some measure of economic development, typically gross domestic product (GDP) per capita.13 But, if we have highly modern industries and regions within an overall poor and undeveloped economy, we may get IDPs that are unrelated to the overall development of the home country, measured as GDP per capita. In the case of India, we would place the country at Stage 1 or 2 if we use GDP per capita (United Nations Conference on Trade and Development 2006). However, the regions and industries

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driving Indian OFDI are highly integrated into the global economy, and are displaying FDI profiles that resemble Stage 3, or even Stage 4, countries (e.g., Tamil Nadu, the Delhi, Mumbai, and Bangalore regions, and the IT, business process outsourcing, and pharmaceutical industries). In order to enhance the predictive power of the IDP theory, we thus argue that we need to move to a less aggregated level of generalization than country development, perhaps focusing on regions and/or industries, in the case of a large country like India. As to the causal model underlying the IDP, it seems that the model rests on a theory of FDI that does not adequately capture recent developments in the global economy. The IDP is essentially a structuralist theory that claims that FDI paths are caused by structural changes in the home country economy. But, as argued by the latecomer theory, home country economic factors may not be as important to OFDI as they used to be, due to changes in the global economy as well as the arrival of new types of MNE organizations and strategies. The latecomer theory argues that the inherent characteristics of developing countries, in combination with globalization, allow latecomer MNEs to escape the predicted IDP, and to instead become rapidly globalizing MNEs. We agree that dynamic capabilities and globalization create new opportunities for MNE growth and internationalization that were not present in previous episodes of OFDI from developing countries, and that many Indian MNEs appear to have benefitted from these opportunities. In sum, we argue that all three explanations offer important but only partial contributions to our understanding of Indian OFDI. Simply relying on firm-level and industry-level explanations, as in conventional FDI theory, does not offer adequate insight when we want to understand OFDI from a developing country like India. We need to examine the relationship between country context and MNE strategy. This is exactly what the three theoretical models that are discussed in this chapter do. The three explanations each have their strengths and weaknesses, but, instead of viewing them as competing, we should view them as partial theories that help us complement the firm- and industry-specific explanations that dominate conventional FDI literature. While we have offered a strong case for emphasizing location factors, we should be careful not to overstate location factors at the expense of firmand industry-level explanations, for several reasons. First, a substantial portion of developing country OFDI activity can be comfortably explained by conventional theory (Gomez 1999, Buckley et al. 2007, Tolentino 2008a), while the location theories may be overstating the linkage between location-specific factors and MNE strategy aspects (Tolentino 2008a). Second, while location-specific characteristics may indeed have been important in explaining the Indian OFDI path to date, it is likely that Indian MNEs will approximate more typical MNEs, in terms of organization, capabilities, and strategies, as the Indian economy modernizes. Thus, Tolentino argues that “as the actual outward FDI undertaken by MNEs embodies

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higher technological or human capital intensity, the explanatory power of country-specific theories in explaining the emergence and evolution of MNEs diminishes, while the importance of industry- and firm-specific theories increases” (2008a: 33). This view is echoed by Dunning and Rajneesh Narula, who argue that with economic development, the competitive advantage of MNEs becomes less and less related to home country factors such as economic structure, regulation, institutions, and culture (1996). We will thus argue that while the Indian IDP hitherto has been strongly influenced by its country context in the form of structural, developing country, and country idiosyncratic factors, this influence is likely to diminish in the future as Indian institutions and industries mature.

Conclusions There is no shortage of interpretations of the unusual Indian OFDI path. We will not claim to have resolved the debates regarding these interpretations. More modestly, this chapter has tried to extract the theoretical core of the various interpretations, and discuss the extent to which the interpretations can be corroborated by evidence from the Indian OFDI path. We find that the various explanations are complementary to a large extent, but also that their relative significance changes as the Indian economy matures. Regardless of which interpretation is more suitable, there is no doubt that the rapidly growing body of literature on MNEs from countries such as India has infused new dynamism into an international business agenda that was apparently in danger of “running out of steam” (Buckley 2002). The rise of developing country MNEs has generated increased research on the topic, which, in turn, has challenged the accepted wisdom within international business. In particular, the rise of developing country MNEs has highlighted the merits of emphasizing home country context in MNE strategy analysis. We speculate that the study of developing country MNEs will lead to a realization that what we label conventional FDI theory may need to include an analysis of culturally and historically specific phenomena. In other words, the rise of MNEs from developing countries such as India may challenge conventional wisdom, and prompt calls for the formulation of a new research agenda within international business that emphasizes the influence of home country context on MNE strategy.

Notes *

Associate Professor, Copenhagen Business School, Center for Business and Development Studies. 1. “Emerging markets” are all economies that are not members of the European Union and the Organisation of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe.

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2. India is apparently faring much better than other developing countries in frontier technologies. For example, among BusinessWeek’s 2006 Information Technology Top 100, there were 18 firms from four developing countries and transition economies, including a number from India. The Indian firms were described as having smart management, low-cost structures, and visions to join the ranks of the global MNEs. Moreover, in 2005, the Forbes 200 (ranking of the world’s best small and medium enterprises) had only four Chinese firms, but 13 Indian firms on the list. A survey of the most innovative companies in 2006 found two Indian companies on the list, namely Bharty Tele Ventures (telecom) and Infosys (software) (McGregor 2006). Indian firms have been particularly effective in moving into becoming global companies, and 20 of 100 companies deemed to be the “The New Global Challengers” were Indian (Boston Consulting Group 2009. 3. For example: Ranbaxy Laboratories, Reliance Industries, Hindalco Metals (part of the Aditya Birla Group), Welspun, Jubilant Organosys, Tata Motors, Bajaj Auto, Moser Baer, and Bharat Forge (India Brand Equity Foundation, 2007). 4. What, then, are the specific market and institutional factors of developing countries shaping OFDI? Overall, many of these countries suffer from deep structural imbalances caused by decades of heavy-handed and often misguided industrialization policies. Public sectors are oversized, midsized firms are often notably lacking, integration into the world economy is limited, relative prices are seriously distorted, etc. Consumer markets are often characterized by being relatively unsegmented, having high growth rates, and having substantial unmet demand (Arnold and Quelch 1998). Moreover, there will often be a significant bottom of the pyramid segment (Prahalad 2002) that firms may want to access. Factor markets are characterized by abundant low-cost labor reserves, but also serious problems with inadequate skill levels. Capital markets are frequently dysfunctional, making financing for good projects difficult to find. Technology markets are highly imperfect and firms are operating far from technical efficiency. Market intermediaries, such as firms providing reliable market intelligence, are nonexistent or underdeveloped (Khanna and Palepu 2004). The institutional context is the source of many of the market failures that fundamentally shape business activity in developing countries, a point emphasized by the institutional strategy literature (Hoskisson et al. 2000, Peng 2002, Wright et al. 2005). Underdeveloped market support institutions prompt the development of particular business practices to circumvent those deficiencies, for example, the formation of conglomerates and business networks, which would normally be ineffective in developed countries. 5. Attributing FDI patterns to the development stage is not unique to the IDP. Kojima argues that while U.S. MNEs tend to be trade suppressing, Japanese MNEs are trade enhancing, a difference that essentially can be attributed to the different developmental stages of the two home countries (1978). 6. This pattern is further explained by Sanjaya Lall’s localized technological change theory, which argues that developing country firms transform developed country technology and business models to the particular conditions of developing countries (1983). Raymond Vernon’s product life cycle theory is also applicable to these investments. According to this theory, MNEs from more advanced developing countries may be extending the life cycle of a technology or product by expanding into less developed countries (Vernon 1966). Furthermore, the institutional strategy literature may be helpful in understanding these intra-developing-country investments; growing out of challenging institutional context may furnish developing country firms with ownership advantages vis-à-vis Western MNEs, which they can then exploit in other developing countries with institutional structures resembling those of their home country (Khanna 2005).

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7. Here we measure the IDP position differently from the original IDP. According to Dunning and Rajneesh Narula, the net outward investment position is defined as gross outward investment stock less gross inward investment stock (1996). The problem of this way of measuring the IDP position in a country like India is that large countries almost always will have a relatively strong negative net outward investment balance as the large home market will create a bias in favor of IFDI, because relatively more foreign firms will be investing in the country and because there is relatively less incentive for local firms to go abroad. The inward bias means that even very large relative increases in OFDI vis-à-vis IFDI may go undetected due to absolute increases in IFDI vis-à-vis OFDI. In order to compensate for this problem, we measure the IDP position as OFDI relative to OFDI. 8. For example, Daksh Services, India’s largest BPO company, established a facility in the Republic of the Philippines, MsourcE invested in building a language center in Tijuana, Mexico, in 2003, and Hinduja TMT Ltd took over a Philippine call center in 2003 (UNCTAD 2004a). 9. The unusual Indian path has not been overlooked in the Indian debate, not even at the highest political level. In a speech in the United States, the Indian Minister of Finance said that “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. Til[l] 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” (Chidambaram 2007). 10. For instance, services accounts for 52% of output in India but only 30% of output in the People’s Republic of China. Conversely, manufacturing accounts for 39% of output in the People’s Republic of China but only 16% of output in India (Winters and Yusuf 2007). Moreover, whereas India, as opposed to the People’s Republic of China, never succeeded in developing a sizable manufacturing export industry and attracting large-scale investments within efficiency-seeking manufacturing industries (apart from textiles and a few other industries), Indian service exports have been relatively successful (id.). 11. See Chapter 3 for a detailed analysis of Indian government policy towards OFDI. 12. State-owned enterprises have played a key role in the internationalization of many Asian economies, but not India, except for in extractives. Thus, Boston Consulting Group’s list of 100 “changing the world” firms from developing countries has 21 Indian companies, of which all but one are privately owned (Ramamurti and Singh 2008). Also, see Chapter 4 for more on the role of Indian conglomerates in industrial globalization. 13. How to position a given country in a particular stage of the IDP is not entirely clear. One way is based on income per capita; another is based on net outward investment position. In Dunning and Narula, it seems that the stages are defined by net outward investment position, for example Stage 2 ends when net outward investment starts increasing, Stage 3 ends when net outward investment is zero, and Stage 4 ends when net outward investment starts falling (1996: 2). But at other times, stages have been equated with income per capital levels. Dunning argues that Stage 1 countries have incomes below US$2,000 per capita, Stage 2 countries have incomes of US$2,000– 3,500 per capita, Stage 3 countries have incomes of US$3,500–8,000 per capita, and Stage 4 and 5 countries have incomes of more than US$8,000 per capita (id.).

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Dunning, John H. (1988b), Explaining International Production (London: Unwin Hyman). ——— (2003), “The role of FDI in upgrading China’s competitiveness,” 4 (1) Journal of International Business and Economy, pp. 1–13. Dunning, John H. and Rajneesh Narula (1996), “The Investment Development Path Revisited: Some Emerging Issues,” in John H. Dunning and Ranjeesh Narula, eds., Foreign Direct Investment and Governments: Catalysts for Economic Restructuring (London: Routledge), pp. 1–38. ——— (2004), “Industrial Development, Globalization and Multinational Enterprises: New Realities for Developing Countries”, in John H. Dunning and Ranjeesh Narula, eds., Multinational and Industrial Competitiveness (Cheltenham, U.K.: Edward Elgar), pp. 38–77. Elango, B. and Chinmay Pattnaik (2007), “Building capabilities for international operations through networks: a study of Indian firms,” 38 Journal of International Business Studies, pp. 541–555. Ernst, Dieter (2000), “Inter-organizational knowledge outsourcing: What permits small Taiwanese firms to compete in the computer industry?,” 17(2) Asia Pacific Journal of Management, pp. 223–256. Evans, P.B. (1998), “Transnational corporations and Third World States: From the Old Internationalization to the New,” in Richard Kozul-Wright and Robert Rowthorn, eds., Transnational Corporations and the Global Economy (London: Macmillan Press), pp. 13–33. Gereffi, Gary and Miguel Korzeneiewicz, eds. (1994), Commodity Chains and Global Capitalism (Westport, CT and London: Praeger). Gerschenkron, Alexander (1962), Economic backwardness in historical perspective (Cambridge, MA: Belknap). Giddy, Ian H. and Stephen Young (1982), “Conventional theory and unconventional multinationals: do new forms of multinational enterprise require new theories?,” in Alan M. Rugman, ed., New Theories of the Multinational Enterprise (London: Croom Helm), pp. 55–78. Gomez, Edmund T. (1999), Chinese Business in Malaysia: Accumulation, Accommodation and Ascendance (Richmond: Curzon Press). Grant, Robert M., Paul Almeida, and Jaeyong Song (2000), “Knowledge and the Multinational Enterprise,” in Carla C.J.M. Millar, Robert M. Grant, Chong Ju Choi, eds., International Business: Emerging Issues and Emerging Markets (London: Macmillan). Hansen, Michael W. (2008), “The rise of Indian MNCs,” working paper (Copenhagen: Copenhagen Business School). Hay, Françoise (2006), “FDI and Globalization in India,” presented in International Conference: The Indian economy in the era of financial globalization, Maison des Sciences de l’Homme, Paris, Sept. 28–29, 2006. Hennart, Jean-Francois (1991), “The transaction cost theory of the multinational enterprise,” in Christos Pitelis and Roger Sugden, eds., The nature of the Transnational Firm (London: Routledge). Hobday, Michael (1998), “Latecomer catch-up strategies in electronics: Samsung of Korea and ACER of Taiwan,” 4(2–3) Asia Pacific Business Review, pp. 48–83. Hoskisson, R., Eden, L., Lau, C. M., and Wright, M.,(2000), “Strategy in Emerging Economies,” 43(3) Academy of Management Journal, pp. 249–267. Huang, Yasheng and Tarun Khanna (2003), “Can India Overtake China?,” 137 Foreign Policy, pp. 74–81. Hymer, Stephen (1976), “The international operations of national firms: A study of direct foreign investment,” PhD Thesis (Cambridge, MA: MIT Press).

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India Brand Equity Foundation (2007), “Capex takes Indian firms to global top league,” http://www.ibef.org/artdisplay.aspx?cat_id=391&art_id=6878. Johanson, Jan and Jan-Eric Vahlne (1977), “The internationalization process of the firm—A model of knowledge development and increasing foreign market commitments,” 8(1) Journal of International Business Studies, pp. 23–32. Khanna, Tarun (2005), “Asia’s new business giants,” 3 Global Agenda, pp.166–167. Khanna, Tarun and Krishna Palepu (1997), “Why Focused Strategies may be wrong for Emerging Markets,” Harvard Business Review Magazine, July 1, 1997. ——— (2004), “Globalization and convergence in corporate governance: Evidence from Infosys and the Indian software industry,” 35(6) Journal of International Business Studies, pp. 484–507. Kindleberger, Charles P. (1969), American Business Abroad (New Haven: Yale University Press, 1969). Kojima, Kiyoshi (1978), Direct Foreign Investment: A Japanese Model of Multinational Business Operations (London: Croom Helm). Kumar, Nagesh (2007), “Emerging TNCs: trends, patterns and determinants of outward FDI by Indian enterprises,” 16(1) Transnational Corporations, pp. 1–26. Kumar, Nagesh and Alka Chadha (2007), “India’s Outward Foreign Direct Investments in Steel Industry in a Chinese Comparative Perspective,” Maastricht Economic and social Research and training centre on Innovation and Technology Working Paper, No. 53 (Maastricht: United Nations University). Lall, Sanjaya, ed. (1983), The New Multinationals: The Spread of Third World Enterprises (New York and Chichester: John Wiley & Sons). Lall, Sanjaya (1996), “The Investment Development Path,” in John H. Dunning and Rajneesh Narula, eds., Foreign Direct Investment and Governments: Catalysts for Economic Restructuring (London: Routledge). Lecraw, Donald J. (1993), “Outward direct investment by Indonesian firms: motivation and effects,” 24(3) Journal of International Business Studies, pp. 589–600. Lee, Jaeho and Jim Slater (2007), “Dynamic capabilities, entrepreneurial rent-seeking and the investment development path: The case of Samsung,” 13 Journal of International Management, pp. 241–257. Li, Peter P. (1993), “How national context influences corporate strategy: a comparison of South Korea and Taiwan,” in S. Benjamin Prasad and Richard B. Peterson, eds., 8 Advances in International Comparative Management (London: JAI Press), pp. 55–78. ——— (2003), “Toward a geocentric theory of multinational evolution: the implications from the Asian MNEs as latecomers,” 20(2) Asia Pacific Journal of Management, pp. 217–42. ——— (2007), “Toward an integrated theory of multinational evolution: The evidence of Chinese multinational enterprises as latecomers,” 13 Journal of International Management, pp. 296–318. Lim, Linda Y.C. (1996a), “The evolution of Southeast Asian business systems,” 12(1) Journal of Asian Business, pp. 51–74. ——— (1996b), “Southeast Asian business systems: the dynamics of diversity”, in A.E. Safarian and Wendy Dobson, eds., East Asian Capitalism: Diversity and Dynamism (Toronto: University of Toronto Press), pp. 91–117. Luo, Yadong and Rosalie L. Tung (2007), “International expansion of emerging market enterprises: A springboard perspective,” 38(4) Journal of International Business Studies, pp. 481–498. Madsen, Tage. K., & Servais, Per (1997), “The internationalization of born globals: An evolutionary process?,” 6(6) International Business Review (1997), pp. 561–583. Mathews, John (2006), “Dragon Multinationals: New Players in 21st century Globalization,” 23 Asia Pacific Journal of Management, pp. 5–27.

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McGregor, Jena et al. (2006), “The World’s Most Innovative Companies,” Business Week Online, April 24, 2006, http://www.businessweek.com/magazine/content/06_17/ b3981401.htm. Pal, Parthapratim (2008), “Surge in Indian Outbound FDI to Africa: An Emerging Pattern in Globalization?,” paper presented at the Global Studies Conference, University of Illinois, Chicago, May 16–18, 2008. Pananond, Pavida and Carl P. Zeithaml (1998), “The Internal Expansion Process of MNEs from Developing Countries: A Case Study of Thailand’s CP Group,” 15(2) Asia Pacific Journal of Management, pp. 163–184. Peng, Mike (2002), “Towards an Institution-Based View of Business Strategy,” 19(2–3) Asia Pacific Journal of Management, pp. 251–267. Pradhan Jaya Prakash (2005), “Outward Foreign Direct Investment from India: Recent Trends and Patterns,” Gujarat Institute of Development Research Working Paper, No. 153. ——— (2007), “Growth of Indian Multinationals in the World Economy: Implications for Development,” MPRA Paper No. 12360, MPRA Munich Personal RePEc Archive. Prahalad, C.K. and Allen Hammond (2002), “Servings the World’s Poor, Profitably,” 80(9) Harvard Business Review, pp. 48–58. Ramamurti, Ravi and Jitendra V. Singh (2008), “Indian multinationals: Generic internationalization strategies,” in Ravi Ramamurti & Jitendra V. Singh, eds., Emerging Multinationals in Emerging Markets (Cambridge: Cambridge University Press). Reserve Bank of India (various years), Annual Reports, http://www.rbi.org.in/scripts/ AnnualReportPublications.aspx. Rugman, Allan. and Li, J. (2007), “Will China’s Multinationals Succeed Globally or Regionally?,” 25(5) European Management Journal, pp. 333–343. Saxenian, Annalee (2006), The New Argonauts: Regional Advantage in a Global Economy (Cambridge, MA: Harvard University Press). Sauvant, Karl P. (2005), “New Sources of FDI: The BRICs,” 6(5) The Journal of World Investment and Trade, pp. 639–709. Scott-Kennel, Joanna and Peter Enderwick (2005), “FDI and Inter-firm Linkages: Exploring the Black Box of the Investment Development Path,” 14(1) Transnational Corporations, pp. 13–23. Sim, A. B., and Rajendren Pandian (2003), “Emerging Asian MNEs and their internationalization: Strategies—Case study evidence on Taiwanese and Singaporean firms,” 20(1) Asia Pacific Journal of Management, pp. 27–50. Srinivas, Smita. and Judith Sutz (2008), “Developing countries and innovation: Searching for a new analytical approach,” 30(2) Technology in Society, pp. 129–140. Suzlon Company Profile (2008), http://www.suzlon.com/about_suzlon/ l2.aspx?l1=1&l2=1 (last visited November 2008). Teece, David J. (2000), “Firm Capabilities and Economic Development: Implications for Newly Industrializing Economies,” in Linsu Kim, L., and Richard R. Nelson, eds., Technology, Learning and Innovation (Cambridge: Cambridge University Press), pp.105–128. Teece, David J., Gary Pisano, and Amy Shuen (1998), “Dynamic capabilities and strategic management,” 18(7) Strategic Management Journal, pp. 509–533. Tolentino, Paz Estrella (2008a), “Explaining the competitiveness of multinational companies from developing economies: a critical review of the academic literature,” 4(1) International Journal of Technology and Globalisation, pp. 23–38. ——— (2008b), “The determinants of the outward foreign direct investment of China and India: Whither the home country?,” Maastricht Economic and social Research and training centre on Innovation and Technology Working Paper (Maastricht: United Nations University).

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United Nations Conference on Trade and Development (2004a), “India’s Outward FDI: A Giant Awakening?,” U.N. Doc. UNCTAD/DITE/IIAB/2004/1 (UNCTAD: October 20, 2004), available at http://www.unctad.org/sections/dite_iiab/docs/ diteiiab20041_en.pdf. ——— (2004b), World Investment Report 2004: The Shift Towards Services,” (Geneva and New York: UNCTAD, 2004), available at http://www.unctad.org/en/docs/ wir2004_en.pdf. ——— (2006), World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/wir2006_en.pdf. ——— (2007), World Investment Report: Transnational Corporations, Extractive Industries and Development (Geneva and New York: UNCTAD), available at http:// www.unctad.org/en/docs/wir2007_en.pdf. ——— (2010), FDI Database, online database found at http://www.unctad.org/ Templates/Page.asp?intItemID=1923 (last visited Feb. 2010). Vernon, Raymond (1966), “International investment and international trade in the product cycle,” 80(2) Quarterly Journal of Economics, pp. 190–207. Vernon-Wortzel, Heidi, & Lawrench H. Wortzel (1988), “Globalizing strategies for multinationals from developing countries,” 23(1) Columbia Journal of World Business, pp. 27–36. Whitley, Richard D. (1990), “Eastern Asian enterprise structures and the comparative analysis of forms of business organization,” 11(1) Organization Studies, pp. 47–74. ——— (2001), “Developing Capitalisms: The Comparative Analysis of Emerging Business Systems in the South,” in Gurli Jakobsen and Jens Erik Torp, eds., Understanding Business Systems in Developing Countries (New Delhi: Sage). Winters, Allan and Shahid Yusuf (2007), “Introduction: Dancing with Giants”, in ed. Alan Winters and Shahid Yusuf, eds., Dancing with Giants. China, India and the Global World (Washington, D.C.: World Bank & Institute of Policy Studies), pp. 1–34. Wright, M., Filatotchev, I. , Hoskisson, R., and Peng, M. (2005), “Guest Editors’ Introduction: Strategy Research in Emerging Economies: Challenging the Conventional Wisdom,” 42(1) Journal of Management Studies, pp. 1–33. Yeung, HenryWai-Cheung (1994), “Third world multinationals revisited: a research critique and future agenda,” 15(2) Third World Quarterly, pp. 297–317. Zeng, Ming and Peter J. Williamson (2003), “The hidden dragons,” Harvard Business Review Magazine, Oct. 1, 2003.

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3 Political Factors Behind the Rise of Indian Multinational Enterprises: An Essay in Political Economy Jørgen Dige Pedersen*

Introduction In the literature on the emergence of foreign direct investment (FDI) and multinational enterprises (MNEs), politics and state policies—though not completely absent—have never figured prominently. The main exception to this is when politics enters as a factor determining the direction of FDI through its influence on the attractiveness of different potential host countries. Thus, host country policies have generally been subject to scrutiny in some detail, while home country policies have largely been ignored. This chapter will try to rectify this lacuna through a discussion of the importance of home country policies in the case of Indian outward FDI (OFDI).1 The point emphasized in this chapter is a political economy one. From a political economy perspective, power and wealth, politics and economics, and markets and states are regarded as being in constant interaction, and politics, in the form of government interventions (policies), will always be present as a factor influencing, shaping, and directing economic transactions, and particularly FDI. This implies that government interventions are more widely present and more important in determining the nature of FDI than is usually acknowledged in the literature on MNEs. A further argument in this chapter is that, from a theoretical perspective, it is to be expected that government policies will play an important role in the economic progress of developing countries, 2 possibly stronger than they do in developed countries, and that this is indeed also the case in the context of OFDI. This will be examined through a discussion of the driving forces behind the emergence of Indian MNEs, both in its initial period in the 1960s and 1970s, and in the most recent period of strong international

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expansion.3 Finally, an argument for aligning the debate of OFDI, with elements from the debate on the East Asian developmental states, will be offered.

A. The Debate on Foreign Direct Investment and Multinational Enterprises 1. Conventional MNE Theory In conventional MNE theory, the logic behind the emergence of MNEs and of FDI activities has most often been found in considerations of various forms of market failure. The starting point for many theorists has been the observation that in a world of perfect markets, there is no incentive to establish production facilities abroad. This focus on market incentives has led most authors to neglect the possible role played by nonmarket mechanisms, especially those related to home country public policies.4 In his pioneering contribution to MNE theory, Stephen Hymer sees the explanation for corporate control over FDI—meaning control over the international operations of national firms, rather than portfolio investments—in those market imperfections that would normally give local firms operational advantages over foreign companies (1976). From this observation, a logical and necessary condition for firms to operate in foreign markets, or to become multinational, would be the possession of one or more operational advantages not available to local firms in the host country. Such advantages would normally be more widespread among companies in developed regions of the world, which would then constitute the dominant home countries for MNEs. In a similar fashion, Raymond Vernon argues that MNEs would mostly originate from developed countries. In his view, companies would invest abroad, in order to defend their export market position as it evolved according to the product life cycles of the various new products invented in developed countries (1966). Shifts in both international trade and international investment flows would take place according to the successive stages of this product life cycle. Finally, John Dunning integrates the contributions from these and other theories in his eclectic framework for explaining the emergence of MNEs. According to Dunning, three sets of variables need to be considered in order to provide a full answer to the question of why FDI takes place and MNEs emerge (1988). Ownership (O), location (L), and internalization (I) variables each provide an answer to a specific question: ownership variables indicate the advantages that foreign companies need to possess in order to be able to compete against local companies; location advantages determine the location for a company’s foreign activities; and internalization variables explain why the company chooses to exploit the ownership and location advantages within its own organizational framework, rather than letting other firms do it through a licensing arrangement or other forms of outsourcing arrangements. The logic behind Dunning’s analytical framework

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is impeccable, and the framework has rightfully become a standard analytical tool for explaining FDI activities. The interesting part, however, is the precise nature of—and the dynamics behind—the emergence of ownership advantages, location advantages, and internalization advantages for different countries, different groups of enterprises, or even individual enterprises. The lists drawn up by Dunning to illustrate the framework’s advantages include a large variety of possible benefits that may explain concrete examples of FDI (Dunning 1988: 27, 30–31), including: (O) size, capital, technology, and management advantages; (L) energy, labor, and transportation costs; and (I) company attitudes, control needs, and the functional nature of production. Dunning does mention the possible importance and influence of governments on each set of company advantages, but the role of government policies is clearly not considered to be significant enough to merit further consideration in this framework. 5 Subsequent, more empirically oriented writings on MNEs have done little to redress the general neglect of the role of home country governments in explaining the emergence of these firms. In an authoritative series of United Nations publications on MNE issues, one volume was dedicated to the role of governments, but the topic of home country policies was hardly mentioned (Moran 1993).6 In the third survey of MNEs (United Nations Centre on Transnational Corporations 1983), home country policies of developed countries were briefly mentioned as having a supporting and catalytic role in assisting the international expansion of home country MNEs, but their role was judged to be quite limited (87–105). Host country policies were seen as have much more importance (88). It was not until the 1995 World Investment Report that a whole chapter was devoted to home country government policies related to OFDI (United Nations Conference on Trade and Development 1995). According to the Report, developed countries have used a large array of regulatory and supportive policies to promote OFDI, including generous financial support programs, and, collectively through bilateral, regional, or multilateral arrangements, developed countries have devised different mechanisms to promote and protect the interests of their internationally active companies. The Report also added a new section that dealt with the policies of those developing countries that—it was then recognized—had recently become home countries for a range of new MNEs. In the case of Taiwan Province of China, and the Republic of Korea, home country policies have been judged to be very important for these new emerging MNEs, both in the construction of their ownership advantages and in assisting the process of their international expansion (Dunning et al. 1998). Despite this, no theoretical consequences for the theory of MNEs were drawn from the observation. The new phenomenon of emerging market MNEs did, however, lead to a dynamic reformulation of Dunning’s framework into a theory of investment paths (Dunning 1988: 140–68, United Nations Conference on Trade and Development 2006: 141–168). According to this extension of the original framework, the FDI position of a country moves through different

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stages as the country develops, in a manner similar to that envisaged by traditional modernization theory.7 From being a net receiver of investment at a low level of development, conventionally measured by GDP per capita, a country may progress to a higher stage of development, where it can become a source of OFDI. Such investment will typically be directed towards host countries at a lower level of development. Finally, a country may progress to later stages, where it will experience a more balanced investment position, or may even end up as a net exporter of capital to more advanced destinations. While this hypothetical investment cycle arguably suffers from the same dangers of being simplistic, mechanistic, and deterministic as classical modernization theory, Dunning does acknowledge that the precise nature of the path is influenced by the strategies pursued by home country governments, though the theoretical significance of this is not clearly spelled out.8

2. The Political Economy Perspective While the conventional theories of MNEs and FDI have been developed by economists—a fact that may reasonably explain the cursory treatment of the role of home country governments—one would expect a much stronger emphasis on the role of governments in the political economy tradition, with the involvement of political scientists, especially those working in the field of international relations. The activities of MNEs are often interpreted in the context of the host country’s foreign policy, especially for the larger world powers. As Robert Gilpin, one of the most prominent authors in this tradition, once expressed it: Economic and technical factors alone are undoubtedly sufficient to explain the level and types of foreign investments made by relatively small capitalist countries such as Switzerland and The Netherlands. But they are insufficient to explain the deep penetration of so many foreign economies by British investors in the nineteenth century and by American multinational corporations in the twentieth. (1975: 5)

For Gilpin, “the political order is a major determinant of the direction of economic activity” (59), and, more specifically, with U.S. MNEs, their “overseas expansion [ . . . ]was encouraged by the favorable provisions of American tax laws” (115). In general, Gilpin sees U.S. FDI as part of a deliberate U.S. strategy of international dominance, with the government’s tax policy intentionally supporting each enterprise’s international operations. This is a view shared by critics of U.S. MNEs, like Harry Magdoff, who sees U.S. multinationals as an integral part of U.S. imperialism (1969). Magdoff also points to official U.S. aid policy and the government’s use of international organizations like the International Monetary Fund (IMF) as being part of a policy that supports the international expansion of U.S. private capital (129, 144). While generally acknowledging the importance of state policies for the emergence and expansion of internationally oriented

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enterprises, these theoretical contributions displayed little interest in exploring how precisely states could and would influence the internationalization of their own enterprises. While governments may have assisted MNEs as part of their foreign policy, governments and enterprises were, in the political economy tradition—as in the conventional MNE literature—usually seen as being largely autonomous entities, and perhaps even entities that would constitute potential rivals in the international quest for power in the global political economy (Stopford and Strange 1991). The discussion of government-business relations in this theoretical tradition deals mostly with the bargaining relationship between MNEs and host country governments, while considerations of home country government policies and their relationship with OFDI—apart from the examples mentioned above—are largely absent. An interesting footnote to this brief survey of selected MNE writings is that Soviet scholarship on MNEs seems to have been more explicitly aware of the importance of home country government-MNE relations. The general theoretical position, as it is put forward by one Soviet scholar about the rise of U.S. MNEs, is that “the [MNEs] were formed with the direct support and active participation of their own state” (Astapovich 1983: 208). This general position is then documented by reference to the important role of the U.S. federal state in financing research and development (R&D) programs, and in providing state contracts, export credits, investment guarantees, and insurance to companies, in addition to directly financing investment projects through aid programs (194–208). This viewpoint seems, however, to have had little influence on mainstream discussions of MNEs. The bias against considering the relationship between MNEs and the policies of their home country governments is still present in recent literature. In his textbook on MNEs and FDI, Stephen Cohen gives an excellent survey of a variety of important topics associated with MNEs (2007). This includes a lengthy discussion of the importance of host country policies for attracting FDI, and the prospects of MNEs undermining the sovereignty of host country governments and, perhaps, governments in general. However, the book completely ignores the relationship between home country governments and MNEs, reflecting the status of existing research.9 Overall, neither the conventional economic theory of MNEs nor the broader political economy literature on MNEs has paid sufficient attention to the role played by home country governments in the emergence and growth of MNEs. To some extent, this may be explained by the fact that many MNEs have their origin in developed countries, where it can be argued that government policies have been of less importance. As discussed above, this is a matter for debate, as authors as diverse as Dunning, Gilpin, and Astapovich have, at times, noted the importance of home country government interventions. Another explanation for the neglect of home country government interventions in scholarly work is the dominance of economists among MNE researchers, and their understandable

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reluctance, and perhaps inability, to include political factors in their theoretical universe. As noted earlier, however, an increasing focus on home country government intervention associated with OFDI is noted in recent writings on the emergence of new MNEs from a few select developing countries, in particular from Taiwan Province of China, and the Republic of Korea. This is hardly surprising, given the almost universal agreement among otherwise different theoretical traditions that governments in developing countries can be expected to play a major role in economic affairs. To those who emphasized developing countries’ roles as latecomer industrializers, it was expected—from what was known about the earlier history of latecomer industrialization in Europe—that the state would play a major role in the economic progress of these countries (Gerschenkron 1962). Meanwhile, for those who put the emphasis on the colonial history of developing countries, and regarded the state in these countries as being “overdeveloped,” it would also come as no surprise that this type of state would be strongly interventionist when forming its economic policies (Alavi 1972). And finally, for the dominant school of modernization theorists, it was regarded as nearly inevitable that the state plays, or would have to play, a major role in determining the pace and nature of economic development (Adelman 2000). From each of these different but related viewpoints, it would not be surprising if governments came to play a role in the external economic relations of developing countries equal to that played in the domestic economic sphere. If we accept that home country policies may plausibly play a role in influencing the process of outward expansion of local capital in the form of OFDI, the questions that remain are: (1) what kind of government policies are relevant in this process, and (2) how influential are they for the emergence of new MNEs from developing countries? Generally speaking, the state may influence the international expansion of local companies in four major ways. First, the state can indirectly influence the strength and direction of the international expansion of local private capital through the creation of a supportive environment and institutional facilities, domestically as well as internationally. By virtue of its foreign policy activities, the state may provide both a kind of reputational international infrastructure and an institutional framework that is capable of supporting the country’s own MNEs. The government can also assist internationally active companies through its network of diplomatic representation, its participation in international agreements (bilateral, regional, or multilateral), and its influence on those international institutions that create the international rules of FDI. Such institutions provide a degree of security and calculability that is needed by investors venturing abroad, especially if they are active in politically troublesome parts of the world. Domestic institutions that are established for this purpose may also provide many of these services. In addition, the state may directly provide support (or the opposite) for internationalization efforts through the provision of financial and logistical aid, commercial

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information, or state-owned infrastructural facilities, and through selective use of its fiscal power (tax rules, etc.). Second, through its general domestic developmental policies, the state can shape the domestic development of ownership advantages that are needed by local companies in order to be able to survive internationally. These advantages may come in the form of size and financial muscle, mastery of technology, access to educated workers, etc.—all factors that a government’s domestic policies can help create and sustain. Third, the state may directly influence the outward flow of capital through its regulatory powers, including its control over the release of the foreign exchange needed for a foreign investment project. Finally, the state may directly take part in the export of capital through the investment activities of state-owned companies. In the next section, these different ways of influencing the strength, nature, and direction of FDI will be illustrated through a discussion of the activities of the Indian government, and how it has exerted influence on OFDI from the country. India may be a particularly good case for discussing the role of governments because of the omnipresent role of the Indian government in domestic economic development. For this reason, the Indian case provides a good example of the wide spectrum of potential government interventions. Furthermore, India has a long history as a home country for OFDI, with broad-based investment projects in many industries, and in many host countries worldwide. The government is also known to have played a significant role in other forms of international expansion of Indian capital other than OFDI (Pedersen 1993).

B. The Rise of Indian Multinational Enterprises: The Role of Home Country Government Activities While Indian MNEs have invested abroad in a small way since the late 1950s, it was only around 1970 that the Indian government explicitly formulated its policy towards OFDI. The policy declaration came at the same time that the country’s general trade policy was being strongly reoriented towards export promotion (Export Policy Resolution 1970). This meant that the policy on OFDI placed export promotion as an overriding motive for permitting investments abroad, along with a permanent concern for preserving foreign exchange. In addition, the guidelines stipulated that Indian investors would normally only be allowed to invest in joint ventures (JVs) abroad as minority partners, in order to ensure local participation.10 Besides limiting capital outflow, this provision also reflected the government’s policy of treating OFDI as a means of promoting mutually beneficial South-South relations. Later revisions of the guidelines (in 1978, 1986, and 1992) gradually shifted the emphasis away from Indian minority participation, and increasingly allowed for total financial control over foreign ventures (Pedersen 2008: 615–616). Moving away from the promotion

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of South-South relations, various semiofficial declarations increasingly focused on a general ambition of developing India’s own class of MNEs. An early statement of this ambition came in a report from an official commission in 1980.11 The objective was probably dampened by the stagnation in OFDI during the 1980s, but it was strongly revived in the late 1990s and early 2000s in the context of increasing globalization of the world economy. At this time, Indian government officials increasingly began to see the necessity of promoting India’s own MNEs. In the new 1995 guidelines, OFDI was seen in the context of increasing global competition, and in the need for technological updating (Indian Investment Centre 1995). Finally, in 2003, when announcing a further liberalization of the guidelines, the then Minister of Finance was quite optimistic about the prospects of Indian MNEs virtually “conquering the world” (Singh 2006: 358), and the Prime Minister of the new government spoke in 2004 of India becoming home to its own breed of MNEs (Singh 2004). While these (and other) examples of official ambitions on behalf of Indian companies becoming global players suggest that the government’s policies towards OFDI have been both active and strongly supportive, the reality has been far more complex, as we shall see in the following subsections of this chapter, when describing the different elements of the government’s policies. The policies will be grouped according to the direct and indirect ways in which they influence the internationalization process outlined above.

1. Creating a Supportive Environment and Institutional Facilities India has always had friendly diplomatic relations with most countries in the world, and, through its embassies, India has had a worldwide diplomatic presence. Its policies of nonalignment and of promoting of SouthSouth relations resulted in particularly good relations with other developing countries, particularly those in Africa and Asia. These diplomatic relations have probably provided an overall friendly atmosphere for Indian MNEs venturing abroad in most countries, and, in more concrete terms, Indian embassies have been instrumental in providing commercial information and assistance in the establishment of Indian JVs abroad.12 Similarly, other aspects of India’s foreign policy, such as India’s official aid programs in many developing countries, may have been important in this respect (Vohra 1980). More importantly, the large and expanding network of offices of state-owned Indian banks abroad has also provided a financial institutional infrastructure that is capable of supporting Indian MNEs desirous of investing abroad. The main objectives of establishing branches abroad were stated in 1973, shortly after the government nationalized the banking industry (Rao 1991: 8–9). One specific objective was to assist Indian JVs abroad, so it is unsurprising that the periods of expansion and contraction of the international banking network have, since the mid-1970s, mirrored the development of Indian OFDI—in other words, rising during the 1970s, stagnating or declining slightly during the 1980s, rising slowly during most of the 1990s, and increasing again with the rapid rise in investment after

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2000.13 Especially during the 1970s and early 1980s, the overseas offices of the state-owned banks were important in assisting the establishment of many investment projects.14 Through the establishment of an Overseas Investment Finance Scheme in 1978 (incorporated in the newly established EXIM Bank in 1982) the Indian government also provided financial support for OFDI (Agrawal 1984: 32). Linked to this was an Overseas Investment Insurance Scheme, available within the Export Credit and Guarantee Corporation (34–36). In addition, by entering into double taxation avoidance agreements, and, in recent years, bilateral investment treaties with a large number of countries, the Indian government has clearly done its best to pave the way for Indian investors (30–31).15 Domestic tax concessions have long been available to outward investors, and these concessions have probably also been instrumental in encouraging investments abroad. Since January 6, 1994, India has been a member of the World Bank’s Multilateral Investment Guarantee Association, thus making this organization’s investment guarantee facilities available to Indian MNEs that operate abroad. There is little doubt that these initiatives by the Indian government have had a positive impact on Indian MNEs, and it is likely that they have influenced both the magnitude and the geographical direction of OFDI, especially in the early period when most investments were directed towards Asian and African host countries. In a very direct manner, government support has probably been important in the many instances where the local partner of the Indian MNE was a government agency, which probably felt more comfortable entering into a venture that it knew enjoyed official support (Morris 1990: M32).

2. Shaping the Domestic Development of Ownership Advantages The Indian government’s domestic industrial policies have undoubtedly been of great importance in the creation of the capabilities and characteristics that Indian companies have acquired over the years. Technological and managerial capabilities have clearly been facilitated and influenced by the government’s policies with regard to investments in higher education and a variety of R&D activities (Nayyar 2008: 126). More controversial are the ownership advantages that are possessed by Indian companies, by virtue of the size and diversity of activities within those industrial conglomerates, which have been a dominant feature of the country’s industrial development.16 It has often been claimed that the restrictive policies pursued by the Indian government in its industrial licensing regime in general, and, in particular, the restrictions inherent in its antitrust legislation, have been instrumental in pushing larger companies away from the domestic market and into international markets (Balakrishnan 1976, Encarnation 1982, United Nations Conference on Trade and Development 2005).17 There is no doubt that on paper the antitrust legislation has made life difficult for large private companies, but as studies of the actual workings of both the licensing system and the antitrust legislation show, both policy measures seem to have been implemented in ways that have actually strengthened the

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larger industrial groups (Khurana 1981). In addition, large enterprises have benefitted disproportionally from various government-operated financial support mechanisms (Goyal 1979). Thus, it may be argued that in its policies, the Indian government has indirectly (and perhaps unintentionally) supported the growth of a group of companies that, by virtue of their size, would be capable of operating abroad. One specific group that may—at least temporarily—have found the domestic investment climate unfavorable is the Birla Group. The Birla Group was by far the largest foreign investor among the early Indian MNEs, and its investments abroad have constituted a sizeable part of the Group’s overall assets.18 In the official reports on the working of the industrial licensing system, the Birla Group was singled out as the worst offender in a study of companies that secured licenses without actually using them, thus, effectively keeping competitors at bay (Dutt Committee Report 1969). It would not be surprising then, that in the administration of the antitrust legislation recommended by the Dutt Committee Report, the Birla Group in particular would have found it more difficult to secure new domestic investment licenses. Several sources specifically mention the example of the Birla Group to support the argument that the domestic antitrust legislation provided an extra incentive for companies to go abroad (Balakrishnan 1976: M48, Agrawal 1984: 82, Piramal 1996: 176). In reality, this push mechanism may have been instrumental for only a few of the large conglomerates, while for other large MNEs, other factors were more important. In either case, it has been a consistent pattern that OFDI has been dominated by large MNEs, at times overwhelmingly so.19 Parallel to the development of the domestic economy, the universe of large MNEs engaged in OFDI has expanded considerably with the entry of new industries, above all in the pharmaceutical and information technology (IT) industries. Many of the IT and other service companies have been relatively small companies, but this probably reflects the nature of their operations.

3. Direct Regulation While the above-mentioned government policies have all facilitated and encouraged OFDI by interested and capable Indian companies, the most important political influence on the actual investment flows has been the government’s policy regarding the approval of individual OFDI projects. As stated above, policy guidelines for the approval procedure have been in place since 1970. 20 Before 1992, all investment projects abroad—no matter how small—required official permission by the government, reflecting an overriding concern of the Indian authorities to preserve scarce foreign exchange resources, or, if possible, to bring in foreign exchange through exports associated with the foreign venture. For this reason alone, the implemented policies for authorizing OFDI were essentially restrictive, but the degree of restrictiveness seems to have fluctuated in step with the prevailing foreign exchange situation. In 1977, one observer thus reported that the favorable foreign exchange situation at the time made it possible to

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accommodate those companies that were seeking permission for OFDI. 21 Almost ten years later, in 1986, the same observer reported Indian businesses having a strong interest in more freedom to invest abroad (B.M. 1986). The difference between the situation in the mid-1970s and the mid1980s was apparently not the enthusiasm (or the capabilities) of prospective Indian MNEs. Instead, the difference lay in the balance of payments and the foreign exchange situation. Figure 3.1 gives an indication of the situation with regard to foreign exchange since 1970. In the mid-1970s, the foreign currency situation improved, and, as a consequence, many investment projects abroad were permitted. In the 1980s, the balance of payment situation worsened, and less foreign exchange was deemed available for investments abroad, and hence fewer investment projects were permitted. While complete information on the annual outflow of investments is not available, the available evidence, based on partial information on the number of projects and the amount of share capital invested in companies abroad, strongly suggests a pattern that closely matches that found in the reserve situation. 22 Even after OFDI policy was slightly liberalized in 1992, with automatic approvals for small investment projects, and similarly in 1995, when the policy was further liberalized and officially changed from being one of regulation to one of facilitation, the danger of “a massive outflow of foreign investment by companies” remained a major concern for the authorities (Indian Investment Centre 1994). 23 To avoid this “massive outflow,” the government introduced an overall ceiling on OFDI, and it was only in the light of the rapidly rising foreign exchange reserves that

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Figure 3.1 International reserves minus short-term debt obligations (1970–2008) in US$ billions, and annual outflow of FDI (1994–2009) in US$ millions. Source: International Reserves: World Bank, Global Development Finance, Online Database, www. worldbank.org (last visited Mar. 5, 2010). Annual outflow: Reserve Bank of India Bulletin, www.rbi. org.in (last visited Mar. 2010).

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this ceiling was removed in 2003, and, as a result, OFDI boomed, as shown in Figure 3.1. Besides influencing the overall level of OFDI, the government’s approval policy may have influenced both the industry distribution and the choice of host countries of investment. Little is known, however, of how the Indian authorities have administered company applications, or of their motivations for approval or rejection of investment proposals. To the extent that the official guidelines are an indication of the actual treatment of applications, it is known that the guidelines initially favored industrial investments, while commercial services, trading, mineral exploration, and even agricultural activities were only added to the list of permissible investment activities later. It seems likely that the approval policy initially contributed to the concentration in manufacturing-related OFDI, and that the later widening of the scope for investments abroad probably was a reflection of the increase in the interest in OFDI from MNEs from other industries.

4. Direct Participation in OFDI The last and most direct government influence on the process of outward expansion is through OFDI by state-owned enterprises. The first stateowned industrial company to invest abroad was probably Hindustan Machine Tools, which received approval for a machine tool project in Kenya in 1978 (Agrawal 1984: 134). The company later started a similar project in Nigeria (137). At about the same time, other state-owned enterprises that were engaged in the hotel business, consulting, and the insurance business began investing abroad, but the overall overseas engagement by state-owned enterprises remained quite modest.24 In 1982, only four state-owned companies were reported to have ongoing investment projects, and their investments constituted less than 3% of Indian OFDI (Morris 1990: M25). At that time, more investments were in the pipeline, but apparently many of these were never implemented.25 Even in the late 1990s, when OFDI had increased considerably, very few state-owned enterprises were active as MNEs abroad.26 While the number of investments abroad was limited, state involvement in the largest overseas investment project at the time (a fertilizer and phosphoric acid project in Senegal, started in 1984) suggests that the government’s investment decisions can be said to have had a significantly positive influence on the overall level of OFDI.27 Since 2000, however, things have changed. The Indian government began to encourage its large oil and gas enterprises (GAIL India Ltd., Oil and Natural Gas Corporation, and Oil India) to invest in energy projects in Russia, Central Asia, Africa, 28 and later Latin America, and the resulting investments contributed substantially to the increase in the overall level of OFDI. 29 Overall, state-owned enterprises have been engaged in OFDI, and they have significantly contributed to its increase, especially during the last ten years. There is little to suggest, however, that the overseas activities of state-owned enterprises have worked to stimulate private investment in any meaningful way. Overall, most overseas investment projects and the

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majority of the invested capital abroad have been contributed by private industry. In this sense, the outward drive of Indian capital has mainly been a private industry phenomenon.

5. Summing Up: The Role of the State in the Outward Investment Process From our survey of policies that may have been both directly and indirectly influential, it seems likely that political factors in the form of state policies have contributed significantly to the process of external expansion through OFDI. In the early period before the 1990s, a variety of state-support mechanisms were put into place, which benefitted those private MNEs that became active investors abroad. The most direct influence that the Indian government has exerted on the OFDI of private MNEs came through the screening process of applications for investments, resulting in a pattern of OFDI that broadly mirrored the foreign exchange situation of the country. This is of interest because most conventional theories tend to explain the level of OFDI with reference to the accumulation of ownership advantages among MNEs. The accumulation of advantages is of importance, but, in this case, it seems that as far back as the early 1970s, Indian companies saw themselves as being both capable and ready for OFDI. However, they were held back from venturing abroad because the government had to be careful with its balance of payment policy. The later rise in the level of Indian OFDI only imperfectly reflects the growing capabilities of Indian MNEs; it also reflects the more comfortable foreign exchange situation and the consequent easing of investment restrictions. This is particularly evident for the latest rise in investments, after the almost complete removal of the remaining OFDI restrictions in 2003. Direct state involvement was limited in the early period, but of late, it has become quite significant due to the international activities of stateowned energy MNEs. That government policies as a whole have been of great significance does not mean, however, that the usual economic factors associated with OFDI have been of less importance. Company and market characteristics have clearly been important, especially regarding the explanation of both the composition and the geographical regions of OFDI host countries with many investments in developing countries having markets similar to those of India. Even here, government policies may have been influential, albeit less so than in determining the overall level of OFDI. In addition, government policies may have had different effects on different industries, and, in a more detailed analysis, the reasoning for the outward expansion of different industries may be found in different sets of government policies. The domestic growth and international expansion of the IT and pharmaceutical industries, for instance, has probably been helped most by the government’s policies with respect to education and R&D, 30 while the international expansion of the chemical and engineering industries may have benefitted from some of the earlier industrialization policies, such as import substitution and restrictions on foreign investments. There is plenty Brian Harley

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of room for more research of the role of government policies in industryspecific areas. In theoretical terms, what is needed in order to fully comprehend the different aspects of the process of OFDI by Indian companies, then, are some reflections that combine economic and political variables in a way that also captures the interactions among state policies, enterprise, and market characteristics. To conclude this chapter, I will outline some theoretical elements that may be useful in the construction of a new, more encompassing theory.

C. A Theoretical Reinterpretation A significant feature of the evolution of the Indian government’s policy on OFDI is the constant and intimate interaction between government bureaucrats and business representatives in the discussion of various policy elements. An early observer of Indian JVs abroad spoke of the “confluence of interest” and the “symbiotic relations” between business and government (Encarnation 1982: 54, 58). This characterization of the evolution of the Indian government’s OFDI policy bears a resemblance to the concept of “embedded autonomy” in the relationship between state and business, which constitutes the core argument in Peter Evans’s contribution to the debate on the East Asian developmental states (1995). According to Evans, the key explanation of the successful industrial transformation of the East Asian Tigers lay in the establishment of an institutionalized and cooperative relationship between the state officials entrusted with the task of formulating policies, and those business interests that possessed the relevant knowledge of market conditions necessary for the design of intelligent policies (id.). In the case of Indian OFDI, an institutionalized set up of government-business consultations seems to have been in place since at least the early 1970s. According to another observer, who had the benefit of having been an insider in the regular consultations between business and government, the initiative to start these consultations, and the suggestions for new policy initiatives, came from the side of business: “the policy was evolved through proddings, as it were, of Indian enterprises” (Agrawal 1984: 16). 31 This “prodding” apparently started in earnest in 1973, when the first seminar between government officials and representatives of private industry was held, under the auspices of the then leading industry association in India, the Federation of Indian Chambers of Commerce and Industry, to discuss OFDI policy and other forms of international expansion, such as project export, construction activities, consulting, etc.32 These seminars were periodically repeated during the 1970s and 1980s, and from the minutes of these meetings, it is apparent that there was an open exchange of views and a very positive attitude on the part of government officials towards requests from business.33 In 1982, for example, the Vice President of the Federation noted with satisfaction that “the thinking of Government

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and of entrepreneurs is on the same wavelength,” and the chair of the organization’s foreign trade subcommittee emphasized that the “setting up of a successful joint venture constitutes a joint effort between Indian enterprises and our Government” (Federation of Indian Chambers of Commerce and Industry 1982: xxxvi-xxxvii). The Commerce Minister responded by promising that the specific recommendations from the meeting would receive careful attention from his ministry (xxxxii). There is little doubt that many of the suggestions were later translated into official policy, but it is also evident that the government was very much aware of the limitations of what it could offer to prospective investors, given the balance of payment situation and other policy constraints. As noted earlier, what is truly remarkable is that Indian companies seem to have been eager to invest abroad as early as the first half of the 1970s. At the time, they apparently saw themselves as having sufficient ownership advantages to be able to manage foreign ventures. This may, in many instances, have been a misconception, as many of the early foreign ventures approved by the government had to be abandoned by Indian MNEs or were never implemented (Pedersen 2008: 619). It must be taken into account, however, that some of these failures happened in politically and socially unstable host countries, where the Indian government was unable to protect MNEs from being nationalized, as happened with all of the Indian JVs in Ethiopia after the revolution in 1974 (Encarnation 1982: 56). That Indian industry in general seemed to be ready to invest abroad, yet was not allowed to do so by the Indian government, can also be seen from the joint government-business seminar in 1986. At that time, overseas investment was stagnating, and this stagnation has often been interpreted as being caused by a lack of competitiveness on the part of Indian industry, or by unfavorable market conditions abroad. At the meeting, however, industry representatives argued for an easing of the restrictions on OFDI, while the government officials had to emphasize that, given the balance of payments situation, there were limits to how much capital outflow could be allowed, but that Indian entrepreneurs should feel free to come to the government with their difficulties and problems (Federation of Indian Chambers of Commerce and Industry 1986: 36, 42). The tradition of regular institutionalized meetings between government and business, under the auspices of the Federation of Indian Chambers of Commerce and Industry, seems to have stopped in the late 1980s. Reasons for this include the decline of the Federation as the dominant representative of Indian private business, the decline in OFDI, and a gradual reorientation of the government’s overall economic policy.34 The rise of a new dominant industry association, the Confederation of Indian Industry, and a change in economic policy did not bring an end to the close collaboration between the government and business, as might have been expected. To the contrary, the relationship between Indian business and the government seems to have become more collaborative and closer than ever before. For example, the Ministry of Commerce reorganized its advisory Board of Trade

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in 1989 to include a stronger representation of private industry, including both the Federation of Indian Chambers of Commerce and Industry and the Confederation of Indian Industry. The new, more liberal guidelines for OFDI, which were announced in 1992, thus had their origin in the suggestions made by a committee that was established under this Board of Trade (the Kalyan Banerjee Committee) (Department of Commerce 1994: 106). The rise of the Confederation of Indian Industry meant better and probably more professionally managed relations between the government and business associations, and also induced a change towards more professionalism within the older associations like the Federation (Kochanek 1995–96). Overall, the Government’s economic policies, including those on OFDI, have, in recent years, been very business friendly, especially since the administration of policies was made less bureaucratic and transferred to the Reserve Bank of India from 1995 onwards (Indian Investment Centre 1995). Apart from influencing the government’s policy, the Confederation of Indian Industry is today active in directly supporting the globalization of Indian industry, and through its offices abroad, it has established an infrastructure for doing this (Confederation of Indian Industry 2010). These friendly and intimate relations between government and business are, perhaps, more than anything else, the key to understanding why India both developed as much as it did industrially, and why it also succeeded in expanding internationally. In a fashion similar to the “embedded autonomy” relationship between government and industry in East Asian countries, the friendly relations between industry and the Indian government may help explain why Indian industry developed its ownership advantages and expanded internationally in the first place, despite its relatively weak currency situation. Later, the intimate relations between industry and government may help explain why Indian industry was allowed to take advantage of the increasingly advantageous currency situation and go abroad in a big way. The “embedded autonomy” argument would thus, in the context of Indian OFDI, be formulated as follows: Indian OFDI was determined by how well Indian business had developed domestically, where it was helped and regulated by government policies. The government policies that influenced the process of OFDI were a compromise between the wishes and interests of business on the one hand, and the general obligations of the government, in terms of managing the fiscal balance (i.e., limiting the amount of tax benefits and financial assistance) and the external balance (i.e., limiting the amount of foreign exchange utilized for the purpose), on the other hand. Since the early 1970s, the actual policies were developed through close interaction between the two sides, and it was because of this interaction that the policies were largely successful in promoting OFDI. This kind of political economy theory of OFDI may not lend itself easily to formal empirical testing of the kind used by many economists. It does, however, provide a broad framework within which the formal analysis of the different kinds of ownership advantages of MNEs, and perhaps also the nature of probable investor motives, can easily be subsumed. It may also

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enrich the theory of the investment path, because it questions whether the timing and dynamics of OFDI are determined only by factors associated with the overall level of development, or whether they are rather determined by certain other features of the home country’s political economy, in particular the nature of the relationship between business and government in the making of relevant policies.

Conclusions This chapter has hopefully substantiated the argument that home country government policies did matter significantly in the development of OFDI from India. Government policies cannot, of course, fully explain the pattern of OFDI; they need to be combined with considerations of the various capabilities of potential investors. Inspired by the debate over successful East Asian developing countries, it seemed as though the best way to conceptualize the interaction between business and government is through the notion of “embedded autonomy.” Generalizing from the case of India and formulated in hypothetical terms, the theoretical approach suggested here would expect that a country will be able to act as a home country for private OFDI if: (1) it has, through its domestic policies, nurtured a competent class of domestic entrepreneurs who possess a range of ownership advantages; and (2) it has developed and implemented a set of policies to support international expansion, in close collaboration with the relevant private entrepreneurs. The policies will only be effective to promote OFDI, however, if the export of capital falls within the overall limits given by the government’s balance of payment policy and the availability of foreign exchange.

Notes * Senior lecturer in the Department of Political Science, University of Aarhus. 1. Some of the points raised in this chapter were discussed in an earlier work on the broader process of internationalization of Indian capital (Pedersen 1993). 2. “Emerging markets” are all economies that are not members of the European Union and the Organisation of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe. 3. In discussing the factors behind the emergence of MNEs, I will not consider the diverse motivations of individual companies. These are often categorized as resource, market, efficiency, and asset-seeking motives, but empirical research usually finds many more. Several of the other chapters in this volume, including Chapter 2 and Chapter 4 discuss these motivations. 4. The almost universal emphasis on market failures is evident in the authoritative collection of papers in Dunning (1993). 5. This contrasts with an early statement of his that “government policy is vitally important [ . . . ] there are many obvious examples of government affecting the behaviour of international companies and it seems likely that the role will become even more important in the future” (Dunning 1973: 330).

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6. The chapters by Sunkel and Rodman in the volume briefly mention home country government activities in support of OFDI. 7. The standard formulation is set out in Rostow (1960). Also, see Chapter 2 for a more detailed analysis of the investment development path theory as well as its application to India. 8. Dunning’s statement that “all countries—irrespective of their economic structure, and of the strategy and policies of governments towards development—tend to pass through various stages of development” sounds like traditional modernization theory and ascribes little importance to governments policies, whereas the following sentence: “the speed and direction of the development process will depend inter alia on the political objectives of governments,” indicates that state policies do play a role (1988: 165). 9. To be fair, Cohen does mention governmental policies such as “tariffs, quotas[,] and subsidies” that he sees as constituting a separate category of market failures (2007: 122). 10. See Jørgen Dige Pedersen (2008: 615–616) for an overview of the guidelines since 1969. 11. The Tandon Committee Report (1980) put it this way: “We should begin to look ahead with our own new [MNEs].” It was also noted that “they are also beginning to look further afield” (than towards other developing countries) but that “[this expansion] will need some active support from government” (43, 126). 12. Sebastian Morris mentions that the Indian embassy in Nairobi, Kenya, played a crucial role in the establishment of three early investment projects (1987: 1917). 13. The number of overseas branches of Indian banks is regularly published by the Reserve Bank of India. 14. This is at least the assessment of the managing director of the most internationally active bank, Bank of Baroda (Sivaramakrishnayya 1983). A similar assessment is found by Federation of Indian Chambers of Commerce and Industry (FICCI) (1986: 42). A few of the bank offices abroad were established as joint ventures and some, but not all, are included in the official lists of joint ventures abroad. 15. An overview of current bilateral investment treaties is provided by Ministry of Finance 2010. 16. See Chapter 4 for a discussion of how the Indian conglomerate structure has impacted Indian OFDI. 17. Dennis Encarnation argues that the introduction of the antitrust legislation added to the incentives for large companies to invest abroad (1982). This interpretation is challenged, however, by his own data on investment approvals that shows a decline in the large companies’ share of the investments after the legislation was introduced (45). 18. Morris estimated the overseas assets of the Birla Group to be close to 25% of the Group’s total assets (1990: M26). 19. Morris calculated that more than 80% of the equity in MNEs in 1982 belonged to large companies (1990: M25). Pradhan later found that larger companies were more likely to engage in OFDI (2004, see also Encarnation 1982). The United Nations Conference on Trade and Development also reported the dominance of large companies, which were the source of over 90% of the cumulative OFDI in manufacturing to date as of 2001 (2005: 7). 20. See the summary of the policy guidelines in Pedersen (2008). 21. As B.M. sees it, the government had asked itself the question of “how exactly to draw down the swelling foreign exchange resources” and one solution to this “problem” lay in exporting capital through joint ventures abroad (1977). 22. The accumulated number of investment projects and their associated investments approved and implemented before the mid-1990s are shown in Pedersen (2008: 620).

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24.

25.

26.

27.

28. 29.

30. 31. 32.

33.

34.

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The data are incomplete, however. Morris provides an estimate of the annual additions to the Indian share capital invested abroad and his figures show precisely the rise of investments during the latter half of the 1970s and the decline during the 1980s (1987: 1913, Table 5). The shift from a policy of regulation to one of facilitation is mentioned in the Department of Commerce (1996: 127). In June 1997, an Indian newspaper reported that the finance minister had indicated “that the rising forex reserves with the [Reserve Bank of India] have necessitated a further liberalisation of the policy on outward investment flows” (Venu 1997). State-owned enterprises were much more active in turn-key projects, construction activities, engineering consulting, and other forms of exporting technology abroad that did not involve direct investments (Pedersen 1993). K.V.K. Ranganathan reported a total of five state-owned investment projects operating abroad in 1986 (1988). This indicates that few, perhaps only one, of the planned projects were implemented. In a list of select joint ventures abroad functioning at the end of 1998, very few public corporations could be found (Confederation of Indian Industry 2000: 131–144). This small participation is in stark contrast with the sometimes dominant role that state enterprises have played in many industries of the domestic economy. In 1994, the project in Senegal constituted around 8% of all Indian OFDI. The project was managed by the Indian Farmers Fertilizers Cooperative, but the Indian government was also financially involved (Agrawal 1984: 50, 138). See Chapter 9 for a discussion of Indian OFDI in Africa. Investment data for individual companies are not available, but in the investment approval figures for the period 1996–2005, investments in Russia and Sudan (hosts to Indian oil and gas investments) combined constituted 27% of all approved investments (author’s calculation from data in Pedersen 2008). It is likely that up to one-third of all Indian OFDI during this period can be attributed to state-owned enterprises. See Chapter 6 for further analysis of Indian pharmaceutical and IT MNEs. Agrawal had joined the Federation of Indian Chambers of Commerce and Industry in 1947 and later became Deputy General Secretary of the organization. As early as 1963, the government had established an India-Africa Development Association, and this could well be regarded as the first venue for governmentbusiness dialogue on potential foreign investments (Agrawal 1984: 16). I have had access to the official minutes from the meetings in 1982 and 1986 only, but there is little to suggest that other meetings were different from those two. See Federation of Indian Chambers of Commerce and Industry 1982, 1986 and Encarnation 1982 for reports from the meeting in 1977. The changes in the organization of business interests in the late 1980s are described by Stanley Kochanek (1995–96).

References Adelman, Irma (2000), “The role of government in economic development,” in Finn Tarp, ed., Foreign Aid and Development. Lessons Learnt and Directions for the Future (London: Routledge), pp. 48–79. Agrawal, Ram Gopal (1984), Joint Ventures Abroad. Indian Experience (New Delhi: Government of India Publications Division). Alavi, Hamza (1972), “The State in Post-Colonial Societies: Pakistan and Bangladesh,” 74 New Left Review, pp. 59–81. Astapovich, A. Z. (1983), The Strategy of Transnational Corporations (Moscow: Progress Publishers).

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Balakrishnan, K. (1976), “Indian Joint Ventures Abroad: Geographical and Industry Patterns,” 11(22) Economic and Political Weekly, pp. M35-M48. B.M. (1977), “India as Capital Exporter,” 12(51) Economic and Political Weekly, pp. 2079–81. ——— (1986), “If We Can’t Export Goods, Let’s Export Capital,” 21(48) Economic and Political Weekly, pp. 2081–83. Cohen, Stephen (2007), Multinational Corporations and Foreign Direct Investment (Oxford: Oxford University Press). Tandon Committee Report (1980), Committee on Export Strategy (New Delhi: Government of India). Confederation of Indian Industry (2000), Statistical Yearbook 2000 (New Delhi: Confederation of Indian Industry). ——— (2010), www.cii.in (last visited Mar. 10, 2010). Department of Commerce (1994), Annual Report 1993–94 (New Delhi: Department of Commerce). ——— (1996), Annual Report 1995–96 (New Delhi: Department of Commerce). Dunning, John H. (1973), “The Determinants of International Production,” 25(3) Oxford Economic Papers, pp. 289–336. ——— (1988), Explaining International Production (London: Unwin Hyman). ——— (1993), “The Theory of Transnational Corporations,” in John H. Dunning, ed., United Nations Library of Transnational Corporations (New York and London: Routledge), Vol. 1. Dunning, John H., Roger van Hoesel, and Rajneesh Narula (1998), “Third World Multinationals Revisited: New Developments and Theoretical Implications,” in John H. Dunning, ed., Globalization, Trade and Foreign Direct Investment (Amsterdam: Elsevier), pp. 255–286. Dutt Committee Report (1969), “Report of the Industrial Licensing Policy Inquiry Committee” (New Delhi: Government of India). Encarnation, Dennis J. (1982), “The political economy of Indian joint industrial ventures abroad,” 36(1) International Organization, pp. 31–59. Evans, Peter (1995), Embedded Autonomy: States and Industrial Transformation (Princeton: Princeton University Press). Export Policy Resolution(1970) (New Delhi: Government of Indian). Federation of Indian Chambers of Commerce and Industry (1982), “Workshop on Indian Joint Ventures Abroad and Project Exports,” report (New Delhi: FICCI). ——— (1986), Indian Joint Ventures Abroad and Project Export (New Delhi: FICCI). Gerschenkron, Alexander (1962), Economic Backwardness in Historical Perspective (Cambridge: Belknap Press). Gilpin, Robert (1975), U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books). Goyal, S.K. (1979), Monopoly Capital and Public Policy (New Delhi: Allied Publishers). Hymer, Stephen (1976), “The international operations of national firms: A study of direct foreign investment,” PhD Thesis (Cambridge, MA: MIT Press). Indian Investment Centre (1995), Guidelines for Indian Joint Ventures and Wholly Owned Subsidiaries Abroad (New Delhi: IIC). Kochanek, Stanley A. (1995–1996), “The Transformation of Interest Politics in India,” 68(4) Pacific Affairs, pp. 529–550. Khurana, Rakesh (1981), Growth of Large Business: Impact of Monopolies Legislation (New Delhi: Wiley Eastern). Magdoff, Harry (1969), The Age of Imperialism: The Economics of U.S. Foreign Policy (New York and London: Monthly Review Press). Ministry of Finance (2010), www.finmin.nic.in (last visited Mar. 10, 2010).

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Moran, Theodore H. (1993), “Governments and Transnational Corporations,” in John H. Dunning, ed., United Nations Library on Transnational Corporations (London and New York: Routledge), Vol. 7. Morris, Sebastian (1987), “Trends in Foreign Direct Investment from India (1950– 1982),” 22(45–46) Economic and Political Weekly, pp. 1909–1918, 1963–1969. ——— (1990), “Foreign Direct Investment from India: Ownership and Control of ‘Joint Ventures’ Abroad,” 25(7–8) Economic and Political Weekly, pp. M23-M34. Nayyar, Deepak (2008), “The Internationalization of Firms from India: Investment, Mergers and Acquisitions,” 36(1) Oxford Development Studies, pp. 111–131. Pedersen, Jørgen Dige (1993), “The Determinants Behind India’s South-Bound Economic Expansion,” 23(3) Journal of Contemporary Asia, pp. 354–381. ——— (2008), “The Second Wave of Indian Investments Abroad,” 38(4) Journal of Contemporary Asia, pp. 613–637. Piramal, Gitam (1996), Business Maharajas (New Delhi: Penguin Books). Pradhan, Jaya Prakash (2004), “The Determinants of Outward Foreign Direct Investments: A Firm-level Analysis of Indian Manufacturing,” 32(4) Oxford Development Studies, pp. 619–639. Ranganathan, K.V.K. (1988), Indian Joint Ventures Abroad, Corporate Studies Group Working Papers (New Delhi: Indian Institute of Public Administration). Rao, V. L. (1991), Indian Banks Abroad (New Delhi: Ashish Publishing House). Reserve Bank of India Bulletin, www.rbi.org.in (last visited Mar. 2010). Rostow, Walt W. (1960), The Stages of Economic Growth (Cambridge: Cambridge University Press). Singh, Manmohan, “Prime Minister’s address at meeting of PM’s Council of Trade and Industry,” New Delhi, Dec. 4, 2004, available at http://pmindia.nic.in/speech/ content.asp?id=56. Singh, Jaswant (2006), A Call to Honour: In Service of Emergent India (New Delhi: Rupa & Co.). Sivaramakrishnayya, Y. V. (1983), “Indian joint ventures abroad: Performance and prospects,” The Economic Times, December 30, 1983, p. 5. Stopford, John, and Susan Strange (1991), Rival states, rival firms: Competition for world market shares (Cambridge: Cambridge University Press). United Nations Conference on Trade and Development (1995), World Investment Report 1995: Transnational Corporations and Competitiveness (Geneva and New York: UNCTAD). ——— (2005), “Case study of outward foreign direct investment by Indian small and medium-sized enterprises,” U.N. Doc. TD/B/COM.3/EM.26/Add.2 (Geneva and New York: UNCTAD). ——— (2006), World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/wir2006_en.pdf. United Nations Centre on Transnational Corporations (1983), Transnational Corporations in World Development: Third Survey (New York: UN/CTC). Venu, M. K. (1997), “Investment norms to be eased,” The Economic Times, June 18, 1997. Vernon, Raymond (1966), “International Investment and International Trade in the Product Cycle,” 80(2) Quarterly Journal of Economics, pp. 190–207. Vohra, Dewan C. (1980), India’s Aid Diplomacy in the Third World (New Delhi: Vikas). World Bank (2010), Global Development Finance, Online Database, www.worldbank. org (last visited Mar. 5, 2010).

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4 When a Great Industry Globalizes:1 Indian Conglomerates Pioneering New Trends in Industrial Globalization Joël Ruet*

“Globally, India is not just a flavour of the week or the month or even the year. We are the flavour of the times. Previously, it was only China. Now it is China and India. [ . . . ] Indian business has its work cut out. Develop and strengthen in the fast growing domestic market and move into overseas markets. Also, look around the corner for newer products and technologies.” —Rahul Bajaj, Chairman of Bajaj Auto (“Realizing the Indian Dream,” speech at Wharton India Economic Forum, Philadelphia, Nov. 11, 2006). “India’s potential to transform the world economy in the next two decades is the same as America did in the last century or what China has been doing for the past decade and we have determined that India exploits this potential to the fullest.” —Kamal Nath, Union Minister for Commerce and Industry (speech at the World Economic Forum’s India Economic Summit, Davos, Jan. 29, 2005).

Introduction: Not Just Followers; Indian Multinationals are Changing the Global Business Model Indian multinational enterprises (MNEs) are not only internationalizing by selling abroad. They are also producing abroad, and even, for some, globalizing their production processes by rethinking their supply chains, and entering new value chains of global opportunities. In this chapter, we suggest that, whether they conduct outward foreign direct investment (OFDI) by means of greenfield investments, acquisitions, or partnerships, Indian MNEs must, in fact, combine assets and resources

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from both emerging markets and developed countries. 2 This idea has two major implications. First, MNEs will have to relearn their own lines of business again from scratch, acquiring local knowledge and also rethinking their capital-labor ratio; that is, they must largely reinvent their organizations. While they need to capitalize on their assets quickly in order to climb the value chain, they will also need to continue pursuing technological development and internationalization. Second, rather than moving towards convergence, this will lead to the creation of new opportunities for numerous companies. Original business models that are being devised in India today focus on accelerated technological development; rapid capitalization by means of diversifying client portfolios; interindustry technological synergies; the reorganization of production, design, and distribution; the reintegration of specific human, mineral, or energy resources; new financing models; etc. The key factor we wish to underline in explaining the success of Indian MNEs is their conglomerate structure: often analyzed as a handicap in literature, it has in fact proven to be an accelerator for catching up in production process-efficiency and technology, while multiplying the opportunities for partnerships amongst Indian MNEs. Our approach to understanding the current dynamics of Indian OFDI relies on an initial review of the origins of these groups. If they are now autonomizing or trying to autonomize their business models from the state, they have, nonetheless, all originated from very India-specific and statedriven forms of political economy. Licensing is at the very root of their conglomerate form, thus at the root of the many possibilities of partnerships they manifested when they encountered with global business models. To understand the Indian form of capitalism, one has to go further than the MNEs themselves, and factor in the Indian state. The existing literature has developed many analyses of the competitive advantages of emerging country MNEs (for the last few years, mostly focusing on Chinese and Indian MNEs). In particular, the literature has focused on the forms of joint ventures (JVs) and entry modes (Meyer, Estrin, and Bhaumik 2005), on host country assets and the resilience of partnerships and funding of acquisitions (Deloitte et al. 2007), on learning strategies and vision (Bartlett and Goshal 2000), and sometimes on the global institutional environment (Huang and Khanna 2003). However, unlike the research carried out by Peter Hall and David Soskice in the case of developed countries (2001), different varieties of capitalism have seldom been studied in the context of emerging markets. Indeed, very few studies have sought integrative explanations that sift through all of these possible explanatory factors. Rather, case studies have been the usual method of study (see e.g., Bonaglia, Goldstein, and Mathews 2007). Here, we try to provide an integrative framework for the various explanatory factors, rooted in the trajectory of the political economy of a country, to explain how different varieties of capitalism have emerged. This chapter concludes by suggesting a theoretical concept to reconcile current

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developments in China and India, and the theories of development/catching up: namely, the complementarity between the concepts of “catching-up growth” and “globalization of firm-induced growth.” This chapter calls for a refined level of analysis, including direct interviews to analyze the industrial economics of (often unstable) business models, an analysis of technological contents of trade with respect to capital control over its various subsegments, an analysis of asset creation and portfolio building, and an analysis of asset specificity. In order to reinstate a sense of the trajectories of business models, and, as we feel that studies of the internationalization of firms too often overemphasize international acquisitions, while completely overlooking the business model at home, we will establish a sense of symmetry between domestic and international MNEs’ affiliates. We will do so in two ways in Section A. First, we redefine the push factor of growing competition that Indian MNEs face in their own domestic market as a locational advantage that MNEs have leveraged in the past (through building advantageous partnerships), though its importance has been diminishing. This push factor is at least as important in the internationalization move as is the pull factor of acquiring new markets and skills. Second, we recall that the spree of acquisitions by Indian MNEs, if motivated by global opportunities and the availability of liquidity, was also made possible by a home-based financial structure that gave advantages to Indian MNE. After recalling these general “national” factors and issues, with respect to the emergence of Indian MNEs, Section B goes on to identify the specific organizational advantages of Indian MNEs within this context, and to suggest that the surge of Indian MNEs is compatible with the low level of the country’s integration into the “Asian system of production.” This low level of Indian integration into global trade, which made India go mostly unnoticed until major takeovers started in 2006, was nonetheless a further incentive for Indian businesses to internationalize faster than Chinese companies that saw the world’s business coming to their own soil. Section C then explores the dynamics of the process of Indian emergence, technological catching up, and, ultimately, globalization, to show that business models have long been or are still unstable, and that they express a sense of variety. Thus, the experience of Indian MNEs presents both an emergent model and a contribution to the varieties of capitalism, and Section C offers a schematization of these evolutions, informed by some “model-making” examples. In information technology (IT), the BT Group and various manufacturing industries provide evidence of several alternative models, based on initial assets and MNE-specific strategic choices, but these models ultimately fall within broader categories. It is interesting to find in the Indian case something that was studied in North America and East Asia by Suzanne Berger: that within one framework of globalization, many models coexist (2005). The section then undertakes a deeper analysis of one Indian characteristic, the synergies within conglomerate groups, relying particularly on the example of the Tata Group.

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Section D then seeks even further generality and a prospective outlook by considering the motivations and incentives for partnership that the framework of global competition is now producing. The chapter concludes by suggesting that Indian capitalism has the potential to profoundly renew global capitalism today, and it puts this potential into the perspective of the larger shift in the Indian policy regime, from a focus on national growth to a focus on globalization-induced growth.

A. Indian Multinational Enterprises Out to Conquer the World? Going Global Because of Domestic Challenges as well as Global Opportunities Postliberalization, if one analyzes the transformation of Indian industrial firms, it is probably wise to mark a cutoff point around the years 2001–2002. Before this turning point, the major Indian industrial groups had undergone a long decade of refocusing on certain core areas of production, after having been forced to diversify for nearly 40 years due to investment regulations set up after independence in 1947 (known as the “License Raj,” in reference to rules imposed by the British). By 2002, these groups were still conglomerates, but they were less diversified, having restructured the productivity of their main branches. Not yet very internationally competitive in the early 1990s, these groups had preferred to stay in the domestic arena, where levels of protection decreased quite slowly. A decade later, the groups were feeling better prepared and had a model to follow. Indeed, after 1995, the reverse brain drain of returning Indian expatriates gave rise to a very dynamic IT industry. Some of these companies worked their way up the value chain fairly quickly, and they ventured into foreign investment during the late 1990s (Bomsel and Ruet 2000). Companies in the biotechnology and pharmaceutical industries then followed suit (Huchet, Richet, and Ruet 2007). But it wasn’t until after 2002 that the major Indian manufacturing groups would truly begin their internationalization process. The restructuring of their activities during the previous decade provided them with considerable financial reserves, and they anticipated the pressure of foreign competition on the domestic market, which they knew was bound to grow because of the opening-up measures that were introduced by the various governments since 1991. With the surge in both OFDI and inward foreign direct investment (IFDI) activity, mergers and acquisitions (M&A) increased. But until 2006, M&A remained largely the advantage of foreign firms, although Tata Steel’s exceptional bid for Corus in 2006, followed by Suzlon’s smaller-scale but still significant bid on Repower in 2007, foreshadowed a new trend.

1. Technology-Focused Geographic Patterns in OFDI Distribution With regard to the host countries of Indian OFDI, a radical change has been observed that clearly attests to an overhaul of the industrial strategies

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of Indian groups. Before 1990, the only host countries whose share of Indian OFDI exceeded 5% of the total were, in decreasing order of total Indian OFDI stock, Thailand, Singapore, Kazakhstan, Senegal, the United Kingdom (UK), the United States, and Indonesia. Emerging markets were thus the major beneficiaries of Indian OFDI (Wee 2007: 4). In 1991, the United Kingdom was in the lead with nearly 27% of the total, the United States came next with 25%, and the tax haven of Mauritius followed with nearly 10% (serving as a platform for reinvestment in India) (Pradhan 2007). Although Indian MNEs initially sought to secure energy resources and conquer external markets in a context where their growth in the domestic market was tightly controlled, recent dynamics mainly reflect a search for strategic assets: technology, market shares in developed countries, brands, and new research and development (R&D) skills. Like Chinese MNEs, they are seeking to improve their initial cost advantage in the domestic market by moving up the value chain. It is thus interesting to note that in the year 2004, around the take-off point of Indian OFDI in quantity, there was already a qualitative distinction between the United States and the European Union as destinations. The industries in which Indian MNEs concentrated their OFDI in the United States were IT (80%), chemicals (7%), and pharmaceuticals (7%) (Milleli 2007). 3 On the other hand, only 19% of the OFDI in the European Union targeted IT, with the rest going to pharmaceuticals (17%), electronics (10%), transportation (9%), chemicals (7%), and metal products (6%), with the remaining 30% going to a wide variety of other industries (id.). These figures are a very accurate reflection of the industrial specialization of the host countries concerned, but they also show targeted knowledge- and market-seeking interactions between Indian industry and host countries. Thus, to a large extent, the changes in the target host countries of Indian OFDI evidence a search for new technological skills and brands, naturally leading to an increase in the weight of developed countries among them. But, there is also a purely geographic trend due to the need to get closer to the customer, in the computer outsourcing area, for instance. Indian companies are investing in Eastern Europe and North Africa to reach Western European markets, and Mexico to penetrate the U.S. market. In doing so, Indian MNEs today are anticipating what is likely to be a major industrial evolution with the digitalization of certain industry design processes that can be outsourced outside the United States, while maintaining time zone and geographical closeness for interactions with the clients: the essence of nearshoring. In May 2007, Tata Consultancy Services announced the opening of an office in Guadalajara, Mexico (Tata Consultancy Services 2007). Tata already employs 5,000 people in Brazil, Chile, and Uruguay. Wipro has subsidiaries in Saudi Arabia, Canada, China, Portugal, and Romania, to name a few (Wipro Locations 2010). Cognizant Technology Solutions has offices in Shanghai and Phoenix, Arizona (Cognizant Locations 2010). Meanwhile, Indian MNEs in the IT industry are seeking to profit from their cost advantage to dominate the growing outsourcing industry in emerging

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markets. This is the case, for instance, with Infosys, which recently bought up back offices in Thailand and Poland (Einhorn 2007).

2. The Imperatives of Globalization and Internal Transformations in the Indian Economy: Financial Advantages and Growing Domestic Competition Before the 2008 global financial crisis, Indian MNEs benefitted from high stock market values, which were linked to their rapid and steady growth (according to an elementary stock market mechanism, which justly gave them greater value than their Western competitors for equal turnover, because of higher anticipated gains). For example, the largest acquisition made by an Indian group—Tata Steel’s takeover of the Anglo-Dutch Corus for US$11 billion—was partly made possible by the presence of Tata Consultancy Services in the Tata Group, which increased Tata Steel’s borrowing capacity.4 The rising prices on the Bombay Stock Exchange enabled Indian groups to issue more shares and, thus, raise the capital required for their future expansion. This option was comparatively less available to their Chinese counterparts, as, despite a 170% rise in the Shanghai Stock Exchange from January to mid-October 2007 (Ruet & Huchet 2008), many companies listed on the exchange have a majority of their shares quoted in the form of nonconvertible shares owned by the state or indirectly state-controlled institutions, and so are nonfungible in international financial markets. Despite the sharp fall in global stock prices due to the crisis, the price-equity ratio advantage of Indian companies over U.S. and European companies remains. There has been an absolute decline, but the most important advantage, that of relative ratios, remains. Indian MNEs will continue their internationalization because they are increasingly exposed to direct competition from major international groups on their own soil. Major international groups will also increasingly benefit from the same price structures related to the cost of labor in China and India, as they delocalize. These changes will affect both production and product design. In the automobile industry, the Indian groups involved in car manufacturing know that even if they can sometimes rely on JVs with international major groups, these are not long-term partnerships capable of substituting for their own production. Such groups must develop their own models in the long run. Indian groups, such as Tata and Mahindra & Mahindra, are thus faced with having to sell vehicles abroad to offset the foreign competition they face domestically.5 In the field of electronics, another problem prevails: geographic competence clusters and the overall number of MNEs are much more limited in India than in China. Indian MNEs therefore face competition from Europe, the United States, Japan, and China. Indian industry is trying to build competitive clusters outside of the IT and pharmaceutical industries,6 but competition is stiff in these areas. The major Indian groups find themselves in a more difficult situation than their Chinese counterparts in several key industries. However, Indian

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groups do have one major advantage over Chinese companies: the structure of their capital, which is mainly private, enables them to move faster than Chinese groups in the M&A market.

3. The Need to Scale up Technology and Build Brand Names In this context of increased competition in domestic markets, Indian MNEs must also continue to accumulate technological skills and build recognized brand names that allow them to move beyond the segments with the lowest added value in the international division of labor. Private Indian industrial MNEs, less numerous but larger than their Chinese counterparts, have, by and large, begun the process of brand building. Brand promotion, nevertheless, remains confined to a rather small number of host countries. To remedy this problem, brands that are already well known in India are seeking to reinforce their brand recognition abroad. In addition to the IT groups and pharmaceutical MNEs already known internationally, new brands are also beginning to emerge. Some traditional groups such as Tata and Reliance are gradually acquiring a reputation in infrastructure and energy industries. Others, such as Jet Airways in airline transportation, Suzlon in renewable energy, Bharti in telecommunications, and DLF in real estate, are following suit.

B. Indian Groups on the Global Stage: Firm-Level Bridging of Low National Integration into Global Trade From 1990 to 2000, the share of MNEs from developing countries out of the total number of MNEs globally has increased fourfold, climbing from 6.6% to 26%, and broadly stabilizing to this level in 2008 (United Nations Conference on Trade and Development [UNCTAD] 2007).7 The progress, in terms of absolute numbers, is even more impressive, as, during the period 1990–2000, while the total number of MNEs listed by the UNCTAD World Investment Report almost doubled, the number of MNEs from developing countries grew from nearly 2,800 to almost 18,000 companies (id.). This progress is largely explained by the emergence of Asian multinationals, which climbed from 5.8% to 21.2% of the total (id.). This rise is, in part, linked to the emergence of the so-called Asian system of production (assembly processes that spread across several Asian countries, notably China, led by Asian capital, but with a smaller amount of ownership of capital by Chinese nationals). Under this system of production, Asian MNEs internationalize their production processes across other Asian countries. Chinese companies’ production share has almost tripled from 1% to 2.8% (United Nations Conference on Trade and Development 2007). However, as the Indian economy is less integrated into global trade than the Chinese economy, the rise of Indian MNEs is perhaps better explained by their own entrepreneurship and capital-driven investment, rather than by the actions of external global chains and outsourcing, which explain the

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rise of Chinese MNEs. For Indian MNEs, progress has been remarkable, with the total number of Indian MNEs increasing almost 70-fold, from 0.05% to 3.4%, between 1990 and 2000, the decade of unprecedented change (id.). The latest figures themselves illustrate a number of points: on the one hand, they underline that the potential of Indian MNEs appears to be greater than that of the Chinese MNEs as their number has increased faster, and on the other hand, they point to the constraints that the Indian MNEs faced until the initiation of the reforms of 1991. In short, these facts suggest that the dynamism of MNEs can be distinct from that of their home countries. Indian MNEs internationalize quickly, unlike Chinese ones. In contrast, China as a nation has managed to secure a major share of the world trade in manufactured goods, while India has not. During the ten-year period from 1993 to 2003, China’s share of worldwide exports of manufactured goods grew from 3.8% to 7.7%, while its imports grew from 3% to 5.2%. Over the same period, India increased its exports only marginally, moving from 0.7% to 0.8% of manufactured products. While Indian MNEs have tended to specialize in services, their activities have also extended to manufactured products. China shows a large international industry specialization, with large macroeconomic significance, but it has seen limited international growth of very large privately owned MNEs. Meanwhile, the process of internationalization has given Indian MNEs experience and understanding of international specialization. Further, if one looks at M&A activity among developing country firms, these are often essentially intraregional, so the internationalization of developing country MNEs is essentially taking place within developing regions. During the period 2002–2004, intra-Asian deals worth a total of US$48 billion were undertaken, as compared with US$2.7 billion in intra-Latin America M&A (United Nations Conference on Trade and Development 2007), which reflects the fact that the Asian economy is in the process of rapid integration (even though deals between India and China have not really taken off). This integration was initiated in the 1970s by Japanese OFDI that was directed towards the New Industrialized Economies—namely, the so-called “Dragon” countries: Hong Kong (Special Administrative Region of China), Taiwan Province of China, Singapore, and the Republic of Korea; and then the “Tiger” countries: Malaysia, Thailand, and Indonesia)—and continued by the OFDI of the latter group towards China in the 1990s, and by the further internationalization of Japanese MNEs. However, Indian MNEs are comparatively less present in this partly externally driven rearrangement of the Asian economy, and are rather more focused on global investment, directed towards Asia but also towards the United States, the United Kingdom, continental Europe, and other non-Asian emerging markets (chiefly Brazil) (United Nations Conference on Trade and Development 2009). We argue that the Indian industrial groups, and notably the Indian conglomerates, are quite advanced in their trajectory towards globalization in and, to a greater extent, beyond Asia.

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To better understand the current dynamics of Indian conglomerates, one has to look at the business models of these MNEs at the microeconomic level. These models carry the imprint of national trajectories of industrial regulation that are still reflected in company structures. Reforms took place gradually in the 1980s and then became more sustained during the 1990s. This allowed industrial conglomerates to reorient themselves towards their main activities within the domestic setting, which is managed by and within close-knit personal networks. Since 1984, the JV created in the automobile industry between Maruti India and Suzuki Japan, which is today the leading player in the rapidly growing Indian automobile market, has been an example of this new logic of import and transfer of selected technologies. With the help of the business world, the government began to identify the industries in which fast modernization of obsolete production apparatuses would lead to the best results. This historical perspective reminds us not to overestimate the role of the service industries in Indian development: as important as they are, we should not focus so exclusively on the software and biotechnology industries as to neglect the diversity in the industrial infrastructure of the country, especially with respect to exports.

1. Changing Regime, Changing Business Models: From Licenses to Production Efficiency It was within a relatively protected environment that Indian conglomerates, starting in the mid-1990s, accelerated the reorganization of their activities, in particular by multiplying their strategic alliances with foreign companies. Their conglomerate form allowed them to extend organizational processes initially transferred to one entity to all of their related entities (a form of spillover effect), which helps explain the very rapid restructuring of Indian groups. But the explosion in the field of new technologies is, without a doubt, the best example of the entry into the world stage by the Indian MNEs. In the 1990s, many of the Indian “brains” who had migrated to the United States returned to India to create their own software companies (such as Infosys and Satyam), with contracts from their previous U.S. employers. At the same time, the big conglomerates developed software subsidiaries, such as Tata Consultancy Services. As a result, since 1994, the growth rate of the IT industry has remained steady at 40%–50% per annum (“High Growth . . .” 2001). Today, the IT industry represents around 5% of Indian GDP and more than a quarter of Indian exports (National Association for Software and Service Companies). The Indian software companies began with less demanding subcontracting jobs, but nowadays, many of these companies offer world-class services and consulting. Some start-ups adopted a strategy of “global localization” right from the start. Since 2001, half of the world’s companies that have been awarded the SEICMM5 certification—the highest quality norm for software—are Indian (by comparison, no French company received this certification in 2006).

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Some Indian MNEs from the subcontinent are quasi-integrated with their U.S. clients, whose software systems they develop, putting them at the very heart of the decision-making processes of large, global organizations. The number of Indian affiliates abroad grew 40-fold over the span of 20 years from 1986 to 2006, from 208 to 8,620 (United Nations Conference on Trade and Development 2009). From 1995 to 2006, the stock of Indian OFDI grew from US$212 million to US$8.2 billion (Pradhan 2007). The purchase of the Anglo-Dutch steelmaker Corus by Tata in 2007 for US$11 billion, followed by the purchase of Jaguar and Rover by Tata Motors, could mark the beginning of a new chapter for Indian OFDI. Before 1990, Indian OFDI (for the few private groups authorized to invest abroad) was mainly directed towards manufacturing, energy, and raw materials. Most of this OFDI was undertaken by large public companies. After 1991, a triple evolution took place: a massive increase in the sums invested, a diversification of the industries engaging in OFDI, and the arrival of new players from the private sector who quickly became the principal source of the Indian OFDI.8 But it is probably more appropriate to divide the post-1991 period by marking a break around the years 2001–2002. In the decade before this turning point, the major Indian industrial groups were primarily preoccupied with refocusing their activities on their core businesses and stripping away inefficient activities carried out under the “License Raj” era. As OFDI grew, M&A activity also increased. Until 2006, most M&A activity was mostly beneficial to foreign MNEs. However, the exceptional deal in which Tata Steel acquired Corus, followed by a more modest but also significant deal in which Suzlon acquired Repower, clearly marked the beginning of a new phase. In 2006 and 2007, the value of overseas acquisitions crossed the threshold of US$30 billion, which is much higher than the level of IFDI in India (which stands at US$5.5 billion in industrial investments, not counting purely financial inflows) for the same fiscal year, making the net outflow of investment around 3% of the Indian GDP (Reserve Bank of India 2008). Outflows were resilient the first semester of 2008—as plenty of good opportunities manifested due to the financial crisis, outflows only dropped by roughly one-third on a year-to-year basis— but nearly stopped after October 2008, compared with Chinese OFDI, which kept peaking. After spring 2009, Indian OFDI soon took off again, and from the autumn of 2009 onwards, Indian firms have been on a shopping spree again (see e.g., Narayanan 2010). Furthermore, today, Indian industrial groups are devising new car models at one-third of the cost of their development in Europe, according to interviews by the author in the global car industry. In short, India has become a platform for manufacturing by foreign multinationals and exportation on a global scale. The country is at the heart of the industrial strategy of the global production chain of MNEs such as Hyundai, Toyota, ABB, and Nokia. The importance of partnerships in the context of internationalization of conception and production is well understood by the Indian government, which is multiplying its means of support, in particular with regard

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to research and higher education, by financing the creation of technological parks and by maintaining a special link with the Confederation of Indian Industry (the main federation of employers).9 Large Indian MNEs now aim for a global strategy, and approach the international market directly, without necessarily trying to fit into the existing subcontracting system or supply chain. Since 2006, the motor, motor parts, and accessories industries (with MNEs like Bajaj, Bharat Forge, Mahindra & Mahindra, Tata Motors, and TVS Motor Company) have been multiplying the number of plants, subsidiaries, and greenfield investments abroad. Engineering is not being left out of this trend, thanks to the efforts of MNEs like Crompton Greaves and Larsen & Toubro. Many deals have also been made in the natural resources industries, in particular in the areas of energy and raw materials, for example, with Hindalco (nonferrous metals), Tata Steel, the Reliance conglomerate (energy), and last but not least, the state-run Oil and Natural Gas Corporation. Investment abroad in oil and gas accounted for 19% of the volume of Indian OFDI in 2006. If we look at firms that undertook multiple acquisitions, we observe a combined geographical-technological strategy. Bharat Forge, for instance, focused its OFDI on developed host countries, according to a clear strategy of pursuing technological excellence in a field of forging and molding, where outsourcing from customers leads to acquiring skills that can reach new clients.10 Jindal Group, on the contrary, deals with an industry where markets are more localized—supply of pipes and commodity steel—and pursued a three-prong strategy of acquiring a large commercial presence in the United States, entering a new market in Indonesia, and targeting technology from France, according to interviews by the author. Mahindra & Mahindra, which is at a more advanced stage in its globalization, with wellestablished global business networks concentrated in Europe, could afford to have an expansion strategy that includes both developed and developing countries (Doshi 2007).11 The case of the Tata Group is analyzed in detail in the following section.

C. Integration of Multinational Enterprises into Global Ties the Indian Way: Industry Trajectories, Schematic Models, and Cases of Conglomerate Synergies From the 1990s onwards, the growth of emerging market MNEs was concentrated in Asia at first, before becoming a global phenomenon. The level of development of China in international commerce after 1993 was already very high. A finer analysis, however, shows that, as a continent, Asia’s place in the global market stabilized between 1993 and 2003. The increase in international exports from China (+ 3.9%) and the Tiger economies (+ 0.7%) was offset by the decrease in Japan (which fell from 12.5% to 7.5% of international exports of manufactured goods between 1993 and 2003) (World Trade Organization 2005). Around 41% of manufactured Chinese imports

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and 55% of Chinese manufactured exports are goods that require assembly (id.). Thus, China did not specialize in specific industries per se, but rather in the function of industrial assembly. Specialization in specific industries is largely carried out by non-Chinese MNEs, mostly Asian MNEs, which have become multinational as a result. For example, if we observe the share of technological components in the import of goods into China that are intended for assembly, 71% come from Asia. If we break up this 71% by studying the capital structures of the companies involved in the assembly procedure, only 17% are controlled by Chinese companies, 15% by JVs between other foreign MNEs and Chinese companies, and the remaining 39% are controlled by foreign MNEs (Lemoine and Ünal-Kesenci 2007). The trajectory of Indian MNEs has been very different from that of Chinese MNEs. Technology exports as a share of manufactured Indian exports stands at only 5% (as compared to 23% for China) (id.). Nevertheless, Indian MNEs (which control the capital for assembly of technological contents), particularly large private Indian MNEs, have shown themselves to be quick at technological upgrading and internationalization. In fact, since the mid-1990s, Indian conglomerates have accelerated the reorganization of their activities, notably by increasing their strategic alliances with foreign companies. The story of the automobile maker Mahindra & Mahindra illustrates this point. The firm first entered into a technological partnership with Ford, but did not hesitate to pull out some years later to launch its own model, and then finally concluded a new deal with Renault-Nissan. Having reinforced its position in the meantime, Mahindra & Mahindra was able to obtain better conditions in the second technological partnership, according to an interview with the author.12 Like Mahindra & Mahindra, many other Indian industrial groups engage with the world economy on the basis of a give-and-take strategy: to their partners, they offer a point of entry into emerging but complex markets, in exchange for which they acquire the skills relevant to new industrial processes, are involved in R&D, and gain increasingly in terms of technological range. Tata, the largest Indian group in terms of market capitalization, signed an international commercial alliance with Fiat in 2005, and is already exporting its models to the United Kingdom, according to interviews with the author. Meanwhile, Tata’s software subsidiary represents 50% of the group’s capitalization. At a time when General Motors, Ford, and others are engaging in serious restructuring, Tata is developing car models for one-third of the cost of their development in the West. The Indian groups are globalizing rapidly, establishing subsidiaries in Shanghai, London, and New York, just as they are doing in Africa (with, for example, US$100 million worth of investments in Africa by Tata) (Tata in Africa Overview 2010). They are investing in emerging markets such as Mexico, Brazil, and South Africa, and they are delocalizing part of the software industry to Southeast Asia and China. In the field of technology, Indian groups are moving upstream through acquisitions: 80% of Indian OFDI by way of M&A in the United States is oriented towards IT, and

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Indian acquisitions in Europe are targeting IT, pharmaceuticals, electronics and computers, and high-end chemicals (Milleli 2006), with Reliance, for example, buying a subsidiary of DuPont in Germany in 2004. Clearly, with its 24% annual growth for the past 30 years, Reliance has enough cash to continue acquiring companies in order to grow, with further M&A projects in Europe as of March 2010 (Leahy 2010). In reality, capitalism in emerging markets is undergoing accelerated change, as big groups move beyond simple low-cost strategies. Groups are concentrating and structuring growing technological capacities in the emerging markets (whose extent was predicted by Pierre-Noël Giraud [1996]). But there is also a natural geographical evolution arising out of the necessity to come back closer to the clients, for example, in highly userspecific information technology outsourcing.

1. Towards Models or Diversity? Our surveys and field work in India (Bomsel and Ruet 2000, Ruet 2007) have led to the classification of four key business models within the IT industry, and three key models within the biotechnology industry. a. Three Key Business Models for MNEs within the IT Industry i. Traditional Conglomerates Traditional conglomerates are specific to India. The most successful examples are Tata Consultancy Services—as part of the conglomerate Tata Group—which is the leading exporter in the IT industry, and Wipro, which occupies the second position. ii. Large Pure IT Players In India’s software industry, MNEs like Infosys, NIIT, Satyam, and HCL have emerged as significant global players. They are helping to challenge the established hierarchy in the industry, and are competing with traditional conglomerates that initially had the lead due to their funding from within the group. The large pure IT players started out as small companies, but they have grown through support from the capital markets. Along with Tata Consultancy Services and Wipro, they have all managed to move up the value chain. For instance, Infosys has succeeded by developing domain competencies in software development services and end-to-end facilities, while Satyam has found success in the development of integrated competence in telecom and Internet services, and, at a later stage, in finance and insurance. iii. Global Niche Start-ups and Product Start-ups This model is found in both India and China, but with some key differences: government funding and government-aided markets are very important in China, while there is a greater emphasis on spillover technology and reverse brain drain in India. The basic model relies on the fact that, in

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global markets, some niche opportunities for creating new products or more focused and specialized services remain unoccupied. Some Indian MNEs are now trying to develop services and products to fit into these niches. Their business models are generally well planned and global in spirit, with implementation beginning on day one of incorporation. An example is TechSpan, which focuses on e-commerce integration in the U.S. market. Let us first look at the example of the large IT players. Tata Consultancy Services aims at developing a worldwide geographical presence, in part by targeting Europe for contracts, and by integrating management consulting into its activities. It is a direct competitor to the large U.S.-based consulting MNEs, though it does partner with them in some instances. Since 2006, Tata Consultancy Services has had a presence in 47 countries, with offices in 34 countries (Tata Consultancy Services Worldwide 2010), and 7.5% of its workforce has been located outside of India (Prayag 2006). Meanwhile, Wipro managers have voiced their belief that competition will now emerge from other developing countries, due to the bridging of the technological gap and the relative rise in wages in India. Thus, Wipro has started thinking about relocation strategies. Like Tata Consultancy Services, Wipro has developed a European strategy, since the European market accounted for about 20% of Wipro sales in 2001, and grew to 25% by 2009 (Wikinvest—Wipro 2010). To increase its presence in Japan, Wipro has created Wipro Japan as a greenfield investment, recruited Japanese engineers, invested in teaching the Japanese language to 40 engineers per year, and partnered with several Japanese firms, including NEC, Fujitsu, Epson, and Mitsui, through consortiums. One example of this greater involvement in Japan is that Wipro has become the tester for Japanese versions of Microsoft software packages, according to interviews with the author. Wipro’s efforts have led to a compound annual growth rate of 42% from 2001 to 2006, and now comprises a broad base of 485 customers across the United States, Europe, and Japan, and a market capitalization that makes Wipro the fourth-largest IT services company in the world. In the process of globalization, the large IT players have begun to redefine their location strategies. Wipro managers acknowledge the positive advantages of maintaining their headquarters in Bangalore, because of the information sharing and other clustering effects that are present in Bangalore, according to a 2001 interview by the author. However, because Large IT player’s competitors are mostly international, they are keen on exploring other locations, especially given the problems with Indian infrastructure (power fluctuations, power cuts, the high cost of captive generators and primary energy supply, bad roads, and poor customer service). In comparison, Satyam has quickly globalized its production capabilities. From the beginning of the 2000s, the company began launching development centers (often R&D-focused) in the United States, the United Kingdom, India, Japan, and Singapore (Mahindra Satyam About Us 2010). However, the biggest companies are not the only ones opening branches abroad. For instance, in 2001, IIS Infotech (now renamed Xansa India)

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was the twenty-fourth Indian IT-exporting company in terms of size, but it was already involved in offshore development, and had sent engineers to 15 countries (Bomsel & Ruet 2000). Also, as far as global niche start-ups or product start-ups are concerned, the most active ones go global from day one and are able to grow precisely because of their global nature. A 1999 start-up, MindTree Consulting, took off simultaneously in India and the United States, as its ten Indian founders lived in the United States and brought contracts with U.S. firms into the start-up. Within two years of inception, MindTree Consulting already had 450 consultants and a turnover of US$15 million for the fiscal year 2001, and it plans to open offices in the United Kingdom and Singapore (Bomsel & Ruet 2000). b. Three Key Business Models in the Biotechnology Industry: A Sector Halfway into its Multinationalization As far as the biotechnology industry is concerned, we can distinguish among three clear business models in technology and globalization: the industrial biogeneric-recombinant producer, the integrated pharmaceutical company, and the dedicated start-up (Ruet 2007). The technological choices made by companies in these three different models reflect the market positioning that each company has chosen. However, keep in mind that the Indian biotechnology industry is young, and that business models have not yet stabilized. Therefore, we mostly provide a schematic account of companies of these three types, based on: (1) their initial industrial research activity, (2) their business targets, and (3) the business models they plan to rely on, going from their starting points to achieving their business targets. On the basis of the 2002 writings of Maria, Ruet, and Zérah, and follow-up interviews in 2005, we can categorize the industry in the following ways: First, firms that make biogeneric-recombinant products can be classified into three main categories and analyzed on the basis of their former activities, which explains their asset acquisition strategy (integrated pharmacy, diagnostic reagent and vaccine manufacturers, enzyme manufacturers). Second, in the area of drug development, it is possible to separate companies into four separate subcategories: those involved in genomicsproteomics, which includes the stage of drug discovery itself (where we have both opportunity-driven companies and technology-driven companies; those involved in clinical trials; those involved in an integrated process of biotechnology-based drug development (discovery plus testing); and, finally those involved in bioinformatics, which can be a support function at all stages of the drug development process. Of course, a company may be involved in one or more of these activities at the same time. Without going into too much detail, let us focus on three kinds of firms: the industrial company wanting to enter the field of biogeneric-recombinants, the pharmaceutical company wishing to become a molecule discoverer through biotechnology, and the dedicated start-up (either in biogeneric-recombinants or bioinformatics).

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i. The Industrial Biogeneric-Recombinant Producer The technological breakthrough of biogeneric-recombinant products makes it possible to identify biotechnology-produced macromolecules and their spatial configurations. The first asset that a company needs to enter this field is a laboratory capable of carrying out all of the tests that can prove the presence of the key characteristics of the target molecule in the biotechnology-produced molecule. The next set of assets required includes production capacities and the engineering knowledge to scale up production. In India, very few technology-based companies, and no laboratories, have this industrial production capacity. Instead, Indian companies have to partner with industrialists, ultimately giving the reagent and enzyme manufacturers the key advantage in this industrial field. This fact explains the success of Biocon or, at a lower scale, of Bangalore Genei (a private limited enzymes and reagents manufacturer for genetic engineering research) and Bharat Serums and Vaccines (the market leader in India for plasma derivatives). Bangalore Genei achieved industrial scaling up in 2003, only by being acquired by Sanmar Specialty Chemicals Ltd. This acquisition ensured the synergies of industrial capacity in the development of the company, which could materialize only when the two companies merged. ii. The Pharmaceutical Company Traditional pharmaceutical companies can target emerging markets for biogeneric-recombinants, use biotechnology to reduce their costs in the drug development process, and move up the value chain by accessing inhouse capacity in the drug development process. Indeed, the major costs incurred in running a pharmaceutical company arise at the clinical testing stage, which can now be considerably simplified through the use of bioinformatics for the analysis of clinical databases. Moreover, the drug discovery process itself can be optimized by biotechnological production of target molecules, through the use of proteomics or bioinformatics. Most traditional Indian pharmaceutical companies have moved in this direction since the early 2000s. Their strategies, however, vary significantly. For instance, Ranbaxy focuses on in-house biotechnology-based drug discoveries, while Dr. Reddy’s strategy is to simultaneously address recombinant product manufacture and drug development, both in-house and through Aurigene, a contracting firm that Ranbaxy set up specifically for this purpose. Dr. Reddy’s strategy ended up paying off, despite the high risks of service-provisions activities in biotechnology (due to intellectual property risks), and the increased difficulty in moving towards asset-building strategies. In 2006, Aurigene entered into a discovery services agreement with Rheoscience A/S, and a discovery collaboration agreement with Novo Nordisk. Ultimately, Ranbaxy’s only way to scale up was to be taken over by the Japanese Daiichi Sankyo in 2008. As these examples reveal, the strategies and business models of pharmaceutical firms have not yet stabilized, as far as integration of the Indian

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biotechnology industry in the global biotechnology processes is concerned; their attempted multinationalization has shown some successes, but also some takeovers by foreign competitors. iii. The Dedicated Start-up Some of the smaller dedicated start-ups grew out of technological developments in public research laboratories. Shanta Biotechnics and Bharat Biotech are two such start-ups in the field of biogenetics. Such companies usually have well-defined and well-focused strategies, very similar to niche start-ups in the IT industry. However instead of developing products on their own, the dedicated start-ups build competencies that can later be transferred to other fields. Avesthagene started out as such a start-up, initially focusing on plant genomics, and then in 2002, becoming involved in medical applications, with profits starting in 2006. The key assets of such start-ups are close partnerships with laboratories that provide the start-up with both the necessary equipment and the academic network they require to build their databases. This brief description of the biotechnology industry provides a glimpse at its diversity. It is characterized by models that are still developing at the firm level and have not stabilized at the subindustry level (as the market has not yet separated the efficient models from the inefficient ones). Furthermore, given the predominance of technological assets in the industry, economic models may end up being a mere second parameter, with luck! c. Summarizing India’s Business Models The current form of Indian capitalism is thus characterized by a range of business models, providing diversity that is beneficial for entrepreneurship. We will now take a broader perspective and try to identify relevant trends, by describing the cycle that an increasing number of new companies are following. These new companies operate in markets where the growth rate is very high and consistent, leading to a tight flow of investment, without delays between profits and reinvestments. This ensures strong cash flow and low rates of debt. Note that this is the case for many countries that have recently transitioned away from an administered-socialist type system of industrial regulations, such as India. Though this assertion may not hold for the entirety of China, it remains true for its most dynamic companies. Biotechnology firms, in particular, must globalize to develop the assets they need, especially academic networks, which are not as important in the IT industry. However, this globalization is not yet occurring in the majority of biotechnology firms in India: in a 2002 survey of 54 leading modern biotechnology firms based in India, there were only eight partnerships13 with foreign laboratories (two in the United States, two in France, two in Singapore, one in Japan, and one in the United Kingdom), and no partnerships with foreign companies (Maria, Ruet, and Zerah 2002).

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2. An Indian Specificity: The Synergetic, Innovative Conglomerate The Tata Group is well known, so this chapter will not state the facts in any detail, but rather focus on analyzing its conglomerate synergies. Let us specifically consider Tata’s international growth, with a look at international revenue. Its two fastest-growing activities abroad from 2003 to 2007 were the mobile telephone (through its subsidiary VSNL, with a compound annual growth rate, during the period, of 254%) and automotive (Tata Motors, with a compound annual growth rate, during the period, of 72%) activities (Rosling 2007). What we want to underline is that, while Tata Motors’ ultimate core strategy (outside the Nano car) is to develop as a high technology positioning in the automobile sector, targeting rich customers, the Group’s global revenue growth and financing was helped by the growth of VSNL telephonic activity. The latter business reaches beyond rich customers to grow through its ability to tap poor customers in developing countries. In short, the Group’s ability to develop assets such as cars for the upper strata of the economy is partially financed by its capacity to serve high-volume, thin-margin low-end markets. While it is usually difficult to have such a range of products within the same company, the conglomerate structure allows this to occur. This double-edged strategy is, to an extent, reproduced by Tata at the global level, as it targets both rich countries (including the United States, the United Kingdom, the Netherlands, and Germany) and emerging markets (including China, South Africa, the Gulf Cooperation Council countries, Thailand, Indonesia, Russia, Brazil, and Vietnam) (Tata Worldwide Overview 2010). The long-term conglomerate dynamics can be even better observed in the Group’s M&A activity. One strategic aim of the Tata Group is to acquire a global name through its high-quality, clean technology, low-cost cars. A global brand and proprietary technologies are of prime importance to achieving this goal. As an example of a step towards this objective, the takeover of Corus by Tata Steel had two advantages for the Group beyond Tata Steel. First, the ability to take over and manage a UK-based company later helped convince the financial markets that Tata Motors could operate and manage Rover and Jaguar. Second, the acquisition of Corus allowed Tata to access specialty steel that is useful in technological upgrading in the car industry. Thus, Tata Steel’s takeover of Corus helped raise the technology profile of Tata Motors. Of course, the subsidiaries of the Group benefit from the reputation of the Group as whole as well. The acquisitions of Rover and Jaguar, though financed at the company level (the Corus acquisition was financed through Tata Steel assets and borrowings [“Tata Steel raising . . .” 2007], and the acquisitions of Rover and Jaguar were financed by Tata Motors alone without recourse to the Group [Chandran 2008]), did ultimately benefit from an excellent credit rating that was granted to the Group as a whole. This strong credit rating can be explained by the presence of Tata Consultancy Services in the Tata Group. Tata Consultancy Services, which accounts for

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a mere 16% of the Group’s turnover, represented, at its peak valuation, 50% of the Group’s market capitalization, owing to its fast and steady growth. Though the valuation premium was obviously not transferred to all the subsidiaries of the Tata Group, the credit rating of the Group has always benefitted from the excellent position of Tata Consultancy Services. Thus, Tata Consultancy Services helped raise the financial profile of Tata Motors.

3. Summing up Industrial Trajectories, Modes of Entry, Technological Emancipation, Value Chains, and Internationalization For national groups to emerge from former planned, command, or importsubstitution systems, they have to catch up technologically, and achieve emancipation through R&D and technological and commercial agreements and partnerships. The question of strategy is whether to target subcontracting, niche markets, or to jump straight to the global market. As more and more IFDI dominates domestic markets in different industries, both through JVs and greenfield affiliates, Indian firms are faced with even more barriers to catching up technologically. India and China have followed different strategies, with different implications, to address this problem of technological emancipation. Indian IFDI to date has not involved many greenfield investments. Instead, IFDI has mainly been in the form of JVs targeting local Indian markets (in growing areas like automobiles, phones, or computers), with surprisingly little production for the export market. The IT industry is the most notable exception to this trend, where, from an original strategy of “body shopping” and outsourcing, the industry has shifted its focus to climbing the value ladder and achieving globally integrated development of products and services. While textiles are generally seen as another exception, it is not clear whether the textile industry fits into this framework. Instead, the textile industry is still largely based on trade, and it does not depend on the codevelopment of products by MNEs or firms with transnational agreements. Indian capitalism has emerged under the shadow of the state and the pursuit of patronage links. Indian enterprises have diversified significantly, compared to many other businesses worldwide. The diverse structures of Indian industrial groups help explain the way in which the groups have positioned themselves in the world economy. The insertion of Indian groups into the world economy is primarily concentrated at the interface of (1) emerging markets, where groups have large, regular sources of financing through the control of high-volume, small-margin markets; and (2) the new international division of production, in which investment capacities are used through either partnerships with MNEs and/or technology acquisition. International MNEs that are interested in accessing the Indian market, and other emerging markets through Indian companies, enter into technology JVs and partnerships. Meanwhile, the R&D capacities of Indian

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firms are increasingly coveted by international MNEs that are looking to lower their global R&D costs. Ultimately, and notwithstanding the various schematic trajectories we have mentioned, Indian industrial groups play a unique role in the world economy. Starting with assets that are adapted to the low-income domestic market, their oligopolistic positions have allowed them to leverage low margins into high profits, through volume. The strength of group brands and customer portfolios means that any new product secures early returns. Thus, the groups have very secure financing structures. Their participation in international JVs has been based on these double advantages of cost competitiveness and large-scale returns. Moreover, using their dominant positions in the Indian market, groups are able to bargain for an entry point for foreign players to enter India through JVs, and convert their double advantages into an opportunity to catch up with process and technological innovations. This process becomes a virtuous cycle that leads to more funds becoming available for the acquisition of technology or growth in other emerging markets. From a global point of view, Indian groups have found themselves, partly through luck and partly through opportunism, at the interface between a key emerging market and the reconfigurations of the international division of productive processes. This has allowed them to enter into commercial partnerships and sequential JVs (as in the case of Mahindra & Mahindra, discussed above). In the meantime, Indian groups have managed to catch up with global knowledge and processes standards much more quickly than their Chinese counterparts, for which catching up took a whole generation (Richet and Ruet 2008). It is telling that Indian MNEs have advanced their internationalization strategies much more quickly than Chinese MNEs, relying on their capacity to engage in diversification, and climbing up the value chain, thanks to low costs in both production and design. Given the fact that the largest Chinese MNEs are state controlled, the role of the private sector is much more dominant in India, providing several advantages. In terms of product range, China has predominantly monolithic monoproduct firms that are hampered by substantial domestic competition, which contrasts with Indian conglomerates, which operate in a relatively more oligopolistic context, with milder competition. As for the development of technological competences, many exporting Chinese companies, whose products have a high technology content, are ultimately controlled by foreign capital, while Indian groups tend to maintain higher levels of domestic ownership over their technology. There has also been some internationalization on the boards of Indian companies. Furthermore, the Bombay Stock Exchange compares well with the very atypical functioning of stock exchanges in Shanghai and Shenzhen (with nontradable shares, an important role of the state assets organization, etc.). Indian groups have now reached a stage where they can establish strategic partnerships, undertake collaborative research, and develop intellectual property in technologically advanced

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areas, including automobiles, parts, textiles, biotechnologies, pharmaceuticals aircrafts, services and consultancy software, and mobile telephones. Note, however, that the initial advantages of Indian conglomerates appear to have already been used up. Just like companies from other emerging markets, Indian groups will need to capitalize on their assets quickly in order to climb the value chain, continue their technological development, and internationalize. Let us now turn to examine the role of partnerships in this process.

D. On Building New Models: From Constraints to Partnerships?14 For Indian groups, the effort to become global and technologically advanced must be codesigned with partners because it takes place in a world where global firms are already making strategic moves in India, and the competition itself has already become global. What we present for India is relevant for partnerships amongst MNEs from all emerging markets.

1. Overall Global Competition Moves in the global competitive structure can be analyzed in accordance with Figure 4.1, with a focus on two parameters: the type of advantage (either low costs or technology and brand assets) and the kind of value chain positioning where the advantage is expressed (either the strategic segments of a value chain or niche segments). Value Chain Position Niche Segments

Strategic Segments Delocalizations/ Outsourcing Low Costs

Technology and Brand Development in Niches MNE Emerg. (1990s)

Moving upward in value chain

nt

pid e ra opm h it el , w dev A & y M log no h ec

Advantage

t Technology and Brand Assets

Dynamic importance of niches, traditionally for MNE Emerg, and now targeted by MNE Dev

MNE Dev. (1990s)

Figure 4.1 Generalized competition.a Source: The author. a.

MNE Emerg. stands for MNEs from emerging markets; MNE Dev. stands for MNEs from developed countries.

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Clearly, until a decade or so ago, the most successful MNEs from developed countries were positioned in the quadrant with technology and brand asset advantages and strategic value chain segments, while the most aggressive MNEs from emerging markets, irrespective of their positioning at home, were positioning themselves on the global markets in the quadrant with low-cost advantages in niche segments. But this has begun to change, and the change has been relatively rapid. To summarize the cases that we have described above in sections B and C, MNEs from emerging markets in general, and Indian MNEs in particular, have sought to develop several strategies: (1) leveraging cost advantages to gain customers in higher added-value segments of the value chain; (2) dynamically capitalizing on niche segments to develop a brand and acquire technologies; or (3) combining both strategies, usually through M&A. The first two strategies brought MNEs from emerging markets into direct competition with MNEs from developed countries. MNEs from developed countries, on the other hand, have begun to (1) pay attention to niche markets, given the high-volume possibilities of niches in some emerging markets, and (2) lower their costs through outsourcing and developing low-cost or “good-enough” brands. Competition obviously grew as more MNEs occupied more quadrants. Today, a true MNE needs to have the assets originating from both developed country and emerging market production bases.

2. From All-out Competition to Partnerships In a context of all-out competition, acquiring new assets may be faster through partnerships, which provides the next challenge for many MNEs, though Indian MNEs are well positioned for this next step. To illustrate this point, let us focus on one industry that has seen some of the biggest moves towards direct technological and brand competition between MNEs from developed countries and emerging markets—the automotive industry. Both the suppliers and the partnerships in the automotive industry15 are becoming more concentrated (Ruet and Gicquel 2008). More specifically, the strategic partnerships that are pursued are often between manufacturers from developed countries and manufacturers from emerging countries. These partnerships were first established so that each partner could access some specific assets that it lacked among those that the other possessed (for instance, a technology for the partner from an emerging market, and the knowledge of a new market for the partner from a developed country). Today, it is becoming clear that these partnerships can go beyond their original, project-based intentions, to become global. For example, Fiat and Tata Motors, which already have a JV, are planning to extend their agreement to the Jaguar and Land Rover brands, which Tata Motors purchased from Ford in March 2008. Meanwhile, Renault and Bajaj Auto have announced that their partnership to build an ultra-low-cost car will be expanded to encompass other models. Finally, Chrysler signed an agreement in July 2008 with Great Wall Motors to

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study the possibility of sharing distribution networks and technology (Roberts 2008). We have identified five types of partnerships, in increasing order of strategic intensity: (1) local commercial partnerships and JVs with local manufacturers, such as the ones car manufacturers from developed countries resorted to in order to get access to the Chinese market, like, for instance, Fiat or General Motors with Shanghai Automotive; (2) global commercial partnerships, such as that between Tata Motors and Fiat, pursuant to which Fiat uses Tata’s distribution network in India and may market the Nano car, as well as the Jaguar and Land Rover brands for Tata in Europe (Tata Motors Profile 2010); (3) technology partnerships, such as the one between Heuliez and Reva to make electric cars;16 (4) hybrid partnerships that are both commercial and technological, such as the one between Bajaj and Renault, who will jointly develop and market a low-cost car (Seth 2009); and (5) partnerships that consist in pooling networks, as Fiat and Tata Motors do, with Fiat, for example, putting Tata in contact with motorists for its Nano. In this context, there are three sets of questions that we aim to answer. First, what are the drivers of these partnerships? Why does company A form an alliance with company B, and why do they choose any given type of partnership? Second, what are the (sometimes unforeseen) positive effects of these partnerships that can lead to extending or deepening them? And third, what are the concrete impacts of these partnerships on the organization of projects, in terms of delays, difficulties related to management differences, organizational gaps, or differences in business models?

3. Partnerships and New Value Chains Emerging markets have a growing impact on the design of new car models. Indeed, car manufacturers in these countries, faced with local issues, have developed vehicle models that comply with the expectations of their markets, often favoring small and cheap cars, and introducing the concept of ultra-low-cost cars. In addition, manufacturers from developed countries have been undertaking an increasing amount of their R&D in emerging markets. For instance, Renault’s Sandero is assembled in several European countries, but was designed in Brazil. Here, we will study how automakers from both emerging markets and developed countries are rethinking their industry’s value chain to take into account the assets and resources of emerging industrial bases. We will focus on the consequences of their rethinking in terms of contracts and partnerships, in the short or long term. An increasing number of car manufacturers are turning towards the development of ultra-low-cost cars. Among others, Tata Motors (with its Nano), the partnership between Renault and Bajaj Auto, and Fiat are working in this area. The markets ultimately targeted for such vehicles, which should, in principle, be India for the first two, and developed countries for Fiat, are instead far from being obvious, as it is unclear which additional markets they will be exported to once they are launched.

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Besides the ultra-low-cost car, some manufacturers are also beginning to think about the “world car,” that is to say a vehicle designed globally, from its development to its production, and destined to be sold worldwide (with possible minor local adaptations). To what extent is this concept relevant? What is the typical production size (depending on the mechanical functions) of a reference cluster of parts around which production can be organized? What kinds of emerging markets can accommodate such clusters? What successive steps are contemplated today for developing this world car? Will manufacturers acquire local research consultancies, will they create the designs within alliances, and/or will suppliers play a part in this? A world car is certainly different from an ultra-low-cost car (for example, Renault’s Logan is being sold at a low price in both emerging markets and developed countries, but was initially designed for Eastern Europe).

4. Partnerships and Technological Innovation Another important dimension of business models is technology. Emerging markets play a role in two strategies for large-scale technological innovation in the automotive industry: the use of biofuels and the development of electric vehicles. By starting to invest more heavily in R&D, car manufacturers from emerging markets have sped up technological progress, developing both technologies related to local specificities (e.g., ethanol fuel in Brazil) and technologies that address increased competition, given the simultaneous entry of numerous electric car developers. What advantages might result from forming alliances to design cars? Are Chinese automakers currently able to develop hybrid vehicles alone? Some car manufacturers are working on using alternative fuels that have smaller carbon footprints and may possibly become less expensive than petroleum-based fuels. For example, foreign car manufacturers in Brazil have developed “flex-fuel” engines that can work on regular petroleum, ethanol, or a mixture of the two (see, e.g., “Peugeot introduces . . .” 2005). Other automakers from emerging countries are also studying this kind of technology: in India, Mahindra & Mahindra is developing engines powered by liquefied petroleum gas and compressed natural gas (“Maryti, Hyundai, M&M to make . . .” 2009), and in China, Great Wall Motors has developed engines powered by methanol. From the launch in 1997 of the world’s first hybrid car, Toyota’s Prius, an increasing number of car manufacturers have begun to develop electric vehicles, in both emerging and developed countries. Reva, a JV between an Indian MNE called Maini Group and a U.S. MNE called AEV, is now the worldwide leader in purely electric cars, and it exports its products successfully to developed countries (Hybrid and Electric Cars—REVA cars 2010). Tata Motors and Mahindra & Mahindra are each developing hydrogenpowered cars, while Bajaj and Renault stated that they aim for high-energy efficiency for their jointly designed low-cost car. Meanwhile, in China, imports of hybrid cars have only been able to satisfy a small portion of

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demand because of the high price, so now, the local automakers are taking over; in 2008 and 2009 almost every one of them has announced the development of hybrid or purely electric cars. BYD has hybrid and electric cars, dubbed F3DM and E6, to roll out of their respective factories soon; Dongfeng Motors has said that it will share R&D with its various foreign JV partners; Chery presented the electric car that it developed with the British company Ricardo during the last Olympic Games (ZER Customs—Ricardo Chery hybrid 2010); and so on, for SAIC, Great Wall Motors, etc.

5. Business Recomposition: Globalization and Concentration of Suppliers The manner in which parts manufacturers from developed countries and from emerging markets became multinational has been different. The ones from developed countries have become truly multinational, even beyond their international sourcing, under cost pressure from their traditional clients, who were competing among themselves for lower costs and, therefore, forced their suppliers to explore emerging markets with cheaper labor. On the other hand, suppliers from emerging markets had to enter international markets in a different manner, with niche strategies and a focus on cost advantages rather than technology, so internationalization was a way to reach more clients and access more advanced technology. In the past, some parts manufacturers from developed countries completely outsourced the design of their parts and focused their attention on production, but they now want to get this designing function back, so as to control their profit margins. Thus, it is likely that the supply segment of the automotive industry will become more concentrated, and that should be especially true for second- and third-tier suppliers (such as plastics manufacturers). Suppliers from emerging markets are now challenging their counterparts from developed countries and competing on a more global scale than the latter had foreseen. Indeed, having coped with international competition since their inception, parts manufacturers from emerging markets have had to meet international standards very early in their development. Furthermore, the partnerships that they have developed with automakers from developed countries now go beyond their domestic borders. For instance, five of Volvo Trucks’s Indian suppliers now sell their products to Volvo plants worldwide; some have even replaced European suppliers. Thus, parts manufacturers from developed countries cannot take the continued patronage of their traditional clients for granted anymore. Also, while the relationship between automakers and their suppliers is becoming increasingly standardized, a good command of computer tools has become crucial. The Indian parts manufacturer Bharat Forge—whose competitive advantage comes from low costs, quality services, and the speed of its responses to customers, thanks to a high degree of computerization—has been so successful that is now diversifying its activities in aeronautics (Kshirsagar 2007).

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Conclusions: From Indian Multinational Enterprises to a Mixed Developed-Emerging Model of Capitalism? To summarize, Indian MNEs have entered global capitalism in the following context and sequence: (1) MNEs from emerging markets like India need to have global strategies, because they not only operate in markets that are the targets of MNEs from developed economies, but these market bases and these networks of MNEs from emerging economies contribute to redefining the world production system—these are not “static” markets, and MNEs from emerging markets have a situational advantage in hand; (2) low costs increasingly have to be leveraged into a double comparative advantage of fast capitalization in emerging markets coupled with powerful technological and brand-based catching up, to further use this situational advantage; and (3) there are dynamic links between the processes of growth (i.e., the business model) and technological catching up, such as leveraging cost-based strategies to climb the value chain, using strategic JVs, and acquiring technology portfolios. The phenomenon of international acquisitions by Indian MNEs is part of the larger phenomenon of the increasing globalization of industry, while in contrast, the motivations of Chinese MNEs to internationalize is intertwined with the Chinese government’s interest in foreign direct investment. Global MNEs have learned many lessons in this process, and are, in all likelihood, moving towards a mixed-business model. A mixed “developedemerging” capitalist model has yet to stabilize, but we should take three lessons from our discussion in this chapter. The first lesson is that the accumulation of capital is much faster today in emerging markets than in developed countries. Given that the level of investment itself was pushed up by growing demand, which resulted in an increase in capital, it was to be expected that strong and regular growth would finally pay off. While there are grounds to support this assertion, European industry nevertheless often remains torn between its necessary expansion into emerging markets (especially in Asia) and the financial constraints imposed by a race for technological modernization. It is not only necessary to do both, but over time, it will be the growth in emerging markets, especially India, that will help finance R&D and hence provide capitalization for developed country MNEs. A second lesson is that Indian MNEs have moved beyond their origins, and they are now transforming their cost advantages by investing in technological upgrading, first through licensing, to develop their processes, and later through purchase or development of patents. They are also making strategic acquisitions of technological firms, implementing indigenous R&D programs, and establishing themselves as competitors in developed countries. In this race, Indian MNEs undoubtedly have an advantage over their private Chinese counterparts, due to their large size and uninterrupted history—if tamed by regulations—of entrepreneurship.17

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Finally, the third lesson is that even in high-end technology, a successful MNE will be the one that is financed by abundant capital and that conducts relatively inexpensive R&D. All truly global firms should not only have one developed and one emerging limb, but should also utilize these two types of territories as both markets and as bases for complete capitalist growth (having a stable portfolio of clients, yet also pursuing new, adaptive technologies and processes). Thus, emerging market MNEs will invest in the developed countries and vice versa. Of course, this reasoning can be further refined for each specific industry, but in this general form, it is relevant to most industries: steel and capital goods manufacture, the automobile industry, banks and finance, and, to some extent, to other high-tech areas, including biotechnology. This leads to the emergence of a new question: will there be a convergence towards North-South capitalism? This question is normally dealt with in terms of norms and governance, but here let us briefly consider the industrial determinants. To this day, MNEs from developed countries retain technological advantages and brand assets, but emerging market MNEs are expected to catch up because of the dissemination of R&D and acquisitions of brand assets. One fact will remain vital: access to emerging markets and to their low-margin markets demands specific competences, especially when global competition is very strong. After decades of high-level competition, developed country MNEs have lost their knowledge in markets with low margins. They will have to relearn the necessary skills. On the other hand, in emerging market contexts, developed country MNEs need to innovate in terms of production procedure, like adapting assembly lines to be more labor intensive, and dealing with transition demand. From this point of view, the experience gained in an emerging market improves competencies and the knowledge portfolio, but necessitates further investment. This process takes time, which increases the risk of competitors partnering with local companies. Thus, for developed country MNEs, the dynamics of upgrading prompts associations, JVs, and other partnerships as a means of acquiring a competitive edge: a capacity to create privileged relationships with industrial districts and poles of competence, while keeping a watch on strategic purchases by emerging markets MNEs will be crucial. And, even in this arena, some emerging market MNEs are learning fast and developing similar relationships. Developed country MNEs are delocalizing, a trend that began in industries with lesser technological contents. Today this is happening more and more in areas with strong technological content or high-end technology, including in the processes of innovation and design. To accelerate this trend, it has become necessary to consider JVs, acquisitions, and alliances more strategically. Moreover, today, developed country MNEs cannot afford to neglect the dynamic importance of certain niche companies, which are positioned to become new business models.

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In contrast, emerging market MNEs have developed three strategies to climb the value chain (or even to change the value chain by diversifying into another one). The first is to climb the value chain in pursuance of a strategy of extending capacities at a low cost. This is quickly followed by the second strategy of pursuing technological development and brands within niche companies. The third strategy is a combination of the first two: in a favorable financial environment, the emerging market MNE can envisage a quick strategy of direct technological acquisition (or even indigenous development). This strategy has been mastered by Indian groups like Huawei, Tata, and Mahindra & Mahindra, while Chinese companies like Geely and Chery have had more difficulty until 2009.18 It is too early to talk about the nature or the scale of the coming convergence in business models. But what is certain is that in terms of industrial MNEs, the concepts of North and South will increasingly lose their meaning. The next question will instead revolve around which regulatory regimes emerging markets like India will adopt. In that respect, we can consider two key concepts for understanding the economic dynamics of the contemporary world: “catching-up growth” and “globalization of firminduced growth”. Catching-up growth occurs through the availability (imported or homegrown) of technologies that have reached a relatively low cost in the middle of their life cycles (i.e., they have been conceived, tested, and still remain relatively efficient in numerous contexts, compared to newer technologies). This growth has slowly taken off in India and has been more rapid and sudden in China. This growth depends heavily on national policies, which involve capital accumulation through public finance, territorial equipment, probusiness reforms (such as those in India in the 1980s), and industrial restructuring (as in China throughout the reform era). While this mode of catching up has redistributive impacts, it is based mostly on scale, an articulation of nonstrategic industries (even if technological catching up does happen in those areas), and whether an effort has an impact that is large enough to create notable macroeconomic growth. India experienced this type of growth in the last 20 years, while China has been experiencing it since the mid-1980s. Similar dynamics were also present in postwar Europe, Japan, and the Republic of Korea. By contrast, globalization of firm-induced growth denotes territorial and organizational recomposition through (internal and external) internationalization of productive processes and R&D, from conception through commercialization. These processes offer new economic potential, both within and among firms, and can help develop new business models for market entrants. This growth is characterized by: (1) differential effects of specialization, and agglomeration of networks and competencies within a localized territory, leading to a reconcentrated economy; (2) a focus on technological and organizational strategy; and (3) a limited impact on GDP, but a large impact on revenue polarization, segmentation of labor markets, and the choices of strategic investments.

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Globalization of firm-induced growth is what allows the alreadyemerged part of the economy to globalize, and is at the core of the early formation of MNEs from what we call earlier “catching-up countries”: that is Japan, the Republic of Korea, and Taiwan, where the majority of the middle class managed, starting in the 1960s–1980s, to access consumption. In other words, globalization-induced growth leads to new business models, but this causes difficulties in the measurement of success. This growth is often the result of actions that are more organizational than quantitative in nature, such as acquisitions of strategic assets to move towards price-setting power in a niche market, or acquisitions of modern technology. Both economic information and the general debate tend to neglect these crucial activities, and underrate these dynamics within an econometric system that was framed for national economies and material production. As we have seen, simplistic analysis, in terms of liberalization, is not enough to explain the rapid rise of large Indian conglomerates or the birth of trailblazing technological groups.

Notes * CNRS Researcher (French National Centre for Scientific Research) at LATTS-Ecole Nationale des Ponts et Chaussées (University of Marne-la-Vallée), and CEFC (Hong Kong). 1. This title is a tribute to Milton Singer’s, When a great tradition modernizes—an anthropological approach to Indian civilization (New York: Praeger, 1972). 2. “Emerging markets” are all economies that are not members of the European Union and the Organisation of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe. 3. See Chapter 7 for a discussion of Indian OFDI in the United States. 4. At the time when it took over Corus, Tata Consultancy Services accounted for 50% of the Tata Group stock market value while representing only 16% of its turnover (Rosling 2007). 5. See Chapter 5 for a case study on Mahindra & Mahindra in the automotive industry. 6. See Chapter 6 for a discussion of OFDI in these two industries, IT (software) and pharmaceuticals. 7. The number grew from 37,530 developing country MNEs in 1990 to 69,727 in 2000 and 78,000 in 2007, with a total of 780,000 affiliates (United Nations Conference on Trade and Development 2007). 8. See Chapter 3 for a political economy explanation of some of these changes. 9. See Chapter 3 for a detailed discussion on the Indian government’s policies’ impacts on OFDI. 10. See Chapter 5 for a case study of Bharat Forge. 11. See Chapter 5 for a case study of Mahindra & Mahindra. 12. As mentioned earlier, see Chapter 5 for a case study on Mahindra & Mahindra. 13. The study only counted partnerships that had gone beyond the Memorandum of Understanding stage. 14. This section was developed in partnership with May Gicquel. It develops ideas from Ruet and Gicquel (2008) that are currently being developed into a book.

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15. Horizontal partnerships, as opposed to vertical partnerships such as those between car manufacturers and suppliers. 16. This partnership was initially supposed to be entered into between Heuliez and Argentum, with Argentum wishing to acquire a 62% share in Heuliez, but Argentum backed out in 2009. 17. We, in fact, argue that the Nehruvian model was some sort of “mixed socialism,” that industrially favored the rise of oligopolies, prevented from growth but de facto protected from entry by others. Entrepreneurship, alongside, could coexist in “new sectors” to which the state wanted to give priority and wished the Indian industrialist to accompany the national effort: subsidized by the state and developed by the private conglomerates. 18. On Chinese difficulties, see Richet & Ruet (2008), and on Chinese recent catching up in automobile, refer to Ruet & Gicquel (2008).

References Bajaj, Rahul (2006), “Realizing the Indian Dream,” address at Wharton India Economic Forum, Philadelphia, Nov. 11, 2006. Bartlett, Christopher A. and Sumantra Goshal (2000), “Going Global: Lessons from Late Movers,” Harvard Business Review Magazine, Mar.-Apr. 2000, pp. 132–142. Berger, Suzanne and the MIT Industrial Performance Center (2005), “How We Compete: What Companies around the World are Doing to Make It in Today’s Global Economy” (New York: Doubleday). Bomsel, Olivier and Joël Ruet, eds. (2000), “Digital India—Report on the Indian IT Industry” (Paris: Centre d’économie industrielle, Ecole Nationale Supériere des Mines de Paris). Bonaglia, Federico, Andrea Goldstein, and John A. Mathews (2007), “Accelerated Internationalization by Emerging Multinationals: the Case of White Goods,” 42(2) Journal of World Business, pp. 369–386. Chandran, Rina (2008), “Tata Motors completes acquisition of Jag, Land Rover,” Reuters, June 2, 2008, available at http://www.reuters.com/article/ idUSBMA00084220080602. Cognizant Locations (2010), http://www.cognizant.com/html/contactus/officelocations.asp (last visited Mar. 12, 2010). Deloitte Research et al. (2007), “Globalizing Indian Manufacturing: Competing in Global Manufacturing and Service Networks,” report (Deloitte Research), available at http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/ Globalizing%20Indian%20Manufacturing.pdf. Doshi, Bharat (2007), CFO of Mahindra & Mahindra, presentation at OECD Meeting on Emerging Multinationals, Paris, July 6, 2007. Einhorn, Bruce (2007), “Eye on Asia: Infosys finds Thailand,” Business Week, Jul. 26, 2007, available at http://www.businessweek.com/globalbiz/blog/eyeonasia/ archives/2007/07/infosys_finds_t.html. Giraud, Pierre-Noël (1996), L’inégalité du monde: Economie du monde contemporain (Paris: Gallimard Folio). Hall, Peter A., David Soskice, eds. (2001), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (New York: Oxford University Press). “High Growth: India IT Software and Services Industry” (2001), Business Week, available at http://www.businessweek.com/adsections/indian/infotech/2001/growth. html (last visited Mar. 12, 2010). Huang, Yasheng and Tarun Khanna (2003), “Can India Overtake China?,” 137 Foreign Policy, pp. 74–81.

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Huchet, Jean-François, Xavier Richet, and Joël Ruet (2007), Firms and the State: Industrial and Administrative Models for Globalisation in China, India, Russia (New Delhi: Academic Foundation India). Hybrid and Electric Cars—REVA cars (2010), http://www.hybridandelectriccars.co.uk/ car-models/381925/reva_cars.html (last visited Mar. 12, 2010). Kshirsagar, Alka (2007), “Bharat Forge plans foray into aerospace, shipping products,” The Hindu Business Line, Apr. 12, 2007, available at http://www.thehindubusinessline.com/2007/04/12/stories/2007041205730200.htm. Leahy, Joe (2010), “Reliance pushes for Lyondell catalyst,” Financial Times, Jan. 20, 2010, available at http://www.ft.com/cms/s/0/b3847790–05e8–11df-8c97– 00144feabdc0,dwp_uuid=aece9792-aa13–11da-96ea-0000779e2340.html. Lemoine, Françoise and Deniz Ünal-Kesenci (2007), China and India in international trade: from laggards to leaders? (Paris: Centre d’Etudes Prospectives et d’Information Internationales). Mahindra Satyam About Us (2010), http://www.mahindrasatyam.com/corporate/ about_us.asp (last visited Mar. 12, 2010). Maria, Augustin, Joël Ruet, and Marie-Helene Zerah (2002), “Biotechnology in India,” report to the French Embassy in India (New Delhi: Centre d’économie industrielle, Ecole Nationale Supérieure des Mines de Paris and Centre de Sciences Humaines de New Delhi, 2002). “Maryti, Hyundai, M&M to make CNG-powered vehicles” (2009), domain-b.com, May 25, 2009, available at http://www.domain-b.com/industry/Automobiles/ cars/20090525_vehicles.html. Meyer, Klaus E., Saul Estrin, and Samon Bhaumik (2005), “Institutions and Business Strategies in Emerging markets: A Study of Entry Mode Choice,” paper (London: London Business School). Milleli, Christian (2006), “International expansion by Indian firms: What of European market entry?,” presented at The Indian economy in the era of globalization, Maison des Sciences de l’Homme, Paris, Sept. 28–29, 2006, available at http://economix.uparis10.fr/docs/21/Indian-firms-in-Europe_Milell.pdf. Nath, Kamal (2005), speech at the World Economic Forum’s India Economic Summit, Davos, Jan. 29, 2005. Narayanan, Pratish (2010), “Market strength tempts India back into M&A fray,” http:// www.livemint.com/2010/02/03162119/Market-strength-tempts-India-b.html. “Peugeot introduces its first flex-fuel car” (2005), Just-auto.com, May 3, 2005, available at http://www.just-auto.com/article.aspx?id=73110. National Association for Software and Service Companies [NASSCOM] (2010), http:// www.nasscom.in (last visited Mar. 12, 2010). Pradhan, Jaya Prakash (2007), “Trends and Patterns of Overseas Acquisitions by Indian Multinationals,” MPRA Paper No. 12404, MPRA Munich Personal RePEc Archive. Prayag, Anjali (2006), “Learning to Manage Diversity,” The Hindu Business Line, Jul. 31, 2006, available at http://www.thehindubusinessline.com/manager/2006/07/31/ stories/2006073100601300.htm. Reserve Bank of India (2008), Reserve Bank of India Annual Report 2007–08: Report of the Central Board of Directors on the working of the Reserve Bank of India (Mumbai: RBI). Richet, Xavier and Joël Ruet (2008), “The Chinese and Indian Automobile Industry in Perspective: Technology Appropriation, Catching-up and Development,” 15(3) Transition Studies Review, pp. 447–465. Roberts, Dexter (2008), “Great Wall Motor: Gunning for Glory,” Business Week, Jul. 9, 2008, available at http://www.businessweek.com/globalbiz/content/jul2008/ gb2008079_416346.htm.

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Rosling, Alan (2007), Executive Director of Tata & Sons, presentation at OECD Meeting on Emerging Multinationals, Paris, Jul. 6, 2007. Ruet, Joël (2007), “Asset Specificity, Partnerships and Global Strategies of IT and Biotechnology Firms in India,” in Jean-Françoise Huchet, Xavier Richet, and Joël Ruet, eds., Globalisation of China, India and Russia: Emergence of National Groups and Global Strategies of Firms (New Delhi: Academic Foundation). Ruet, Joël and May Gicquel (2008), “Les pays émergents, partenaires de la recomposition industrielle,” Le Monde, Nov. 25, 2008. Ruet, Joël and Jean-François Huchet (2008), “Chinese and Indian Multinationals out to Conquer the World”, pp. 186–196, in C. Jaffrelot, ed., Emerging States. The Wellspring of a New World Order (London: Hurst and Company). Seth, Keshav (2009), “Bajaj to produce low-cost car in partnership with RenaultNissan,” Top News, Nov. 15, 2009, available at http://www.topnews.in/bajajproduce-lowcost-car-partnership-renaultnissan-2236505. Tata Consultancy Services (2007), “Tata Consultancy Services (TCS) Announces Expansion of its Global Network Delivery Model™ with a New Center in Mexico,” press release, May 30, 2007, available at http://www.tcs.com/news_events/press_releases/ Pages/ TataConsultancyServicesTCSannouncesexpansionofitsGlobalNetwork DeliveryModelwithanewcenterinMexico.aspx. Tata Consultancy Services Worldwide (2010), http://www.tcs.com/worldwide/Pages/ default.aspx (last visited Mar. 12, 2010). Tata in Africa Overview (2010), http://www.tataafrica.com/aboutus/overview.htm (last visited Mar. 12, 2010). Tata Motors Profile (2010), http://www.tatamotors.com/our_world/profile.php (last visited Mar. 12, 2010). “Tata Steel raising $2.3 b for Corus payment” (2007), The Hindu Business Line, Apr. 18, 2007, available at http://www.blonnet.com/2007/04/18/stories/2007041805500100. htm. Tata Worldwide Overview (2010), http://www.tata.com/tataworldwide/index. aspx?sectid=1y2Y3CZ5A2s= (last visited Mar. 12, 2010). ——— (2007), World Investment Report 2007: Transnational Corporations, Extractive Industries and Development (Geneva and New York: UNCTAD), available at http:// www.unctad.org/en/docs/wir2007_en.pdf. ——— (2009), World Investment Report 2009: Transnational Corporations, Agricultural Production and Development (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/wir2009_en.pdf. Wee, Kee H. (2007), Outward foreign direct investment by enterprises from Thailand (Geneva: UNCTAD), available at www.unctad.org/en/docs/iteiit20071a4_en.pdf. Wikinvest—Wipro (2010), http://www.wikinvest.com/stock/Wipro_(WIT)#_note-5 (last visited Mar. 12, 2010). Wipro Locations (2010), http://www.wipro.com/contactus/locations-flash.htm (last visited Mar. 12, 2010). World Trade Organization (2005), Annual Report 2005 (Geneva: WTO). ZER Customs—Ricardo Chery hybrid (2010), http://www.zercustoms.com/news/ Ricardo-Chery-hybrid.html (last visited Mar. 12, 2010).

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5 Acquisition of Technologies and Multinational Enterprise Growth in the Automotive and the Pharmaceutical Industries: Drivers and Strategies Giovanni Balcet and Silvia Bruschieri*

Introduction Multinational enterprises (MNEs) from emerging markets1 are new and very dynamic actors on the global scene. Among them, Indian MNEs have actively contributed to this scene: since the liberalization process that started in the 1990s, a growing number of firms have been able to acquire frontier technologies from Western and Japanese MNEs, often through innovation-oriented joint ventures (JVs) and alliances, and, subsequently, to grow internationally, building multinational networks. In a previous work, we analyzed the evolution of the Indian automotive industry, from a highly protected industry in the 1980s, through the liberalization process of the 1990s, to the new competitive arena of the early 2000s, with special reference to inward and outward foreign direct investment (IFDI and OFDI) flows, multinational alliances, the processes of technology transfer and acquisition, and the impact of trade and industrial policies (Balcet and Bruschieri 2008). In Section A we critically review relevant theoretical approaches on emerging market multinationals, stressing the asset-seeking motivations and the role of alliances, JVs, and networks as instruments for acquiring technologies, and proposing an alternative approach. In Sections B and C, following a case study methodology, we illustrate the internationalization process of four Indian companies operating in two industries that are highly representative of India’s successful entry into the global market:2 the automotive and the pharmaceutical industries. We focus on the kinds of ownership advantages that the case study firms possess, the roles that their abilities to establish linkages with third parties

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and leverage resources play, and the motivations driving this process. In so doing, we try to assess whether the internationalization in question calls for a new theory. To conclude, we propose a two-stage pattern of multinational growth of Indian firms, pointing out both firm-specific and country-specific competitive advantages, in order to explain their international performances.

A. Theoretical Frameworks on Emerging Market Multinationals Starting in the late 1970s, literature about developing country multinationals flourished. Three main approaches were used to interpret this phenomenon: the product life cycle (Vernon 1979, Wells 1983); the localized technological change theory and the theory of technological accumulation (Lall 1983a); and the investment development cycle, coupled with the eclectic paradigm of international production (Dunning 1986). All of these theoretical approaches share the same fundamental assumption, elaborated starting from the 1960s, with reference to the behavior of the Western MNEs: that, in order to expand abroad, firms must possess ex-ante competitive advantages that are strong enough to overcome the initial disadvantages they face in the host country (Hymer 1960).3 This assumption has been questioned by some scholars, with reference to the internationalization experience of contemporary emerging market MNEs. In the new theories, asset-seeking motivations become a key explanation of international operations.

1. The Imbalance and the Springboard Approaches Hwy-Chang Moon and Thomas W. Roehl advance the “imbalance theory” to interpret the “unconventional FDI,” among which they include the investment undertaken by the developing country firms in developed countries (Moon and Roehl 2001). These scholars, who draw on the resource-based view of the firm, recognize that the decision to undertake OFDI can be motivated by the intention to exploit firm advantages abroad. They maintain, however, that there are cases in which “the firm may be motivated by its own disadvantages in going abroad” (200). The term “disadvantage” can refer to a lack of resources, such as technology or management knowledge, but also to the possession of too little a market share. Nevertheless, some ownership advantages are still needed to engage in factor-seeking OFDI. Yadong Tung Luo and Rosalie L. Tung argue that emerging market MNEs use OFDI “as a springboard” to acquire strategic assets needed to compete more effectively, and in particular to access advanced technology (2007). According to this theory, competitive advantages are mainly generated through participation in international alliances, as well as from spillover effects of IFDI.

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2. The Linkage, Leverage, and Learning Theory According to John Mathews, the internationalization process of emerging market MNEs is not based on the possession of domestic assets that can be exploited abroad: this is true for both newcomer MNEs and for “Dragon MNEs,” based in Asian Dragon countries (Hong Kong [Special Administrative Region of China], Singapore, the Republic of Korea, and Taiwan Province of China) (2002). On the contrary, the most salient feature of latecomer firms’ “starting position is the absence of vast resources and capabilities” (171). The internationalization process represents the best way through which they can acquire resources, and thus secure a competitive position for themselves. Therefore, while Dunning’s framework can be retained as fitting for the incumbent MNEs, this theory aims to “go beyond” it “for the new cases such as Dragon MNEs” (Mathews 2006: 18). In particular, when interpreting the internationalization process of the latter, the linkage, leverage, and learning theory is proposed.4 Such companies are indeed claiming to be skilled at establishing several kinds of linkages with incumbent firms. Latecomers are not focused on their own advantages, but on those which they can acquire externally. Thanks to their ability to weave such linkages, latecomers can leverage “resources from the strengths of others” (14). The resources that latecomers are expected to target through this leveraging are the most easily imitated, and the most transferable. Latecomers are very keen on learning—that is, on enhancing their capabilities as a result of the repeated application of linkage and leverage strategies. The latter two features allow latecomers’ internationalization to proceed faster, so that Mathews claims that acceleration represents a feature characterizing the internationalization process of latecomer MNEs.

3. An Alternative Approach: Alliances, Acquisitions, Leverage, and Learning Emerging market companies can be expected to lack monopolistic advantages in the strict sense, particularly in regard to patents or strong brands. However, it seems to us that the claim that the most salient feature of latecomer MNEs is the absence of resources and capabilities does not correspond to the empirical evidence in the case of emerging markets. These companies often possess competitive advantages and firm-specific capabilities that can correspond fairly well to the ownership advantages considered by John Dunning (1979, 2000). The following competitive advantages can play a major role in the internationalization of emerging market MNEs: • The ability to obtain inputs on favored terms, due to size or monopsonistic influence, as happens when the companies in question have reached dominant positions in their home markets • The favored access to production inputs such as low-cost labor and raw materials

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• The supply of low-cost skilled labor and human capital, as in the case of Indian engineers and information and communication scientists • The capacity for fast assimilation and creative recombination of transferred technologies and knowledge • Abundant financial resources • Marketing skills, especially suitable to be exploited in other emerging markets • Managerial abilities in finding and leveraging resources and capabilities from around the world, especially from foreign partners, and to coordinate them with existing resources and capabilities • Last but not least, the active support of the government of many emerging markets, ranging from traditional forms of trade protection to new forms of strategic trade policies and state or public ownership

Drawing from works at the frontier between FDI theory and economics of innovation, a useful concept that we could apply to the case of emerging market MNEs is the double network, proposed by Davide Castellani and Antonello Zanfei (2006). Developing the idea of asset-seeking FDI, scholars propose to apply that concept to interpret the recent evolutions in the way MNEs generate and transfer knowledge (Dunning and Narula 1995). • MNEs “tend to develop external networks, with other firms and institutions that are located outside” their boundaries, “in order to increase the potential for use and generation of knowledge” (Zanfei 2000: 516, emphasis added). The external network involves not only the multinational headquarters, regional and global, but also their subsidiaries in each country. It includes cooperative relations, alliances, and JVs, not only with incumbent firms (as stressed by Mathews), but also with local specialized suppliers, clients, research institutions, and universities. • The internal network refers to the complex intragroup flows of goods, people, information, and resources, which connect subsidiaries, regional headquarters, and global headquarters. It represents a web of linkages among the internal units of the MNE, scattered in different geographical regions, and is characterized by an active role of subsidiaries in generating and circulating knowledge for the advantage of the whole MNE, while asset-seeking and asset-exploiting strategies coexist (Castellani and Zanfei, 2006).

The organizational challenge posed by the double network consists in the tension between the need for local units to be autonomous in order to perform their tasks in the best way, and the need to avoid centrifugal forces that might constrain the circulation of knowledge throughout the MNE and finally disintegrate the MNE itself. As a consequence, this approach suggests that the relations between these units are not merely hierarchical, and a different mix of centralization or decentralization characterizes the stages of growth and the multinational expansion of the firm. Even if it referred more directly to research and development (R&D) activities, the double network structure of the MNE can be generalized to other functions of the firm, such as distribution or purchasing (Zanfei 2000).

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We think that the broad notion of linkages can be better qualified and decomposed in the more precise notion of alliances, referring to the external network and its international expansion, on the one hand, and in that of acquisitions, with reference to the internal network, on the other hand. We can include in the category of alliances different forms of equity and nonequity long-term cooperative relations. In this respect, some useful insights are provided by the theory of the JVs, considered as representative of a wider range of organizations aimed at strengthening cooperative ties between companies from different countries (Contractor and Lorange 2002). Two main approaches seem relevant in order to qualify the external network of MNEs (Balcet 2009). • From a static point of view, a JV can be interpreted as a “hostage”—an institutional device created in order to protect each of the partners from the possible opportunistic behavior of the others. Therefore, it allows the partners to make operational transactions too complex for a purely contractual arrangement, given the failures and imperfections of markets. It is the case, in particular, for the market of knowledge, which is imperfectly regulated by intellectual property rights, rules, and international standards. • From a dynamic point of view, the JV can be viewed as a “learning instrument” in a broad sense, with different and complementary motivations for each of the partners. Such motivations include the access to new technology and knowledge, learning of organizational and managerial skills, and access to new markets, especially those characterized by a strong “distance” factor (geographical, cultural, or institutional). In the case of developing countries, a dynamic equilibrium can typically be reached between a Western multinational, which provides advanced technology, and a local partner, which provides the access to a difficult but large and growing market. The dynamic approach helps us to understand the evolutionary nature of JVs and alliances in a way that considers their specific historical and geographical contexts.

Both alliances and acquisitions (i.e., the external network and the internal multinational network, respectively) characterize the trajectories of the multinational growth of emerging market enterprises. Alliances and JVs may be located within the emerging market in a first stage, or abroad in a second stage of multinational growth. Similarly, the acquisitions in a first stage may target foreign subsidiaries in the country, and companies abroad in the second stage. Two different and parallel sequences can therefore be highlighted: Alliances (JVs) ⇒ Leverage ⇒ Learning and Acquisitions ⇒ Leverage ⇒ Learning All together, these trajectories allow the acquisition and assimilation of skills and new technology, shaping the new emerging multinational actors.

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With our empirical work, we aim to test whether our case study companies reflect the characteristics that, according to the literature outlined above, would make emerging market MNEs different from their so-called “conventional” counterparts.

B. Empirical Evidence on Indian MNEs: Two Case Studies from the Pharmaceutical Industry In recent years, the Indian pharmaceutical industry has established itself on the global scene, and contributed to shaping the new international image of India (“The New Titans . . .” 2006). Several companies active in this field have successfully entered the international scene, not only as exporters, but also by signing alliances with incumbent pharmaceutical MNEs, and by undertaking operations abroad. Ranbaxy is probably the best known example of this kind of Indian MNE.5 It is interesting to note that this was achieved by an industry that has a relatively short history in the country: the production of allopathic drugs started only under British rule,6 and the industry was still “almost non-existent at the dawn of independence” (Pradhan 2007: 1). At that time, the market share of domestic firms was about 10%, compared to 90% in the hands of MNEs that met demand predominantly through imports (id.). The development of the Indian pharmaceutical industry is strongly linked to a set of measures implemented by the Indian government since independence, having as their object the development of a domestic pharmaceutical industry. Initially, that aim was pursued by setting up public undertakings as well as research institutions, and by adopting a liberal attitude towards foreign direct investment (FDI) (Aggarwal 2004). While, during the colonial period, foreign companies were present in India through their exports of formulations, they entered directly on the field after Indian independence. They established their units in the country first for the packaging operations of imported formulations, subsequently for the manufacturing of medications with imported ingredients, and later they began the local production of—at least part of—the ingredients they needed (Chaudhuri 2004). To fix the problem that a country as poor as India was experiencing some of the highest drug prices in the world, the government began in the 1970s to take several initiatives, the first of which was to reform the international property rights regime: the Indian Patent Act of 1970 was the “most conscious attempt among developing countries [ . . . ] to improve terms for accessing international intellectual property” (Forbes 1999). According to this regulation, pharmaceutical products were not patentable in India, and the protection granted by patents on pharmaceutical processes could not last more than seven years. While price controls had been introduced in the 1960s, a more comprehensive price regulation policy was introduced in 1970 with the Drug Price Control Order, whose coverage

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reached about 90% of the industry in 1979 (Aggarwal 2004). Restrictions on foreign firms’ activities were also introduced, first with the Foreign Exchange Regulation Act of 1973 (setting a 74% cap on foreign ownership in companies in the industry) and then with the Drug Policy of 1978 (reducing that cap first to 40%, and later to 26%). As a result of the aforementioned interventions, a domestic pharmaceutical industry—based on reverse engineering with knowledge gained by copying and doing—started developing, and in 1982 domestic firms held about 50% of the local market (Gehl Sampath 2006). The liberalization of the Indian economy also affected the pharmaceutical industry, as this was one of the objects of the liberalizing measures that began in the late 1980s and continued during the 1990s. Among such measures, the new international property rights regime ought to be mentioned. Indeed, a series of amendments to Indian patent law were issued between 1994 and 2005 to bring it in line with the TRIPs (Trade Related Aspects of Intellectual Property Rights) agreement in the World Trade Organization framework. As a result of such interventions, product patents could be granted in India starting on January 1, 2005 (The Patents [Amendment] Act 2005). Other measures included the above-mentioned progressive reduction of the price control,7 the introduction of compulsory good manufacturing practices, a reduction of the trade barriers that had protected the industry,8 and a new attitude from the government towards FDI. Trade liberalization increased competitive pressures, especially on local bulk drugs manufacturers, as their products could be imported more and more cheaply, often from China. Moreover, the new international property rights regulation forced domestic companies to rethink their businesses. Under the 1970 international property rights regulation, Indian pharmaceutical firms could thrive, thanks to their chemical R&D skills and manufacturing expertise, which allowed them to discover and apply noninfringing processes to the manufacture of drugs that were covered by patent protection elsewhere. Such formulations could then be sold in the Indian market, as well as in other low-income markets with similar international property rights regimes. The new regulation, however, outlaws the manufacturing of generic versions of drugs that are patented in other countries.9 To remain in the market, Indian companies have taken the following main routes (or a combination of them): • Specializing in their “traditional” business—generics manufacturing—by developing noninfringing processes to produce off-patent pharmaceutical products. In so doing, they could profit from the expiry of patent protection on numerous blockbuster products in the near future. This option, however, implies operating in a more and more competitive market, populated by emerging market competitors, and also by research-focused MNEs that developed a generic branch and invested in R&D to quickly enter the market after patent expiry; • Focusing on their own genuine product innovations, though this requires very substantial investments in R&D; and

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• Specializing in outsourcing contracts with foreign companies, which, in the pharmaceutical industry, basically consists of contract research and/or contract manufacturing agreements. In this way, the Indian companies can exploit the strong need for international pharmaceutical MNEs in order to cut their costs along the whole product chain, externalizing one or more of their production phases, such as clinical trials, medical and safety monitoring, data management, and writing services connected to the drug application process for contract research, and the actual manufacturing, in the case of contract manufacturing. This route also implies major investments in order to improve reputation, and to be chosen as a reliable partner by foreign parties.

As a result of the policies outlined above, the Indian pharmaceutical industry developed over time, showing strong growth beginning in the 1980s. In 2007 the Indian pharmaceutical industry accounted for about 1.8% of global sales of pharmaceuticals in terms of value, but 8% in terms of volume, and the highest number of FDI-approved manufacturing facilities outside of the United States was located in India (Organisation of Pharmaceutical Producers of India 2007). In the middle of the first decade of the twentyfirst century, local manufacturing met about 75% of India’s demand for medicines (KPMG 2006). The industry is characterized by a small number of large companies and a large number of small units. Jaya Prakash Pradhan, drawing upon the Annual Survey of Industries (2000–2001), mentions a total of 2,872 units in the organized segment, with 249 large units and 2,623 small units (2007).10 The Indian pharmaceutical market is fairly competitive, but concentration at the top is increasing: the total share of the top ten firms stood at roughly 16% in 1992 and 18% in the late 1990s, while in 2002, the top six firms controlled about 25% of the market (Aggarwal 2004). In 2006, the share of the top ten companies was around 37% (Organisation of Pharmaceutical Producers of India 2007).11 Direct employment generated by the organized segment is estimated at 290,000 people, and this number increases to 460,000 if estimates for the unorganized segment are included (Organisation of Pharmaceutical Producers of India 2005).

1. Nicholas Piramal and Sun Pharmaceutical Industries: Structure and Evolution Nicholas Piramal12 is part of Piramal Enterprises, a family group that was established in India in 1933 and originally operated mainly in the textile industry. In 1988, Nicholas Piramal’s history began with Piramal Group’s acquisition of Nicholas Laboratories (India), a pharmaceutical company that already possessed an interesting product portfolio and belonged to Aspro Nicholas, a Swiss firm which had been acquired in 1984 by the U.S. MNE Sara Lee (Piramal et al. 2002). Today, Nicholas Piramal is a leading Indian pharmaceutical company that manufactures formulations across ten therapeutic areas, as well bulk drugs, and represents one of the largest contract research and manufacturing enterprises in the country.13 In 2006,

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Nicholas Piramal was the fourth-largest pharmaceutical company in India, with 4.3% of the market (Organisation of Pharmaceutical Producers of India 2007). In 2008, the company employed about 7,700 people, 2,000 of whom were outside India, and its consolidated turnover was US$700 million. Data about the historical trend of stand-alone sales of Nicholas Piramal are supplied in Figure 5.1. The acquisition of Nicholas Laboratories was followed, during the 1990s, by several acquisitions carried out by Nicholas Piramal, targeting other Indian units of MNEs such as the subsidiaries of Roche Products Ltd. in 1993, Boehringer Mannheim India Ltd. in 1996, Hoechst Marrion Roussel Ltd.’s Research Centre in 1998, Rhone Poulenc India Ltd. in 2000, and ICI India Ltd.’s Pharmaceutical Division in 2002. These acquisitions helped Nicholas Piramal establish its production and R&D areas. Moreover, they helped the company generate economies of scope and improve the company’s access to the market. Indeed, the acquisitions progressively enriched the company’s portfolio with several branded products, and strengthened its sales capacity. So by 2001, Nicholas Piramal could count 16 products among the top 300 pharmaceutical brands in the country (Nicholas Piramal 2001). In addition, after the first three acquisitions, its field force (the number of people employed in promotional activities with prescribing doctors) numbered 1,600 people (Piramal et al. 2002). At the end of the 1990s, Nicolas Piramal formulated its strategy to meet the competitive challenges posed by the change of the international property

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Nicholas Piramal Sun Pharmaceutical Inds. Ltd.

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rights regulation, and by the liberalization process. First, it decided to invest heavily in R&D activities oriented towards the discovery and development of new patentable products. Second, it decided to use strategic alliances with foreign MNEs to access new molecules (Piramal et al. 2002), and to develop both the contract research business (which also provided a means to generate profit out of R&D resources within a short time) and the contract manufacturing business. Nicholas Piramal, therefore, found an alternative way to exploit India’s low-cost advantage. Instead of manufacturing generic drugs to sell on foreign markets very soon after patent expiry, or challenging existing patents, the company strategically decided to tap the opportunities offered by regulated markets by partnering with innovator companies there, offering outsourcing solutions “across the pharmaceutical life cycle,” and, in this way, “delivering [to its partners] the India advantage” (Nicholas Piramal 2004: 5). The growth path of Nicholas Piramal was, therefore, based on the building of both an external and internal network. Lastly, regarding the formulation business, Nicholas Piramal decided to move towards high growth potential therapeutic segments, to enhance the power of the company’s branded products, and to expand the share of products that were not subject to price controls in the company’s product basket (Nicholas Piramal 2001, Piramal et al. 2002).14 As a result of these efforts, the sales of formulations in the so-called lifestyle segment, which includes therapy areas considered to have a high growth potential, contributed to 32.9% of Nicholas Piramal’s total consolidated operating income in 2008 (Nicholas Piramal 2008). The company, which in 2008 was active in ten therapeutic areas, also chose to specialize in respiratory drugs, to which it devoted special attention in relation to overseas acquisitions.15 In addition, by 2008 only 14% of formulation sales were of products subject to price controls. Sun Pharmaceutical Industries is a family company that was established by Dilip Shanghvi in 1983. It started as a very small enterprise, employing only two people, manufacturing only five products in the psychiatry therapeutic area, and distributing them in only two Indian states. In 1988 Sun Pharmaceutical was ranked 107th in the Indian prescription drug market, on the basis of its 0.1% market share (Sun Pharmaceutical Industries 2009). Impressively, by 2006, little more than 20 years since its founding, it reached sixth place among pharmaceutical companies in India, with a market share of 3.2% (Organisation of Pharmaceutical Producers of India 2007). Such growth was obtained through repeated acquisitions and the purchase of domestic equity stakes. Though the first such acquisition, in 1996, targeted an Indian unit of an MNE (the active pharmaceutical ingredient manufacturing plant of Knoll Pharmaceuticals), Sun Pharmaceutical’s acquisition campaign for the Indian market mainly involved local competitors. These acquisitions allowed Sun Pharmaceutical’s production capacity to expand, and generated economies of scope, allowing it to progressively enter new therapeutic segments. Other acquisitions and greenfield operations that were carried out overseas strongly contributed to company growth. By

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2008 Sun Pharmaceutical was a vertically integrated company, employing about 8,000 people, with 1,400 of them abroad (Sun Pharmaceutical Industries 2008). Sun Pharmaceutical manufactures both active pharmaceutical ingredients and formulations, with the latter representing the most important part of its business. Sun Pharmaceutical began production of bulk drugs in 1995 to facilitate its manufacture of complex formulations. Ingredients are sold to external customers—which today include both generics manufacturers and innovative firms mainly in regulated markets—and they represented about 10% of Sun Pharmaceutical’s consolidated sales in 2008.

In the early 2000s, the company’s strategy was focused on three elements: strong brands, research, and international markets. Particularly in the formulation business, the company strategy was focused on therapeutic segments for the treatment of chronic ailments, an area in which it wished to develop technically complex products, and to have a shorter time to market than its competitors. In India in 2008, the company sold about 500 formulations in 14 therapeutic segments, the largest of which, in terms of Sun Pharmaceutical’s sales, remains neuropsychiatry (Sun Pharmaceutical Industries 2008). With regard to the active pharmaceutical ingredient business, where, in general, their strong competition comes from Eastern European and Chinese companies, Sun Pharmaceutical is targeting the segment of specialty active pharmaceutical ingredients (Kale 2008). Likewise, to deal with increasing competition in the generic formulation business, Sun Pharmaceutical is focusing on high technology drug delivery systems. In 2008, Nicolas Piramal and Sun Pharmaceutical registered a turnover of US$700 and US$900 million, respectively, compared to US$9,400 million registered in 2007 by the Israeli company Teva, the world leader in the generic segment of the pharmaceutical industry. Thus, we can say that, even if our case study companies’ dimensions clearly remain far from those of a global leader, the increase in their stand-alone sales in the last 14 years is impressive, amounting to a compound annual growth rate of about 30% and 20% in the case of Sun Pharmaceutical and Nicholas Piramal, respectively.

2. Competitive Advantages: Technological Innovation Nicholas Piramal started investing in R&D at the end of the 1990s. This decision was part of the company’s strategy to meet the competitive challenges posed by the change in international property rights regulation, and by the liberalization process. In 1998, it acquired Hoechst Marion Roussel’s R&D unit in India, which possessed state-of-the-art research facilities, employed 100 highly experienced scientists, and held a large number of international patents (Piramal et al 2002). In the following years, Nicholas Piramal’s ratio of R&D to sales fell but still remained higher than in the 1990s, and began to increase

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again in 2004, as shown in Figure 5.2. In addition to the internal resources devoted to R&D activities, the company has been very active in developing a number of agreements with research institutions, both in India and abroad, since the late 1990s. It entered into several R&D agreements with foreign MNEs, as discussed in Section B.5. Lastly, contract research agreements also represent, as already mentioned, an important part of the company’s business. This activity, besides contributing to generate turnover out of the R&D resources in a shorter time frame than pure innovative research activities, also contributes to the company’s technological upgrading (Kale 2008). For a list of the above-mentioned R&D-related agreements and contracts, see Section B.5. In 2007 the company conducted several kinds of R&D activities: in new chemical entities discovery, covering four therapeutic areas (oncology, infectious diseases, diabetes, and inflammation); in natural products, to develop a collection of extracts from microbes and plants to be used as a source of chemical compounds for new chemical entities discovery; in the development of processes to manufacture active pharmaceutical ingredients, that is, the ingredients used to manufacture drugs, both for intracompany use and for external customers; and in the development of dosage 14

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Figure 5.2 The ratio of R&D expenses to sales: Nicholas Piramal, Sun Pharmaceutical, large Indian pharmaceutical companies, and Italian pharmaceutical companies (1994– 2008), in (%).a Source: Sun Pharmaceutical Industries and Nicholas Piramal: authors’ elaborations on Prowess data. Large Indian pharmaceutical companies: Pradhan, Jaya P. (2008), Transnationalization of Indian Pharmaceutical SMEs (New Delhi: Bookwell), based on Prowess data. Italian firms: Farmindustria (2008), Indicatori Farmaceutici (Rome: Farmindustria). a The large pharmaceutical unit category includes those units having gross plant and machinery value above Rs. 10 crore.

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formulations of drug products across all major therapeutic areas, also in this case for both intracompany use and external clients. In 2007 the most innovative part of Nicholas Piramal’s R&D activities, those focused on new chemical entities discovery, was spun off into another company owned by Nicholas Piramal and some of its shareholders (listed on the National Stock Exchange and the Bombay Stock Exchange in June 2008): Piramal Life Sciences Ltd. (Nicholas Piramal 2008, “Nicholas Piramal to de-merge . . .” 2007). This move aimed to separate this kind of activity, which requires a higher commitment of financial resources, develops on a longer time horizon, and implies higher risks, from the branded formulations and custom manufacturing businesses. According to the company, this move also aimed to allow interested investors to invest directly and solely in innovative research (“Nicholas Piramal to de-merge” 2007). Sun Pharmaceutical Industries started investing in R&D earlier, in the first half of the 1990s, with the construction of an R&D center located in Baroda (Gujarat), inaugurated in 1993. A second research center was set up in Mumbai in 1997, to develop generics for the regulated markets. In particular, most of the products manufactured by Sun Pharmaceutical’s U.S. subsidiary, Caraco (described later in this section), were developed in the Mumbai center. R&D activities develop within three temporal horizons. In the short term, R&D remains focused on reverse-engineered pharmaceutical products, which allows the introduction of new products into India soon after their international launch, and helps the company maintain its leadership position in the domestic specialty formulation market. This kind of research is also used to compete in the U.S. generic market. Furthermore, it also offers Sun Pharmaceutical Industries the opportunity to develop specialty active pharmaceutical ingredients both for intracompany use and for external customers in the international regulated markets. It is this kind of R&D activity that most contributed to the company’s product basket expansion, allowing it to bring to market, on average, 40 new formulations and 25 new active pharmaceutical ingredients every year. Increasing resources have also been invested in medium- and long-term projects (Sun Pharmaceutical Industries 2006, 2008). So, medium-term projects are focused on both new and known drug delivery systems for India and other emerging markets, and on complex active pharmaceutical ingredients like steroids and peptides, which require special technology, manufacturing processes, and dedicated sites. Finally, long-term projects include developing new chemical entities and new drug delivery systems that are totally new to the world. The results of such R&D activity, which are more uncertain, are intended to reach world markets. Sun Pharmaceutical Industries spun off these long-term projects in 2007 into the Sun Pharma Advanced Research Center Ltd. To evaluate whether technological capacities can represent a firm-specific advantage of our focus companies, we looked at several indicators. Before looking at the patent activity of our case study companies, we should mention that, from 1970 until the 1990s, Indian law did not

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provide for the possibility of patenting pharmaceutical products, and that the institutional setting, which strongly protected the local pharmaceutical industry, did not offer Indian companies many incentives to invest in R&D. It was, indeed, only since the 1990s that our case study companies started investing in R&D in order to make innovation a source of their competitiveness. In 2008 Sun Pharmaceutical claimed to possess a total of 72 patents, granted to the company out of 414 patent filings (Sun Pharmaceutical Industries 2009).16 Nicholas Piramal claimed to possess “nearly 250” patents in August 2007 (Nicholas Piramal 2007b). As such numbers are not very meaningful per se, we take again into consideration Teva’s performance for a rough comparison.17 In September 2008, Teva claimed to possess 2,978 patents, belonging to 987 patent families, out of 4,668 applications (Teva 2008). On the basis of this comparison, we can therefore say that proprietary technology falls far short of representing an absolute ownership advantage for our case study companies (that is, a competitive advantage they can rely on abroad against all potential competitors). Turning to R&D expenses, if we look at our case study firms’ ratios of R&D expenses to sales, as shown in Figure 5.2, we can see that Sun Pharmaceutical Industries outperforms the large Indian pharmaceutical companies, and that, since 1999, Nicholas Piramal’s performance has been better (even if only on average) than that of the large Indian units for all years for which data are available. Lastly, if we consider the trend regarding Italian pharmaceutical companies’ investments in R&D, the effort of Sun Pharmaceutical since 2004 turns out to be quite respectable. With regard to Nicholas Piramal’s R&D staff, we can approximate that at the end of the 1990s, the company employed about 100 employees in R&D, as that was the amount of staff in Hoechst’s R&D unit, which was acquired in 1998 and from which the company started its research center. By 2007, that number had increased to 387, out of which about 150 were in the U.S. and UK subsidiaries (Nicholas Piramal Interview 2008). The number of staff engaged in R&D at Sun Pharmaceutical Industries was about 150 in 2003, and exceeded 500 by 2008 (Sun Pharmaceutical Industries 2003, 2008). The limited staff engaged in R&D activities abroad (in the United States, at Caraco in Detroit and the Cranbury New Jersey plant) is not included in that number (Sun Pharmaceutical Industries Interview 2008). As an indicator of the innovative capacity, and, in particular, “of the focus of the firm to develop new proprietary drugs,” (Chittoor and Ray 2007: 345), we can look into the number of new chemical entities that the companies have in their pipeline. For Nicholas Piramal, this number increased from five in 2002—the year that saw the first new chemical entity patent filing by Nicholas Piramal—to 13 in 2007 (Nicholas Piramal 2004, 2007b). In the case of Sun Pharmaceutical, in 2002 the company had a “two-year research objective: in innovation-based research, to have one new chemical entity and three delivery system products in human trials” (Sun Pharmaceutical Industries 2002: 21). In 2007 Sun Pharmaceutical’s

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pipeline included four new chemical entities and four new drug delivery systems (Kale and Little 2007). It is worth noting here two additional aspects that can give our case study companies a competitive advantage in this field. The first concerns the external source of technology represented by R&D staff members, who have experience abroad of working in big MNEs or in the academic world (a phenomenon that involves about 10% of Nicholas Piramal’s R&D staff, according to the company manager we interviewed in 2008). These persons contribute their precious capacities and experience, and, as a consequence, contribute to raising the company’s level of knowledge. The second is represented by the low cost of skilled work in India. Indeed, if we exclude the top-level R&D personnel, the staff employed in this kind of activity receives a wage much lower than that which is standard in developed countries. It is estimated that the wage of an Indian chemist is about one-fifth of what such a professional would earn in the United States.18 This means that the companies can have well-managed, large teams, which increases the speed and quality of work at a much lower cost, relative to operations based in developed countries.19

3. Competitive Advantages: Differentiation While a measure of the extent of product differentiation is not easy to obtain (Caves and Williamson 1985), the producer’s expenditures on advertising and marketing expenses, expressed as a share of the total sales, is widely used to proxy this variable. The trend of such expenses for our case study companies is illustrated in Figure 5.3. 9 8

Nicholas Piramal Sun Pharmaceutical

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Figure 5.3 The ratio of advertising and marketing expenses to sales: Nicholas Piramal and Sun Pharmaceutical (1996–2008), in %. Source: Authors’ elaboration on Prowess data.

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It is worth noting that in the pharmaceutical industry, marketing activity plays a fundamental role in determining the level of a company’s sales and profitability (Gianfrate 2004). Strong engagement in this kind of activity is not necessary only for innovative, research-based companies, but also for generic drug manufacturers (Aggarwal 2004). Looking at possible ownership advantages of our case study companies, and looking at the ratio of advertising and marketing expenses to sales, we can see that it is much lower in the case of Sun Pharmaceutical and Nicholas Piramal than the 15% estimated for U.S. pharmaceutical companies (Lakdawalla, Philipson, and Wang 2006). Part of this can be explained by the fact that advertising prescription drugs is allowed in the United States, while in India, this is not possible in mainstream general media. In 2002 this indicator for “203 [Indian] pharmaceutical companies covered by [Centre for Monitoring Indian Economy]” (Aggarwal 2004: 56) was around 5%; in the same year, Sun Pharmaceutical’s ratio was slightly higher (5.75%), and Nicholas Piramal’s ratio was much lower (3.09%) than the average. Nonetheless, since the mid-1990s, the ratio has been increasing for Nicholas Piramal (average 1996–1999: 1.12%; 2000–2008: 3.65%), signaling a stronger effort to differentiate products. Sun Pharmaceutical Industries’ ratio is decreasing (average 1996–1999: 6.42%; 2000–2008: 5.29%). A differentiation effort can also be observed by looking at the increase in the number of people in the field force, engaged in promotional activities with prescribing doctors. Due to the limits on advertising prescription drugs mentioned before—except for over-the-counter products, where advertising plays a role—the field force represents the main marketing tool for both of our case study companies in the formulation business (Nicholas Piramal Interview 2008, Sun Pharmaceutical Industries Interview 2008), and its importance has been increasing over the course of the past few years. Nicholas Piramal’s field force consisted of 1,600 people at the end of the 1990s (Piramal et al. 2002) and increased to 3,789 people in 2008 (taking into account only Indian representatives). Sun Pharmaceutical Industries employed 1,411 people in it field force in India in 2002, and 2,450 in 2008. Sun Pharmaceutical’s field force abroad consisted of 90 people in 2002 and 450 people (outside the United States) in 2007. The attention devoted by Nicholas Piramal to brands is also shown by the progressive enlargement of its product basket, through both the acquisition of some Indian units of major pharmaceutical firms, and in licensing agreements it has signed with other large foreign multinationals. 20 On the other hand, however, it aimed to make a name for itself as a low-cost partner for large pharmaceutical MNEs looking to outsource, differentiating its image from that of its low-cost domestic pharmaceutical competitors. Sun Pharmaceutical’s management, interestingly, deems the company’s marketing capacities one of its most important competitive advantages, which it has exploited through the internationalization process (Sun Pharmaceutical Industries Interview 2008). In its foreign markets apart from the United States (mainly emerging markets), the company follows

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a marketing model that is fairly similar to the one used in India, based on doctor calls and activities such as doctor group meetings, conferences, and symposia (Sun Pharmaceutical Industries 2008).

4. Competitive Advantages: Financial Resources and Managerial Skills A lack of financial resources is commonly considered a weak point for developing country firms. Such shortage of resources does not seem, however, to affect our case study companies. Indeed, when asked about this point, both sets of representatives maintained that financing their international expansion had not presented a problem (Nicholas Piramal Interview 2008, Sun Pharmaceutical Industries Interview 2008). In particular, Nicholas Piramal managers mentioned the positive role played by a private equity fund that holds a stake in the company. Internal accruals and the debt market were mentioned as other sources of financing employed in the company’s internationalization. Sun Pharmaceutical management highlighted internal accruals and money raised on the stock market as the main means used to finance the company’s internationalization; while obtaining financing through the bank system would have been easy, it has not been necessary. In addition to the managers’ statements, we can report the following information concerning the availability of financial resources: First, with regard to internal accruals, Sun Pharmaceutical’s performance is indeed remarkable, in both the ratio of profit after tax to sales, as shown in Figure 5.4, and the ratio of current assets to current liabilities, as shown in Figure 5.5. 45 40

Nicholas Piramal Sun Pharmaceutical Industries Indian large pharmaceutical units

35 30 25 20 15 10 5 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Figure 5.4 The ratio of profit after tax to sales: Nicholas Piramal, Sun Pharmaceutical, and a pool of large Indian pharmaceutical unitsa (1994–2008), in %. Source: Sun Pharmaceutical Industries and Nicholas Piramal: Authors’ elaboration on Prowess data. Large Indian pharmaceutical companies: Pradhan, Jaya P. (2008), Transnationalization of Indian Pharmaceutical SMEs (New Delhi: Bookwell), based on Prowess data. a The large pharmaceutical unit category includes those units having gross plant and machinery value above Rs. 10 crore.

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Giovanni Balcet and Silvia Bruschieri 7


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Figure 5.5 The ratio of current assets to current liabilities: Nicholas Piramal and Sun Pharmaceutical (1994–2008), in numbers. Source: Authors’ elaboration on Prowess data.

Second, we can note that both of the case study companies are listed on the Bombay Stock Exchange and the National Stock Exchange, which have both been very dynamic in the last years. For instance, the Bombay Stock Exchange capitalization increased from about US$400 billion in January 2005 to almost US$600 billion in 2006, US$800 billion in 2007, and over US$1,400 billion in April 2008 (Bombay Stock Exchange 2008). Our case study companies’ performances in terms of profitability can also help them to raise money through the stock market channel. Sun Pharmaceutical outperformed the average of large pharmaceutical companies, with regard to the ratio of profit after tax to sales, for all the years when this comparison is possible, and Nicholas Piramal did the same for most of them, as shown in Figure 5.4. In particular, Sun Pharmaceutical’s capacity to raise funds through the stock market is attested by the fact that, when it was listed in 1994, its initial public offering was oversubscribed by 55 times, and the money generated by this operation (US$18 million) was sufficient to help with the Caraco acquisition of 1997 (Sun Pharmaceutical Industries Interview 2008). Third, it is interesting to note that both Sun Pharmaceutical and Nicholas Piramal were also able to raise financial resources abroad. In 2004, Sum Pharmaceutical issued a US$350 million foreign currency convertible bond on the Singapore Stock Exchange, while in 2003 Nicholas Piramal used external commercial borrowing to raise US$10 million (Reserve Bank of India 2009). Other such borrowings were obtained by Nicholas Piramal in the following years for a total value of US$40 million (id.).

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Turning to management skills, the successive acquisitions that Nicholas Piramal made in the Indian market offer the opportunity to learn a lot about how to carry out such operations, and how to smoothly integrate different companies (Piramal et al. 2002). This knowledge could be widely applied in the international environment, and, indeed, Nicholas Piramal’s management deems this ability one of the most important competitive strengths of the company (Nicholas Piramal Interview 2008). Management learned a way to integrate manufacturing structures, product mix, distribution infrastructures, and also people, as well as how to transfer the best practices across different units in every sphere of activity. Furthermore, it can be noted that Nicholas Piramal’s top managers received part of their education abroad. 21 With regard to Sun Pharmaceutical, in 2003 it was included by AT Kearney-Business Today as being among the best-performing companies in India across all industries, and in 2005 Dilip Shanghvi, the company Founder, Chair, and Managing Director, was acknowledged by Ernst and Young as the “E&Y Entrepreneur of the Year” in the healthcare and life science category. In the first half of the first decade of the 2000s, Sun Pharmaceutical was listed by Forbes four times in five years among the best 200 Asian companies with sales of less than US$1 million. Note that Mr. Shangvi was 52 in 2008, so he was very young when he started up Sun Pharmaceutical in 1983, and, in general, the top managers’ average age is quite young, around 40–45 years.

5. Linkage and Leverage: The External Network Strategic alliances in the pharmaceutical industry include licensing and cross-licensing agreements, joint R&D projects, marketing agreements for products that have been approved by authorities, and equity investments that are often undertaken with contextual technology transfer (Prašnikar and Škerlj 2005). The internationalization strategies that are followed by our two case study companies differ with regard to their participation in international strategic alliances, and, in general, in their establishment of linkages with third parties. A thick web of linkages has been established by Nicholas Piramal since the time of its acquisition campaign in the Indian market, as shown in Table 5.1, when such operations were often coupled with the establishment of strategic alliances with the parent companies of the acquisition’s target. One benefit of this strategy was that it allowed Nicholas Piramal to share the risks and costs of its R&D activities, and to access its partners’ knowledge. Furthermore, these alliances have bolstered the company’s reputation and the confidence of potential customers. In contrast, neither strategic alliances with foreign firms nor the establishment of extensive linkages with institutional subjects, such as Universities or public research centers, represented important elements in Sun Pharmaceutical’s development strategy. 22

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Table 5.1 Nature of linkages

Nicholas Piramal’s web of linkages with incumbents and institutions Partner (Description)

Partner’s nationality

Year

U.S.

2006

U.S.

2007

U.S.

2007, 2008

French

2008

Swiss

1993

French

2004

U.S.

2004

U.S. Italian

2004 2004

French

2004

U.S.

2004

German U.S.

2004 2003

Swedish

N/A.

U.S.

1995

A) Strategic alliances 1) R&D agreements With foreign Napo Pharmaceuticals, Inc. (plant-screening companies: agreement to develop and commercialize proprietary pharmaceuticals (diabetes therapeutic agents) for the global marketplace. Nicholas Piramal will utilize its screening facility, natural product chemistry expert Merck (collaboration agreement to discover and develop new oncology drugs for two selected targets provided by Merck) Eli Lilly (2 agreements concerning new drugs that Nicholas Piramal would develop and, in certain regions, commercialize starting from a select group of Lilly`s pre-clinical drug candidates that span multiple therapeutic areas) Pierre Fabre (collaboration in research on oncology) 2) License agreements For the Indian Hoffman-La Roche (manufacturing and distributing market: all Roche products under the Roche brand name) Ethypharm (paracetamol melt tablets drug delivery technology, especially for pediatric use) Biogen Idec (marketing multiple sclerosis and psoriasis drugs) Gilead Sciences (marketing antifungal agent) Chiesi Farmaceutici (marketing a lung surfactant drug for infants) Pierre Fabre (marketing dermatology and skincare products) Genzyme Corporation (marketing an orthopedic pain management drug) Gruenthal (pain management drug manufacturing) For foreign Minrad (distribution of inhalation anesthetic markets: products in Russian Federation, Ukraine, Africa and Middle East) AstraZeneca (manufacturing and exporting antiscabies soap to select countries) 3) Equity agreements JV with Allergan (manufacturing ophthalmic products for India and since 2002 for export to other emerging markets) JV with Reckitt & Benckiser (distribution in India) JV with Alliance Boots (distribution of both companies’ products—especially over-the-counter ones—in India) JV with Arkray Inc (distribution of diagnostic products in India)

U.K.—Indian 1998 U.K.—Indian 1998

Japanese

2008 Continued

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Continued Partner (Description)

Partner’s nationality

B) Contract research and contract research and manufacturing agreements Advanced Medical Optics (supply of ophthalmic U.S. products for advanced markets) Allergan (supply of ophthalmic products for foreign U.S. markets) AstraZeneca (development and manufacturing of Swedish active pharmaceutical ingredient) Pfizer Int. - Animal Health Div. (development and U.S. manufacturing)

Year

2003 2004 2005 2005

C) Agreements with research institutions National Institute of Oceanography of Goa Indian Institute of Chemical Biology of Kolkata Central Drug Research Institute of Lucknow Centre of Biochemical Technology Indian Institute of Science of Bangalore Regional Research Laboratory f Jammu (part of the Council for Scientific & Industrial Research) Anna University of Chennai National Research Council of Canada National Institutes of Health Oncotest De Montfort University Nine national research institutes

Indian Indian Indian Indian Indian Indian

N/A N/A 1998 2001 2004 2004

Indian Canadian U.S. German U.K. Indian

2004 N/A N/A N/A N/A 2008

Sources: Nicholas Piramal (2009), www.nicholaspiramal.com (last visited May 2009); Nicholas Piramal Interview (2008), Silvia Bruschieri, interviewer, Apr. 3, 2008, Mumbai; Nicholas Piramal (2007a), Annual Report 2006-2007 (Mumbai: Nicholas Piramal); Pradhan, Jaya P. (2006), “Global Competitiveness of Indian Pharmaceutical Industry: Trends and Strategies,” MPRA Paper No. 12340, MPRA Munich Personal RePEc Archive; “NPIL inks pacts with 7 global pharma firms” (2004), The Financial Express, Oct. 9, 2004.

6. The Internationalization Process: Exports With regard to Nicholas Piramal’s internationalization process, it should be noted that in the early 2000s, exports were still insignificant for the company, as illustrated in Figure 5.6. Thanks to both the alliances that Nicholas Piramal has made with foreign partners and its international expansion through OFDI, which offered the opportunity to increase captive exports, exports grew substantially during the 2000s. The ratio of Nicholas Piramal’s sales outside of India to its total sales increased even more than exports during the early 2000s. While around the mid 2000s exports and operations of foreign subsidiaries were still “not significant” (Nicolas Piramal 2005: 88), in 2008 over 44% of consolidated revenues came from outside of India (Nicholas Piramal 2008). Sun Pharmaceutical’s internationalization also developed substantially during the last decade, as illustrated in Figure 5.6. The company started exporting in 1989, selling pharmaceutical products in countries neighboring

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Giovanni Balcet and Silvia Bruschieri 35


30 25 20 15 10 5 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

Figure 5.6 The ratio of exports to sales: Nicholas Piramal and Sun Pharmaceutical (2000–2008), in %. Source: Authors’ elaboration on Prowess data.

India (Kale 2008). The high level of internationalization reached by the company is reflected in its high ratio of foreign sales to total sales of 54.8% in 2008. With regard to the geographic breadth of exports, in 2008 about 1,000 registered products of Sun Pharmaceutical were sold in about 30 countries (Sun Pharmaceutical Industries 2009). The United States represents the largest market for the company’s business outside of India, with the oldest subsidiary in the country generating sales of US$350 million (Sun Pharmaceutical Industries 2008). While active pharmaceutical ingredients are sold mainly in regulated markets (United States and Europe), it seems that the penetration of formulations into the regulated markets other than the United States is still in its initial phase. While the first concrete move in this context was done with the acquisition of a manufacturing unit in Hungary (see Section B.7 below), other plans for Europe are being developed. Sun Pharmaceutical wishes to focus on three key markets (the United Kingdom, France, and Germany) and work on complex generic products to be filed from India. The company does not plan a direct market presence in these countries, but since 2005, it has been looking for a partner to develop this activity. Sun Pharmaceutical also plans to focus on the Commonwealth of Independent States (CIS), China , South Africa, Brazil, Mexico, and the countries of Southeast Asia.

7. Internationalization through OFDI: The Internal Network Nicholas Piramal undertook a series of foreign investments since 2004:23 • In 2004, acquisition of the inhalation business of Rhodia Organique Fine Limited (UK) for US$14 million (manufacturing of inhalation anesthetics)

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• In 2005, acquisition of Avecia Pharma (UK) (formerly part of AstraZeneca), now called Nicholas Piramal Pharmaceuticals (UK), for US$17 million (R&D; active pharmaceutical ingredient and formulation manufacturing; custom manufacturing; also developed proprietary process technology) • In 2005, acquisition of Torcan (through the acquisition of Avecia) (Canada) for part of Avecia Pharma’s acquisition (manufacturing [biotechnology field]: custom manufacturing for biotechnology and mid-sized pharmaceutical companies; niche active pharmaceutical ingredients) • In 2005, acquisition of 25% of Reaxa Ltd. (through the acquisition of Avecia) (UK) for part of Avecia Pharma’s acquisition (custom manufacturing [also using proprietary process technology developed by Avecia Pharmaceuticals in collaboration with Cambridge University]) • In 2006, acquisition of a Pfizer manufacturing unit in Morpeth (UK) (active pharmaceutical ingredient manufacturing and contract manufacturing; R&D) • In 2006, greenfield establishment of a sourcing office in Shanghai (China) (resource-sourcing office) • In 2009, acquisition of Minrad International (U.S.) for US$40 million (manufacturing of generic inhalation anesthetics)

The OFDI undertaken by Nicholas Piramal thus far seems to have been inspired by several main aims. Some of the OFDI (including Rhodia [UK] and Minrad [U.S.]) is directed towards specialization in the inhalation anesthetics business, and gaining access to hospitals as target customers. Other investments carried out abroad strengthened the company’s contract research and manufacturing business: among them, we can mention the acquisition of Avecia Pharmaceuticals (and—through it—that of Reaxa [UK], and Torcan [Canada]) and the Morpeth (UK) unit of Pfizer (which made Nicholas one of the biggest contract manufacturers of Pfizer). Some operations also gave the Indian company access to critical technologies, as in the case of Avecia, which had developed those technologies in collaboration with Cambridge University. In addition, the creation of the sourcing office in China in 2006 clearly had a resource-seeking motivation. Looking at the relationships between the parent company and subsidiaries, that is, at the way in which the internal network of this MNE is organized, we can see that Nicholas Piramal applied some of the skills developed in its acquisition campaigns to the Indian market. For example, strong coordination emerged in relation to the homogenization of the information technology (IT) structure and accounting procedures across units after every OFDI operation (Nicholas Piramal Interview 2008). Indeed, IT was widely used for internal governance and decision making, both to share success stories, and to make it possible to constantly monitor all units and functions performances (Piramal et al. 2002). This system allowed headquarters to intervene early when an underperformance was noticed in a foreign unit. Personnel mobility is strongly encouraged through the Career Opportunity Program, which gives employees of all units the first opportunity to apply for new positions that are created within the organization, due either to resignations or to the set up of new structures, in an effort to “home grow” the company’s future leaders (Nicholas Piramal 2008).

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With regard to Sun Pharmaceutical’s expansion through OFDI, the following list illustrates how momentum has increased in this process during the last decade:24 • In 1993, greenfield establishment of a 100% subsidiary (Russia) (marketing). • In 1995, greenfield establishment of a representative office (Belarus) (marketing). • In 1997, acquisition of a 30% stake in Caraco (Detroit, Michigan) for US$8 million. Successively further shares of Caraco’s capital were bought; in 2004 Sun Pharmaceutical’s stake in Caraco was 44%; in 2008 Caraco was a 70% subsidiary of Sun Pharmaceutical (manufacturing and R&D). • In 2001, establishment of a 72.5% JV with the local partner City Overseas Ltd. (Bangladesh) (manufacturing for local market). • In 2005, acquisition of the manufacturing facilities of Able Laboratories located in Cranbury (New Jersey, United States) for US$23 million (manufacturing of controlled substances [active pharmaceutical ingredients] and R&D). • In 2005, acquisition of the manufacturing operations of the U.S. company Valeant Pharma, renamed Alkaloida (Hungary) for US$10 million (manufacturing of controlling substances [active pharmaceutical ingredients and formulations]). • In 2006, acquisition of a plant manufacturing pharmaceutical products from Valeant Pharma (Bryan, Ohio) (manufacturing). • In 2007 (though not yet finalized), the acquisition of Taro (Israel) for US$454 million (generic manufacturing and R&D). • In 2008, the acquisition of Chattem Chemicals Inc. (United States) (manufacturing of controlled substances [active pharmaceutical ingredients]).

The first foreign operations of Sun Pharmaceutical were carried out as greenfield investments overseas in the early 1990s, basically to develop marketing activities. In 1997 the company made its first acquisition in the United States, targeting an underperforming enterprise that manufactured generic formulations, Caraco Pharm Labs. It is interesting to note that this operation was carried out as a technology-for-equity agreement, which, over time, led Sun Pharmaceutical to reach a stake of 76% in the U.S. company.25 Several other operations followed in the United States, often targeting companies in bad financial conditions. One motivation underlying some of the OFDI carried out by the Indian company was the enlargement of the company’s basket of complex products in the formulation and active pharmaceutical ingredient businesses. This was the case for the acquisitions of the Valeant Pharma unit in Hungary (renamed Alkaloida Chemical Company), and of Valeant’s unit and Chattem Chemicals in the United States.

8. Conclusions From the Case Studies on Nicholas Piramal and Sun Pharmaceutical Industries If we look at the presence of competitive advantages created by technological innovation, the evidence we presented in this section leads us to conclude that the internationalization process of our case study companies clearly started in the absence of ownership advantages derived from proprietary Brian Harley


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technology, as measured by patents. However, if we look at indicators such as R&D expenses, R&D staff, patent activity, and the number of new chemical entities in their pipeline, we observe that our case study companies have been developing a nonnegligible innovative capacity simultaneously with their internationalization process. Even without strong patent activity, technological capacities represented an important competitive advantage that both Nicholas Piramal and Sun Pharmaceutical exploited for their internationalization, as discussed by each company’s managers. So, Nicholas Piramal’s internal R&D capacity allowed the company to develop both alliances with established MNEs, and a contract research and manufacturing business. Indeed, as Ranjeesh Narula remarks, to enter business relationships with other firms, incumbents must find that their partners offer them something (amounting to a kind of competitive advantage) (2006). On the other hand, the importance of Sun Pharmaceutical Industries’ strong development capacities for its internationalization process are proved, for instance, by the fact that its acquisition of the U.S. company Caraco was largely performed through a technology-for-equity agreement. Drawing on the figures we presented in this section concerning differentiation capacity, as measured by advertising and marketing expenses, we can again conclude that these companies started their operations abroad without possessing advantages of this kind. This confirms the common vision that developing country firms lack powerful brands and differentiation capacity. Also in this case, however, as in that of technological capabilities, several elements allow us to claim that our focus companies have been increasing their differentiation capacity in parallel with the internationalization process that they have been undergoing, and that, in a certain measure, they were able to exploit such capacity to become multinational. With regard to financial resources, which one could expect to represent a constraint in the case of MNEs based in a country that—despite strong economic growth—remains part of the developing world, access to the capital necessary for international expansion apparently does not represent a problem for our case study companies. The profits and returns that they have generated for their investors in recent years, joined with the positive trend in the Indian stock market, seem to support what they claim. The fact that they are also able to access the international financial market seems to confirm that their brand images, together with their good business records, are now recognized abroad (Pradhan 2006). Sun Pharmaceutical’s managerial skills are attested by many acknowledgments, while Nicholas Piramal’s management skills are a competitive advantage upon which the company can ground its international expansion. Nicholas Piramal’s path towards internalization shows a strong propensity to establishing linkages with foreign companies, through contract research and manufacturing contracts, nonequity agreements, and equity agreements. Nicholas Piramal also has an extensive web of relationships with both Indian and foreign research institutions. Conversely, Sun Pharmaceutical Industries seems to have approached the internationalization process without creating a network of strategic alliances or developing Brian Harley

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the outsourcing business. The “leverage of the resources of others,” to use Mathews’s terminology (2006), happened instead when the company made use of acquisitions as an entry mode, first to develop in the domestic market, and then in the course of its international expansion. Within Nicholas Piramal, some elements of strong coordination (such as IT structure and accounting procedures) are imposed by the parent company on foreign subsidiaries. The latter, however, do not resemble classical foreign units that are devoted to exploiting the parent company’s competitive advantages abroad. Instead, OFDI carried out by Nicholas Piramal clearly has an asset-seeking nature, such as when R&D resources are accessed through foreign operations (such as in the acquisitions of Reaxa [UK]), or when foreign operations provide access to a distribution network (such as that of hospitals, as was the case in the acquisition of Rhodia).

C. Empirical Evidence on Indian Multinational Enterprises: Two Case Studies from the Automotive Industry The Indian automotive industry was a highly protected industry in the 1980s, was involved in the liberalization process of the 1990s, and had become a competitive industry by the 2000s. The first automobile production in India was developed by Ford and General Motors, which opened assembly units in the 1920s. By the 1940s, a few local enterprises were involved in local assembly under license (Kim 2004). In 1954 Hindustan Motors became the first local automobile manufacturer with its Ambassador model, which was adapted to the local market, and was produced in India under license from the British carmaker Morris. Beginning in the early 1980s, the Indian automotive industry started on a gradual course of modernization, opening markets to competition, and promoting exports. In 1982 the game-changing JV between Maruti Udyog Ltd., a state-owned company that had not been able to start production, and the Japanese multinational Suzuki Motor Company was created. This JV deeply affected the production system and technology standards of the Indian automotive industry. Within a few years, the JV controlled more than 50% of the domestic market. The alliance was characterized by an important flow of technology. Some of Suzuki’s Japanese suppliers invested in India and started production operations. New technology was introduced, as well as new design and management systems. In 1985 new investments in the commercial vehicle segment no longer needed licenses, so existing producers were allowed to enlarge their production capacity. Therefore, the main manufacturers started to diversify production (Singh 2004, BeckerRitterspach 2006). Other deregulation measures soon followed. Since 1991 the automotive industry has been involved in the deregulation process. In particular, since that year, foreign investments have been allowed to constitute up to 51% of commercial vehicle production and

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component production. FDI developed rapidly after liberalization, and many MNEs entered the market, including Ford, Honda, Fiat, Daewoo, and Hyundai. Almost all of these newcomers operated through JVs in which the foreign partner supplied managerial power and technology. In the 1990s, most foreign MNEs acquired control through majority ownership (Kim 2004). At the same time, some Indian corporations, which had previously operated in other segments of the automotive industry, entered this market, quickly acquired technology, and signed international agreements. Tata Group entered the industry, while Mahindra & Mahindra (M&M) started producing passenger cars through collaboration with Ford. In the twenty-first century, the growth of the Indian automotive industry—though curbed by poor infrastructure, especially with regard to the road and highway system—has been pushed by the high growth rate of the Indian economy. The government has espoused a new policy with two particular goals: (1) to develop “an international hub for the production of small and economically accessible cars,” and (2), to create a “global source for automotive components” (Government of India 2002: 2). The small car segment is dominant in today’s Indian automotive market, but growing income and the availability of cheap credit have allowed for the growth of the upper segment of demand (Richet and Ruet 2008). Maruti’s position, even if decreasing, is still dominant, with more than 46% of the market (SIAM 2008), while new investments have been made by other domestic and foreign companies, such as Tata and Honda. The number of automotive component suppliers is very large, with more than 500 “organized” suppliers, and more than 5,000 “unorganized” suppliers. The relationships between assemblers and component suppliers have been greatly affected by the entry of big, multinational carmakers that impose new quality standards, and have led to increased concentration in this segment (Humphrey and Salerno 2000, Kim 2003). Partnerships have been a major channel for technology transfer and acquisition by Indian enterprises. Japanese MNEs have been the most frequent partners, having been involved in 145 partnerships out of a total of 482 in the early 2000s (Kim 2003). Partnerships and acquired technologies have set the stage for Indian enterprises to expand abroad, first through exports, and later through OFDI and international production (Banik and Bhaumik 2007). We’ll now focus on two domestic corporations that were able to become multinational, following a process of acquisition of both technology and organizational competencies: Mahindra & Mahindra and Bharat Forge Ltd.

1. Mahindra & Mahindra and Bharat Forge: Structure and Evolution Mahindra & Mahindra Ltd. was established in 1945 by the Mahindra brothers, along with an external partner. At that time, it was licensed to represent the U.S. company Willys Overland Motor Company—manufacturer of the jeep—in India (Kathuria 1996). The licensed capacity in the mid-1950s was

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for 2,500 jeeps per year (Mahindra & Mahindra 2009). In the mid-1960s, the company entered the commercial vehicle business. Over the years, the Mahindra Group developed, emerging as one of the most important examples of an Indian family-owned diversified conglomerate group, and is today among the top ten industrial houses in India. 26 It employs more than 50,000 people, and has a turnover of over US$6 billion a year (Mahindra & Mahindra 2008, 2009). As a result of the restructuring that began in 1994, the Group is now organized into business units whose activities range from the automotive industry and infrastructure, to IT and financial services (Stewart and Raman 2008). Mahindra & Mahindra, the flagship company of the Group, includes the automotive and farm equipment units. Strong cooperative relationships exist between the different units and enterprises that are part of Mahindra. Regarding Mahindra & Mahindra in particular, there are strong synergies with the financial business of the Group and with the companies that are active in the logistics and sourcing businesses (Mahindra & Mahindra Interview 2008). The IT competencies present in the Group are also useful to Mahindra & Mahindra, for instance, to interconnect the points of its distributive network, which includes 650 dealers and 49 sales offices in India (Society of Indian Automobile Manufacturers 2008). Moreover, there is interaction with the Mahindra Group business unit that is focused on the automotive component segment, Systech, which also works as an engineering service provider, relying on a staff of over 600 engineers.27 Mahindra & Mahindra’s automotive production is carried out in five plants in India, and includes sport-utility vehicles, light commercial vehicles, three-wheelers, and passenger cars, the last of which is manufactured through a JV with Renault (discussed below). In addition, Mahindra & Mahindra’s farm equipment division manufactures tractors and equipment. 28 In 2008 the automotive and the farm equipment segments represented about 63% and 35% of the company revenues, respectively. In that year, Mahindra & Mahindra employed about 14,000 people, and had sales amounting to US$3.2 billion (see Figure 5.7 for sales numbers over the years). In 2007 Mahindra & Mahindra was the market leader in the sportutility vehicle market, with a market share of 41%, and had a market share of 24% in light commercial vehicles, ranking second after Tata Motors, with 65% (Society of Indian Automobile Manufacturers 2008). The launch of the Logan model in India, manufactured by Mahindra & Mahindra through its JV with Renault, was quite successful, with sales of 26,000 units in its first year on the market (2008), and a market share of 11.2% in the midsize car segment (Mahindra & Mahindra 2008). India is the largest tractor market in the world, and Mahindra & Mahindra was the market leader in tractors in India for the twenty-fifth consecutive year in 2008, with a market share of 30%, and it ranked third in the global tractor market (Mahindra & Mahindra 2008). Bharat Forge was established in 1961 in order to manufacture forgings for two different industries: the nascent automotive industry and the farm

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Acquisition of Technologies and Growth 3500

139

Mahindra and Mahindra Bharat Forge

3000 2500 2000 1500 1000 500 0 1990

1993

1996

1999

2002

2005

2008

Figure 5.7 Sales (standalone): Mahindra & Mahindra and Bharat Forge (1990–2008), in US$ millions. Source: Authors’ elaboration on Prowess data.

equipment industry. It is the flagship company of the family group Kalyani. Today, the Group’s activities range from auto components and steel, to renewable energy and specialty chemicals. The Group employs about 10,000 people worldwide, and its turnover is US$2.4 billion (Bharat Forge 2009). Bharat Forge’s main business is the manufacturing of components, both in steel and aluminum, for commercial vehicles, tractors, and passenger cars. There are other automotive component manufacturer companies outside of the forging business that are part of the Kalyani Group. Bharat Forge’s business started during the time of Indian import substitution policy, and was consolidated in the following years when India was virtually closed to external competition. 29 It consolidated further when liberalization took off in India; Bharat Forge was able to exploit the opportunities offered by this process. Today, the company can manufacture every kind of forging piece for the above-mentioned industries, but it focuses on some specific niches, in some of which it holds a high market share. So in 2008, besides being the largest forging company in Asia, Bharat Forge was India’s largest manufacturer of automotive components (Bharat Forge 2009). In 2006 it was the second-largest producer of forgings for car engines and chassis components in the world (“A New Breed . . .” 2008). The company has recently begun to diversify into nonautomotive industries, particularly into aerospace, oil and gas, energy, rail, marine, mining, and infrastructure (Bharat Forge 2008). While these nonautomotive industries made up 18% of the company’s consolidated turnover in 2008 (id.), the company’s goal is to have this number reach 30% (interview). 30 In 2008 Bharat Forge had stand-alone sales amounting to US$589 million, as shown in Figure 5.7,

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and consolidated income of US$1.2 billion (Bharat Forge 2008). In the same year, Bharat Forge employed 4,500 people.

2. Competitive Advantages: Technological Innovation During the 2000s, Mahindra & Mahindra devoted increasing resources to internal R&D activities, but the ratio of R&D expenses to sales still remains modest, at 1.68% in 2008, as shown in Figure 5.8. The import of disembodied technology strongly increased in the last few years, 31 which shows an increasing focus by Mahindra & Mahindra on technological upgrading.32 Technology transfer from foreign companies also occurred through domestic acquisitions such as that of Automotive Pressing Unit, from the UK company GKN in 1989. It is also worth noting that, over the course of time, some foreign companies acquired stakes in Mahindra & Mahindra. In the early 1980s, the U.S. companies American Motor Corporation33 and International Harvester held stakes in Mahindra & Mahindra of 8% and 6%, respectively (Lall 1983b). Moreover, Ford invested as well, holding about 5% of Mahindra & Mahindra until 2005, when it sold its holdings. The presence of foreign partners among the shareholders of the company has represented an additional channel for the acquisition of foreign technology. 2 1.8

Bharat Forge Ltd. Mahindra & Mahindra Ltd.

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1992

1994

1996

1998

2000

2002

2004

2006

2008

Figure 5.8 The ratio of R&D expenses to sales: Mahindra & Mahindra and Bharat Forge (1992–2008),a in %. Source: Authors’ elaboration on Prowess data. a

The historical series presented in this figure is not complete because data for some years were not available.

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Starting with the agreement with Willys Overland Corporation in the 1950s, several collaborations with foreign partners have contributed to the improvement of Mahindra & Mahindra’s technology level in the course of time, as discussed further in Section C.5 below. Other indicators can signal a company’s innovation level, such as certifications and awards. In the late 1990s, four Mahindra & Mahindra manufacturing plants in India were certified ISO 9002, and in 2008, extensive certifications were held by many of the company’s plants.34 In addition, Mahindra & Mahindra was recognized for achievements in the field of total quality and innovation.35 Bharat Forge’s investment in R&D remains low despite an increase in the early 2000s: the ratio of R&D expenses to sales amounted to only 0.29% in 2008, as shown in Figure 5.8. With regard to proprietary technology, Bharat Forge’s only patent applications were, in fact, filed by Carl Dan Peddinghaus, a company that the case study firm acquired in 2003, signaling that the acquisition had an asset-seeking motive. For Bharat Forge, agreements with foreign companies represented a way to access technology. Several such agreements were signed, mostly with Japanese companies, as detailed in Table 5.3 later in this section. Bharat Forge’s technology sourcing also involved the import of equipment. In 1988, the company invested two-thirds of its annual income in a Germanengineered state-of-the-art plant (“Bharat Forge Pulls Ahead . . .” 2007). During the 1990s and early 2000s, equipment was sourced abroad from Germany and Japan, which gave the company the possibility of upgrading its technological level so that it could grow “from a primarily automotive ancillary to an engineering enterprise” (Bharat Forge 2009), while expanding its production capacity. The quality of the Bharat Forge production process was attested to in the 1990s, with the certifications ISO 9002 (obtained in 1993) and QS 9000 (obtained in 1999) (Bharat Forge 2009). In 2008 the company was certified as ISO/TS 16949:2002, ISO 9001:2000, and ISO 14001. In addition, Bharat Force uses management techniques like quality circle, total quality management, and Kaizen, as well as specific programs to highlight and spread best practices (Bharat Forge Interview 2008). Automation was widely introduced in the late 1990s, so that by the early 2000s, the company had fully automated press lines and CAD/CAM systems (Bharat Forge 2003). In addition, the company has made full use of IT technologies, introducing a virtual manufacturing system and an integrated supply chain management system. The advanced technological level of Bharat Forge’s manufacturing process is one of the factors that allowed the company to climb up the value chain and increase the importance of machined components in its business, 36 reducing the focus on raw forging. To make the most of new technologies, the company improved the education level of its workforce, which could consequently be reduced in number (“Bharat Forge Pulls Ahead . . .” 2007). Indeed, as a result of an employment reduction and partial replacement at the end of the 1990s,37 the share of white-collar workers increased from about 15% to 85% (Kumar et al.

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2009). In 2008, while only 120 people were employed in R&D activities, Bharat Forge employed about 2,000 engineers worldwide (Bharat Forget Interview 2008). Bharat Forge has undertaken specific programs of talent scouting and staff training, developed in collaboration both with foreign universities (in the UK, Germany, and Sweden) and with technical colleges in Indian rural towns (Elliott 2007). As a result, the company has an educated, high-quality workforce, whose remuneration in the lower positions still offers a cost differential when compared to European workers (though this differential is relatively small for higher management positions) (Bharat Forge Interview 2008).

3. Competitive Advantages: Financial Resources The case study companies’ capacity to generate financial resources that can be employed in internationalization growth, as proxied by the ratio of retained profit to sales as well as the ratio of current assets to current liabilities is shown in Figures 5.9 and 5.10. Mahindra & Mahindra was listed on the Bombay Exchange as far back as 1956, and subsequently also on the National Stock Exchange. In the dynamic context of the Indian stock market, in recent years the company’s stock has performed well, rising over 20-fold over the past seven years, compared to a twofold increase in the Sensex index over the same period (Stewart and Raman 2008). To finance its overseas operations, Mahindra & Mahindra also turned to foreign currency convertible bond issuance, raising US$115 million in 10


8

6

4

2

0 1989

1992

1995

1998

2001

2004

2007

−2 Figure 5.9 The ratio of retained profit to sales: Mahindra & Mahindra and Bharat Forge (1989–2008) (%). Source: Authors’ elaboration on Prowess data.

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3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1989

1992

1995

1998

2001

2004

2007

Figure 5.10 The ratio of current assets to current liabilities: Mahindra & Mahindra and Bharat Forge (1989–2008), in numbers. Source: Authors’ elaboration on Prowess data.

1996 and US$100 million (in an oversubscribed offering) in 2004 (“FCCB Issue Oversubscribed” 2004). It also joined forces with venture capitalists such as ICICI, India’s largest private-sector bank (“Mahindra & Mahindra and ICICI Venture . . .” 2008). In evaluating the capital availability of the company, it is also appropriate to consider the favorable position that Mahindra & Mahindra enjoys as part of a Group that operates in finance and trade.38 Finally, Mr. Anand Mahindra, vice chair and managing director of Mahindra & Mahindra, also owns a stake in the commercial bank Kotak Mahindra (“Anand Mahindra ends promoter’s . . .” 2009). Meanwhile, Bharat Forge’s international growth was financed through internal accruals (for instance, in the case of the acquisition of the German company Carl Dan Peddinghaus) (“Bharat Forge acquires . . .” 2003), and with money that has been raised on the international financial markets. Foreign currency convertible bonds were issued in 2005 and 2006 in the amounts of US$120 million and US$80 million, respectively, part of which the company used to finance its international expansion (Bharat Forge 2008). External commercial borrowings were also obtained by the company in 2004 (US$30 million) and in 2008 (US$50 million) (Reserve Bank of India 2009).

4. Competitive Advantages: Management Skills and Differentiation In the case of Mahindra & Mahindra, it should be highlighted that Mr. Anand Mahindra, the vice chair and managing director of Mahindra & Mahindra, is in the third generation of the family running the company,

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and took over as head of the company in 1991, in his mid-30s (Mahindra & Mahindra Interview 2008, Stewart and Raman 2008). He is a Harvard College and Harvard Business School graduate, and has received several awards recognizing his managerial achievements.39 Moreover, an “increasing number of managers” have foreign education or professional experiences abroad in their backgrounds, while the company’s top managers’ average age is under 50 (Mahindra & Mahindra Interview 2008). Lastly, the human resource management techniques that are employed are focused on talent scouting (both domestically and abroad) and retention.40 In the case of Bharat Forge, it should be noted that Mr. Baba Kalyani, the company’s promoter, chair, and managing director, whose family holds a 51% stake in the company, graduated as a mechanical engineer from the Massachusetts Institute of Technology and has extensive foreign exposure (Bharat Forge Interview 2008). The ratio of advertising plus marketing expenses to sales for Mahindra & Mahindra is reported in Figure 5.11. As we can see, the ratio remains low, but it has been increasing since the end of the 1990s. Both tractors and passenger vehicles are “strongly advertised” by the company (Mahindra & Mahindra Interview 2008). It is also worth noting that the company is devoting efforts to “establishing the Mahindra brand across the globe” (Mahindra & Mahindra 2007), which is one reason why it has pushed for Mahindra-named products within its strategic alliances, wherever the name is strong enough (Mahindra & Mahindra Interview 2008).

3.5

Mahindra & Mahindra Bharat Forge

3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990

1993

1996

1999

2002

2005

2008

Figure 5.11 The ratio of advertising and marketing expenses to sales: Mahindra & Mahindra and Bharat Forge (1990–2008), in %. Source: Authors’ elaboration on Prowess data.

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Bharat Forge’s expenditure for advertising and marketing remains low, as shown in Figure 5.11, but showed an increase in the early 2000s, and in particular from 2002 to 2004. Last, Mahindra & Mahindra’s offer of three-wheelers, passenger vehicles, and light commercial vehicles are far from being undifferentiated: we count at least 18 models of such products—two three-wheelers, five pickups, two sport-utility vehicles, the Logan car, and eight light commercial vehicles (Mahindra & Mahindra 2009).41 These vehicle models are also adapted from their Indian design when they are exported to foreign markets (Mahindra & Mahindra Interview 2008).

5. Alliances and Leverage: The External Network Over time, Mahindra & Mahindra has leveraged external resources through equity and nonequity agreements with foreign partners, as shown in Table 5.2. Some of these contracts were more focused on technology, as in the case of the engine licenses obtained in 1979 from Peugeot, and in 2001 from Renault, or in the case of the JV with Menzolit (an important German composite manufacturer) in 1983, where Menzolit supplied the latest technology in the field (Mahindra & Mahindra 2009). But other resources were also accessed thanks to these relationships. The aforementioned agreement with Peugeot was also intended to help Mahindra & Mahindra penetrate the European market (Lall 1983b). Another JV, Mahindra International, was established with a subsidiary of the U.S. company Navistar, a leader in the North American markets for medium and heavy trucks and buses. This JV should allow the Indian company to make its entry into those markets soon, and to engage in the engineering services and contract-sourcing businesses. Lastly, the JV Mahindra Renault provides Mahindra & Mahindra both international technology and the opportunity to enter the potentially massive market for low-cost passenger cars.42 Bharat Forge has entered into a few agreements with foreign companies that have allowed it to upgrade its technological level since the 1960s, as shown in Table 5.3. We can observe that, before starting its internationalization process through FDI, the company was already established as a supplier to a number of global customers. Thus, in 2003, the year in which the company first undertook OFDI, it already had 24 global customers, including vehicle manufacturers, as well as tier-one component suppliers (Bharat Forge 2003). In 2002 Bharat Forge announced that it had succeeded in enlarging its customer base from ten to 21 Original Equipment Manufacturer/tier-one suppliers, including companies such as Daimler Chrysler and Renault Vehicle Industries (Bharat Forge 2002). In 2007 also thanks to the customers gained through the acquired companies, the customer base increased to 35, and included Toyota, BMW, General Motors, Volkswagen, Renault, Volvo, Iveco, Scania, Cummings, and Dana Corporation.

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Table 5.2

Mahindra & Mahindra’s external network

Nature of linkages

Partner and object of the agreement

A. Non-equity Agreements Technical and financial collaboration with Willys Overland Corporation to assemble Jeep-type vehicles Collaboration with Rubery Owen for manufacturing light commercial vehicles License agreement with Peugeot concerning diesel engines (also intended to help the penetration of the European market) Technical collaboration with Mitsubishi / Samcor to manufacture the minivan Mitsubishi L300 Agreement with Renault regarding petrol engines trucks Agreements with local companies to assembly completely knocked down (CKD) vehicles and tractors

Agreements with local companies to assembly CKD sport utility vehicles (Scorpio) B. Equity agreements JV (Mahindra Sintered Products) established with a company of the GKN Group in the auto parts business (exited in 2002) JV (Mahindra Ugine Steel Company) established with Ugine Kuhlmann in the steel—auto part business JV (International Tractor Company of India) established with International Harvester Company, to manufacture tractors (in 1977 merged with Mahindra & Mahindra, giving birth to the tractor division of Mahindra & Mahindra) JV (Mahindra Composites, now part of Systec), established with Menzolit GmbH, the largest manufacturer of composites in Europe; the foreign partner supplied the latest technology of mechanized products JV (Mahindra Steel Service Centre) established with Mitsubishi Corporation and Nissho Iwai Corporation to supply blanks on a just-in-time basis JV with Ford Motor Company to manufacture passenger cars (Mahindra & Mahindra exited in 2005) 51% JV (Mahindra International) with International Truck and Engine Corporation, subsidiary of Navistar International, to manufacture trucks and buses for the Indian market and for exports, and diesel engines for medium and heavy commercial trucks. The JV 51% JV with Renault for manufacturing in India the low-cost sedan Logan

Nationality of the partner

Year

U.S.

1954

U.K.

1965

French

1979

Japanese

1996

French

2001

Iranian, African nationalities, Serbian, South American nationalities Egyptian and Brazilian

various

2008

U.K.

1960

French

1962

U.S.

1963

German

1983

Japanese

1993

U.S.

1996

U.S.

2005

French

2005 Continued

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Table 5.2

Continued

Nature of linkages



Year

51% JV (Mahindra Navistar Engines) with a subsidiary of Navistar International to manufacture diesel engines for medium and heavy commercial trucks JV agreed with Renault and Nissan to manufacture passenger vehicles for the three partners, as well as transmission systems for Nissan and Renault (in January 2008 Mahindra & Mahindra announced its exit from the project)

U.S.

2007

French/Japanese

2007

Source: Mahindra & Mahindra (2007), Annual Report 2006–2007 (Mumbai: Mahindra & Mahindra); Mahindra & Mahindra (2008), Annual Report 2007–2008 (Mumbai: Mahindra & Mahindra); Mahindra and Mahindra (2009), www.mahindra.com (last visited May 2009); Institute of Chartered Financial Analysts of India, Centre for Management Research (2005), “Project Scorpio: The Making of India’s First Indigenous Sports Utility Vehicle,” OPER 046 (Hyderabad: ICFAI), available at http://www.icmrindia.org/casestudies/ catalogue/Operations/OPER046.htm.

Table 5.3

Bharat Forge’s external network

Nature of linkages



Year

U.S.

1962

Japanese

1984

Japanese

1986

Japanese

1996

A. Non equity agreements With incumbents

With institutions

Contracts with global customersa

Technical agreement with SIFCO for hammer forging technology Technical agreement with Tokyo Drop Forge for technology upgrade and quality improvement for hammer forging Technical agreement with Jidosha Buhin Kogyo for machining of front axle beams Technical knowledge and assistance from MetalArt Corporation (Japan) for small forgings Collaboration with universities for internship and use of test facilities Programs of talent scouting and staff training, developed in collaboration with foreign (as well as with Indian) universities Number of global customers increased from 10 to 21 Global customers numbered 35

Indian, U.K., German, and Swedish Indian, U.K., German, and Swedish

various

various

2002 2007

Source: Bharat Forge (2002), Annual Report 2001–2002 (Mumbai: Bharat Forge); Bharat Forge (2003), Annual Report 2002–2003 (Mumbai: Bharat Forge); Bharat Forge (2007), Annual Report 2006–2007(Mumbai: Bharat Forge); Bharat Forge (2008), Annual Report 2007–2008 (Mumbai: Bharat Forge); Bharat Forge (2009), http://www.bharatforge.com/ (last visited May 2009); “Kalyani Lemmerz vrooms in with $25 m to make car wheels” (2007), Financial Express, Feb. 22, 2007; Kumar, Nirmalya, Pradipta K. Mohapatra and Suj Chandrasekhar (2009), India’s Global Powerhouses: How They Are Taking On the World (Boston, Mass: Harvard Business Press). a

Global customers include both component suppliers and vehicle manufacturers.

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6. Internationalization Process: Exports Mahindra & Mahindra started exporting in 1968, with a shipment of utility vehicles and spare parts to Yugoslavia (Mahindra and Mahindra 2009). Exports to Asian countries (Philippines, Sri Lanka, Singapore, and Indonesia) began one year later, and exports progressively extended to Africa, Latin America, and Europe (id.). Measuring the level of internationalization of Mahindra & Mahindra’s automotive business is not easy at all. Indeed, as already mentioned, Mahindra & Mahindra operates in various vehicle segments, while other companies of the Group (gathered in the Systech business unit) are active in the automotive component business. So, on the one hand, looking at Mahindra & Mahindra’s ratio of exports to sales—the only one available to us—tells us only a part of the story, and one that also includes tractors and other farm equipment. On the other hand, looking at the whole Group’s sales to customers outside of India—which amounted to 29% in 2008 (Mahindra & Mahindra 2008) —we obtain a picture that looks at all of the businesses of the conglomerate, some of which are highly internationalized.43 Keeping in mind this caveat, we can observe that Mahindra & Mahindra’s ratio has grown from 1.7% in 2000 to 6.2% in 2008, as illustrated in Figure 5.12. The geographical orientation of exports is different for tractors and passenger vehicles. For tractors, the United States is the main market. Other export destinations are China, Nepal, Bangladesh, Sri Lanka, Australia, countries in Eastern Europe, and several countries in Africa, with forays into New Zealand, Brazil, and Chile. Sport-utility vehicles and pickups are

45 40

Mahindra & Mahindra Bharat Forge

35 30 25 20 15 10 5 0 1990

1993

1996

1999

2002

2005

2008

Figure 5.12 The ratio of exports to sales: Mahindra & Mahindraa and Bharat Forge (1990–2008), in % Source: Authors’ elaboration on Prowess data. a

Data regarding Mahindra & Mahindra refer only to Mahindra & Mahindra Ltd. (therefore do not include exports of auto components, while they include tractors and farm equipment).

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exported to different geographic areas in relatively equal portions: Africa (South Africa, Morocco, and Sudan), Europe (Italy, France, and Spain), South and Central America, Australia, and the South Asian Association for Regional Cooperation countries, the last of which used to be the most important market until the early 2000s. The Logan was exported to Nepal starting in 2008 (Mahindra & Mahindra 2008, Mahindra & Mahindra Interview 2008). Mahindra & Mahindra is also working on its entry into the U.S. pickup and sport-utility vehicle markets. A distribution agreement was signed with Global Vehicles USA in 2006, and Mahindra & Mahindra vehicles are currently being adapted to make them compliant with U.S. regulations, and with the requirements of the local market (Mahindra & Mahindra Interview 2008), so that the launch has been put off until the end of 2009 (Chappell 2008). Bharat Forge’s internationalization process began in 1972 ,when the company executed its first export order to Greece, followed by some others towards the former Soviet Union (Bharat Forge 2009). However, the export business only really took off in the 1990s. As shown by Figure 5.12, the ratio of exports to sales grew considerably in the late 1990s, well before the company started engaging in OFDI, and this growth has continued in the early 2000s. In particular, in the second half of the first decade of the 2000s, exports became a means for the company to overcome the difficulties generated by the slowdown in the domestic market. The dramatic increase in Bharat Forge’s exports was partially due to its breakthrough for engine and suspension components in developed country markets such as the United States, the United Kingdom, and Japan. Currently, the United States is the number one export market for the company (absorbing about 65% of its total exports in 2007); products that sell in the United States (through both exports and local production) include commercial vehicle chassis and engine components (73%), car engine components (13%), and nonauto forgings (14%) (Bharat Forge 2007). Russia, China, and Europe are also important destination areas for Bharat Forge exports, besides those mentioned above.

7. Internationalization Through FDI: Can We Talk about an “Internal Network”? With regard to Mahindra & Mahindra’s internationalization via OFDI, in 2008 the ratio of foreign production to total production was about 16% for the whole Mahindra Group, which, for the same reasons stated above, is not very indicative of the internationalization level of Mahindra’s automotive activities. Regarding the latter, the auto part segment is the most international in terms of foreign production (interview). The steps of Mahindra & Mahindra’s multinationalization process are listed below:44 • In 1969, JV (ended after political events in the host country) (Iran) (manufacturing of auto parts) • In 1984, JV (closed down in mid-1990s) (Greece) (assembly unit for utility vehicles)

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• In 1994, greenfield investment—establishment of Mahindra USA (initially distribution, then assembly of tractors) • In 2004, 80% JV Mahindra Tractors Company (China) for US$8 million (manufacturing of tractors for the local market and some exports; some R&D; in the future, products should be developed and manufactured for the Indian market as well) • In 2004, 51% JV Mahindra & Mahindra South Africa (import and distribution of sport-utility vehicles in South Africa and neighboring countries) • In 2005, greenfield investment—establishment of Mahindra & Mahindra Australia (manufacturing of tractors and import of Indian tractors) • In 2005, 80% JV Mahindra & Mahindra Europe (Italy) (import and distribution of sport-utility vehicles in Italy, France, and Spain) • In 2006, acquisition of 99% of the Stokes Group (through Systec) (UK) (production of auto components) • In 2006, acquisition of 68% of Jeco Holdings (through Systec) (Germany) (production of auto components) • In 2006, acquisition of Schoneweiss (through Systec) (Germany) for estimated US$117–156 million (production of auto components) • In 2008, acquisition of G.R.D Grafica Ricerca Design (Italy) (auto designing, body engineering and feasibility, and styling; two-wheel designs) • In 2008, acquisition of 100% of Metalcastello spa (through Systec) (Italy) (manufacturing of gears and shafts for tractors and construction equipment) • In 2008, acquisition of 100% of Engines Engineering Srl (through Systec) (Italy) (engineering services for the two-wheel business)

After two operations that were undertaken abroad in the late 1960s and the mid-1980s, both of which were ended within about ten years, the real multinationalization of the company started in the first half of the first decade of the 2000s. In the tractor segment, Mahindra & Mahindra’s internationalization occurred through the setting up of assembly and manufacturing units, both in developed countries and in China, preceded—in the case of the United States and Australia—by operations simply dealing with distributive activities. In the passenger vehicles segment, the company’s multinational expansion mainly focused on distribution and assembly activity. Recently, Mahindra & Mahindra has undertaken asset-seeking foreign operations. Among such operations, we can mention the acquisition of Engines Engineering Srl, an Italian company that operates in the two-wheel business, a sector in which M&M intends to diversify. Lastly, to measure the company’s ambitions in this business, it is worth noting that Mahindra & Mahindra was also among the bidders for the acquisitions of Land Rover and Jaguar from Ford in 2007, but Tata Motor’s offer was preferred to Mahindra’s. The auto part segment is the area in which Mahindra & Mahindra has been pursuing its multinationalization most intensively. In 2004 the group decided to develop its automotive components business, believing in its high growth potential, in the context of the development of the Indian automotive industry (Mahindra and Mahindra 2009). Thus, the business unit Mahindra Systems and Automotive Technologies (later renamed Systech)

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was established, fusing several companies of the Group, as well as different activities previously performed inside different Mahindra companies. The growth of the automotive components and engineering business was fueled in large part through a sequence of acquisitions, first in India—where a plant equipped with state-of-the-art German equipment, and having among its customers the U.S. company John Deere, was bought from Amforge Industries in 2005—and then abroad—where Mahindra & Mahindra’s targets were high-ranking companies based in developed countries, having among their customers firms such as Land Rover, DaimlerChrysler, Volvo, Renault, MAN, Scania, Bosch, Visteon, Ford, and Jaguar. Programs and initiatives have been developed to foster value sharing and best practice transfer across company units in order to create an internal multinational network involving Mahindra & Mahindra’s parent company and foreign subsidiaries. The company’s values have recently been formally articulated after a consulting program that involved the different levels of personnel in India and abroad, in order to take into account “what the common values are in the company” (Mahindra & Mahindra Interview 2008). Moreover, an extensive training program provided by Mahindra & Mahindra, both in India and abroad, represents an opportunity for the personnel of the units located in different countries to meet, and, therefore, contribute to strengthening the company’s common values. Another such opportunity is offered by the executive development program that Mahindra & Mahindra organizes yearly at Harvard University. Videoconferences and other information and communication technologies devices are also extensively used, thanks to the synergies that the company enjoys due to the presence of an information technology business unit within the Mahindra Group (Stewart and Raman 2008). Drawing upon the presence of the above-mentioned elements, one could assume that a “horizontal” pattern of relationships exists between parent company and subsidiaries, in which the contribution offered by the latter is valued, and knowledge flows exist in both directions. Other signs, however, indicate that the parent company is definitely in charge of coordination. Each foreign unit reports to a strategic business unit inside the Mahindra Group; these units, in turn, have some objectives to pursue that are set by the center, and are coordinated at central level through monthly meetings with the Group’s chair, where a monitoring of their performances is also carried out (Mahindra & Mahindra Interview 2008). A set of procedures is also issued by the center, and has to be applied across the whole company (id.). Bharat Forge’s multinationalization path is outlined in the list below. As shown, since 2003, the company has developed a production presence abroad: in the United States, Germany, Sweden, Scotland, the United Kingdom, and China. By 2008 it counted 12 production locations in those countries, and 73% of its consolidated revenues came from outside India. This result was achieved through successive acquisitions of developed country companies that were often near bankruptcy, which made the

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acquisitions easier to carry out from a financial point of view, and were more likely to be accepted by target company workers and local stakeholders (Bouissou 2007, Goldstein 2007). The sequence of Bharat Forge’s foreign investments is as follows:45 • In 2003, acquisition of Carl Dan Peddinghaus (Germany) (manufacturing [engines, chassis, and railroad components]; R&D) • In 2004, acquisition of Aluminiumtechnik GmbH & Co. KG (Germany) for €6.3 million (manufacturing [forged chassis parts]; R&D) • In 2005, acquisition of Federal Forge (United States) for US$9.1 million (forgings for cars and trucks) • In 2005, acquisition of Kilsta AB and its wholly owned subsidiary Scottish Stampings (Sweden and Scotland) (manufacturing [crankshafts, front axle beams, steering arms, and transmission parts for automotive industry]; R&D) • In 2005, 52% JV with FAW Group (China) (manufacturing [parts for engine, chassis, front axle beam, transmission, gear box, and driveline catering for commercial vehicles and cars; components for the railway segment and the construction industry machines])

Regarding the internal network that characterizes Bharat Forge, we found that the company has implemented specific programs to benchmark the different units’ best practices, and to spread them throughout the company.46 Thus, extensive exchange programs have been developed that involve the company engineers, who are sent for some time to work at the units in which the best practices for their specific jobs are in place (Bharat Forge Interview 2008). In addition, to encourage the sharing of common values across its operations, Bharat Forge has undertaken a system of “integration meetings” that are held three times a year, involving personnel at many different levels. The meetings are organized outside of firm premises, and address subjects that also go beyond the questions strictly connected with Bharat Forge. Nevertheless, elements of strong central coordination are also present in the relationship between the parent company and subsidiaries, as it is necessary to run the dual-shore designing and manufacturing system.47 The original and flexible organization of the Bharat Forge internal network represents a source of managerial efficiency for the Group.

8. Conclusions from the Case Studies on Mahindra & Mahindra and Bharat Forge Despite the modest level of formal R&D expenses, the important achievements of Mahindra & Mahindra—such as its Indian market leadership in the sport-utility vehicle and tractor segments, its penetration of the tractor market in several foreign countries, and the numerous awards received and certifications obtained—signal the presence of a respectable level of innovation. The technological advantage pointed out for Mahindra & Mahindra by Lall as far back as the early 1980s seems to be confirmed (1983b). Lall saw Mahindra & Mahindra’s advantage mainly consisting

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in the “fresh injection of foreign technology”—for instance, at that time, from Peugeot—and in its product adaptation capability (59). This capability has now increased to allow the company to manufacture the first indigenously developed Indian sport-utility vehicle, Scorpio, in 2002, and to unveil Asia’s first biodiesel sport-utility vehicle and India’s first biodiesel tractor in early 2007. Bharat Forge’s production also shows a nonnegligible technological level, attested by the certifications it held as far back as the early 1990s, and by the fact that it has been serving many global vehicle makers and tierone suppliers, even before starting its multinationalization process. Bharat Forge was also able to achieve this result thanks to the skilled manpower it has employed, and the attention it has devoted to the quality issue, both in production, with the application of total quality management practices, and with management. Being part of a conglomerate is the source of several competitive advantages for Mahindra & Mahindra. Its vehicle and tractor units benefit from numerous synergies that arise from the activities of other firms of the group: for instance, they can resort to in-group design, sourcing, logistics, and aftermarket services, and can offer their customers an in-group retail finance service. The conglomerate structure also allows the transfer of technology and flow of cash within the Group (Richet and Ruet 2008). Similarly, for Bharat Forge, being part of an industrial group represents a competitive advantage, for instance in the access to raw materials (steel, in particular) at favorable rates, thanks to the presence of companies operating in this business within the Kalyani Group. The motivations of M&M’s international strategy in the tractor and passenger vehicle sectors seem to be fundamentally of a market orientedasset exploiting sort. In this context, however, the acquisition of the Italian design companies GRD and Engines Engineering presents different characteristics. In this case, the asset-seeking motivation, with regard to technology and skilled labor, is indeed prevalent, joined with that of generating scale and scope economies. Finally, Mahindra & Mahindra’s internationalization process in the auto component segment is marked by a strong assetseeking motive, for technology and the production structures themselves. In our opinion, Bharat Forge’s multinationalization process has different motives. On the one hand, it is aimed at allowing the company to keep growing beyond the Indian market, which required production presence near the customers’ plants in foreign countries, as required by the customers themselves. Therefore, we observed an evolution from exports towards foreign production. On the other hand, Bharat Forge has aimed at accessing resources that could improve several aspects of its business, beginning with R&D. Another motivation for this process was to lower business risk by diversifying the company’s product portfolio and entering different geographical markets with separate business cycles. Last but not least, international expansion allows the company to attain economies of scope, putting it in a position to supply more complex subsystems, in

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addition to its traditional single components (Ramachandran et al. 2004). Thus, the company’s motivation in becoming multinational seems to be fairly varied. Alliances played an important role in the case study companies’ technological upgrading. Mahindra & Mahindra, in particular, used frequent JVs as a learning instrument (Balcet 2009). Taking into consideration the question of the development of an internal network, our case study MNEs do not reflect the more traditional organizational model of a parent company generating innovation and possessing several kinds of competitive advantages that are exploited abroad by its subsidiaries. Indeed, there are several instances in which the parent companies’ foreign operations, carried out through acquisitions, represented a way to access knowledge resources. This is certainly the case for Bharat Forge’s acquisition of Carl Dan Peddinghaus, and of Mahindra & Mahindra’s acquisition of design companies. Likewise the relationships between parent companies and subsidiaries do not correspond to the very loose one described by the 1970s literature on developing country MNEs (Wells 1977, 1983). Instead, the parent-subsidiary relationship seems to follow a horizontal pattern. For instance, all units are offered the possibility of contributing to a company’s common values and corporate image, and their personnel can take part in common training and motivation meetings, supporting the “learning to learn” process within the company (Bartlett and Ghoshal 2000). Furthermore, technology transfer is aided by extensive personnel exchange programs. Nevertheless, a number of elements of strict coordination by the center, and hierarchy between the center and periphery, are also present. This is true, for instance, in the strict monitoring and assessment system for foreign units in Mahindra & Mahindra, and with Bharat Forge’s dual-shore designing and manufacturing system.

Conclusions: From Learning and Acquisition of Capabilities to Multinational Growth This chapter sheds light on the emergence of Indian MNEs in the pharmaceutical and automotive industries, and on the role of technology transfer, acquisitions, and production or technological alliances in creating the conditions for multinational growth of Indian MNEs. We sum up our main findings below.

1. A Two-stage Pattern of Multinational Growth Our selected case studies in these two key industries seem to show that company trajectories broadly follow two stages. In a first stage, the acquisition and assimilation of technological knowledge, accumulation of human capital and managerial skills, and improvement of production efficiency and marketing capabilities takes place within the Indian market. This process is supported by the creation of an external

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network of JVs, and by alliances with incumbent Western and Japanese MNEs in the domestic market and local research institutions. The acquisition of other MNEs’ multinational affiliates within India can be a complementary strategy or an alternative one, in order to reach the same result. New competitive advantages arise from economies of scale and scope, managerial efficiency, financial strength, and the ability to assimilate the imported technology, adapting and recombining it in creative ways. In a second stage, the multinational expansion takes place, thanks to the capabilities, resources, and abilities accumulated during the domestic market-driven phase. The international growth is market oriented, but also asset seeking and asset augmenting. The firm-specific advantages created during the first stage are significantly developed during the internationalization process, when new assets are acquired and new competencies are created. In this second stage, both the external network of alliances and linkages and the internal multinational network extend geographically, and they affect new activities. During both the first and the second stage, the external network of international alliances and JVs plays a crucial role in the process of leveraging resources and building competitive advantages. Meanwhile, internal multinational networks expand via acquisitions abroad. Therefore, the “double network” mechanism creates crucial synergies in the process of growth of Indian MNEs, consistent with two proposed sequences: Alliances (JVs) ⇒ Leverage ⇒ Learning and Acquisitions ⇒ Leverage ⇒ Learning From the point of view of the multinational growth, in the middle of the first decade of the twenty-first century, the Indian automotive industry was more dynamic than the much bigger Chinese industry (Richet and Ruet 2008).

2. Firm-Specific Competitive Advantages From the point of view of emerging market MNE theory, our empirical evidence suggests that the international operations of Indian MNEs are not simply asset seeking, nor are they motivated by a simple lack of competitive advantages, as suggested by some authors. To the contrary, significant firmspecific advantages (or ownership advantages, in terms of John Dunning’s paradigm) predate multinational expansion. Therefore, the common claim of emerging market MNE internationalization as a means for acquisition of resources needs to be integrated into a wider view of the process. In the case of Indian MNEs, some traditional ownership advantages, such as patented proprietary knowledge and technology, were indeed

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lacking when multinational expansion began. However, other advantages supported international growth. In particular, we argue that the following factors represented significant competitive advantages supporting the multinational expansion of Indian firms: • Economies of scale and scope, as is the case for automakers in the commercial vehicle, pickup, and low-cost vehicle segments, and the auto component segment, whose growth was driven by booming domestic demand and the entry of multinational assemblers. The opportunity to become suppliers to, or partners with, global car manufacturers offered Indian companies the possibility to grow and diversify their production. • Synergies derived from the diversified or conglomerate nature of familycontrolled business groups, as in the case of Mahindra & Mahindra and Bharat Forge, among our case study companies. Intragroup technology transfer, information flows, access to raw materials at favorable conditions, and the availability of abundant financial resources were all crucial factors supporting international growth. • The capacity for fast assimilation and creative recombination of transferred technologies and knowledge, supported by the managerial and engineering abilities developed during the first domestic stage of growth, in both the automotive and pharmaceutical industries. • Acquisition of well-established brands during the first stage of domestic market-driven growth, through the acquisition of foreign MNEs’ affiliates in India. This was the case for Nicholas Piramal, which was also supported by strong marketing skills.

3. Country-Specific Competitive Advantages The empirical evidence suggests that crucial firm-specific competitive advantages of Indian MNEs derive from several country-specific advantages: • The huge size and fast growth of the domestic market generated both static and dynamic economies of scale. The innovation processes themselves are mostly market driven, as in the case of the low-cost sedan Logan project, launched by Mahindra & Mahindra through its JV with Renault. • Domestic savings and the expanding national financial system supported corporate growth and international expansion, until the 2008 global financial crisis. • Unlimited supply of low-cost unskilled labor pushed corporate profits and growth, as well as exports, including exports of low-cost components and intermediate goods to subsidiaries and affiliates abroad. • Low-cost highly skilled labor, including engineers, chemists, managers, and technologists, explains why the Indian ability to absorb foreign-generated technology evolved into the capacity to introduce original improvements, incremental innovations, and, finally, new products and processes. • The liberalization of trade and industrial policies played a major role, pushing Indian groups to expand abroad. However, the impact of past importsubstitution industrial policies should not be underestimated as a key element in building some of the preconditions for industrial growth over the course of several decades.

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• The Indian national system of innovation and the educational system fostered essential conditions for the acquisition of industrial technology and the development of organizational capabilities that allowed industrial groups to go abroad.

4. Specialization, Diversification, and Trajectories Some of the Indian emerging MNEs are market leaders worldwide in specific product segments and niches. This is the case for Bharat Forge in the manufacturing of some chassis components, and Mahindra & Mahindra in tractors. The internationalization process is then based on such leadership, allowing a twofold diversification process, both in new markets and in new industries. Asia is not a dominant destination for our focus companies’ multinational operations, largely oriented to both Europe and the United States, as can be seen by looking at the list of their international operations. This seems to suggest that the multinationalization of Indian corporations tends to develop from within the confines of the continent-sized domestic market directly to a global dimension. The multinationalization processes observed in our case study companies can be defined as “accelerated,” after a take-off stage had taken place, usually in the early 2000s. Last, the different trajectories we have observed in our case studies confirm how important the issue of hybridization is in explaining the growth patterns of the new Indian MNEs, a circumstance that may possibly apply to emerging market MNEs in general. The same patterns are not followed by all of our case study MNEs. For instance, Sun Pharmaceutical successfully grew in the domestic market, and later in the international market, without developing a network of JVs or alliances with foreign companies, and with limited acquisitions of foreign subsidiaries in India. While some common features are emerging, there is no one best way to go multinational, and international strategies reflect different paths, trajectories, corporate traditions, and competitive assets.

Notes * Giovanni Balcet is Professor of International Economics and International Business, at Dipartimento di Economia Cognetti De Martiis, Università di Torino (giovanni. [email protected]) Silvia Bruschieri, PhD at Dipartimento di Economia Cognetti De Martiis, Università di Torino; Italian Institute for Foreign Trade staff (ICE) (silvia. [email protected]). The opinions expressed in this chapter are not necessarily shared by these institutions. The authors warmly thank Wladimir Andreff, Grazia Ietto-Gillies, Xavier Richet, Joël Ruet, and Vittorio Valli for their comments. They also thank the interviewed managers of Indian multinationals, and the Editors of this book. Financial support is acknowledged by the Progetto Alfieri of the Fondazione CRT of Turin, Italy.

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1. “Emerging markets” are all economies that are not members of the European Union and the Organisation of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe. 2. Out of 100 companies based in the “rapidly developing economies” that are “at the leading edge of globalizing their businesses” (Boston Consulting Group, 2006: 7), 20 are Indian, and out of them, five are in the automotive and three in the pharmaceutical sector. 3. Following Bain, Stephen Hymer tracked back such advantages to particularly favorable conditions to access the factors of production, to better control of a more efficient production function, to better distribution facilities, and to differentiated products. 4. This definition is to be found in Mathews (2006), while in Mathews (2002) the same framework was referred to as OLI*: Outward orientation, Linkage and leverage, Integration. 5. Note, however, that a majority stake in Ranbaxy was acquired in 2008 by Daiichi Sankyo Co., Japan’s third-biggest drugmaker (“Daiichi acquires 52.5 per cent in Ranbaxy”, domain-b.com, 22 Oct. 2008). 6. Under the initiative of the government, the manufacture of antimalarial drugs began at that time, and several research initiatives were established (Chaudhuri 2004). 7. The Drug Price Control Order revisions of 1987 and 1995 reduced the percentage of price-controlled drugs to 70% and 40% of the market, respectively (Aggarwal 2004). 8. Peak custom duties on bulk drugs and raw material have been progressively reduced from 35% in the early 2000s to 15% five years later; exemption from custom duties for materials imported for clinical trials; and more drugs included in the list of lifesaving medicines (Pradhan 2007). 9. Though, in fact, this possibility is still allowed for pharmaceutical products patented internationally before Jan. 1, 1995. 10. With regard to the number of units, the industry association Organisation of Pharmaceutical Producers of India mentions about 10,000 units in 2007, without distinguishing between the organized and unorganized sectors. The number of large companies is around 300, according to the same source. Due to the official source he draws upon, we prefer to make reference to the data offered by Pradhan, and suppose that 10,000 is the approximate number of units including the unorganized sector. 11. In 2006 the top ten companies in order of market share were: GlaxoSmithKline (5.2%), Ranbaxy, Cipla, Nicholas Piramal, Zydus Cadila, Sun Pharma, Alkem, Pfizer, Lupin, and Dr. Reddy’s Lab (2.3%) (Organisation of Pharmaceutical Producers of India 2007). 12. The company name was changed in 2008 to Piramal Healthcare (Nicholas Piramal 2008). For the sake of simplicity, we will, however continue, to refer to the company by its most widely known original name. 13. In 2008, the latter business generated about 47% of consolidated operative income (Nicholas Piramal 2008). 14. In March 2004, the price of 74 drugs was still under government control (amounting to about 26% of the market) (Organisation of Pharmaceutical Producers of India 2005). As mentioned earlier, this control was much more extensive in the past; with the 1979 revision of the Drug Price Control Order (originally issued in 1970), price controls had reached about 90% of the industry (Aggarwal 2004).

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15. So in 2008, respiratory drugs represented the most important segment of the company’s formulation business, with over 17% of total sales (Nicholas Piramal 2008). 16. When companies release this kind of data, we can suppose that they are interested in mentioning the highest possible figure, to prove their technological strength. Therefore, we assume that the above-mentioned numbers refer to patents (and not to patent families) that the company applied for and received in all countries. As the date to which this information refers is not mentioned by the company website where it is released, we assume that the number in question was up-to-date at the time of one visit to the site, in August 2008. 17. Regarding Nicholas Piramal, a generic company is not exactly the right term of comparison, as our case study company cannot be classified as a typical generic company, even if it does share some common features with generic companies. We are also aware that the comparison between the figures supplied by the three abovementioned companies is, indeed, grounded on two assumptions, which we cannot verify. First, that all of the companies in question, when mentioning the number of granted patents refer (when it is not explicitly stated) to the same criterion: either the number of families or—more likely, for the reason set out in the previous footnote—the number of patents. Second, that they also use the same criterion to include in that number either only the patents granted to the parent companies, or also those granted to their subsidiaries, and those intellectual property rights (if any) included in the acquisition deals they made in the course of time. We think that some possible inconsistency in the data is not very relevant in this case, due to the different order of magnitude between the numbers quoted by the two Indian companies and the Israeli one. 18. This estimate assumes that a U.S. chemist is paid about US$250,000–$300,000 per year (Italian Institute for Foreign Trade 2007). 19. This analysis emerged with reference to Nicholas Piramal during an interview with the company management, but we can say it represents a country-specific ownership advantage that can, therefore, be assumed to be shared by Sun Pharmaceutical Industries as well (2008). 20. As far back as 2001, Nicholas Piramal’s Indian formulation business included wellknown pharmaceutical products such as Valium, Bactrim, and Supradyn (Nicholas Piramal 2001). 21. Ajay Piramal, the company Chair, completed the Advanced Management Program at Harvard Business School in 1992, while his wife, Swati Piramal, the Director of Strategic Alliances and Communication, received her Masters of Public Health from the Harvard School of Public Health. 22. We learned this piece of information from our interview with company management, and found that it is substantially confirmed by the company’s annual reports. With regard to relationships with research institutions, only the 2005 annual report mentions that several R&D projects of Sun Pharmaceutical “use the capabilities of academia/research in alliances that would best draw on their experience” (Sun Pharmaceutical Industries 2005: 9), but no information is supplied about such alliances in any of the reports. 23. Nicolas Piramal 2004, 2007a, 2008, 2009, KPMG 2006, “Nicholas Piramal to take over UK’s Rhodia” 2004. 24. Sun Pharmaceutical 2002, 2003, 2004, 2005, 2006, 2008, “Sun Pharma’s US arm acquires Chattem” 2008. 25. The agreement granted the Indian company a certain number of Caraco’s shares in exchange for every transfer of technology formula for pharmaceutical products to Caraco itself (Sun Pharmaceutical Industries 2003).

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26. See Chapter IV for a discussion of Indian conglomerates, including Mahindra & Mahindra. 27. Systech, as well as the Mahindra companies operating in the other aforementioned business, work both for the different business units of the Group itself and for external customers. Systech’s customers include both Indian companies, like Tata Motors, and global car manufacturers, like Ford or GM (Mahindra & Mahindra Interview 2008). 28. In 2007–2008, the production breakdown for the automotive segment of the company was as follows: 11,079 light commercial vehicles; 34,556 three-wheelers; 26,653 cars (including pickups, sport-utility vehicles, and passenger cars); 98,917 tractors; and 31,922 industrial engines (Mahindra & Mahindra 2008). 29. The close family ties of the Kalyanis with the promoters of some leading companies in the industry, including the Tatas and Kirloskars, was beneficial during this time (Knowledge@Wharton 2007). 30. The JV established in 2008 with India’s state-run power producer National Thermal Power Corporation Ltd. to manufacture castings and forgings used for power plants represents a move in that direction, in particular with regard to the segment of capital goods. 31. The number of such transactions grew from one or two transactions in the years from 1999 to 2003, to nine transactions in 2004, seven in 2005, and 11 in 2007 (Mahindra and Mahindra, Annual Reports, several issues). 32. The aforementioned technological imports included four-wheel drive design, the antilock braking system, and the common rail diesel on utility vehicles. 33. This company had purchased Willys Overland in 1970. 34. The tractor plants were certified S 16949, ISO 14000, and OHSAS (Occupational Health and Safety), while the automotive plants were certified ISO 14001:2004 (Environmental Management System) (Mahindra & Mahindra 2007, 2008, Indian Centre for Management Research 2005). 35. Awards include: the Deming Application Prize for the farm equipment unit (2003); the National Award for Research and Development for manufacturing the first indigenously developed sport-utility vehicle, the Scorpio (2003); the Indian Innovation Award for reducing the time to market in new product development (2006); the Outstanding Innovation Award from the American Society for Agricultural and Biological Engineers for innovative products (2007); the Japan Quality Medal to the farm equipment division for excellence in Total Quality Management (2007); the Golden Peacock Award for the Scorpio (2008); and the Golden Peacock EcoInnovation Award for the Bijlee, an all-electric zero-emissions vehicle (2008) (Mahindra & Mahindra 2007, 2008). 36. Machined components accounted for 44% of Bharat Forge’s sales in 2001–2002, while it accounted for only 26% in 1996–1997 (Bharat Forge 2002). 37. The reduction of about 1,000 members of the workforce, carried out at the end of the 1990s, also contributed to this change. As a consequence of these reductions, in 2002 Bharat Forge employed 2,521 people (Bharat Forge 2002). 38. In the financial industry, Mahindra Group’s business unit includes a retail finance company, an insurance company, and a housing finance company. Moreover, trading in steel has represented a business of the Mahindra Group since the late 1940s. Today, a Mahindra company (Mahindra Intertrade Limited) specializes in the import and export of commodities, domestic trading, marketing, and distribution services (Mahindra & Mahindra 2009). 39. Mr. Mahindra received the following awards: Person of the Year 2005, awarded by Auto Monitor; CNBC Asia Business Leader Award for the year 2006; The Most Inspiring Corporate Leader of the Year 2007 by NDTV Profit; and Business Man of the Year 2007 from Business India (Mahindra & Mahindra 2007, 2008).

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40. A dedicated structure called the “International Talent Council” was set up to find talent and foster the movement of talent within the company (Mahindra & Mahindra Interview 2008). 41. These products are manufactured either directly by Mahindra & Mahindra or by the JVs Mahindra International and Mahindra Renault. 42. The JV agreement provides that Renault will contribute engineering and quality systems and its knowledge of the local market, as well as access to its distribution network and financial resources. In return, Renault gets access to trained low-cost manpower, and to the high-volume potential Indian car market. It is interesting to note that a second JV was created in 2007 by Mahindra & Mahindra, Renault, and Nissan. However, in January 2008, Mahindra & Mahindra announced its exit from this second project (Mahindra & Mahindra 2009). 43. For instance, over 90% of the IT business is generated outside of India (Mahindra & Mahindra Interview 2008). 44. Mahindra & Mahindra (2007), Annual Report 2006–2007 (Mumbai: Mahindra & Mahindra); Mahindra & Mahindra (2008), Annual Report 2007–2008 (Mumbai: Mahindra & Mahindra); Mahindra and Mahindra (2009), www.mahindra.com (last visited May 2009); Lall, Sanjaya (1983b), “Multinationals from India,” in Sanjaya Lall, ed., The New Multinationals: The Spread of Third World Enterprises (New York and Chichester: John Wiley & Sons); “Mahindra buys 98.6 pc in UK’s Stokes Group—Forging capacity to go up by 36,000 tonnes” (2006), The Hindu Business Line, 5 Jan. 2006. 45. Bharat Forge (2003), Annual Report 2002–2003 (Mumbai: Bharat Forge); Bharat Forge (2007), Annual Report 2006–2007(Mumbai: Bharat Forge); Bharat Forge (2008), Annual Report 2007–2008 (Mumbai: Bharat Forge); Bharat Forge (2009), http://www.bharatforge.com/ (last visited May 2009). 46. In the case of R&D activities, the monitoring of the best practices and the actions aimed at their transfer across the different units are coordinated by Bharat Forge’s Centre for Excellence in R&D, located in Germany (Bharat Forge 2007). 47. The company can design and manufacture each of its products in at least two locations, and therefore it is able to fill each order either from a low-cost location such as India or China, at a lower cost but with a longer delivery time, or from an overseas unit operating nearer to the final customer, which involves a higher cost but, among other advantages, a very short delivery time. This system requires coordinated management of the different company units across countries.

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Pradhan, Jaya Prakash (2006), “Global Competitiveness of Indian Pharmaceutical Industry: Trends and Strategies,” MPRA Paper No. 12340, MPRA Munich Personal RePEc Archive. ——— (2007), “New Policy Regime and Small Pharmaceutical Firms in India,” MPRA Paper No. 12335, MPRA Munich Personal RePEc Archive. ——— (2008), Transnationalization of Indian Pharmaceutical SMEs (New Delhi: Bookwell). Prašnikar Janez, and Renato T. Škerlj (2005), “New product development process and time-to-market in the generic pharmaceutical industry,” 35(5) Industrial Marketing Management, pp. 690–702. Prowess Database of the Center for Monitoring Indian Economy (2009), available at http://dqindia.ciol.com (last visited May 2009). Ramachandran, Jaya et al. (2004), “Indian Companies in Overseas Markets: Perspectives, Patterns, and Implications,” 29(4) Vikalpa, pp. 93–111. Reserve Bank of India (2009), www.rbi.org.in/scripts/ECBView.aspx (last visited May 2009). Richet, Xavier, and Joël Ruet (2008), “The Chinese and Indian Automobile Industry in Perspective: Technology Appropriation, Catching-up and Development,” 15(3) Transition Studies Review, pp. 447–465. Singh, Neelam (2004), “Strategic Approach to Strenghtening the International Competitiveness in Knowledge Based Industries: The Case of Indian Automotive Industry,” RIS Discussion Papers 82/2004 (New Delhi: RIS), available at http:// www.ris.org.in/risdiscussion_papers.htm. Society of Indian Automobile Manufacturers (2008), Statistical Profile 2007–08 (New Delhi: SIAM). Stewart, T. A. and A.P. Raman (2008), “Higher Gear,” Harvard Business Review Magazine, Jul.-Aug. 2008, pp. 69–76. “Sun Pharma’s US arm acquires Chattem” (2008), domain-b.com, Nov. 27 2008, available at http://www.domain-b.com/companies/companies_s/Sun_Pharma/20081127_ acquires_chattem.html Sun Pharmaceutical Industries (2002), Annual Report 2001–2002 (Mumbai: Sun Pharmaceutical Industries). ——— (2003), Annual Report 2002–2003 (Mumbai: Sun Pharmaceutical Industries). ——— (2004), Annual Report 2001–2002 (Mumbai: Sun Pharmaceutical Industries). ——— (2005), Annual Report 2004–2005 (Mumbai: Sun Pharmaceutical Industries). ——— (2006), Annual Report 2005–2006 (Mumbai: Sun Pharmaceutical Industries). ——— (2008), Annual Report 2007–2008 (Mumbai: Sun Pharmaceutical Industries). ——— (2009), www.sunpharma.com (last visited May 2009). Sun Pharmaceutical Industries Interview (2008), Silvia Bruschieri, interviewer, Apr. 2, 2008, Mumbai. Teva (2008), Teva Global Patent Group, presentation delivered in Jerusalem on Sept. 9 2008, available at www.tevapharm.com/pdf/Patents.pdf “The new titans: A survey of the world economy” (2006), The Economist, Sept. 16, 2006. The Patents (Amendment) Act (2005), No. 15 of 2005, Apr. 4, 2005, New Delhi. Vernon, Raymond (1979), “The Product Cycle Hypothesis in the New International Environment,” 41(4) Oxford Bulletin of Economics and Statistics, pp. 255–267. Wells, Louis T. (1977), “The Internationalization of Firms from Developing Countries,” in T. Agmon, and C.P. Kindleberger, eds., Multinationals from small countries (Cambridge, MA: MIT Press). ——— (1983), Third world multinationals: the rise of foreign investment from developing countries (Cambridge, MA: The MIT Press). Zanfei, Antonello (2000), “Transnational firms and the changing organisation of innovative activities,” 24(5) Cambridge Journal of Economics, pp. 515–542.

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6 Outward Investment by Indian Pharmaceutical and Software Multinational Enterprises: Are the Factors Different? Vinish Kathuria*

Introduction The 1990s and early 2000s were a time of strong economic performance and increasing outward foreign direct investment (OFDI) for many developing countries.1 India partook in the growth in both of these areas. One important aspect of Indian OFDI is the dominance of two knowledge-intensive industries—information technology (IT), including software and business process outsourcing, and pharmaceuticals. From a total of 306 foreign acquisitions by Indian multinational enterprises (MNEs) in the period 2000–2006, nearly 50% were in these two industries, with 29.4% from IT, software, and business process outsourcing, and 20.3% from pharmaceuticals and healthcare (Federation of Indian Chambers of Commerce and Industry 2006).2 The dominance of these two industries—one services industry and one manufacturing industry—gives rise to several interesting research questions: Why are the two leading Indian OFDI industries not from the same sector, either manufacturing or services? Does the Indian diaspora have any role to play in the OFDI focus of MNEs? Are the host countries for OFDI from the two industries different? Are the factors that influence the decision to invest abroad the same or different for manufacturing and services? Are MNEs in these two industries first-time investors, or do they already have significant investment experience at home? How influential is Indian government policy in inducing firms from these industries to invest abroad? The present study is an attempt to look into the factors that explain the extent of OFDI in the IT and pharmaceuticals industries, and to determine whether these factors are the same for both industries, through the consideration of firm-level data for the MNEs that have invested abroad

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in these industries. It needs to be mentioned at the outset that though IT includes both software and business process outsourcing, the growth in IT has been predominantly concentrated in software development. As a result, whenever we mention IT in this chapter, we are essentially referring to software. This study has important policy implications for the Indian government. If the study finds that the factors influencing the extent of OFDI are the same across the two industries, policies to encourage OFDI can be general in nature. On the other hand, a finding of different key factors would imply that tailor-made policies are required to encourage OFDI in different industries. This chapter is organized into five sections. Section A discusses the evolution of OFDI policy in India, with a focus on the pharmaceutical and IT industries. Section B provides the analytical framework and model within which the research question will be addressed. Section C looks at the key performance characteristics of the pharmaceutical and IT industries. This is followed, in Section D, by a brief comparison of the extent of OFDI from MNEs in these two industries. Finally, Section E considers the similarities and dissimilarities between MNEs investing abroad in these two industries, and provides the results of the econometric model.

A. Outward Foreign Direct Investment Policy Regime in India: Evolution3 This section briefly discusses the evolution of OFDI from India. It should be mentioned at the outset that the Indian government’s OFDI policy has been general in nature, and not specific to any industry. However, at the end of this section, we will provide a summary of the specific policies that have spurred growth in OFDI from the IT or pharmaceutical industries, to see how future policies may target different industries. The first set of formal guidelines for OFDI in India was issued by the government in December 1969. Under the guidelines, Indian firms were only permitted minority participation in turnkey projects that involved no cash remittances (Gopinath 2007). The evolution of the OFDI policy regime in India since the 1960s can be broken down into three phases: the restrictive phase, the permissive phase, and the liberal phase. As discussed in detail in Chapter 1, the significant upsurge in OFDI from India since the mid-1990s can be linked to both changes in the policy regime, in particular with the transition from the permissive phase to the liberal phase, and to greater access to financial markets for Indian MNEs. The first phase, the restrictive phase, spanned the 15 years from 1978 to 1992. The policy stipulated that 50% of declared dividends had to be repatriated to India, and every proposal for a joint venture had to be brought before the Inter-Ministerial Committee on Joint Ventures for approval (id.). The second phase, the permissive phase, lasted from 1992 until 2003, and was characterized by a gradual but steady relaxation of Indian OFDI

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policy. The policy changes made during this period include automatic approval for overseas investments of up to US$2 million—introduced in 1992 (with the limit raised to US$4 million in 1995)—the allowance of cash remittances, and the removal of the prohibition on majority ownership of foreign entities. At the start of this phase, the clearing of OFDI proposals of up to US$15 million required approval from the Reserve Bank of India, and proposals of more than US$15 million required permission from the Ministry of Finance (id,). In 2000 the upper limit for automatic approval was revised upwards to US$50 million per annum, a more than 12.5-fold increase from 1994, and the previously required profitability condition was removed (id.). This upper limit was again doubled to US$100 million in 2002, of which 50% could be obtained from any authorized dealer in foreign exchange (id.). The third phase, the liberal phase, began in 2004 (Nayyar 2008). In that year, MNEs were allowed to invest up to 100% of their net worth under the automatic approval route. In 2005 this limit was raised to 200% (Gopinath 2007). Two other key policy changes were that the requirement of prior approval by the Reserve Bank of India was removed, and the entire amount of repatriated profits could be funneled through any authorized dealer in foreign exchange. This liberalization of the OFDI policy regime was cotemporaneous with the increase in access to financial markets by Indian MNEs. Financial deregulation in the domestic capital market began almost at the same time as the economic liberalization of the early 1990s, and by the early 2000s, Indian MNEs had substantially greater access to domestic capital markets than before. The rules for access to international financial markets were also progressively liberalized in the early 2000s. In April 2003, banks in India were permitted to provide credit to majority-owned affiliates or wholly owned subsidiaries of Indian MNEs abroad, in amounts of up to 10% of the entity’s unimpaired capital funds. In November 2006, this limit was raised to 20% of their unimpaired capital funds. In addition, starting in June 2005, banks in India were allowed to extend credit to Indian MNEs for investment in existing or new joint ventures and in wholly owned subsidiaries (Nayyar 2008). Moreover, Indian MNEs were also allowed the use of special purpose vehicles in international capital markets to finance acquisitions abroad. This may be the reason why, unlike most international mergers and acquisitions (M&A) that are completely through equity swaps, Indian MNEs have usually acquired foreign firms with cash (Nayyar 2008). For larger acquisitions, Indian MNEs have followed the leveraged buyout route, with the help of special purpose vehicles in international financial markets.4 Thus, the rapid growth in OFDI from India that began in the late 1990s, and the boom in foreign acquisitions by Indian MNEs that started in 2005, were both made possible by significant changes in the policy regime and greater access to financial markets. In this context, it is important to mention that these policy changes facilitated the growth of Indian MNEs

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across borders, even though that was not the original intent of the policy changes. The next sections specifically look into the policy changes that led to greater OFDI in the two industries that are the concern of this chapter— the software and pharmaceutical industries, respectively.

1. Policy Evolution Facilitating OFDI in the Software Industry5 The rise and growth of the Indian software industry, which was born in the 1980s, can be linked to two factors: increased usage of computers at the international level and changes in Indian policy. Since the 1980s, the industry has passed through three distinct policy phases. In the first phase, up to 1986, the two policies that were most instrumental in kickstarting the growth of software industry were the National Computer Policy of 1984, and the Computer Software Development, Export and Training Policy of 1986 (Pradhan 2007). As a result of the latter policy, computer software was recognized as a stand-alone industry, and the Software Development Agency was established to steer its growth. Other key changes that were introduced to promote the software industry included reductions in tariffs and import duties for the components and inputs that were vital for software development, and the granting of permission to large domestic and foreign hardware firms to become software producers (id.). Furthermore, several fiscal and nonfiscal incentives were given to promote software exports. These included simplifying procedures, granting export-oriented software companies liberal access to foreign exchange, exempting software MNEs from the 40% ceiling on foreign ownership under the Foreign Exchange Regulation Act,6 allowing software imports under the Open General License, and granting copyright protection to software (id.). In the second policy phase, which lasted from 1987 to 1990, the government of India established several new institutions, and introduced key changes to support the growth of the software industry. Software exports by MNEs registered with the Department of Electronics were provided with export promotion benefits, such as export shipment credit and credit guarantees similar to those given to manufacturing exporters (id.). In 1988 the Electronics and Computer Software Export Promotion Council was established to facilitate trade in electronics and IT. In March 1988, the Centre for Development of Advanced Computing (formerly the National Centre for Software Technology) was established by the government to design, develop, and deploy advanced IT-based solutions. The third policy phase began in the 1990s, with the creation of software technology parks in order to generate agglomeration benefits, such as increased networking, concentration of skilled labor, and common infrastructure. The adoption of satellite-based telecommunications and a ten-year tax holiday for software firms in software technology parks provided a further boost to software exports. In addition, the devaluation of the rupee in 1991 made Indian software cheaper in the global market, and the time difference between India and the United States—which was

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the major importer of Indian IT products and services—allowed Indian companies to address software issues during the hours when U.S. offices were closed, further facilitating offshore Indian software and services development.

2. Policy Evolution Facilitating OFDI from the Pharmaceutical Industry7 With respect to pharmaceuticals, the two key policies that infused dynamism into the industry were the Patent Act of 1970 and price controls on pharmaceutical products. In 1970 the Indian healthcare industry was dominated by foreign players, with eight of the top ten industry players being foreign MNEs. Increasing drug prices in the industry, which was dominated by Western MNEs, presented a national healthcare problem. Indian policy makers responded by weakening the patent laws to recognize only process patents, and by instituting price controls for essential drugs (Athreye and Godley 2009: 309). The absence of product patents helped Indian pharmaceutical firms develop cost-effective processes for creating known chemical products.8 Meanwhile, the price controls limited the profitability of the domestic market. As a consequence of these two policies, by the mid-1980s, market leaders such as Ranbaxy had already begun to explore export markets in Asia and Africa. Much of this activity was centered around the export of pharmaceutical ingredients, although the export of generic drugs also started rising (Athreye and Godley 2009). Domestic price controls also prompted a handful of Indian firms to invest in research and development (R&D) in order to manufacture “copycats” of foreign drugs by reverse-engineering processes, bringing down costs, and patenting any new process innovations. These patents were then licensed back to foreign MNEs operating in the country. The profits from process innovation were thus shared between the innovative Indian firms and the foreign MNEs that marketed the branded products (id.). Another policy measure that affected the growth of the Indian pharmaceutical industry was the passing of the U.S. Hatch-Waxman Act in 1984, allowing the entry of foreign MNEs into the U.S. generics market (id.). This was a lucrative business opportunity for Indian pharmaceutical MNEs, which enjoyed a cost advantage of about 30%, relative to other manufacturers.9 The opportunity also arose to reinvest some of the profits made from the generics business to developing technological advantages in new biotechnology products/therapeutics, to make and test drugs and vaccines. With liberalization, beginning in 1991, the licensing requirements on the pharmaceutical industry were removed, allowing more R&D in the field, and price controls for most drugs were removed, making the industry more attractive. By 2004 only 76 drugs were subject to price controls (id.). India’s entry into the World Trade Organization (WTO) in 1995 prompted strengthened patent protection, and an increase in patent life from seven to 20 years.

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B. Determinants of the Extent of Outward Foreign Direct Investment: An Analytical Framework There exist several theories explaining the OFDI undertaken by MNEs. Among these, the ownership-location-internalization framework developed by John Dunning is the leading theory in the field (2000).10 According to Dunning’s theory, a firm will expand its operations internationally if it has unique ownership advantages that offset the costs and disadvantages of operating in an alien overseas market. These ownership advantages also affect the extent of OFDI. Therefore, a key question in undertsanding the extent of OFDI is the kind of ownership advantages that distinguish MNEs in the pharmaceutical and IT industries from their competitors, facilitating their continued outward expansion.

1. OFDI from the Pharmaceutical and Software Industries Indian OFDI in the pharmaceutical and IT industries is primarily directed towards developed host countries. This is a sign of the growing sophistication of ownership advantages of Indian manufacturing MNEs, and the emergence of service MNEs in areas like software that cater to the demand in developed country markets (Pradhan 2003). As discussed in the prior section, many Indian MNEs in the pharmaceutical industry now have considerable ownership advantages derived from product and process development, and are competing more effectively in the world market. In further developing these competitive capabilities, MNEs have chosen OFDI as the natural global strategy to maximize returns on their intangible assets. Moreover, OFDI increases the range of products available to the consumers in host countries by supplying low-cost, highquality products as alternatives to the costly branded products of local firms. In the context of rising health costs in the United States, generics production by Indian MNEs provides a way to cut the costs of drugs and, therefore, helps make healthcare in the United States more affordable. Developed countries have also been the main source of opportunities for service MNEs in the software industry to grow and integrate with the global economy. Since client-tailored software development is facilitated by proximity to developed country clients, OFDI has been used by Indian software MNEs to establish fully controlled branches or foreign affiliates abroad, and to acquire overseas competitors in order to gain market access and additional intangible assets (Pradhan and Abraham 2005). Therefore, the strengths of Indian MNEs are likely to be concentrated in relatively standardized and mature technologies dominated by price competition, as well as those activities that require proximity to customers. In what follows, we develop a model that explains the extent of Indian MNE forays into foreign markets. To explain the extent of OFDI by Indian MNEs in these two key industries, we have formulated a simple model where the dependent variable Y

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takes on the value of the number of investments made by MNEs in the industry. Denoting X i as a vector of k (k⫽1 . . . k) factors capturing ownership advantages and other factors explaining the ith firm’s overseas investment decision. These factors are expected to provide the outward investing MNEs in the software and pharmaceutical industries some edge over local rivals, in order to overcome the cost of foreignness in the host country. Thus, our empirical model is of the following form: Yij ⫽ βkjX ij ⫹ uij Where i is the firm and j is the industry (pharmaceuticals or software), βkj is a vector of k coefficients, and uij is a normally distributed error term. Yij is the number of times that an Indian firm in jth industry will undertake OFDI (NOFDI), given X ij. We now identify a few factors in X ij that may be the sources of ownership advantages for Indian MNEs, and therefore explain the extent of OFDI. The key factors include size, age, and profitability. a. MNE Size (GFA or SIZE) Generally, larger MNEs are more likely to invest abroad than smaller MNEs, due to their greater ability to bear risk. Larger MNEs also have greater financial strength, and are better able to unwind market information. MNE size has turned out to be an important determinant of overseas operations for developed as well as developing country enterprises (see, e.g., Caves 1996). Two different measures have been used: one in absolute terms, gross fixed assets (GFA), and the other in relative terms, gross fixed assets of the firm relative to the median firm in the industry (SIZE). Both GFA and SIZE are hypothesized to have a favorable effect on the extent of investment. b. Accumulated Learning and Managerial Skills (AGE) The accumulated production experience is a source of considerable learning for MNEs. This learning is the source of a number of incremental innovations on the shop floor that are often not captured by indicators of more formal innovative activity. Accumulated experience also allows a firm to develop endowments of managerial skills and market information. These advantages become a key factor when investing in relatively mature and standardized industries. Thus, other things being equal, we expect the age of a firm (AGE), measured in terms of the number of years the firm has been in production, to be an indicator of accumulated learning that positively affects its propensity to engage in OFDI. c. Profitability (PAT or ROA) One of the unique advantages enjoyed by Indian MNEs could be their ability to bring about adaptations and incremental changes in production processes, to make them more cost-effective, in view of their experience

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operating in a highly price-competitive environment. Hence, we expect owning cost-effective production processes, which lead to increased profitability, to be positively associated with the extent of OFDI. Like size, two different measures have been used: one in absolute terms, profit after tax (PAT), and one in relative terms, return on assets (ROA, i.e., profit after tax to gross fixed assets of the firm). Both, PAT and ROA are posited to have a favorable effect on the extent of investment. Thus, the number of FDI undertaken (NOFDI) can be estimated as follows: NOFDIij ⫽ β0 ⫹ β1jAGEij ⫹ β2jGFAij (or SIZEij) ⫹ β3jPATij (or ROAij) ⫹ uij

2. Empirical Estimations The above model is estimated separately for the two industries using data from different sources. The model has been estimated using the simple ordinary least squares method. Since we have a cross section of MNEs in these two industries investing outside India, they differ with respect to size and age, both of which could introduce heteroscedasticity. If tests indicate the presence of heteroscedasticity, consequently all variance-covariance matrices will be estimated according to Halbert White’s method (1980). The model has been run using econometric software STATA 8. The package STATA provides robust standard errors using the Huber-White sandwich estimators that can effectively deal with potential problems of not meeting some assumptions like normality or homoscedasticity, or some observations that exhibit large residuals, or influence.

C. Features and Performance of the Two Selected Industries This section describes the characteristics and performance of the two selected industries.

1. The Indian Pharmaceutical Industry The Indian pharmaceutical industry ranks high among its developing country counterparts in terms of technology and quality. According to the Mashelkar Committee Report, in 2003, there were around 5,877 enterprises in the industry, comprised of firms of all sizes—small, medium, and large—and having all kinds of ownership structures—foreign owned, private limited ownership, public limited ownership, and government owned (3). Studies estimate that the leading 250 pharmaceutical enterprises control over two-thirds of the market (Chaudhuri 2005). The industry is composed of bulk drug, formulation, large-volume parenterals, and vaccines subgroups (Mashelkar Committee Report 2003: 3).11 The bulk drug subgroup resembles a perfectly competitive market, with no single firm accounting for a significant share. Most of the enterprises in this area are small (id.).

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Meanwhile, large private companies dominate the formulations market, with 23% of the market share going to MNEs, and 77% to purely domestic enterprises (Chaudhuri 2005) Investment in R&D is one of the important ways in which pharmaceutical enterprises enhance their competitiveness, and it also facilitates forays outside the domestic turf. In 2004, R&D spending of the organized pharmaceutical industry as a whole was nearly US$4.34 billion, which represented an increase of more than 300% from the level in 2000 (Dhar and Gopakumar 2006). The structure of the industry and the industry’s R&D has itself undergone changes over years. In the early 1950’s, foreign MNEs had a considerable market share in bulk drugs, so R&D spending was undertaken for the production of formulation with the supplied bulk drug. With the Patent Act of 1970, the trend changed as a strong indigenous domestic pharmaceutical industry developed, with R&D spending for the development of generics. As discussed earlier, the Patent Act of 1970 did not allow product patents, but rather only allowed process patents, supporting reverse-engineering opportunities. The data show that Table 6.1 Patents filed and R&D expenditure by Indian pharmaceutical firms (1990–2005), in numbers and US$ millions Year

No. of U.S. patentsa No. of Indian patents R&D expenditureb

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

5 7 13 17 6 10 12 20 35 51 61 80 126 142 109 115

87 118 94 145 232 132 71 291 150 307 276 320 312 419 192 457

36.5 29.4 37.0 39.8 44.6 45.5 51.5 56.0 61.2 73.6 97.8 130.5 175.3 280.0 392.4 495.2

Total

1,175

3,603

2,046.3

Source: For U.S. patent information, Narayanan, K. and Savita Bhat (2009), “Technological Efforts and Export Performance of IT MNCs from India,” in N.S. Siddharthan and K. Narayanan, eds., Globalization of Chinese and Indian Enterprises, (Delhi: Routledge). For Indian patent information, Annual Reports of the Office of Controller General of Patents, Designs, Trade Marks and Geographical Indications for various years. For R&D expenditure numbers, author’s elaboration on Prowess data.c a

U.S. patents are based on Class 424, Drug, Bio-Affecting and Body Treating Compositions (includes Class 514) and Class 532, Organic Compounds (includes Classes 532–570). b

US$ millions.

c

Prowess is the Centre for Monitoring Indian Economy database of medium- and largesized Indian firms.

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current R&D spending undertaken in the Indian pharmaceutical industry is mainly in the development of generics, novel drug delivery systems, new production processes, and new chemical entities (new drugs). During the reform period of the 1990s, the Indian government devised specific policies to increase the R&D activity of the industry through special subsidies and tax incentives (Dhar and Gopakumar 2006). One of the important measures of R&D efforts is the number of patent filings by Indian firms made in both India and the U.S. patent offices (Dhar and Rao 2002), as shown in Table 6.1. As mentioned, another manifestation of increased competitiveness of the firms in the pharmaceutical industry is their ability to invest abroad. Table 6.2 shows the number of MNEs engaging in OFDI in the industry, and includes information on how many of these MNEs carry out R&D.

2. The Indian Software Industry The IT industry, which started in the 1960s, has two parts—electronics and software. The former consists of five different segments: consumer electronics, communication and broadcasting equipment, instrumentation and strategic electronics, electronic components, and computer hardware. In the initial period, International Business Machines (IBM) and International Computers Limited (ICL) were the two key players in India. In order to promote Indian exports, the Santa Cruz Electronics Export Processing Zone was established in Bombay in 1973 (Parthasarathy 2004). In 1975 Tata, Table 6.2 Outward investors and their research orientation in the pharmaceutical industry (1990–2005), in numbers and percents

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Domestic firms Total domestic that engage in MNEs engaged MNEs that R&D by firms R&D in OFDI engage in R&D MNEs (%) 63 68 72 92 129 173 189 171 181 189 194 193 185 205 201 165

3 8 16 32 48 60 65 71 67 71 75 72 83 93 94 85

15 17 17 17 23 25 26 27 28 31 30 30 29 29 30 28

0 3 3 8 13 15 16 19 18 20 18 20 24 21 25 25

0.0 17.6 17.6 47.1 56.5 60.0 61.5 70.4 64.3 64.5 60.0 66.7 82.8 72.4 83.3 89.3

Source: Adapted from Narayanan, K. and Savita Bhat (2009), “Technological Efforts and Export Performance of IT MNCs from India,” in N.S. Siddharthan and K. Narayanan, eds., Globalization of Chinese and Indian Enterprises (Delhi: Routledge).

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with its partner Burroughs, established a unit in this zone. Revenue from the exports was used to pay for the import of technology. In 1984, with the new hardware policy in place, microcomputers became more readily available in India. Further, the Computer Software Export, Development, and Training Policy of 1986 facilitated an increase in software production for both the domestic and export markets (Parthasarathy 2004). However, the kinds of projects that the Indian enterprises got from overseas clients were mainly low-level projects that involved maintenance or integration of systems after mergers and acquisitions, or solving Y2K problems (Henley 2006). The need for constant client-provider interaction was unmet due to a lack of data communication facilities, accentuating the need for on-site services or “body shopping.” Thus, Indian MNEs decided to create or acquire subsidiaries, or enter into joint ventures (JVs) abroad. As mentioned in Section A.1 above, the rupee devaluation in 1991, the creation of Software Technology Parks in the 1990s, and the advantageous time difference with the United States resulted in more offshore development of software and services. As a result, the Indian software industry grew rapidly from the early 1990s onwards, and reached US$30 billion in total revenue in 2005–2006.12 Most of this growth was achieved through exports, for which the compound annual growth rate exceeded 88% over the 15-year period from 1990–1991 to 2004–2005, as shown in Figure 6.1 (National Association for Software and Service Companies 2005). 35,000

30,000

Domestic Revenue Exports Revenue Software & software services revenue

25,000

20,000

15,000

10,000

5,000

0 1990–91

1993–94

1996–97

1999–00

2002–03

2005–06

Figure 6.1 Revenue from software & software services (1990–1991 to 2005–2006), in US$ millions. Source: National Association for Software and Service Companies (2005), The IT Industry in India: Strategic Review 2005 (New Delhi: NASSCOM).

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As shown in Figure 6.1, in 1990–1991, the revenue from domestic sales and exports was nearly the same, but at the end of 2005–2006, the revenue from exports accounted for nearly 78% of total revenue. In terms of growth, software exports increased 214-fold over the period, whereas domestic sales increased 68-fold.13 To summarize, the Indian software industry began by providing customized software services to customers abroad, mainly in North America, using the “body shopping” model, in which Indian software employees are temporarily located at the customers’ place of business in order to do programming, testing, and maintenance. Over time, enabled by the electronic transmission of output to the customer, the offshore provision of software services performed in India supplemented or replaced on-site provision. Software services remain the dominant output of the industry, accounting for more than 90% of sales revenue (Heeks 2007). The availability of large numbers of young Indians trained in technology, who are willing to work for low wages (in US$ terms, compared to U.S. wages), is often cited as the Indian industry’s main competitive advantage (see, e.g., Ramamurti and Kapur 2001). Another reason for the high growth of the software industry is its low dependence on physical infrastructure. The deficiencies of physical infrastructure in India adversely affect manufacturing industries, but are less critical to software services. Finally, another salient feature of the Indian software industry is that it is mostly homegrown. Foreign ownership of software operations in India is quite small—less than one-fifth of Indian software companies are majority foreign-owned, and among the largest software companies, only a few are majority foreign-owned (Commander 2005). The presence of non-resident Indians in the United States and the United Kingdom is also frequently mentioned as an important contributor to Indian MNEs’ international business success (Ramamurti and Kapur 2001). The above discussion thus highlights some crucial differences between the two selected industries: the pharmaceutical industry is a relatively old industry, whereas the Indian IT industry emerged much more recently; the growth of the Indian pharmaceutical industry has been led by domestic demand, with competitiveness abetted by government patent policy, whereas the IT industry has relied on external demand; and the role of the Indian diaspora has been critical in the rise of IT industry, but not so much in the case of the pharmaceutical industry. With these differences in mind, the next section looks into the extent of OFDI in these two industries.

D. Outward Foreign Direct Investment by Pharmaceuticals and Software Multinational Enterprises The previous sections have highlighted the policies pursued to enhance the competitiveness of the pharmaceutical and software industries. In this section, we specifically look into OFDI by MNEs in the two industries.

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For the present study, we have used different data sources. The list of MNEs investing abroad in both the industries has been compiled from works by Jaya P. Pradhan (2006, 2007) and Pradhan and Abhinav Alakshendra (2006). This is incorporated with the firm-level information, as obtained from the PROWESS Database of the Center for Monitoring Indian Economy. PROWESS provides annual report data for nearly 10,000 firms listed on the Bombay Stock Exchange. For the present study, we found that there are 112 MNEs in the software industry, and 47 MNEs in the pharmaceuticals industry that have engaged in OFDI, and for which PROWESS provides data. For one software MNE and one pharmaceutical MNE, the data reported zero income and no sales of goods, respectively, so those two companies were dropped from the analysis. The total number of instances of OFDI by these 47 pharmaceutical MNEs and 112 software MNEs from 1991 to 2006 was 174 and 523, respectively. The number of times that each of these MNEs invested abroad varies from 1 to 20, in the case of the pharmaceutical MNEs, and from 1 to 47, in the case of the software MNEs, as indicated in Table 6.3. Table 6.3 Distribution of the instances of OFDI (NOFDI) by MNEs in the pharmaceutical and software industries (1991–2006), in numbers of instances and percent frequencies NOFDI 1 2 3 4 5 6 7 8 9 10 11 12 14 15 17 19 20 31 47 Total

Pharmaceutical industry (frequency as a % of total) 24 (51.1) 3 (6.4) 5 (10.6) 4 (8.5) 2 (4.3)

Software industry (frequency as a % of total) 28 (25.0) 22 (19.6) 15 (13.4) 6 (5.4) 10 (8.9) 8 (7.1) 6 (5.4) 5 (4.5) 2 (1.8) 2 (1.8)

1 (2.1) 2 (4.3) 2 (4.3) 1 (2.1)

2 (1.8) 2 (1.8) 1 (0.9)

1 (2.1) 1 (2.1)

1 (0.9) 1 (2.1) 1 (0.9) 1 (0.9) 47

112

Source: Pradhan, Jaya P. (2006), “Global Competitiveness of Indian Pharmaceutical Industry: Trends and Strategies,” MPRA Paper No. 12340, MPRA Munich Personal RePEc Archive; Pradhan, Jaya P. (2007), “National Innovation System and the Emergence of Indian Information and Software Technology Multinationals,” MPRA Paper No. 12359, MPRA Munich Personal RePEc Archive; Pradhan, Jaya P. and Abhinav Alakshendra (2006), “Overseas Acquisition versus Greenfield Foreign Investment: Which internationalization strategy is better for Indian pharmaceutical enterprises?” MPRA Paper No. 12339, MPRA Munich Personal RePEc Archive.

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As can be seen from Table 6.3, over half of the MNEs in the pharmaceutical industry have only one net investment, whereas in the software industry, only 25% MNEs are onetime investors. As discussed above, the reasons for investing are different across the two industries. The delivery of services seems particularly important in computer software and business process outsourcing. According to Deepak Nayyar, the large number of foreign acquisitions by Indian MNEs in the IT industry was due to a desire to deliver services more effectively and to secure markets (2008). On the other hand, the capture of international brand names has been particularly important for MNEs in the pharmaceuticals industry (Pradhan and Alakshendra 2006). The acquisition of RPG Aventis in France by Ranbaxy constitutes a lead example in the industry. Access to technology and market access for exports (for example, Dr. Reddy’s Laboratories acquisition of Betapharm in Germany) are also important factors in the pharmaceuticals industry (id.).

E. Factors Influencing Outward Foreign Direct Investment: Econometric Results We will now examine if there are any significant differences between the MNEs investing abroad from each of the two industries. After this examination, we will try to determine the factors that explain the extent of OFDI for the MNEs from the two industries.

1. Comparison between MNEs in the Software and Pharmaceutical Industries Table 6.4 compares the key characteristics of MNEs investing abroad from the pharmaceutical and software industries. There are three statistically significant characteristics that distinguish pharmaceuticals MNEs from software MNEs—gross fixed assets (GFA), AGE, and R&D intensity. Pharmaceutical MNEs are not only older, but also have statistically significantly larger assets. As indicated in Section C.1, the dynamism of the pharmaceutical industry is reflected in the relatively high R&D intensity. With respect to the other indicators, the average number of times that software MNEs invested abroad is larger than the equivalent figure for pharmaceutical MNEs, but the difference is not statistically significant. Similarly, the profitability, as measured in PBIT or PAT, is not significantly different between the two industries. Lastly, the ROA and ROA1 are not statistically different across the two groups of MNEs. a. Econometric Results For each industry, two sets of equations as developed in Section B have been estimated. In the first set of equations, the number of times an MNE has invested abroad (NOFDI) has been regressed against the AGE, gross fixed assets (GFA) in nominal terms, and profit after tax (PAT) in nominal terms.

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Outward Investment Table 6.4

Differences between pharmaceutical and software MNEs (1991–2006) Pharmaceutical MNEs N Software MNEs ⫽ 46 N ⫽ 111 (standard deviation) (standard deviation)

Indicator 1 2 3 4 5 6 7 8 9 10

181

NOFDI GFA (Rs. 10 million)a SIZE (relative to mean industry size) AGE (years)a R&D Intensity (%)ab Capital Goods Import Intensity (%)b PBITc (Rs. 10 million) PATd (Rs. 10 million) ROA1e (⫽7/2) ROAe (⫽8/2)

3.76 (4.44) 559.41 (686.24) 7.00 (8.59)

4.70 (5.91) 296.28 (886.45) 4.62 (13.83)

31.48 (20.44) 4.5 (6.23) 1.87 (3.29)

16.44 (7.57) 0.65 (3.08) 1.74 (7.93)

165.14 (273.40) 117.56 (230.81) 0.27 (0.42) 0.14 (0.34)

208.50 (816.82) 173.58 (684.19) 0.40 (0.85) 0.31 (0.71)

Source: Author’s elaboration from Prowess. a

Difference in means is statistically significant at a 5% level. For software MNEs, the denominator is total income, whereas for pharmaceutical MNEs it is sales of goods. c PBIT is profit before interest and tax. d PAT is profit after tax. e ROA is profit after tax to fixed assets, whereas ROA1 is the profit before interest and tax to fixed assets. b

In the second set of equations, the NOFDI is explained using AGE, SIZE in relative terms, and profitability (ROA). Since we have a cross section of MNEs in these two industries investing outside India, they differ with respect to size and age, both of which could have introduced heteroskedasticity. Pretesting, using the Breusch-Pagan test (Judge et al. 1985) indicated the presence of heteroscedasticity; consequently all variance-covariance matrices have been estimated according to White’s 1980 method. Table 6.5 gives the results for both industries. A positive coefficient implies that the independent variable tends to influence NOFDI positively, while a negative coefficient implies the opposite. Table 6.5 shows some interesting results. From the table, it can be inferred that different factors determine the extent of OFDI in the two industries. For the pharmaceutical industry, AGE and the profitability of the firm (PAT) determine how much OFDI will be carried out. All else being equal, a young firm or a firm that earns high profit after tax will invest more frequently outside the country. On the other hand, the extent of OFDI in the software industry is primarily a function of the relative SIZE of the MNE. Interestingly, AGE has no statistically significant influence on the extent of OFDI in the software industry, though it comes out with the same sign as for pharmaceuticals (negative), meaning younger MNEs in pharmaceutical industries engage in more OFDI. For MNEs in the pharmaceutical industry, gross fixed assets (GFA) or the SIZE of the MNE, relative to the average MNE size in the industry, has no statistically significant influence on the outward decision of the firm.

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Table 6.5 Factors influencing the number of times an MNE has invested abroad (NOFDI) (1991–2006) Variable 1

Age

2

GFA

3

SIZE

4

PAT

5

ROA

6

Constant

7 8

Adjusted R 2 F-value

Pharmaceutical MNEs N ⫽ 46 –0.036 a (0.021) 0.001 (0.002)

–0.034 (0.023)

Software MNEs N ⫽ 111 –0.129 (0.102) 0.001 (0.005)

0.262 a (0.147)

0.203 (0.130) 0.009 a (0.002)

3.477 a (1.199) 0.304 17.81 0.00

–0.177 (0.132)

0.004 (0.007) 2.271 (1.671) 3.093 a (1.179) 0.217 2.68 (0.06)

5.821 a (1.526) 0.325 1.26 (0.29)

0.547 (0.477) 6.232 a (1.890) 0.309 1.36 (0.26)

Source: The author. a

Statistically significant at minimum 10% level.

Thus, based on the results above, it can be concluded that different factors determine the extent of OFDI in the pharmaceuticals and software industries, respectively. Age and profitability are important for pharmaceutical MNEs, whereas relative size is an important determinant for software MNEs.

Conclusions Like some other developing countries, India experienced strong economic performance and an increase in OFDI in the 1990s and early 2000s. The data show that the stock of OFDI from India had a compound annual growth rate of 33.6% in the 15-year period from 1990 to 2005. India’s OFDI is dominated by two knowledge-intensive industries, IT and pharmaceuticals. As discussed in the introduction, about 50% of the foreign acquisitions by Indian MNEs from 2000 to 2006 were in these two industries. The dominance of these two industries gave rise to research questions that led to the study in this chapter. The study in this chapter is an attempt to discover what factors explain the extent of OFDI in the IT and pharmaceutical industries, including whether the factors differ across the industries. Using MNE-level data for MNEs that invested abroad in these areas, we considered the number of instances of OFDI in 47 pharmaceutical MNEs (174 instances, ranging from 1–20 investments per MNE) and 112 software MNEs (523 instances, ranging from 1–47 investments per MNE). Comparing the MNEs in the two industries, we determined that there are three salient characteristics

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that distinguish pharmaceutical MNEs from software MNEs—gross fixed assets (GFA), AGE, and R&D intensity. A simple econometric exercise showed that, for the pharmaceutical industry, age and profitability of the firm were the statistical determinants of how much OFDI would be carried out—young MNEs and MNEs with high profits after tax (PAT) were engaging in more OFDI. On the other hand, the extent of OFDI in the software industry is primarily a function of the relative size of the MNE. One significant problem with the data used in this chapter is that the use of cross-section data does not afford any insights into any dynamic aspects of MNEs’ behavior. As mentioned in the introduction, the chapter looks into only one aspect of the OFDI (i.e., the number of instances of OFDI). Other issues, including the role of government policy,14 choice of entry mode,15 and other factors influencing the direction of investment, also need to be considered for a complete understanding of Indian OFDI.

Notes * Associate Professor at Shailesh J. Mehta School of Management, Indian Institute of Technology (IIT) Bombay. The author can be reached at [email protected].

1. “Emerging markets” are all economies that are not members of the European Union and the Organisation of Economic Co-operation and Development plus Chile, Mexico, the Republic of Korea, Turkey. “Developing countries” are all emerging markets that do not belong to the Commonwealth of Independent States (CIS) and Southeast Europe. 2. Another key aspect of Indian OFDI is that acquisitions primarily occur in OECD or rich countries. Of the total 306 acquisitions during 2000–2006, nearly 80% were in OECD countries (Federation of Indian Chamber of Commerce and Industry 2006). See Chapter 7 and Chapter 8 for discussions of Indian OFDI in the United States and Germany, respectively. 3. This section draws mainly on Gopinath (2007). 4. Note that such acquisitions, supported by borrowing abroad, are not reflected in the official statistics on OFDI. 5. This section draws mainly on Pradhan (2007). 6. The Foreign Exchange Regulation Act of 1973 required that foreign companies without a substantial manufacturing base in India limit their ownership stake in Indian subsidiaries or joint ventures to 40% of equity. 7. This section draws mainly on Athreye and Godley (2009). 8. The pharmaceutical firms could develop cost-effective processes because Indian firms had already accumulated some technological capabilities and managerial and technical expertise, thanks to the import-substitution industrialization strategy pursued during the first four decades after independence. The availability of trained manpower, the comparative ease of imitation, and the strong chemistry base among Indian research institutes also supported the efforts of these firms (Athreye and Godley 2009: 310). 9. For example, in 1991, Ranbaxy successfully patented a noninfringing process patent for Cefaclor (a drug sold by Eli Lilly), resulting in a JV with Lilly for the new process. Other Indian firms, such as Dr Reddy’s Laboratories, Lupin Laboratories, Sun Pharmaceuticals, Wockhardt, and Cipla, soon joined the race to find cheaper processes for drugs that were due to go off-patent.

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10. See Chapter 2 for a discussion of this theory and others that can help to explain the Indian OFDI experience. 11. “Bulk drug” is the term for the active substance in the drug. Formulation is the actual produced drug, in the form of tablets, syrup, etc. Thus, formulation involves value addition. Large-volume parenterals are aqueous drugs packaged in single doses with a capacity of 100 ml or more, and intended to be administered to, or used by, human beings. They include intravenous infusions, irrigating solutions, etc. 12. Please see the works of Ashok Desai (2005) and Suma Athreye (2005) for a discussion of the development of the Indian software industry. 13. Despite such a phenomenal growth, Richard Heeks notes that most IT exports from India are still at the lower end of the technological ladder (2007). Further, R&D and product development efforts remain limited. 14. See Chapter 3 for an analysis of the importance of home country government policy. 15. See, generally, Chapter 1 and Chapter 5 for discussions of different entry modes.

References Athreye, Suma (2005), “The Indian Software Industry,” in Ashish Arora and Alfonso Gambardella, eds., From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel (Oxford: Oxford University Press). Athreye, S. and Andrew Godley (2009), “Internationalization and technological leapfrogging in the pharmaceutical industry,” 18(2) Industrial and Corporate Change, pp. 295–323. Caves, Richard (1996), Multinational Enterprise and Economic Analysis, Second Edition, (Cambridge: Cambridge University Press). Chaudhuri, Sudip (2005), The WTO and India’s Pharmaceuticals Industry (Delhi: Oxford University Press). Commander, Simon (2005), “What Explains the Growth of a Software Industry in Some Emerging Markets?” in Simon Commander, ed., The Software Industry in Emerging Markets (Cheltenham, U.K.: Edward Elgar). Desai, Ashok (2005), “India,” in Simon Commander, ed., The Software Industry in Emerging Markets (Cheltenham, U.K.: Edward Elgar). Dhar, Biswajit and K.M. Gopakumar (2006), Post-2005 TRIPS Scenario in Patent Protection in the Pharmaceutical Sector: The Case of the Generic Pharmaceutical Industry in India (Geneva: UNCTAD). Dhar, Biswajit and C Niranjan Rao (2002), Transfer of Technology for Successful Integration into the Global Economy: A case study of the Pharmaceutical Industry in India, UNCTAD/ UNDP Programme on Globalization, Liberalization and Sustainable Development, United Nations,(Geneva: UNCTAD). Dunning, John H. (2000), “The eclectic paradigm as an envelope for economic and business theories of MNE activity,” 9(2) International Business Review, pp. 163–190. Federation of Indian Chambers of Commerce and Industry (2006), India Inc’s Acquisitions Abroad (New Delhi: FICCI). Gopinath, Shyamala (2007), “Overseas investments by Indian companies—evolution of policy and trends,” Bank for International Settlements Newsletter, Aug. 2007, available at http://www.bis.org/review/r070122c.pdf. Heeks, Richard (2007), “Using Competitive Advantage Theory to Analyse IT Sectors in Developing Countries: a Software Industry Case Analysis,” 3(3) Information Technologies and International Development, pp. 5–34.

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Henley, J (2006), “Outsourcing the Provision of Software and IT-Enabled Services to India”, 36(4) International Studies of Management and Organisation, pp. 111–31. Judge, George G. et al (1985), The Theory and Practice of Econometrics (New York: John Wiley & Sons, New York). Mashelkar Committee (2003), Report of the Expert Committee on a Comprehensive Examination of Drug Regulatory Issues, including the Problem of Spurious Drugs, Ministry of Health and Family Welfare, Government of India, Nov. 2003. Narayanan, K. and Savita Bhat (2009), “Technological Efforts and Export Performance of IT MNCs from India,” in N.S. Siddharthan and K. Narayanan, eds., Globalization of Chinese and Indian Enterprises, (Delhi: Routledge). Nayyar, Deepak (2008), “The Internationalization of Firms from India: Investment, Mergers and Acquisitioans,” 36(1) Oxford Development Studies, pp. 111–31. National Association for Software and Service Companies (2005), The IT Industry in India: Strategic Review 2005 (New Delhi: NASSCOM). Parthasarathy, Balaji (2004), “Globalizing Information Technology: The Domestic Policy Context for India’s Software Production and Exports,” 3 Iterations: An Interdisciplinary Journal of Software History, May 3, 2004, available at http:// www.cbi.umn.edu/iterations/parthasarathy.pdf. Pradhan, Jaya Prakash (2007), “National Innovation System and the Emergence of Indian Information and Software Technology Multinationals,” MPRA Paper No. 12359, MPRA Munich Personal RePEc Archive. ——— (2006), “Global Competitiveness of Indian Pharmaceutical Industry: Trends and Strategies,” MPRA Paper No. 12340, MPRA Munich Personal RePEc Archive. ——— (2003), “Rise of Service Sector Outward Foreign Direct Investment from Indian Economy; Trends, Patterns and Determinants,” MPRA Paper No. 17078, MPRA Munich Personal RePEc Archive. Pradhan, Jaya Prakash and Abhinav Alakshendra (2006), “Overseas Acquisition versus Greenfield Foreign Investment: Which internationalization strategy is better for Indian pharmaceutical enterprises?” MPRA Paper No. 12339, MPRA Munich Personal RePEc Archive. Pradhan, Jaya Prakash and Vinoj Abraham (2005), “Overseas Mergers and Acquisitions by Indian Enterprises: Patterns and Motivations”, (85) Indian Journal of Economics, pp. 365–86. Prowess Database of the Center for Monitoring Indian Economy, available at http:// dqindia.ciol.com/ (last visited May 2009). Ramamurti, Ravi and Devesh Kapur (2001), “India’s Emerging Competitive Advantage in Services,” 15(2) Academy of Management Executive, pp. 20–33. White, Halbert (1980), “A heteroscedasticity consistent covariance matrix estimator and a direct test for heteroscedasticity,” (48) Econometrica, pp. 817–38.

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7 Indian Companies Investing in the United States: An Inquiry into Recent Patterns and Trends Nandita Dasgupta*

Introduction Historically, India has been attracted to the United States as one of its favored foreign direct investment (FDI) destinations. Even as early as in the 1940s, Indian firms had investment ties with the United States, albeit sporadically. For example, the Tata Group established its first presence in the United States by setting up its permanent office in New York City in 1945 (Tata Group North America 2008). However, it was in the 1990s, and even more so after 2000, that a trend of outward FDI (OFDI) by Indian multinational enterprises (MNEs) flowing towards the United States became clearly visible. In 2006 the United States alone received about 15% of India’s OFDI stock (Pradhan 2008c). This recent trend in Indian OFDI being directed towards developed countries such as the United States departs noticeably from the previous trend of South-South investments. The trend of Indian firms increasingly seeking access to the markets and assets of the United States is apparent from Tables 7.1 and 7.2. Table 7.1 reveals that while there were only 23 Indian MNEs investing in the United States during the period 1975–1990, this number had increased to 738 by March 2001. Table 7.2 also reinforces this idea by showing that while U.S.-bound FDI from India was a meager US$17 million in the period 1980–1989, it shot up to US$384 million over 1990–1999, and further to US$2.4 billion over 2000–2007. In the first half of 2008, there were a total of 34 U.S.-bound acquisitions by Indian companies, as compared to 47 in the first half of 2007. Although the number of acquisitions dipped by 15% from the previous year, the value of acquisitions exceeded US$5.1 billion (“India Inc’s US-bound M&A dips . . .” 2008).

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Table 7.1

Indian OFDI flows by host region and host country (1975–1990 and 1991–2001)

Regions / Countries

1975–90 No. of approvals

%

1991–2001

Equity (US$ millions)

%

No. of approvals

%

Equity

%

Developing Countries

165

72.0

191

86.0

1,176

45.9

1,719

40.3

Developed Countries

64

27.9

30

13.8

1,386

54.1

2,542

59.6

United Kingdom

31

13.5

14

6.3

334

13.0

1,133

26.6

North America

23

10.0

13

6.0

749

29.2

1,029

24.1

United States

23

10.0

13

6.0

738

28.8

1,023

24.0

Total

229

100

222

100

2,562

100

4,262

100

Source: Pradhan, Jaya P. (2008a), “The evolution of Indian Outward Foreign Direct Investment: Changing Trends and Patterns,” 4(1) International Journal of Technology and Globalisation, pp. 70–86.

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Table 7.2

Indian OFDI by host region and host country (1970–2007), in US$ millions

Year

1970–1979

1980–1989

1990–1999

2000–2007

All Years Value

Number of MNEs Investing

Percentage

Developed Countries

3

36

1,460

15,652

17,162

European Union

3

18

1,021

12,061

13,105

76.4

857

United Kingdom

3

17

798

8,353

9,171

53.4

531

57

1,701

1,759

10.3

79

17

388

2,815

3,221

18.8

1,156

17

384

2,404

2,805

16.4

1,124

Netherlands North America United States

0.01 0.1

100

1,866

Source: Pradhan, Jaya Prakash (2008b), “Indian Direct Investment in Developed Regions,” paper presented at the Copenhagen Business School Conference on Emerging Multinationals: Outward Foreign Direct Investment from Emerging and Developing Economies, Oct. 9–10, 2008, Copenhagen Business School, Copenhagen.

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Nandita Dasgupta

The growing importance of the United States as a desirable host country for Indian OFDI has inspired substantial media and scholarly research interest in the subject. This provides us with a strong incentive to investigate the nature, causes, trends, and opportunities of India’s OFDI in the United States. With this end in view, this chapter is structured as follows: this introduction provides a general discussion of the current phenomenon of Indian OFDI in the United States. Section A presents a detailed profile of OFDI from India in the United States. This includes an analysis of the volume of U.S.-bound OFDI from India; the age, size, and structures of Indian investing MNEs; and the industry composition of this OFDI. Section B outlines the entry routes of Indian OFDI into the United States. It mainly concentrates on the mergers and acquisitions (M&A) undertaken, as corporate consolidations have been the dominant mode of Indian investment forays into the United States. Then, Section C discusses the driving forces behind OFDI from India. We have distinguished these causal forces into push and pull factors, reflecting the prevailing conceptual divisions in the economic literature on FDI. Section D assembles available evidence on OFDI in the United States by Indian parent firms across industries, based on the author’s sample covering the OFDI undertaken by a significant number of Indian enterprises, from 2000 to the first half of 2008.1 Finally, the conclusion summarizes this study, and indicates our future research agenda. We have compiled a fairly comprehensive sample of 164 Indian parent companies that have engaged in OFDI in the United States in the period 2000–2008, on the basis of secondary sources available in several corporate studies (Federation of Indian Chamber of Commerce and Industry 2006; MAPE 2006; Virtus 2008a, 2008b). Nevertheless, the unavailability of OFDI data in many cases has presented an obstacle to this study. Because of data limitations, we were unable to include reinvested earnings, debt securities, and trade credits in our calculations of OFDI, and we have, therefore, focused only on the equity investments that Indian MNEs have undertaken via joint ventures (JVs) and wholly owned subsidiaries in the United States. Although OFDI technically includes both greenfield investments and M&A, this study focuses primarily on U.S.-bound M&A by Indian MNEs, not only due to the paucity of dependable data on greenfield investments from India, but also because there has been a significant drop in such investments, as reported by the U.S. Department of Commerce (2008). We quote the consideration amounts for cited M&As, wherever the data on such deals has been publicly reported, but in a number of cases, the details have not been disclosed.

A. Pattern of Indian Outward Foreign Direct Investment Flows to the United States The United States is universally recognized as an attractive business and investment destination. While inward FDI (IFDI) flows into the United Brian Harley

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191

States represented 18.6% of world FDI inflows in 2008, the corresponding figures for other competing economies such as China, the United Kingdom and Japan were 6.4%, 5.7%, and 1.4%, respectively. Nearly one-third of the inbound FDI flows directed towards developed countries are absorbed in the United States (United Nations Conference on Trade and Development 2009). In its 2008–2009 Global Competitiveness Report, the World Economic Forum ranked the United States first out of the 134 economies surveyed (2008). This attractiveness of the United States as a hot spot for FDI is no longer confined only to developed countries, but has also captured the attention of many emerging economies as well— including Brazil, Russia, China, India, South Korea, and Chile (U.S. Department of Commerce 2008). The United States’ potential to serve as an effective FDI destination is presumably based on the country’s economic and business competitiveness; stable, lucrative, and high growth consumer market; educated, productive, and innovative workforce; predictable and transparent legal system; reasonably low tax structure; high capital base; and highquality infrastructure and technological innovativeness (U.S. Department of Commerce 2008). Also, in an increasingly competitive international environment for FDI flows, the United States has been pursuing a relatively open-door IFDI policy, providing international investors with a stable and reliable investment and business climate, within certain limitations related to policy restrictions on specific industries and national security concerns. The United States also provides a platform for entry into the markets of the other North American nations. Indian MNEs investing in the United States, in turn, offer technological expertise, cost-effectiveness, high-quality managerial skills, employment, and value-added to U.S. firms (U.S. Department of Commerce 2008). Moreover, the commonality of the English language between the two countries is also assumed to facilitate the FDI relationship between Indian and U.S. companies. Many U.S. firms also have a history of longstanding JVs with Indian firms, which may tend to make them somewhat more familiar with Indian business styles and policies. This can sometimes prove helpful to Indian firms in enhancing their business interests in U.S. companies through FDI. The program of phased legislative reforms in India, which started with the adoption of its liberalization program in 1991, is gradually removing certain key restrictions on the ability of Indian MNEs to expand internationally. This liberalization can be seen as one of the major forces that have triggered the sharp increase in India’s overseas expansion into the United States.2 The governments of both the United States and India have been making concerted initiatives since the formation of the U.S.-India Business Council in 1975—under the aegis of the U.S. Chamber of Commerce—to advance commercial ties between the world’s two largest free-market democracies (U.S.-India Business Council 2008). Moreover, since 2000, both countries have been strengthening the institutional structure of bilateral economic relations through the India-U.S. Economic Dialogue, which aims to deepen the Indian and American partnership through regular dialogue Brian Harley

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Nandita Dasgupta

and engagement. Also, the Confederation of Indian Industry launched the India Business Forum in the United States in June 2006 in order to explore new avenues of corporate partnership through international collaboration. Furthermore, the U.S.-India CEO Forum, the India-U.S. Economic and Commercial Dialogue, and the Federation of Indian Chambers of Commerce and Industry have been formed in recent years to support economic reform and liberalization, expand economic cooperation, increase employment and growth, improve market access for goods and services, and, in the process, create a bilateral business climate that is conducive to trade and investment. Such efforts by both countries in initiating and sustaining investment relations have led to a substantial rise in the volume of FDI outflows from Indian MNEs to the United States, mainly through corporate M&As.

1. Volume of Indian OFDI Flows to the United States As is evident from Table 7.1 on page 188, in the period 1975–1990, more than one-third of the FDI approvals from India to developed countries were directed towards North America—the United States was, in fact, the sole recipient. Over the period 1991–2001, this figure increased by around 53%. The United States has gradually become a major destination for Indian OFDI, with the proportion of OFDI flowing to the United States rising from a meager 6% of overall FDI from India in 1975–1990, to nearly 24% in 1991–2001. Over the same period, the number of OFDI approvals has increased from 10% to nearly 29%. Table 7.2 on page 189 presents a more comprehensive picture of the value of OFDI, as well as the number of Indian MNEs with investments in the United States from 1970 to 2007. It shows that during this 37-year period, Indian OFDI towards the United States has been multiplying consistently, totaling US$2.8 billion invested by 1,124 Indian parent companies over the whole period. This is more than double the number of Indian MNEs investing in the United Kingdom over the same period. Table 7.2 also reveals that Indian OFDI into the United Kingdom has risen fairly uniformly over the decades. Yet, the significantly larger number of Indian MNEs investing in the United States is indicative of an increasingly pronounced presence of Indian firms in America in recent years. Again, if we look at year-onyear figures in Table 7.3, it immediately becomes apparent that approved Indian OFDI to the United States has been consistently higher than OFDI to the United Kingdom since 2002, and also over the period 1996–2002. Combining the data from both tables, we can conclude that, although the United States received Indian FDI sporadically in the 1970s and 1980s (Lall 1983), real momentum gathered only after 1991, and even more so after 2000, after the further legislative reforms in India in 1999. This conclusion is reinforced by actual FDI inflows data provided by the U.S. Department of Commerce, as shown in Table 7.4. Also, according to a report by the International Trade Administration of the U.S. Department of Commerce,

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Table 7.3 Approved Indian OFDI in JVs and wholly-owned subsidiaries to the United Kingdom and the United States (1996–2005), in US$ millions

United Kingdom United States

April 1996– March 2002

2002– 2003

2003– 2004

2004– 2005

2005– 2006

Total

410

34

138

71

120

775

1,540

185

207

251

135

2,320

Source: Hay, Françoise (2006), “FDI and globalization in India,” presented at the International Conference on The Indian Economy in the Era of Financial Globalization, Maison des Sciences de l’Homme, Paris, Sept. 28–29, 2006.

Table 7.4 Actual FDI flows from India to the United States on a historical cost basis, by industry (North American Industry Classification System) (2002–2007), in US$ millionsa FDI Inflows

2002

2003

2004

2005

2006

2007

All industries total Manufacturing total Food Chemicals Primary and fabricated metals Machinery Computers and electronic products Electrical equipment, appliances and components Transportation equipment Other manufacturing Wholesale trade Retail trade Information Depository institutions Finance (except depository institutions) and insurance Real estate and rental and leasing

227

352

629

1,497

1,435

2,957

–2

–26

26

89

195

136

–7 1 6

D 3 5

1 6 D

2 18 D

* 15 D

–1 42 D

–1 –6

D –7

D –7

4 D

–2 D

D D

–1

–2

*

*

*

–2

2

2

D

43

58

57

3

3

*

4

D

47

6 0 5 133

1 0 5 144

D 0 6 162

D * 72 190

D 0 79 222

10 0 101 368

*

*

*

*

D

*

0

0

*

*

2

–1 Continued

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Nandita Dasgupta Continued

FDI Inflows Professional, technical and scientific services Other industries

2002

2003

2004

2005

2006

2007

87

179

404

1,106

793

2,071

–2

–3

D

D

150

271

Source: U.S. Department of Commerce, Balance of Payments and Direct Investment Position Data annual issues, Bureau of Economic Analysis (BEA), International Economic Accounts from 2002 through 2008. a

Prior to 2006, income is presented net of U.S. and foreign withholding taxes. Beginning in 2006, income is presented gross of U.S. and foreign withholding taxes. In addition to equity and debt investment from its foreign parent, a U.S. affiliate may receive loans from (or make loans to) foreign affiliates of the foreign parent. The affiliate may also have interest and services transactions with foreign affiliates of the foreign parent. The value of these loans and the interest and services transactions are included in these data. “D” indicates that the data in the cell have been suppressed to avoid disclosure of data on individual companies. “*” indicates a non-zero value between ⫺US$500,000 and ⫹US$500,000.

the annual growth rate of FDI from India into the United States from 2004 to 2008 was 48%, 3 as compared to 23% for FDI from China over the same period (U.S. Department of Commerce 2008). This is also indicative of the importance of Indian FDI inflows into the United States in recent years.

2. Composition of Indian OFDI in the United States by Industry The early 2000s saw a pronounced shift in the distribution of FDI from India by industry, as is evident from Table 7.4. The manufacturing sector, and in particular the chemicals and transport equipment industries, showed the largest volume and consistent overall rise. However, it is in the service sector that Indian firms have invested most heavily in the early 2000s, mainly in the “Information” category (which refers mainly to information technology (IT)), depository institutions, and professional, technical, and scientific services. This finding is consistent with the detailed breakdown by industry of Indian firms undertaking U.S.-bound FDI over the period 2000–2008, as shown in Table 7.5, which we developed on the basis of our sample. The parent companies belonged not only to traditional manufacturing industries, but also to services industries like IT, business services, banking and finance, telecommunications services, and services relating to media and entertainment. In our sample of 164 Indian MNEs4 that have engaged in OFDI in the United States over the period 2000–2008, 60.4% (99 companies) of the firms are in services and 39.6% (65 companies) are in manufacturing. The service sector, which is the key sector for Indian OFDI in the United States, is dominated by IT and IT-enabled services (such as business process outsourcing), while in the manufacturing sector, the largest contribution is made by pharmaceuticals and healthcare.

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Table 7.5 Distribution of Indian MNEs engaged in U.S.-bound OFDI by sector and industry (2000–2008) Sector/Industry

Number

Percentage 60.4

Service Sector

99

Banking and finance Hotels IT and IT-enabled services Media and entertainment Telecommunications Travel

6 1 82 4 5 1

Manufacturing Sector

65

Agriculture Automotive Chemicals Computer peripherals Electrical equipment Fast moving consumer goods Food and beverages Jewelry Metals Packaging Pharmaceuticals and healthcare Textiles

2 8 9 1 1 2 3 3 6 3 20 7

Total

164

39.6

100.0

Source: Author’s survey, compiling data from Accenture (2006), “India goes global—How cross-border acquisitions are powering growth”; Assocham Eco Pulse (2007), “Mergers and Acquisitions in First Quarter 2007–08”; Ernst & Young and Federation of Indian Chambers of Commerce and Industry (2006), Report on Direct Investment in the United States of America by Indian Enterprises; Federation of Indian Chambers of Commerce and Industry (2006), “India Inc. plumps for American Companies; software, healthcare corner big chunk of deals, says FICCI-E&Y Report”; MAPE (2006), “Indian Inc. Goes Abroad: Indian Companies’ Foreign Acquisitions—January 2000 to March 2006”; U.S.-India Business Council (2008), Investing in America—The Indian Story (Washington, D.C.: U.S.-India Business Council); Virtus (2008a), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in 2007,” Virtus Global Partners, Vol. 1. Mar. 1, 2008; Virtus (2008b), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in the First Half of 2008,” Virtus Global Partners, Vol. 1, July 2, 2008.

3. The Age of Indian MNEs Investing in the United States Of the sample of 164 Indian MNEs that have engaged in OFDI to the United States over the period 2000–2008, age information was available for 150 MNEs (91% of the total). Table 7.6 shows the age distribution of these 150 companies, together with a breakdown of the industries involved for each of the age groups. About 23% of the companies were founded within the last ten years, while the rest were older. Indian firms undertaking OFDI to the United States were largest in number in the 11–20 years age group, with IT firms forming the largest group. Firms older than 30 years account for slightly less than 23% of U.S.-bound

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Table 7.6 Number of companies, percentage and industry distribution of Indian MNEs engaged in OFDI in the United States by age group (2000–2008) Age (years)

Number of companies

Percentage Industry (number of companies)

1–10

35

23.3

IT (26), Agriculture (1), Pharmaceuticals (1), Telecom (3), Energy (1), Life sciences (1), Textile (1), Travel (1)

11–20

46

30.6

IT (33), Agriculture (2), Banking (2), Chemicals (2), Life sciences (2), Pharmaceuticals (2), Computer peripherals (1), Food and beverage (1), Media (1)

21–30

34

22.6

IT (15), Pharmaceuticals (7), Automotive components (4), Packaging (2), Metals (2), Computer peripherals (1), Printing/publishing (1), Telecom (1), Textile (1)

31–40

10

6.6

Chemicals (3), IT (3), Metals (2), Packaging (1), Pharmaceuticals (1)

41–50

13

8.6

Pharmaceuticals (3), Food and beverage (2), Textiles (2), Automotive components (1), Electrical equipment (1), IT (1) Irrigation equipment (1), Jewelry (1), Metal (1).

51–60

4

2.6

Automotive components (2), Pharmaceuticals (1), Textile (1)

61–70

0

0.0

71–80

1

0.6

Textile (1)

81–90

2

1.3

Banking (1)

91–100

1

0.6

Fast moving consumer goods (1)

⬎100

4

2.6

Banking (1) Fast moving consumer goods (1), Hotel (1) Jewelry (1)

Total

150

100.00

Source: Author’s survey, compiling data from Accenture (2006), “India goes global—How crossborder acquisitions are powering growth”; Assocham Eco Pulse (2007), “Mergers and Acquisitions in First Quarter 2007–08”; Ernst & Young and Federation of Indian Chambers of Commerce and Industry (2006), Report on Direct Investment in the United States of America by Indian Enterprises; Federation of Indian Chambers of Commerce and Industry (2006), “India Inc. plumps for American Companies; software, healthcare corner big chunk of deals, says FICCI-E&Y Report”; MAPE (2006), “Indian Inc. Goes Abroad: Indian Companies’ Foreign Acquisitions—January 2000 to March 2006”; U.S.-India Business Council (2008), Investing in America—The Indian Story (Washington, D.C.: U.S.India Business Council); Virtus (2008a), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in 2007,” Virtus Global Partners, Vol. 1. Mar. 1, 2008; Virtus (2008b), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in the First Half of 2008,” Virtus Global Partners, Vol. 1, July 2, 2008.

OFDI. Only 12 firms of more than 50 years old have undertaken OFDI in the United States. Examining the distribution of the companies by industry across the age groups leads to a number of interesting observations. The younger companies have predominantly invested in the service sector, while the older companies have concentrated mainly on the manufacturing sector. Firms

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from technology-based industries, such as IT and IT-associated industries (e.g., computer peripherals), agriculture (agricultural technology), energy, life sciences, telecommunications, and nontraditional service industries, such as travel and media, are dominant among the relatively new Indian investors in the United States. Even in the banking industry, which is usually categorized as a traditional service sector, the private commercial bank, ICICI Bank, and its investment wing, ICICI Venture, both undertook OFDI to the United States at the relatively young age of 11–20 years. The other banks that invested in the United States were the traditional, older banks such as the Bank of Baroda (incorporated in 1920), Bank of India (established in 1906), and the State Bank of India (founded in 1806). While the IT firms were mainly in the 1–40 years age groups, firms in the pharmaceutical industry are distributed evenly among age groups. The lack of productive domestic research and development (R&D), expiration of patents, competition from generic drugs, and high-profile product recalls are some of the documented causes driving OFDI among firms of diverse age groups in the Indian pharmaceutical and biotech industries to enter foreign markets, mainly through M&A (Express Pharma 2008). Our sample also reveals that the group of younger Indian MNEs (i.e., those in the 1–20 years age group) engaging in U.S.-bound OFDI belong to diverse industries, including IT (Mphasis BFL, Prithvi Information Solutions, Teledata Informatics, Polaris Software Lab, Firstsource Solutions), agriculture (Advanta India, Nunhem Seeds Private), automotive (Autoline Industries), banking and finance (ICICI Bank, ICICI Venture), chemicals (Dorf Ketal Chemicals), energy (GMR Energy), entertainment (Accentia Technologies, Pyramid Saimira Theatre), food and beverages (Tata Coffee), life sciences (Protech Biosystems Private, Suven Life Sciences), pharmaceuticals and healthcare (Avestha Gengraine Technologies Private, Bilcare, Indegene Lifesystems, Shantha Biotechnics, Strides Arcolab), telecommunications (Essar Communications, Reliance Communications, Scandent Solutions, WNS Global Services), textiles (Indiaplaza), and travel (TravelGuru). However, of these, IT firms constitute a significant proportion. It is also evident that out of the 82 IT firms in our sample, 59 companies (72%) belong to this relatively young age group.

4. Size Distribution of Indian MNEs Investing in the United States Prior to 1991, OFDI was pursued mainly by a small group of large familyowned conglomerates, including Tata, Birla, Kirloskar, Thapar, Mafatlal, JK Singhania, Mahindra, and others, which had ownership advantages related to finance and technological expertise.5 Traditionally, these MNEs could only acquire minority stakes of up to 49%, and any higher level of participation was allowed only in special cases. This limited expansion of Indian OFDI was largely due to the prevailing restrictive regime limiting outward FDI. With the economic reforms that began in 1991, these large firms were no longer required to limit their investments to minority

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holdings, and could instead acquire complete control over foreign companies. This change, together with the ongoing process of legislative reforms in the OFDI guidelines, enabled Indian MNEs to protect their ownershipspecific advantages from their rivals, and to maximize their returns by engaging in OFDI (Pradhan 2007). Apart from this visible trend of this select group of large Indian MNEs undertaking OFDI after the relaxation of controls, there is also growing evidence of increasing internationalization of small- and medium-sized enterprises (SMEs), a phenomenon virtually absent until the beginning of the 1990s. This conspicuous absence of SMEs among active investors until the 1990s can be attributed to the protective policy regime that prevailed until 1991, under which such firms were insulated from domestic and foreign competition, and consequently had little incentive to invest overseas (Pradhan 2007). The withdrawal of domestic and international restrictions, and the resulting change in the business environment in the 1990s, pushed these SMEs into intense competition with domestic and foreign competitors. For survival, sustenance, and growth under these new competitive pressures, many SMEs decided to turn to OFDI, in search of new markets for their products, and also to strengthen firm-specific intangible assets by acquiring smaller foreign competitors (Pradhan 2007). The OFDI undertaken by these SMEs could provide them with access to foreign technologies or trade-supporting networks in the United States that would help them increase and improve their technological, brand, and skill advantages. Table 7.7, based on data from the United Nations Conference on Trade and Development (2005), shows OFDI to the United States by Indian SMEs and large companies after ten years of liberalization and global competition in India. The table, in conformance with our above observation regarding the distribution of Indian OFDI by industry, reveals that overall OFDI in the service sector is larger—both in the number of investing firms and also in value—than in the manufacturing sector. This is true both for SMEs and for the large firms. This phenomenon is largely attributable to the emergence of a significant number of SMEs, together Table 7.7 Indian OFDI to the United States by SMEs and large-sized enterprisesa (March 31, 2001), in US$ millions OFDI by SMEs Number of firms Manufacturing Services

37 89

Value of investment 9 396

OFDI by Large Firms Number of firms

Value of investment

67 83

149 352

Source: United Nations Conference on Trade and Development (2005), “Case study on outward foreign direct investment by Indian small and medium-sized enterprises” TD/B/ COM.3/EM.26/2/Add.2, Oct. 31, 2005 (Geneva and New York: UNCTAD). a

As defined in the United States, as discussed in the following text.

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with the diversification and growth of existing large firms, mainly in the software industry. On the manufacturing front, U.S.-bound investments by large companies far exceeded those of SMEs, both in number and in volume. The Organization for Economic Co-operation and Development defines SMEs as nonsubsidiary, independent firms that employ less than a given number of employees, the number varying across countries (2005). The standard set by the European Union fixes the upper limit for SMEs at 250 employees, while in the United States, firms that employ fewer than 500 employees are considered SMEs. Following the U.S. definition, we have classified our sample firms into SMEs and large companies. Out of our sample of 164 companies, size information based on employment is available for only 134 firms, of which 37 firms fall into the SME category, while the remaining 97 firms are non-SME. SMEs engaged in OFDI in the United States are present both in the manufacturing and in the service sectors (especially in IT). According to our sample, the service sector dominates both among SMEs and larger companies. However, while the manufacturing-toservices ratio is 37% for SMEs, it is 79.6% for large enterprises. For SMEs, therefore, the service sector accounts for a significantly larger proportion of investment, whereas manufacturing sector investments are more prominent among larger firms. This trend appears to be similar to the one revealed by the United Nations Conference on Trade and Development (2005), as set out in Table 7.7. The qualitative and quantitative characteristics of SMEs determine their relative capability to pursue OFDI (United Nations Conference on Trade and Development 2005). Apart from their smaller size and relative newness in the Indian corporate arena, SMEs in general have neither a well-planned global strategy nor sufficient access to information regarding overseas markets, host country regulations, or the tastes and preferences of host country consumers. Also, these firms are not always capable of bearing the risk and uncertainty of competition in foreign markets. They generally have less ability to undertake R&D and import foreign technologies, and, consequently, have lower profit margins. Due to the combined effect of these factors, the volume of OFDI that individual SMEs engage in is generally less than that of larger Indian corporations. This is apparent from the data available on the amount of consideration that some Indian SMEs have paid for acquisitions in the United States between 2000 and 2008. There are a significant number of acquisitions made by Indian MNEs in the United States that involve amounts as small as US$10 million or less. To name a few, Virinchi Technologies acquired Ksoft Systems in 2005 for US$2.7 million (“Virinchi Technologies acquires KSoft . . .” 2005); Cyber Media took over SX2 Media Labs in 2006 for less than US$5 million (MAPE 2006); and Interactive Media Technology was acquired by FXLabs Studios in 2007 for US$3 million (Virtus 2008a). However, there have also been a few M&As by SMEs involving larger sums of money. For example, BFL Software paid around US$200 million to acquire Mphasis Corp in 2001

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(“BFL Software Buys Mphasis . . .” 2000). Similarly, Megasoft acquired Boston Communications Group in 2007 for US$64 million (Virtus 2008a, 2008b).

B. Entry Routes for Indian OFDI into the United States Home country MNEs can undertake OFDI in the host country market through one of two entry modes. One route is the greenfield investment or organic growth path, which refers to the creation of new enterprises and facilities, and to the development or expansion of existing production facilities in the host country. An alternative but more popular and pervasive entry mode is M&A, where home country MNEs, either by themselves or through their foreign arms, acquire firms with existing technology or markets, rather than building them from scratch. Following this route, domestic firms merge with, or acquire all or part of, an existing foreign company, making that company its foreign affiliate. This is the “inorganic” growth process.

1. Greenfield OFDI from India India’s experience in greenfield OFDI to the United States is relatively sparse in value and volume. Out of our sample size of 164 Indian parent companies engaging in OFDI to the United States over the period 2000–2008, only 11 companies have been observed to have made greenfield investments. Some of the Indian MNEs that entered the United States through the greenfield FDI route are the big Indian banks, including the Bank of Baroda, the Bank of India, ICICI Bank, and the State Bank of India, and IT companies such as Blue Star Infotech, Four Soft, Geometric, Infosys Technologies, Infotech Enterprises, Sonata Software, Tata Consultancy Services, and Tech Mahindra.

2. The Indian M&A Scenario The M&A channel has, in the early 2000s, become by far the most popular method adopted by Indian firms of all sizes when investing in the United States (United Nations Conference on Trade and Development 2004). The popularity of cross-border M&A as an entry route to the United States has developed largely because it offers rapid access to new markets and new sales networks through existing U.S. corporate outlets. Indian MNEs have found in M&A an easier, safer, faster and a more effective way to gain U.S. market share, and to acquire strategic resources such as brand names, access to customers, and marketing networks, rather than undertaking the risks and costs of making greenfield investments (Kumar 2008). For example, Indian IT firms have increasingly resorted to M&A in the United States with the intention of gaining market access and strategic assets, including technology, brand names, marketing and distribution networks,

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and proximity to clients (Pradhan and Abraham 2005, Pradhan 2007). Similarly, strategic motivations for making forays into new markets, such as expanding market coverage and acquiring key skills, have been propelling the interest in acquisitions among Indian pharmaceutical companies.6 Also, once they have established a foothold in the United States, these Indian firms are in a position to explore further M&A possibilities in order to consolidate their local presence, access new clients, and acquire more assets and capabilities (Accenture 2006). Out of the 164 Indian parent companies in our sample, 155 companies ventured into the United States via the M&A route, undertaking 241 acquisitions from 2000 to June 2008. In many cases, these Indian acquirers made a series of small transactions, each with its own strategic rationale, rather than simply buying up expensive competitors outright. For example, Wipro Technologies entered into a string of small transactions between 2002 and 2006, as discussed below in Section D.9 below. Table 7.8 shows the number of M&A deals that took place each year over the entire period, along with the annual values of the deals,7 based on whatever public data could be retrieved on consideration amounts.8 The table also provides a breakdown by industry of U.S.-bound M&A deals made by Indian firms over the period 2000–2008, on the basis of our sample. These investments were spread out over industries as diverse asagriculture, life sciences, textiles, media and entertainment, metals and mining, hospitality, chemicals, and jewelry, in addition to the frequent investments in IT and pharmaceuticals. In our sample, the IT industry was found to be the most acquisitive industry, followed by the pharmaceutical industry, which agrees with the findings of recent cross-border M&A studies (see, e.g., Federation of Indian Chambers of Commerce and Industry 2006, MAPE 2006, Virtus 2008a, 2008b). During this period, more than 70% of Indian OFDI involved the acquisition of 100% of stock in all-cash deals (“India Inc’s US-bound M&A” 2008). With increasingly favorable legislative reforms, booms in the IT industry and service sector, and improved stock market liquidity from the early 2000s, there has been a marked change in India’s business and economic environment (Accenture 2006). Consequently, there has been a steady rise in U.S.-bound M&A deals since 2000, with a larger number of Indian companies—spread across major industry segments—now exploring FDI opportunities in the United States, in a bid to compete with their global peers. In 2006 outward M&A transactions by Indian companies in the United States totaled US$23 billion, more than five times the total in 2005, and approximately 20 times the annual total in 2000 (Marchick and Slaughter 2008). While the volume and value of Indian OFDI to the United States was not very substantial in the early 2000s, there has undoubtedly been an increase in value since 2003, and, indeed, a steady acceleration in growth. The year 2007 saw a spectacular increase in OFDI, with 88 M&A deals worth US$10.5 billion, and a heavy concentration of acquisition activity

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Table 7.8

M&A deals in the United States by Indian MNEs (2000–2008)

Years

Overseas M&A (Annual Industry (number of firms) value in US$ millions)

2000

12 (445)

Fast moving consumer goods (1), IT (10), Pharmaceuticals (1)

2001

6 (255)

2002

7 (110)

2003

11 (110)

Chemicals (2), IT (8), Life sciences (1)

2004

27 (499)

Chemicals (1), IT (9), Life sciences (1), Pharmaceuticals (4), Telecom (1)

2005

29 (963)

Automotive (3), Chemicals (1), Food and beverage (1), Hotel (1), IT (10), Packaging (1), Pharmaceuticals (5), Telecom (5)

2006

21 (1,703)

2007

88 (10,554)

Agriculture (1), Automotive (4), Chemicals (4), Fast moving consumer goods (2), Food and beverage (1), Hotel (1), IT (47), Irrigation components (1), Jewelry (3), Media and entertainment (1), Metals (3), Packaging (1), Pharmaceuticals (9), Printing/ Publishing (1), Telecom (1), Textiles (6), Travel (2)

2008

40 (5,684)

Agriculture (2), Banking (1), Chemicals (1), IT (21), Jewelry (1), Life sciences (4), Media and entertainment (1), Metals (4), Packaging (1), Telecom (1), Textiles (1)

Total

241 (20,325)

IT (6) Automotive (1), IT (5), Pharmaceuticals (1)

Computer peripherals manufacture (1), Food and beverage (2), Hotel (2), IT (9), Irrigation components (1), Packaging (1), Pharmaceuticals (2), Textiles (1)

IT (124), Pharmaceuticals (24), Automotive (8), Chemicals (8), Telecom (9), Textiles (8), Metals (7), Life Sciences (6), Food and beverage (4), Jewelry (4), Packaging (4), Agriculture (3), Fast moving computer goods (3), Hotel (3), Media and entertainment (3), Irrigation components (2), Travel (2), Banking (1), Computer peripherals manufacture (1)

Source: Author’s survey, compiling data from Accenture (2006), “India goes global—How cross-border acquisitions are powering growth”; Assocham Eco Pulse (2007), “Mergers and Acquisitions in First Quarter 2007–08”; Federation of Indian Chambers of Commerce and Industry and Ernst & Young (2006), Report on Direct Investment in the United States of America by Indian Enterprises; Federation of Indian Chambers of Commerce and Industry (2006), “India Inc. plumps for American Companies; software, healthcare corner big chunk of deals, says FICCI-E&Y Report”; MAPE (2006), “Indian Inc. Goes Abroad: Indian Companies’ Foreign Acquisitions—January 2000 to March 2006”; U.S.-India Business Council (2008), Investing in America—The Indian Story (Washington, D.C.: U.S.-India Business Council); Virtus (2008a), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in 2007,” Virtus Global Partners, Vol. 1. Mar. 1, 2008; Virtus (2008b), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in the First Half of 2008,” Virtus Global Partners, Vol. 1, July 2, 2008.

in the IT and pharmaceutical industries. Table 7.8 shows that, overall, the IT and pharmaceutical industries in the United States have experienced the largest number of cross-border acquisitions by investing Indian MNEs. In the IT industry, while most of the acquisitions made by Wipro since

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2000 were small- and medium-sized deals within the US$30 million range, in 2007, Wipro Technologies acquired Infocrossing for US$568 million. Another IT/business processing outsourcing firm, Firstsource Solutions, took over the healthcare business process outsourcing company MedAssist for US$330 million in the same year. In the metals and mining industry, Hindalco acquired Novelis in 2007 for over US$6 billion, and in the same year JSW Steel took a 90% stake in Jindal United Steel, Saw Pipes USA, and Jindal Enterprises, for a total of US$900 million (“Going Global: JSW Steel . . .” 2007). The first half of 2008 alone witnessed 40 acquisitions of U.S. firms by Indian MNEs, with a total transaction value of nearly US$5.7 billion, including three deals valued over US$1 billion, as compared to only one such deal in 2007 (“Indian Companies Hunting Bargains in the U.S.” 2008). These large deals were Sterlite Industries’ acquisition of Asarco, valued at US$2.6 billion, GMR Energy’s purchase of a 50% equity stake in InterGen for US$1.1 billion, and Tata Chemicals’ acquisition of General Chemicals for US$1 billion. The other large M&A deals made by Indian firms in the United States in the first six months of 2008 were the acquisitions of Regulus Group by 3i Infotech for US$100 million, Caterpillar by Satyam Computer for US$60 million, and Jass & Associates and SDG Corporation by Mascon Global for US$55 million total. The Tata Group has been the largest investor in the United States, with investments of nearly US$5 billion through M&A in the period 2005– 2008. It is one of India’s oldest and largest global conglomerates.9 The holding company of the Group is Tata Sons, which has operations in many industries, including engineering, consumer products, energy, and chemicals. The Group operates 16 companies in the United States—from luxury hotels (including the Pierre in New York) to beverages (Tetley Tea, Eight O’Clock Coffee, Good Earth Tea), chemicals, steel, telecommunications, engineering services, and IT consulting companies, employing more than 17,000 people. Revenues generated by the Tata Group in the United States in 2007 amounted to around US$5.4 billion. It has already brought Tata Consultancy Services to Silicon Valley (Giridharadas 2005). In the pharmaceutical sector, Dr. Reddy’s Laboratory is a large Indian MNE that has acquired pharmaceutical manufacturing units in the United States. Wipro, a large Indian firm in the IT industry, has also purchased U.S. companies through horizontal acquisitions (discussed in Section D.5 below).

C. Factors Driving OFDI from India to the United States The trend of Indian MNEs engaging in U.S.-bound OFDI has not emerged in a vacuum. There are identifiable economic, political, and institutional factors that have triggered and sustained this phenomenon. However, there are also, of course, firm- and industry-specific differences in these drivers.

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Nonetheless, generally speaking, the determinants or drivers of OFDI are the factors that activate the MNEs’ internationalization or further expansion overseas (United Nations Conference on Trade and Development 2006). The literature on the motivations for FDI broadly classifies such drivers into two types: one attributing them to the demand-side pull factors, and the other to the supply-side push factors (Ariff and Lopez 2007, Aykut and Ratha 2003, United Nations Conference on Trade and Development 2006).

1. Push Factors Driving OFDI from India Push factors are the micro- (firm-level) and macroeconomic, political, financial, and institutional characteristics of the home country market, which generate the supply-side conditions that induce domestic companies to engage in OFDI. The United Nations Conference on Trade and Development distinguishes among four main types of home country drivers, or push factors that influence domestic companies to move abroad: (1) market and trade conditions; (2) conditions attributable to the costs of production (including constraints on factor inputs); (3) local business conditions; (4) and home government policies (2006). While home OFDI policies have been dealt with in the previous section, we list and explore below some of the other major push factors that drive OFDI from India to the United States. As we will observe, many of these factors are fairly general, and can be applicable to any typical firm engaging in OFDI. a. Changes in Indian OFDI Policies It is beyond doubt that the FDI policy regime in the home country plays a vital role in determining the amount of OFDI flowing out of that country.10 Although access to markets, natural resources, distribution networks, foreign technologies, and strategic assets (such as brand names) constitute the standard motivations for OFDI by Indian firms, such investment activities would not be possible without the favorable policy attitude of the Indian government towards OFDI. The active encouragement provided by the Indian government, through its significant liberalization of policies and regulations on OFDI since 1991, has increasingly played an instrumental role in the expansion of Indian firms abroad (United Nations Conference on Trade and Development 2005, Pradhan 2007, Kumar and Chadha 2008, Pradhan 2008b).11 b. Attitudinal or Behavioral Change among Indian Firms Under the protective industrial, investment, and trade policy regime of the first four decades of Indian independence, which was aimed at the attainment of self-reliance through import substitution, many large Indian manufacturing firms were motivated to undertake in-house R&D in order to build their knowledge base and technological capabilities, within the limitations of the prevailing policy environment. As a result, by the 1990s, many Indian firms had accumulated considerable firm-specific ownership assets,

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including distinctive technological capabilities, as well as local adaptation of imported designs in industries that include chemicals, pharmaceuticals, auto components, software, and consultancy (Lall 1983, Kumar 2008). Also, under the restrictive regime, the bulk of Indian OFDI was invested in neighboring developing countries. Largely driven by the then government agenda of regional (South-South) cooperation, this may also have been spurred by ownership advantages in intermediate technologies in relatively low technology industries, such as light engineering (Lall 1983, Kumar 2008). Comparative advantages, such as local knowledge and geographic and cultural proximity to the host country, were also a factor (ExportImport Bank of India 2008). OFDI to neighboring developing countries also provided a way to escape the sluggish growth in domestic demand and restrictive domestic government policies, which discouraged OFDI elsewhere. Most of this OFDI was concentrated in the manufacturing sector, and in setting up trading outposts and distribution channels abroad. After 1991, a number of Indian firms that succeeded in accumulating intellectual assets and improving their financial capabilities and creditworthiness became increasingly willing to embrace the risk of exploring developed host countries, including the United States, to acquire cutting-edge technology, rather than incurring the risk and expense of domestic R&D. This willingness was strengthened by the gradual relaxation of regulations on overseas capital movements, with the initiation of the economic reform program in 1991, and the associated liberalization measures taken since then. Post-1991, Indian MNEs have also enjoyed a more supportive political and economic environment, including deeper currency reserves and easier access to debt financing, both at home and from international banks.12 Also, during this time, Indian MNEs increasingly invested in the service sector, as well as the traditional manufacturing sector (United Nations Conference on Trade and Development 2006). Their aims were not only to enter overseas markets and secure natural resources, but also to access firm-specific intangibles such as technology, skills, marketing expertise, brand names, and trade-supporting infrastructure (Pradhan and Abraham 2005). The growth and development of the service sector firms in the IT industry in India has significantly contributed to the recent trend of Indian OFDI directed towards the large markets of the United States and other developed countries. Such destinations generate demand for services, and provide the investing MNEs with scope for growth through global corporate integration. Some or all of these factors motivated Indian MNEs to venture abroad in their pursuit of OFDI (Accenture 2006). c. The Impact of FDI Inflows into India Poddar (2004) has argued that the foreign MNEs that have been engaged in FDI into India with an export motive, rather than a local market accessseeking motive, have, over time, generated information and technological spillovers. These spillovers have helped Indian firms develop their export potential by acquiring knowledge of foreign markets, distribution channels,

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and international marketing skills. This has motivated Indian exports to foreign markets themselves. With growing competition in export markets, a need eventually emerged for these firms to develop and expand their overseas trade-supporting infrastructure through OFDI (Pradhan 2008b). Also, increased competition in the domestic market, brought about by FDI inflows, provided many Indian firms with opportunities to develop more efficient production techniques, which, in turn, facilitated entry into foreign markets through OFDI. d. Generation of Corporate Funds Since economic liberalization began in 1991, many Indian firms have been motivated to restructure, which has helped them improve their technological advantages, and has made them more competitive in knowledge-based industries such as IT and pharmaceuticals.13 Such restructuring may have enabled these companies to cut costs, streamline operations, and increase profitability (Kumar 2008).14 As a result of this increased profitability, these firms were able to improve their financial capabilities through the creation of additional corporate reserves for investment. Increased FDI inflows to some Indian firms may have also helped to boost the financial solvency of the recipient companies by providing access to equity funds. e. Capacity to Raise Funds through Domestic and Foreign Borrowings The sustained growth and profitability of many Indian firms since 1991 have helped to build lenders’ confidence in these companies. This, coupled with the gradual relaxations of restrictions on foreign borrowing by Indian companies, has made it easier for Indian MNEs to engage in OFDI. Since its foundation in 1982, the Export-Import Bank of India has been very active in the globalization of Indian MNEs by extending term loans to them for overseas investments in the form of JVs or acquisitions (Export-Import Bank of India 2008). It has financed 241 ventures worth US$420 million, set up by over 193 companies in 63 countries, comprising both developed and developing economies (id.). The Bank’s Overseas Investment Finance program offers both equity and loan financing, and also provides advisory services in order to facilitate OFDI by Indian MNEs (id.). During 2008, the Bank sanctioned both funded and nonfunded assistance to 16 Indian companies, for partial financing of their OFDI in 11 countries (id.). Since April 2003, Indian commercial banks have also been permitted to extend credit to Indian companies for OFDI. In 2005 the Reserve Bank of India, for the first time, allowed domestic banks to lend money to Indian companies for overseas acquisitions (Accenture 2006). Also, from 2005 onwards, Indian firms were provided with access to the expanding international capital markets, as a result of being newly authorized to float special purpose vehicles in international capital markets. This has enabled Indian MNEs to finance acquisitions abroad, facilitating leveraged buyouts in international financial markets (Kumar 2008). On November 6, 2006, in

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order to facilitate the expansion of OFDI by Indian MNEs, the prudential limit on credit and noncredit facilities from banks to Indian JVs (where the holding of the Indian company is more than 51%) and wholly owned subsidiaries abroad was raised from 10% to 20% of their unimpaired capital funds (Gopinath 2007). The increased credibility of Indian MNEs in making profitable acquisitions, as well as turning around loss-making private and public companies abroad15 in the eyes of foreign financial institutions and overseas banks, has led these lenders to increase their loans to Indian MNEs for OFDI purposes. Moreover, the Indian government now allows Indian MNEs to borrow with greater ease in foreign financial markets, if they have the cash flow to repay the loans. The total lending by foreign institutions to Indian companies grew from US$13 billion in the fiscal year 2004 to US$17 billion in 2005. Banks lent US$5 billion to Indian companies in the first four months of the fiscal year 2006 (up to August), double what they had lent during the same period in the previous fiscal year (“FDI outflows will Rise . . .” 2006). Dutch Rabo Bank’s Indian operations funded several foreign acquisitions by Indian MNEs in the United States, including Tata Coffee’s purchase of Eight O’Clock Coffee for US$220 million in June 2006 (“How Indian Companies Fund . . .” 2006).

2. Pull Factors Driving OFDI from India Pull factors are the micro- (firm-level) and macroeconomic financial and institutional characteristics of the host country that generate the demandside conditions that attract outbound investing MNEs to these destinations. These include the presence of markets for an MNE’s products or services; the availability of resources (including extraction resources like oil and gas); the availability of strategic assets (brand names, technology, and distribution channels); low-wage costs; favorable business environments (stable macroeconomic conditions, adequate physical and institutional infrastructure, and preferential tax and tariff treatment, among other things); and also a certain familiarity between the host and home countries through trade, ethnic and cultural ties based on geographical proximity, similarity in ideological and political convictions, or migration relationships, which enable investing MNEs to reduce the transaction costs of undertaking OFDI. a. The IFDI Policy Regime in the United States The United States is considered an attractive investment destination by Indian MNEs, presumably because of the relatively low levels of regulation and government intervention, which give foreign investors ample operational freedom, and afford them fair and equitable treatment. Also, the United States has actively taken steps to liberalize its IFDI regime since the 1990s, for example by opening up certain restricted industries, such as telecommunications, as a result of the Uruguay Round and associated trade agreements.

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This relatively open attitude of the United States towards IFDI can be attributed to the United States’ recognition of the potential benefits of IFDI. Among other things, IFDI is considered to: contribute to productivity growth through the generation of increased investment in physical capital and R&D; generate exports; create high-paying employment opportunities for domestic workers16; bring in technology and skills; raise federal income tax revenues; and help to further integrate the country into the global economy through foreign trade (Slaughter 2008). Such FDI inflows also strengthen domestic U.S. companies through backward and forward linkages, and thus contribute to overall economic growth. They also provide domestic U.S. firms with exposure to new and cost-efficient techniques and practices that are brought in by foreign MNEs. Additionally, domestic companies are subject to competitive challenges from foreign affiliates, which further improve their productivity, quality, technologies, and overall efficiency at a global level. Furthermore, the entry of foreign MNEs has the potential to increase the range of products available to consumers in the United States, by supplying low-cost but good quality products as alternatives to the costly branded products of local firms. In cases where a large part of the inputs required by foreign affiliates is purchased from local firms, IFDI can also strengthen domestic suppliers and customers through information sharing, and by setting new standards of quality or service (Pradhan 2007, Marchick and Slaughter 2008). U.S. IFDI regulations have developed gradually since the early twentieth century. The Trading with the Enemy Act, introduced in 1917, was used by presidents to expropriate German, and even some non-German, chemical and broadcasting assets in the United States, including American Marconi, the largest radio group in the United States at the time, which was controlled by British interests (Marchick and Slaughter 2008). The successor to the Trading with the Enemy Act was the International Emergency Economic Powers Act, enacted in 1977 (id.). This has been used by U.S. presidents for a variety of national security-related actions that affect trade and investment. In 1988 Congress passed the Exon-Florio amendment to the Defense Production Act of 1950. This legislation, enacted in response to concerns about growing levels of Japanese investment in the United States, gave the president the specific authority to block acquisitions of individual U.S. companies by foreign firms, if the acquisition threatened national security, and if no other laws or regulations could adequately protect against that threat (id.). The Foreign Investment and National Security Act was passed by Congress in October 2007. This Act further amends the Exon-Florio amendment to the Defense Production Act. It creates a formal statutory basis for the Committee on Foreign Investment in the United States17 to review acquisitions that threaten national security (id.). It also requires heightened scrutiny of acquisitions by government-owned companies, mandates the involvement of high-level officials in the committee, and requires additional reporting to Congress (id.). The Act, however, does not change the time periods for the review; it does not give Congress the explicit right to override

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decisions by the executive branch; and it does not ban, or even discriminate against, foreign investment in certain sectors of the U.S. economy. Thus, the latest amendment is not a radical departure from the original Exon-Florio amendment. In April 2008, the U.S. Treasury proposed implementing regulations that would, amongst other things, tighten government oversight of foreign investments, even in cases where the foreign buyer is acquiring less than 10% of a U.S. business (id.). While IFDI can be attractive to host countries, in as much as it makes a contribution to the host country’s economic development, it may also have a cost, as M&A involves the acquisition by a foreign MNE of a controlling stake in a domestic firm. Apart from economic competition issues, this may also involve threats of losing national control over homegrown technologies, as well as threats to national security and sovereignty. These concerns are even more acute with regard to M&A in key industries, especially when carried out by a foreign state-owned firm. Moreover, some stakeholders have concerns about corporate governance and corporate social responsibility issues, and the extent to which IFDI makes a genuine contribution to host country development (Pradhan 2007). Recognizing these potential pitfalls of opening up an economy to IFDI, the U.S. government has naturally raised certain restrictive barriers to IFDI, relating to foreign ownership. These barriers typically take the form of limiting the share of the equity capital of investing companies in a target industry so that nonresidents are allowed to hold to less than 50%, or even banning foreign ownership in some areas (Marchick and Slaughter 2008). Laws and regulations have been passed by Congress from time to time to restrict IFDI in certain industries, such as shipping, broadcasting, and air carrier and transportation services (id.). Legislation has also enabled the president to block or seize certain foreign investments (id.). FDI in U.S. financial services is restricted by diverse and complex regulations at the state level (id.). In recent decades, however, the benefits of IFDI have been increasingly recognized, and this has led to a reconsideration of some of these restrictions. b. Size of the Host Country Market The United States has the largest economy in the world, accounting for 42% of the global consumer goods market, and has a population of more than 300 million, a landmass of 3.7 million square miles, a per capita GDP of approximately US$45,000, and a per capita disposable income of approximately US$32,000. In such a deep and dynamic market, acquisitions made by Indian MNEs tend to have a strong market-seeking motivation, involving the horizontal replication of similar production lines (Pradhan 2007). Such market-related motives have been an important factor driving Indian IT and pharmaceutical MNEs to undertake OFDI in the United States. Indian business process outsourcing companies like CBay Systems are also making acquisitions in the United States in order to enter the medical transcriptions market in the country,18 with the objective of attaining global leadership in

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the business process outsourcing industry (“CBay Acquires Illiant” 2004). Similarly, Patni Computers acquired a 100% stake in Cymbal in 2004, in order to gain entry into the high-growth U.S. telecommunications market. c. Access to New Markets through the United States The free trade agreements that the United States has entered into with 14 partner countries, with a combined GDP of approximately US$4 trillion, and its bilateral investment treaties with 40 partner countries, offer foreign investors with operations in the United States, including Indian MNEs, access to a large number of markets around the world. d. Low Value of the U.S. Dollar One factor that may have led to the large volume of OFDI from India to the United States since 2006 is the relatively low value of the U.S. dollar. Other things remaining equal, the depreciation of the U.S. dollar has strengthened the hand of investors that are based in countries with other currencies, such as the Indian rupee, and put dollar-based investors at a comparative disadvantage. Insofar as the present favorable exchange rates are perceived as transitory, it also spurs active investment strategies by foreign MNEs in the United States (Organisation for Economic Co-operation and Development 2007a, 2007b). For example, Tata Chemicals concluded the US$1 billion acquisition of General Chemicals in 2008, at a time when the Indian rupee was strong against the U.S. dollar. Also, raising debt overseas became relatively less burdensome, thanks to the drop in interest rates in the United States. e. Proximity to Client Base Many of the Indian companies that were involved either in exporting or outsourcing software and IT services, business process outsourcing,19 and call center services to U.S. firms were already acquainted with the conduct of business in the United States. Many of these companies wanted to set up their own fully controlled branches or subsidiaries in the United States and acquire overseas competitors in order to gain market access and additional intangible assets, to maintain proximity to major customer sites, and to serve the relevant markets more efficiently. Setting up such branches or affiliates enabled them to take advantage of global opportunities by reducing delivery time, acquiring technological and other skills, and expanding their growth opportunities in markets abroad (Pradhan and Abraham 2005, United Nations Conference on Trade and Development 2004). For example, India’s Essel Propack built a plant in Danville, Virginia, driven by the need to be close to its customer Procter & Gamble’s Crest toothpaste factory in Browns Summit, North Carolina (Federation of Indian Chambers of Commerce and Industry 2008). 20 Another example is the case of Aurobindo Pharma’s acquisition of a U.S.-based FDA-compliant, fully integrated R&D, formulation manufacturing, and distribution facility located in the Princeton Life Sciences Corridor in New Jersey. This

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gives Aurobindo the benefit of being located in the vicinity of its potential customers, as well as facilitating the recruitment of appropriately qualified personnel (“Aurobindo acquires US facility” 2006). f. Technology, Knowledge, and R&D U.S. technology, know-how, and intellectual property are some of the main attractions for Indian MNEs investing in the United States. The highquality and cost-efficient education system of the United States creates an intellectual environment that not only creates a highly skilled labor pool, but also helps drive R&D through partnerships and grants with industry and government. The United States’ global leadership in technology and innovation (as well as in entrepreneurial activity and openness to new products and ideas) is evident from the 2007–2008 Global Competitiveness Index, in which the World Economic Forum ranked the United States as first for innovation, labor market efficiency, and sophistication of business operations and strategy (World Economic Forum 2007). The United States also provides a strong regime of intellectual property rights protection and enforcement. Of the 183,000 patents granted by the U.S. Patent Office in 2006, almost 50% of the applications originated in a foreign country (Invest in America 2008). According to Galama and Hosek (2008): The United States accounts for 40 percent of total world R&D spending and 38 percent of patented new technology inventions by the industrialized nations of the Organization for Economic Cooperation and Development (OECD), employs 37 percent (1.3 million) of OECD researchers [full-time employees], produces 35 percent, 49 percent, and 63 percent, respectively, of total world publications, citations, and highly cited publications, employs 70 percent of the world’s Nobel Prize winners and 66 percent of its most-cited individuals, and is the home to 75 percent of both the world’s top 20 and top 40 universities and 58 percent of the top 100.

The technological and financial competence that many Indian companies acquired through postliberalization corporate restructuring 21 encouraged them to venture into the U.S. market around the middle of the 1990s, and more so in the early 2000s. Their primary aims in doing so were to access the latest technology, skills, and knowledge that were either unavailable or of inadequate quality at home; to invest in R&D; and also to commercialize the results of their creativity, especially in the pharmaceutical, chemical, and IT industries. This has helped Indian companies become highly competitive, and to acquire strong domain expertise in order to develop novel solutions for their clients in those knowledge-based industries. In 2003 Wipro acquired Nervewire in the United States for US$18.7 million, to acquire deep domain knowledge and other IT-related advantages, including access to markets. 22 Sun Pharmaceutical Industries acquired Able Laboratories of New Jersey for US$23.15 million in December 2005, in order to enhance its in-house manufacturing and development capabilities for generic pharmaceutical products. 23 Access to technologies can also be

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achieved by setting up R&D centers in key locations. For instance, the Indian healthcare company Ranbaxy Laboratories has R&D activities in the United States, enabling it to develop novel drugs and to assimilate the latest U.S. technologies (United Nations Conference on Trade and Development 2004). Also, Indian firms have acquired companies in the United States in order to assimilate technologies that have been tried and tested in the United States. In 2003, i-Flex, a Mumbai-based IT company, acquired Supersolutions, paying US$11.5 million to access and assimilate technology that is widely used in the banking industry in the United States (Kundu 2005). At a broader organizational level, such acquisitions can also improve overall standards of customer service, processes, and quality. g. Search for Natural Resources The desire to secure long-term supplies of natural resources has also driven Indian companies to engage in U.S.-bound OFDI, although such instances are relatively few in number. For example, Essar Global acquired Minnesota Steel, which has a capacity of 1.4 billion metric tons of iron ore, for US$85 million in October 2007 (Kumar 2008). Essar Steel Minnesota is now constructing a US$1.65 billion iron ore and steel slab plant near Nashwauk (Range View 2009). *

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The drivers for OFDI during the postliberalization era have thus included not only the standard motives of access to foreign markets24 —increased market share, scale economies, reduced costs, energy security, etc.—but also the quest for strategic assets such as foreign technologies, knowledge, established international brand names, marketing and trade-supporting distributional networks, and client bases, in order to strengthen their competitiveness, and to move their production up the value chain (Pradhan 2008a, Rajwade 2005).

D. Indian OFDI Projects in the United States Indian firms from various industries have moved into the United States, using either the greenfield or M&A route, or sometimes a blend of both entry strategies in a phased manner. Our examination of the 164 Indian MNEs in our data set that have undertaken OFDI in the United States reveals that they have penetrated 20 industries as diverse as agriculture, automobiles, banking, chemicals, computer peripherals, consumer goods, food and beverages, hotels, IT, irrigation components, jewelry, life sciences, media and entertainment, metals, packaging, pharmaceuticals, printing/ publishing, telecommunications, textiles, and travel. This section presents 20 brief case studies of Indian MNEs that have undertaken OFDI in the United States in each of the above-mentioned industries. Wherever the amount of OFDI was available, we chose the company with the highest OFDI value. In cases where the parent Indian company has acquired several firms in the Brian Harley


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United States, we have tried to cover each of the acquisitions briefly (Tata Group and Wipro). In cases where the OFDI amount was not specified (e.g., life sciences), we have chosen to analyze the largest parent company.

1. Agriculture25 Advanta India, an associate company of United Phosphorus, an Indian agrochemical company, was founded in 1998. It markets a broad range of grain and forage sorghum products throughout the Indian subcontinent, Asia, Australia, Africa, Europe, and Latin America. 26 Advanta has over 700 employees, and is represented in more than 30 countries. In March 2008, Advanta India, through its wholly owned subsidiary, Advanta Holding BV (Netherlands), acquired 100% of the business of Garrison & Townsend (Hereford, Texas), for US$10.5 million. This was a horizontal acquisition: Advanta is a producer of seeds, and Garrison & Townsend is a producer of cash grains. This acquisition broadens the product range of Advanta. It is also expected to strengthen Advanta’s already significant presence in sorghum worldwide by giving it access to the U.S. and Mexican markets, and by providing it with a U.S. production base. Furthermore, the strengths of Garrison & Townsend in the U.S. and Mexican sorghum markets are likely to get a further boost from the addition of Advanta’s strong and diverse sorghum portfolio from the global markets.

2. Automotive27 Chennai-based commercial vehicle manufacturer Ashok Leyland, the Indian flagship of the Hinduja Group, was founded in 1948. It is engaged in providing design and engineering services to the automobile, industrial machines, and power generation industries, through its subsidiaries Ashley Design and Engineering Services Division. In April 2007, Ashok Leyland signed a share purchase agreement to acquire 100% of the paid-up capital of Defiance Testing and Engineering Services, an automotive testing services company based near Detroit, for US$17 million (Ashok Leyland 2007).

3. Banking The oldest commercial bank on the Indian subcontinent, State Bank of India is the premier Indian public-sector bank. It was established in 1806 as Bank of Calcutta, and was nationalized by the Indian government in 1955, with the Reserve Bank of India holding a 60% stake. It has four foreign offices and subsidiaries in total. State Bank of India has greenfield operations in the United States, with multiple branches in Chicago, New York, Los Angeles, and Washington, D.C. (State Bank of India 2010).

4. Chemicals28 In 2008 Tata Chemicals, 29 India’s largest soda ash manufacturer, acquired a 100% equity stake in General Chemical Industrial Products, a U.S.-based soda ash manufacturer, for US$1 billion.30 Brian Harley

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This horizontal acquisition of the natural soda ash facility in Wyoming has raised the total global capacity of Tata Chemicals from around three million tons (spread over its units at Mithapur (India), Norwich (UK), the Netherlands, and Lake Magadi in Kenya) to around 5.5 million tons of soda ash per annum (“Tata Chemicals: Buy” 2008). This has made Tata Chemicals the world’s second-largest soda ash company, after the Belgian chemical company Solvay, thus contributing to the economies of scale of the parent company. Acquired capacities are expected to help Tata Chemicals quickly capitalize on the trends of high global soda ash prices (around US$300 a ton), without the gestation period that would be involved in putting greenfield capacities in place. Moreover, this acquisition could endow the parent company with substantial global scale advantages and manufacturing cost advantages in its soda ash business. Cost advantages emerge from the fact that natural soda ash uses less energy, capital, and raw materials than synthetic soda. The added capacities will ensure that a majority of Tata Chemicals’ facilities will be using natural production methods.

5. Computer Peripherals31 Delhi-based Moser Baer India, incorporated in 1983, is the world’s secondlargest manufacturer of optical storage media, including floppy disks, CDs, and DVDs. The company also has a presence in areas such as solar energy, entertainment, IT peripherals, and consumer electronics in over 82 countries, which are served through six marketing offices located in India, the United States, and Europe. In 2006, Moser Baer invested US$7 million in SolFocus, a U.S.-based solar energy technology company in a manufacturing and distribution agreement. This cross-border FDI marked a horizontal integration in solar energy for Moser Baer, which has now become a volume manufacturer of SolFocus, and the exclusive distributor of SolFocus panels in India and neighboring countries. The capabilities that Moser Baer brought to the deal, such as world-class precision, and high-volume and low-cost production processes, were expected to match the manufacturing needs of SolFocus’ innovative solar concentrators.

6. Fast-Moving Consumer Goods Mumbai-based Marico Industries, founded in 1988, is an Indian conglomerate with business interests in manufacturing and retailing personal consumer products. It also provides services in beauty lines. Marico ventured into skin care products in 2003 through its horizontal acquisition of a 70.5% stake in Sundari, a manufacturer of luxury Ayurvedic skin care products (“Marico to sell stake in Sundari” 2009). This entry into the skin care products market marks Marico’s first acquisition in a developed country. In 2005 the consolidated turnover of the company (inclusive of the turnover of its subsidiaries and Sundari LLC) crossed the US$200 million

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mark as it ventured into new businesses and new geographical markets. The acquisition of the Sundari range of beauty products has given Marico a presence in the U.S. skin care market, and a presence in the spa market in leading hotels globally. After its acquisition by Marico, Sundari has been able to roll out five new products in the U.S. market, and has commenced appointing full-service distributors in Asian markets (Marico 2009). In April 2009, however, Marico decided to sell its Sundari stake to another U.S.-based company, Wellness Systems (“Marico to sell stake in Sundari” 2009).

7. Food and Beverages32 Tata Tea Ltd., part of the Tata Group, was formed in 1983 from the Tata Finlay Company, a JV that was formed in 1964. Tata Tea acquired the London-based Tetley Group for US$432 million in 2000, and entered the U.S. tea market through Tetley. With the acquisition of Tetley, the combined entity represented the second-largest branded-tea operation in the world, with a product presence in more than 40 countries. Tata Tea remained only a marginal player in the U.S. tea market, with a presence in black tea, and a small presence in specialty teas. The acquisitions by Tata Tea Inc. 33 of Good Earth Teas and its parent company, Fmali Herb Co. of Santa Cruz, for US$50 million in 2005; of Eight O’Clock Coffee for US$220 million in 2006 (“Tata acquires Eight O’Clock Coffee” 2006); and of a 30% stake in Energy Brands in 2006 for US$677 million, were planned as part of Tata Group’s strategic plan for its globalization agenda in the beverages market. With the acquisition of Good Earth Teas, Tata Tea acquired not just the brand, but also knowledge of the U.S. market. In 2006, Tata Coffee, a 51%owned subsidiary of Tata Tea, acquired Eight O’Clock Coffee Company from Gryphon Investors. This acquisition involved an Indian firm acquiring a company much larger than itself. It was financed through a combination of equity and nonrecourse debt, and was in line with Tata Coffee’s plans to enter the U.S. market. Energy Brands, in which Tata Tea acquired a 30% stake, owns the Glacéau brand of beverages. This 30% stake was previously held by the private equity fund TSG Consumer Partners. The arrangement was that Tata Tea and Tata Sons would together invest US$250 million in equity to buy out TSG Consumer Partners’ stake, and the balance would come through debt. Tata’s objective was to diversify into the fast-growing “enhanced water,” or “noncarbonated flavored water,” market driven by health and fitness-conscious consumers, and thus strengthen its presence in the expanded beverages market of the United States, and provide opportunities for global growth of its drinks business. In November 2007, however, Atlanta-based beverage giant Coca-Cola Company purchased Tata Tea’s 30% stake in Energy Brands for US$1.2 million, thus becoming the 100% owner of the acquired company. This transaction generated a neat

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profit of US$523 million for Tata Tea (“Tata Tea makes $523m profit . . .” 2007).

8. Hotels34 Tata Group’s Indian Hotels Company acquired three hotels in the United States between 2005 and 2008.35 In 2005, it entered into a lease agreement to operate and manage the Pierre, the luxurious landmark hotel on New York’s Fifth Avenue, for US$50 million. In early 2007, it assumed full ownership of the 1927 Boston landmark hotel, the 273-room RitzCarlton, from Millennium Partners for US$170 million. The hotel was renamed the Taj Boston upon closure of the deal. In the same year, Indian Hotels acquired Hotel Campton Place, a 110-room European-style luxury boutique hotel located in San Francisco, from Kor Hotel at a cost of US$60 million (including estimated transaction costs). The acquisitions were made as part of the company’s long-term strategy of penetration and expansion in the United States.

9. Information Technology36 Wipro Technologies, the global IT services business of Wipro Ltd., has undertaken a series of mergers and acquisitions in the IT industry since 2002. In that year, it made two acquisitions in the United States—GE Medical Systems Information Technologies for US$5.73 million, and the Global Energy Practice of American Management Systems at US$26 million. The acquisition of the Global Energy Practice brought Wipro more than 50 client relationships, with 15 active engagements across Europe and the United States. The strong client base that was created included investorowned utilities, public power utilities, regional transmission companies, and independent system operators. In 2003 Wipro acquired Nervewire for an estimated US$20 million. This acquisition also gave Wipro an existing base of customers, along with strategic consulting expertise in industries that are already engaged in a significant amount of offshore outsourcing. Nervewire brought a team of 90 domain experts catering to various segments within the banking, financial services, and insurance space, which fit well into Wipro’s growing financial services business. Nervewire also brought over 40 client relationships, with 20 active engagements and a front-end consulting presence for Wipro in the United States. Wipro’s associations with American Management Systems and Nervewire were expected to strongly influence outsourcers to give projects to Wipro, as the acquired U.S. brands conveyed proximity and comfort to U.S. clients and outsourcers. In 2005, presumably with a view to strengthen its position in the financial arena, Wipro Technologies acquired mPower, of Princeton, New Jersey, with a development center in Chennai, and MPACT Technology Services, based in Chennai, for an all-cash consideration of US$28 million. A niche company, mPower is focused on the payment space. This amalgamation

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was anticipated to bring together the niche expertise of mPower in payments and Wipro’s wide range of services and extended global reach. Through this acquisition, Wipro Technologies also entered into a strategic engagement with MasterCard International, by acquiring a 100% stake in MPACT, a JV between MasterCard and mPower. As a part of the agreement, Wipro was to provide MasterCard and other clients in the payment market with a wide range of services, which could include application development and maintenance, infrastructure services, package implementation, business process outsourcing, and testing. This vertical acquisition was in line with Wipro’s strategy of investing in niche areas where it could establish leadership through superior domain knowledge and operational excellence, and has the potential to help Wipro acheive scale growth. Since December 2005, mPower Software Services has been operating as a subsidiary of Wipro Ltd. In 2007 Wipro made the further acquisition of an infrastructure-cumhealthcare business process outsourcing company, Infocrossing, based in Leonia, New Jersey, for US$600 million. Infocrossing’s biggest assets are its five data centers in the United States (employing 900 employees) that it uses to manage its customers’ IT infrastructure, which mostly consists of mainframes and Unix and Linux servers. The acquisition, one of the largest by an Indian IT company in the United States, is part of an ongoing trend of offshore applications development outsourcers seeking to expand to become full-service companies. Wipro’s acquisition of Infocrossing could help the Indian parent company emerge as a full-service IT outsourcing firm for U.S. customers, and thus expand its U.S. customer base by filling the gap that is created by U.S. customers who want to have their data centers physically located in the United States instead of offshore, despite the cost efficiencies of the latter arrangement. The acquisition of Infocrossing is part of Wipro’s plan to expand its presence in the United States through the opening up of software development centers, and also to build up its U.S. software development talent base by building relationships with U.S. universities and colleges.

10. Irrigation Components37 Jain Irrigation Systems, a diversified company with a product portfolio encompassing irrigation products, piping products, plastic sheets, dehydrated foods, fruit puree, and juice concentrates, acquired 100% shareholder control of Chapin Watermatics in New York, in May 2006 for approximately US$6 million in cash and debt, with deferred payment terms for part of the consideration. Chapin Watermatics is a pioneer and leading manufacturer of drip tape, and is known as a complete source for field crop, nursery, and greenhouse drip irrigation systems. It has the production capacity to produce sales of up to US$15 million. The acquisition is expected to significantly enhance the ability of Jain Irrigation to participate in turnkey projects in developing country markets, while providing a

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strategic brand suited to mature markets in the United States and Europe. With the ever-growing problem of water scarcity, irrigation markets worldwide are witnessing huge growth, and thus the acquisition has very favorable implications for Jain Irrigation. In 2007 Jain Irrigation acquired 100% control in Aquarius Brands of California from Habasit Holding, in an all-cash deal for US$21.5 million. This series of horizontal acquisitions is expected to provide Jain irrigation with access to the United States’ enormous irrigation business market, and the latest technology for irrigation components. Furthermore, the combination of Chapin’s tape, Jain’s low-cost manufacturing capabilities and diverse product selection, and Aquarius’ broad product line and wide distribution network could also provide synergies between operations in India and the United States, and give customers a complete, high-quality package from one source.

11. Jewelry38 In 2007 the 102-year-old diamond and jewelry manufacturing company Shrenuj & Company of Mumbai, with a consolidated group revenue of 9.5 billion rupees in the fiscal year 2006, acquired an 84.6% stake in a Seattlebased, 80-year-old jewelry distribution chain, Simon Golub & Sons. Simon Golub supplies US$100 million worth of jewelry to 2,400 retail outlets in North America, including top stores like Sam’s Club, Wal-Mart, JC Penny, Sterling, and Zales. The acquisition was valued at US$22.7 million. Shrenuj funded the acquisition through long-term debt, foreign currency convertible bonds, and internal accruals. Shrenuj already had export connections, exporting diamonds and studded jewelry to the United States. With this horizontal acquisition, Shrenuj achieved deeper access to the world’s biggest jewelry market. It can now directly sell its range of diamonds and other jewelry to retailers, in order to build additional margins and to access first-hand information regarding changes in fashion trends and consumer preferences. The massive distribution system of Simon Golub could be used to run marketing and branding programs. Shrenuj would also bring to Simon Golub its robust inventory management systems for both large chain stores and independent retailers. Simon Golub closed in 2006 with a turnover, including agency sales, of US$136 million, and US$2 million in profits.

12. Life Sciences39 Hyderabad-based global pharmaceutical company Dr. Reddy’s Laboratories entered into an agreement to acquire BASF’s pharmaceutical contract manufacturing business and related facility in Shreveport, Louisiana, in 2008 for an undisclosed amount. BASF is the world’s largest chemical company, with 95,000 employees. Its portfolio includes oil and gas, chemicals, plastics, performance products, agricultural products, and fine chemicals.

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The BASF business that was acquired involved the contract manufacturing of generic prescription and over-the-counter products for branded and generic companies in the United States. The unit had revenues of US$43 million in 2007. Together with the facility in Louisiana, the acquisition also included the relevant business, customer contracts, Abbreviated New Drug Applications and New Drug Applications, trademarks, and the manufacturing facility and assets of BASF at Shreveport. It also included a tolling and supply agreement. The acquisition of BASF’s finished dosage manufacturing facility in the United States was expected to enable the acquirer to strengthen its supply chain for North America, and provide a strong platform for pursuing additional growth opportunities. The BASF facility would provide Dr. Reddy’s with a profitable revenue base, built on strong customer relationships with branded and generic companies, and offer a platform to further expand its portfolio of prescription generics, over-the-counter capabilities, and products.

13. Media and Entertainment40 In April 2008, Mumbai-based Reliance Big Entertainment Private Ltd. (Reliance Entertainment), the flagship media and entertainment company of the Ambani Group, acquired a 100% stake in the digital images business of U.S.-based DTS Inc. for US$18 million. This marked Reliance Entertainment’s first overseas foray into the digital service space. The U.S. firm’s DTS Digital Images, also known as Lowry Digital Images, offers picture-quality improvement services for movies, television, and video content such as services in digital restoration and enhancement of moving pictures, using its own proprietary tools and algorithms. Among its studio clients are Walt Disney Pictures, Paramount Pictures, MGM, and Twentieth Century Fox, in addition to George Lucas’s and James Cameron’s production companies. With this acquisition, Reliance Entertainment is expected to gain access to Hollywood studios for its content and postproduction services.

14. Metals41 In 2007 Aditya Birla Group’s Hindalco Industries acquired the aluminum giant Novelis, based in Atlanta, Georgia, through its subsidiary AV Metals for approximately US$6 billion, including approximately US$2.4 billion of debt. There are significant geographical market and product synergies in this horizontal acquisition. Novelis is the global leader in aluminum rolled products and aluminum can recycling, with a global market share of about 19%. Hindalco is India’s largest nonferrous metals company, with a 60% share in the potentially high-growth Indian market for rolled products. The combination of Hindalco and Novelis, with complementary expertise, is expected to establish a globally integrated aluminum producer,

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with low-cost alumina and aluminum production facilities that would be combined with high-end aluminum rolled product capabilities.

15. Packaging42 Essel Propack (India) is a Mumbai-based company with three lines of manufacturing businesses: laminated and seamless plastic tubes for the oral, cosmetic, healthcare, food, and industrial markets; medical devices; and specialty packaging. In order to enter the U.S. market, it established its first manufacturing facility, Essel Propack Lamitubes (Essel Propack America) in Danville, Virginia, in 2002. This location was chosen in order to be close to one of its customers, Procter & Gamble’s Crest toothpaste filling plant in Greensboro, North Carolina. Today, Essel Propack is one of the leading global laminated tubes manufacturers. These tubes are used by fast-moving consumer goods companies like Procter & Gamble, Unilever, etc. Essel Propack’s second expansion in Danville was made through the establishment of Essel Propack Plastitubes (Arista U.S.), through its U.K. subsidiary Arista Tubes, in 2006. The investment was made to include equipment and building upgrades at the Danville facility—to accommodate the addition of two new tube production lines, new generation state-of-theart combination print presses, pregraphic facilities, a new print production facility near its Arista factory, improved warehousing systems, and enlarged office areas. In all, the company has created 287 new jobs to manufacture 800 million tubes and 500 million caps and closures annually. It generates US$55 million in sales in the United States, with a 37% market share in the laminated tube industry (Somers 2008). In 2006 Essel Propack Ltd. made its foray into the medical devices business through the acquisition of Tacpro, in the United States (and Avalon Medical Services, Singapore), for US$10.7 million. In 2008, through its U.S. subsidiary Tacpro, Essel Propack acquired 100% of Minneapolis-based Catheter and Disposables Technology, a supplier of specialized disposable medical devices, for US$1.2 million in an all-cash deal. Catheter and Disposables Technology was a subsidiary of CardioTech International, a Wilmington, Massachusetts-based manufacturer of cardiac and other medical devices. It also acquired a 74% equity stake in another Minneapolisbased company, Medical Engineering & Design, a supplier of specialized disposable medical devices, in an all-cash deal through its U.S. subsidiary Tacpro. The two deals were expected to provide an opportunity for Essel Propack to broaden its existing product lines.

16. Pharmaceuticals43 Jubilant Organosys was incorporated as Vam Organic Chemicals in 1978. It was primarily a chemicals company. However, with the acquisition of Max India’s active pharmaceutical ingredient unit in 2002, Jubilant has become an integrated pharmaceutical company, and the largest custom research and manufacturing services company in India.

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In 2005 Jubilant acquired a 100% equity stake in Target Research Associates, a U.S.-based full-service clinical research organization, for a cash payment of US$33.5 million. The acquisition provided an established and robust business platform for the rapid growth and development of Jubilant’s clinical research business. The target was renamed Clinsys Clinical Research, and is now a clinical research organization operating out of the United States. In 2005 Jubilant also acquired Trinity Laboratories, including its wholly owned subsidiary Trigen Laboratories, for US$12.25 million. The acquired company was renamed Jubilant Pharmaceuticals. It has since been operating as a generic pharmaceutical company in the United States, and has a U.S. Food and Drug Administration-approved formulations manufacturing facility. In 2007 Jubilant purchased Hollister-Stier Laboratories in the United States, which marked the largest overseas acquisition in contract manufacturing by an Indian company. Hollister’s contract manufacturing of sterile injectables and its stable and profitable allergy business, with strong brand loyalty, have the potential to strengthen Jubilant’s pharmaceuticals and life science products areas, further enhancing its position in those regulated markets.

17. Printing/Publishing44 In 2007 Laserwords, a company of the Chennai-based Murugappa Group, acquired Wisconsin-based Four Lakes Colorgraphics for around US$11 million. Laserwords, set up in 1983, is a technology-based content production company for the publishing industry. It provides IT solutions for the printing and publishing industry. Four Lakes Colorgraphics offers services such as high-end color reproduction and content production, and the two companies’ services were expected to complement each other advantageously (Four Lakes Colorgraphics 2007).

18. Telecommunications45 Videsh Sanchar Nigam Limited (VSNL) is India’s leading provider of international communication solutions, in which the Tata Group owns a controlling 46% stake. VSNL has made two acquisitions in the United States in recent years. In November 2004, it acquired the Tyco Global Network (named Tata Global Network after the acquisition), a subsea cable system that connects North America, Asia, and Europe, for US$130 million (“VSNL, Teleglobe integrated . . .” 2008). With this acquisition, VSNL could concentrate on providing data services and end-to-end solutions for multinational corporations based in India, and also move into the domestic long-distance and local access markets. VSNL also acquired the U.S.-based Teleglobe International Holdings in 2006 for around US$239 million. The new combined company is represented in more than 35 countries, and has a global customer base of 1,400

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wholesale customers and more than 650 enterprise customers. It would own and operate one of the world’s largest international mobile, data, and voice networks, with coverage in more than 240 countries and territories.

19. Textiles46 The textile firm Himatsingka Seide Ltd. acquired an 80% stake through its wholly owned subsidiary, Himatsingka America Inc., in New Yorkbased Divatex Home Fashions for US$53 million in July 2007. The enterprise value of the transaction was US$75 million. Himatsingka Seide Ltd. manufactures textiles made from fabric and yarn. Its products include silk/ blended fabrics, spun silk/blended yarn, bed linen fabric, and bed linen sets. Divatex is a large distributor of bed linen products in the United States. The vertical acquisition is expected to give the acquirer access to distribution networks in the United States, and generate significant synergies for sourcing requirements from the new Himatsingka US$100 million bed linen facility at the Hassan Special Economic Zone in Karnataka. In October 2007, Himatsingka Seide also brought into its fold a 100% stake in Atlanta-based DWI Holdings, through its wholly owned subsidiary Himatsingka America Inc., for US$30 million. The enterprise value of the transaction was US$30 million. DWI is a diversified company with licenses for the sourcing, marketing, and distribution of luxury home textile brands such as Calvin Klein, Barbara Barry, and Royal Sateen. It also has a hospitality division that caters to the unique needs of five-star and deluxe properties around the world.

20. Travel47 Panoramic Universal, previously known as IT Microsystems, acquired the business of the U.S. travel agency Future Travels in 2007. Based in New York, Future Travels is a leading consolidator with Air India and Kuwait Airways, and is also engaged in business with other airlines such as Delta, Air France, Lufthansa, British Airways, and American Airlines. Future Travels also arranges worldwide tours for Asian ethnic groups based in the United States and other countries. With this acquisition, Panoramic has made a diversification into the U.S. hospitality business, where it already owns and operates five hotels with 900 rooms. The acquisition could possibly deliver synergies and the potential to provide its customers a comprehensive service for all of their travel requirements.

21. Observations from the Case Studies Assessing the case studies set out above, we may make number of important observations: • First, the favored route of entry for Indian MNEs investing in the United States is the M&A route. In our sample, the greenfield route was resorted to only in the banking industry.

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• Second, it is evident from our analysis that most of the acquisitions in the period under study took place between 2005 and 2008, except for some of acquisitions by Wipro, which took place in 2002 and 2003. • Third, all of the companies for which employment data is available satisfy the U.S. definition of a large enterprise (referred to earlier in Section A.4)—that is, they employ more than 500 employees. This is indicative of the fact that, while midsize Indian companies were taking a more cautious approach to the global slowdown, large well-capitalized Indian companies took advantage of relatively low valuations in the U.S. market to strengthen their global positions through M&A (Virtus 2008b). • Fourth, there is tremendous diversity in the net profit margins (net profit after taxes as a ratio to net sales) of the 20 companies, varying from as much as 37% (Panoramic Universal) to as low as -9% (Himatsingka Seide). Net profit margin, a critical method for measuring corporate profitability, quantifies the (residual) amount of money that the company gets to keep per dollar of revenue, after all expenses and taxes have been paid. It serves as an indicator of a company’s pricing policies, and its ability to control costs. A low profit margin reflects a low margin of safety, and points toward a higher risk that a decline in sales will wipe away profits and result in a net loss. Our selection of Indian MNEs engaged in U.S.-bound OFDI, therefore, reveals diversity in terms of the level of financial stability. • Fifth, the ratio of exports to sales, which is a rough indicator of the export performance of a firm, is also very diverse for our list of Indian MNEs. The large export intensity values of some companies reflect their internationalization experiences through the export channel, while the lower values of this ratio indicate that these firms have predominantly adopted the OFDI route to enter U.S. markets, rather than taking both trade and investment as their entry strategies.

Conclusions This chapter has endeavored to analyze recent trends and patterns of Indian OFDI to the United States. First, it has undertaken a holistic macroanalysis of the overall behavior of U.S.-bound Indian OFDI in a global perspective. Then, on the basis of a carefully collected, comprehensive sample of 164 Indian MNEs engaged in OFDI to the United States, both through the greenfield and the M&A routes, between 2000 and June 2008, it has explored the pattern of OFDI made by these firms based on the their age and size structures. It has also studied the composition by industry of OFDI undertaken by these Indian parent enterprises. The choices of entry route of Indian OFDI to the United States have been investigated, and it appears evident from the available information and analysis that M&A remains the dominant entry strategy. The motivational factors behind this U.S.bound FDI from India, including the emergence and prevalence of legislative regimes in India and the United States that promote Indian OFDI, have also been duly examined. Finally, we have considered a number of brief case studies from every industry under analysis, in order to probe deeper into the India-to-United States OFDI scenario.

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One immediate limitation to this study is the lack of any rigorous time series econometric exercise. The explanation for this lacuna is fairly simple. Given the relatively recent character of the phenomenon of U.S.-bound Indian FDI, there is, as yet, too little time series data available to perform an effective quantitative econometric research on the subject. However, under the circumstances, and in order to perform some hands-on analysis, we resorted to firm-specific case studies. Also, since virtually the whole gamut of Indian OFDI to the United States (mainly in the form of M&A) has taken place within the last few years, the postacquisition performance patterns of the Indian parent MNEs and their U.S. subsidiaries is not yet clearly evident from the available information, and it would require more time for the time series data to mature and deliver sustainable results and observations. Hence, such analysis is a major item for future research, where we hope to concentrate on the comparison between the premerger and postmerger performance of the Indian parent firms and their U.S. subsidiaries, to evaluate the sustainability of Indian OFDI to the United States. However, it is clear from the evidence that the volume and value of the OFDI deals, between investing Indian firms and recipient U.S. companies, that have materialized since 2000 is increasing, and that such ventures do create mutual benefits. For the Indian MNEs, OFDI in the United States has demonstrated its potential to give them access to better R&D and skills infrastructure, and has established brand names and other strategic assets available in the United States, which these Indian MNEs have long been aspiring for in their endeavors to push technological frontiers. In return, these Indian MNEs are making considerable positive contributions to the U.S. economy. Extending beyond merely functioning as outsourcing partners, the presence of Indian MNEs in the U.S. business community as capable and competent business partners is becoming increasingly visible. Indian MNEs are also contributing to the U.S. economy by assisting in enhancing productivity and managerial talent, and providing quality training. Thus, Indian parent MNEs help by combining and synergizing the relatively cheap technical manpower and managerial advantages that are offered by India and the R&D infrastructure of the United States. Indian MNEs have also been bailing out U.S. companies from closure or bankruptcy, thus creating more job opportunities in the United States. The employment-boosting effect of Indian FDI in the United States has been confirmed in a study by the U.S.-India Business Council (2008). It claims that Indian MNEs have generated more than 30,000 jobs in the United States in recent years, especially since 2003 (“Indian firms have created 30,000 jobs in US: Report” 2008, Ernst & Young and Federation of Indian Chambers of Commerce and Industry 2009). Currently, Tata has 16 businesses and employs 19,000 employees in the United States (Federation of Indian Chambers of Commerce and Industry 2008). The Indian steelmaker Essar employs 7,200 employees in the United States, of whom only 30 are Indian (id.). Also, Indian OFDI helps smaller and midsized U.S.-based companies by providing the distribution networks and knowledge about local

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tastes, in order to penetrate foreign markets through the Indian parent companies at lower risk, either via exports to new markets or OFDI. These Indian MNEs also provide U.S. companies with access to a larger pool of resources in different countries (U.S.-India Business Council 2008). In view of these potential advantages of U.S.-bound OFDI from India to both the host and home countries, the responsibilities of the policy makers in both countries become significant. Policy makers need to focus on generating and sustaining business and economic conditions that promote the dynamic, high-productivity activities of globally engaged companies, so that these mutual benefits can be realized. Increasing business synergies between India and the United States, mainly in the technology-oriented industries, could thereby be created.48 Finally, we hope and expect that the results and recommendations of this study will be helpful to Indian MNEs, which are either already investing or intend to invest in the United States, to better judge their options and fine-tune their strategies. On the other hand, it should also provide U.S. firms with a better understanding of the business situation, thereby enabling better coordination and policies.

Notes *

University of Maryland, Baltimore County.

1. Hereinafter, “2008” will mean the first half of 2008. 2. See Chapter 3 for an analysis of the impact of the liberalization of Indian FDI regulation. 3. Singapore showed a slightly higher figure than India (49%) (USA Inbound Acquisitions & Investments Blog 2009). 4. The list of companies prepared by the author on the basis of authentic sources is available upon request. 5. See Chapter 4 for a discussion of conglomerates. 6. See Chapter 6 for an econometric model of the factors relevant to OFDI in the pharmaceutical industry, and Chapter 5 for two pharmaceutical MNE case studies. 7. The deals reported include not only the big deals, as made by the larger companies such as the Tata Group, Essar, and Reliance, but also a number of small and midsized deals in the US$20–$60 million range. 8. It has been observed that a substantial number of M&As undertaken by Indian companies have been paid for in cash, presumably because of easy liquidity in the Indian debt markets and a booming capital market. Very few stock transactions have been reported. Perhaps stock transactions are less popular because of the associated transaction costs relating to regulatory issues, and also because of the volatility of the Indian stock market. Finding a foreign seller willing to accept buyer stock as consideration can prove difficult. The foreign currency convertible bond route is also gaining popularity as a means of raising large sums of money for acquisitions (Federation of Indian Chambers of Commerce and Industry 2006). 9. See Chapter 4 for a more extensive discussion of the Tata Group. 10. See Chapter 3 for a thorough discussion of this question in the Indian context. 11. Apart from the liberalization of the OFDI regime, the domestic economic policy environment was also becoming more and more open in the 1990s through

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12. 13.

14.

15.

16.

17.

18.

19.

20. 21.

Nandita Dasgupta de-licensing, relaxation of labor laws, and trade- and exchange rate-related policies. Such overall policy reforms not only raised India’s growth rate from a meager 3% per annum in the 1970s to an annual rate of 8%–10% in the early 2000s, largely improving the competitiveness, scale, and global stature of Indian firms, but also gave greater capability and freedom to the Indian companies to carry out OFDI (Goldberg, Khandelwal and Pavcnik 2008, Ramamurthy and Singh 2008, Pradhan 2008b). See Chapter III for an analysis of the impact of the liberalization of Indian FDI regulation. See Chapter III for an analysis of the Indian government’s evolving policy towards OFDI, and how it has been impacted by India’s foreign currency reserves. The ownership of certain unique advantages by firms creates revenue-generating potential abroad which, combined with the presence of internalization and locational advantages, leads to OFDI and internationalization. Economic literature provides substantial information on the strength of ownership advantages of developed country MNEs engaged in OFDI that have derived these advantages from research and innovation in the home country. Compared to this, similar knowledge of ownership advantages of developing country firms, such as Indian firms, that enables overseas investment is limited (see, e.g., Kumar 2008). With India attaining an average gross domestic product (GDP) growth rate of around 8% since 2005, and the improvements in corporate efficiency achieved through restructuring, Indian companies have been successful in attaining average profit margins of around 10% in 2007 (Marchick and Slaughter 2008). Indian MNEs have succeeded in turning around loss-making private and public companies abroad by shifting part of the target company’s operations to India, and also by cost-cutting management initiatives. Gujarat Heavy Chemicals, an Indian soda ash maker, bought Dan River, a U.S.-based textiles company in 2005. The deal, worth US$93 million, is said to have bailed out Dan River, which had just emerged from Chapter 11 bankruptcy proceedings. The acquisition of Dan River was a marketing strategy, whereby the MNE proposed to harness Dan River’s position as a textile major in the United States, and utilize its American standing in Western markets for its own retailing contracts, manufacturing capabilities, and easy distribution access in North American markets. Most of Gujarat Heavy Chemicals’ production was likely to be outsourced to units in India and China, thus benefiting from cheap labor in those countries. See discussion at section D.15 below (“GHCL acquires Dan River . . .” 2005). In 2005, investing foreign MNEs employed nearly 5.1 million Americans, which represents 4.4% of the U.S. private-sector labor force. The average compensation per worker at Indian affiliates was US$66,042, 31.8% above the average of US$50,124 for the rest of the private sector (Slaughter 2008). The committee was created in 1975. It is an interagency government body led by the Department of the Treasury, tasked with monitoring foreign investment in the United States. It was empowered to formally review M&A transactions involving a foreign acquirer for possible national security risks in 1988. Medical transcription involves trained professionals converting voice-recorded reports, as dictated by physicians or other healthcare professionals, into text format. IT/business process outsourcing companies provide outsourced services to their clients, offering novel competitive solutions through an efficient mix of on-site and offshore service models. See Section D.15 below. While many Indian companies were gaining financial capabilities through restructuring in the 1990s, some of them, at the same time, focused on innovation by developing affordable yet functionally efficient products (Kumar 2008).

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22. See section D.9 below. 23. See Chapter 5 for a detailed case study of Sun Pharmaceutical Industries. 24. Jaya Prakash Pradhan (2008a) shows that acquisitions by Indian companies tend to have a strong market-seeking motivation to serve the local market of the host country or region, which involves a horizontal replication of similar production lines in different locations. Consequently, the market size of the host economies (both by population and by per-capita GDP) plays an important role in attracting Indian acquirers (as does the availability of a large and skilled pool of labor). This contributes to explaining the attractiveness of developed countries, and especially the United States, for Indian OFDI. 25. The case study is based on “Advanta acquires Garrison & Townsend . . .” (2008). 26. Sorghum is the fifth-largest cereal grain in the world and plays an important role in the global expansion of bioenergy. It is significantly more drought- and heattolerant than corn, and so plays a crucial role in the more arid parts of the world. 27. This case study is based on “Leyland buys US auto testing company” (2007). 28. This case study is based on “Tata Chemical’s Acquisition timed well” (2008). 29. Tata Chemicals Ltd. manufactures and sells soda ash, cement, sodium bicarbonate, and food additives, including edible salt and cooking soda. Its fertilizers division produces urea and phosphate for agricultural use. 30. Soda ash is a commodity used to make glass and detergents. 31. This case study is based on The Energy Blog (2006). 32. This case study is prepared on the basis of “Tata Tea’s strategies . . .” (2007). 33. Tata Tea Inc. is the subsidiary company in the United States that is involved in the marketing and value addition of tea extracts. 34. This case study is based on “Indian Hotels to Acquire . . .” (2007). 35. Taj Hotels Resort and Palaces comprises 64 hotels in 45 Indian locations, and 15 hotels at international locations such as in the United States, United Kingdom, Africa, the Middle East, Maldives, Mauritius, Malaysia, Bhutan, Sri Lanka, and Australia (Taj Hotels 2010). 36. This case study is based on “Wipro acquires GE medical . . .” (2002), “Wipro acquires mPower” (2005), and “Wipro expands U.S. operations . . .” (2007). 37. This case study is based on “Jain Irrigation Arm Buys US Firm for $6m” (2006). 38. This case study is based on “Shrenuj buys 84.6% stake in US co Simon Golub” (2007). 39. This case study is based on “Dr. Reddy’s buys BASF’s biz” (2008). 40. This case study is based on “Reliance Big acquires digital images of DTS Inc” (2008). 41. This case study is based on “Hindalco to Acquire . . .” (2007). 42. This case study is based on Essel Propack (2005, 2010). 43. This case study is based on “Jubilant Organosys acquires Clinical Research Organization” (2005) and “Jubilant Organosys acquires Hollister-Stier” (2007). 44. This case study is based on “Murugappa Co. buys out US firm for $11 million” (2007). 45. This case study is based on Tata Communications (2006). 46. This case study is based on “Himatsingka acquires Divatex” (2007) and “Himatsingka completes acquisition” (2007). 47. This case study is based on “Mumbai-based company . . .” (2007). 48. The United Nations Conference on Trade and Development has recognized that, in spite of gradual liberalization initiatives in India, the OFDI regime is still restrictive (United Nations Conference on Trade and Development 2004). Much of the OFDI by Indian firms is enticed by supportive host government regulations and incentives, as well as favorable competition and IFDI policies in the host countries, rather than incentives provided by OFDI-promoting regulations in India.

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Nandita Dasgupta Also, perceptions are that the United States is not sufficiently welcoming to foreign investment, and that it needs to “strike the right balance between national security and economic prosperity” (Invest in America 2007).

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Invest in America (2007), “Real Estate San Diego,” Jun/July 2007, available at www. resandiego.net/invest_in_america_main.html. Invest in America (2008), “USA: Open for Business”, Sept. 2008, available at www. buyusa.gov/hongkong/en/openforbusiness.pdf. “Jain Irrigation Arm Buys US Firm for $6m” (2006), The Hindu Business Line, May 4, 2006. “Jubilant Organosys Acquires Clinical Research Organization in the United States; First Ever Acquisition of US CRO by Indian Company; Jubilant Becomes Largest Indian CRO” (2005), Business Wire, Oct. 5, 2005, available at http://findarticles. com/p/articles/mi_m0EIN/is_/ai_n15661644. “Jubilant Organosys Acquires Hollister-Stier of US for $122.5 million” (2007), domainb.com, Apr. 26, 2007, available at http://www.domainKumar, Nagesh (2008), “Internationalization of Indian Enterprises: Patterns, Strategies, Ownership Advantages and Implications,” Research and Information System for Developing Countries (RIS), Discussion Paper, No. RIS-DP 140 (2008). Kumar, Nagesh and Alka Chadha (2008), “India’s Outward Foreign Direct Investments in Steel Industry in a Chinese Comparative Perspective,” United Nations University, Working Paper, No. 2008–053 (Maastricht: United Nations University). Kundu, Swati (2005), “India Inc goes global,” Asia Times, Nov. 29, 2005, available at http://www.atimes.com/atimes/South_Asia/GK29Df01.html. Lall, Sanjaya (1983), “The rise of multinationals from the third world,” 5(3) Third World Quarterly. “Leyland buys US auto testing company” (2007), Telegraph India, May 1, 2007, available at www.gasgoo.com/auto-news/1554/Leyland-buys-US-auto-testingcompany.html. MAPE (2006), “Indian Inc. Goes Abroad: Indian Companies’ Foreign Acquisitions— January 2000 to March 2006,” Apr. 19, 2006 (Bangalore: MAPE Advisory Group). Marico (2009), “Marico continues to grow despite economic slowdown—FY 09 Turnover at Rs. 2388 crore, up 25%,” Press Release, Apr. 22, 2009 (Mumbai: Marico). “Marico to sell stake in Sundari” (2009), The Times of India, Apr. 23, 2009, available at http://timesofindia.indiatimes.com/Business/India-Business/Marico-to-sellstake-in-Sundari/articleshow/4436960.cms Marchick, David M. and Matthew J. Slaughter (2008), “Global FDI Policy: Correcting a Protectionist Drift, The Bernard and Irene Schwartz Series on American Competitiveness,” Council Special Report No. 34, June 2008 (New York: Council on Foreign Relations). “Mumbai-based company Panoramic Universal acquires New York-based Future Travels,” NRI TravelNews, Dec. 24, 2007, available at http://www.nriinternet. com/NRItravel/AIRLINEnews/WHOsWHO/A-Z/F/Future_Travel_acquired_by_ PanoramicUniversa/index.htm. “Murugappa Co buys out US firm for $11 million” (2007), IndiaTimes Infotech, Aug. 8, 2007, available at http://infotech.indiatimes.com/articleshow/2263960. cms. Organisation for Economic Co-operation and Development (2005), SME and Entrepreneurship Outlook: 2005 (Paris: OECD). ——— (2007a), Main Science and Technology Indicators, May 2007 (Paris: OECD). ——— (2007b), Trends and Recent Developments in Foreign Direct Investment (Paris: OECD). Pradhan, Jaya Prakash (2007), “Growth of Indian Multinationals in the World Economy: Implications for Development,” ISID Working Paper, No. 2007/04 (New Delhi: Institute for Studies in Industrial Development).

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——— (2008a), “The evolution of Indian Outward Foreign Direct Investment: changing trends and patterns,” 4(1) International Journal of Technology and Globalisation (2008a), pp. 70–86. ——— (2008b), “Indian Direct Investment in Developed Regions,” Paper presented at the Copenhagen Business School Conference on Emerging Multinationals: Outward Foreign Direct Investment from Emerging and Developing Economies, 9–10 Oct. 2008, Copenhagen Business School, Denmark. ——— (2008c), “Outward Investment from India: Developments and Implications”, NIPFP-DEA Research Program, Second Research Meeting 27–28 March, 2008, New Delhi, available at www.nipfp.org.in/nipfp-dea-program/PDF/sl_0215_ pradhan.pdf. Pradhan, Jaya Prakash and Vinoj Abraham (2005), “Overseas Mergers and Acquisitions by Indian Enterprises: Patterns and Motivations,” 95 Indian Journal of Economics, pp. 365–386. Poddar, Tushar (2004), “Domestic Competition Spurs Exports: The Indian Example,” IMF Working Paper, IMF, WP/04/173 (Washington, D.C.: IMF). Rajwade, A.V. (2005), “Indian Multinationals,” rediff.com (2005), available at ia.rediff. com/money/2005/apr/25guest.htm. Ramamurti, Ravi and Jitendra V. Singh (2008), “Indian multinationals: Generic internationalization strategies,” in Ramamurti and Singh (eds.), Emerging Multinationals from Emerging Markets (Cambridge: Cambridge University Press). Range View, “It’s more than ore: Iron Range mining benefits state’s economy and students,” Spring 2009, available at http://www.ironrangeresources.org/_site_ components/lists/aboutrangeview/RV09Spring.pdf. “Reliance Big acquires digital images of DTS Inc” (2008) The Hindu: Business Line, Apr. 11 2008, available at http://www.thehindubusinessline.com/2008/04/11/ stories/2008041150700500.htm. “Shrenuj buys 84.6% stake in US co Simon Golub” (2007) The Hindu: Business Line, May 9, 2007, available at http://www.thehindubusinessline.com/2007/05/09/ stories/2007050904050200.htm. Slaughter, Matthew J. (2008), “What Tata Tells us?” Wall Street Journal, Mar. 27, 2008, available at http://www.ofii.org/newsroom/news/032708wsj.html. Somers, Ron (2008), “The Rise of the Indian MNC: Investing in America—The Indian Story,” U.S.-India Business Council. State Bank of India, United States Operations, 2010, available at http://www.statebank. com/contactus.htm (last visited Apr. 13, 2010). Taj Hotels (2010), “Company Information,” available at http://www.tajhotels.com/ AboutTaj/CompanyInformation/default.htm (last visited Apr. 12, 2010). “Tata acquires Eight O’Clock Coffee” (2006), The Hindu, August 9, 2006. “Tata Chemicals: Buy” (2008), The Hindu: Business Line, Nov. 16, 2008, available at http://www.thehindubusinessline.com/iw/2008/11/16/stories/2008111650361100. htm. “Tata Chemical’s acquisition timed well” (2008), The Hindu: Business Line, Feb. 1, 2008, available at http://www.thehindubusinessline.com/2008/02/01/ stories/2008020152371700.htm. Tata Communications (2006), “VSNL completes Acquisition of Teleglobe,” Tata Communications Press Release, Feb. 13, 2006, available at http://www. tatacommunications.com/news/release-view.asp?d=20060213. Tata Group North America (2008), Tata Group—Leadership with Trust, available at http://northamerica.tata.com/images/article/north_america_brochure.pdf. “Tata Tea makes $523m profit with Glacéau sale,” The Hindu: Business Line, May 26, 2007, available at http://www.thehindubusinessline.com/2007/05/26/ stories/2007052605230100.htm.

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“Tata Tea’s strategies for that global cup of tea” (2007), The Economic Times, Nov. 30, 2007, available at http://economictimes.indiatimes.com/articleshow/2673792.cms. The Energy Blog (2006), “Solfocus Completes $32 Million Funding, Signs Manufacturing Agreement,” Oct. 18, 2006, available at http://thefraserdomain. typepad.com/energy/2006/10/solfocus_comple.html. United Nations Conference on Trade and Development (2004), “India’s outward FDI: a giant awakening?” UNCTAD/DITE/IIAB/2004/1, Notes, Oct. 20, 2004 (Geneva and New York: UNCTAD). ——— (2005), “Case study on outward foreign direct investment by Indian small and medium-sized enterprises,” TD/B/COM.3/EM.26/2/Add.2, Oct. 31, 2005 (Geneva and New York: UNCTAD). ——— (2006), World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (Geneva and New York: UNCTAD). ——— (2009), World Investment Report 2009: Transnational Corporations, Agricultural Production and Development (Geneva and New York: UNCTAD). USA Inbound Acquisitions & Investments Blog (2009), “Will Inbound M&A Transactions Emanate from Russia?” Oct. 23, 2009, available at http://www. usainbounddeals.com /2009/10/articles/news-commentary/will-inbound-matransactions-emanate-from-russia/ U.S. Department of Commerce (2008), “Assessing Trends and Policies of Foreign Direct Investment in the United States,” (Washington, D.C.: International Trade Administration), available at www.ita.doc.gov/media/Publications/pdf/fdi2008. pdf. U.S.-India Business Council (2008), Investing in America—The Indian Story (Washington, D.C.: U.S.-India Business Council), available at http://www.ficciindousbusiness.in/InvestinginAmerica-report.pdf. “Virinchi Technologies acquires KSoft for $2.6 m” (2005), The Hindu: Business Line, Aug. 27, 2005. Virtus (2008a), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in 2007,” Virtus Global Partners, Vol. 1. Mar. 1, 2008. ——— (2008b), “U.S.-Bound Acquisitions by Indian Companies: Analysis of Transactions in the First Half of 2008,” Virtus Global Partners, Vol. 1, July 2, 2008. “VSNL, Teleglobe integrated as Tata Communications; new investments of $2 billion on the anvil” (2008), Domain-b.com, Feb. 13, 2008, available at http://www. domain-b.com/companies/companies_t/tata_com/20080213_new_investments. html. “Wipro acquires GE Medical System IT” (2002), Express India, July 18, 2002, available at www.expressindia.com/fullstory.php?newsid=12843. “Wipro Acquires mPower” (2005), CXOtoday.com, Dec. 23, 2005, available at http:// www.cxotoday.com/cxo/jsp/article.jsp?article_id=69921&cat_id=908. “Wipro Expands U.S. Operations Through $600 Million Acquisition of Infocrossing” (2007), InformationWeek, Aug. 7, 2007, available at http://www.informationweek. com/news/management/outsourcing/showArticle.jhtml?articleID=201300286. World Economic Forum (2007), Global Competitiveness Report 2007–2008 (Geneva: World Economic Forum, Geneva). World Economic Forum (2008), Global Competitiveness Report 2008–2009 (Geneva: World Economic Forum, Geneva).

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8 The Emergence of Indian Multinationals: An Empirical Study of Motives, Current Status, and Trends of Indian Investment in Germany Rajnish Tiwari and Cornelius Herstatt*

Introduction India, of late, has emerged as a major source of foreign direct investment (FDI). A recent study by IBM Global Business Services ranked India sixth worldwide in terms of overseas jobs creation in 2007 and 2008, ahead of China (IBM 2009a). Within a span of just eight years, from 2000 to 2008, India’s outward FDI (OFDI) stock has grown over 33-fold, from about US$1.9 billion to US$61.8 billion (United Nations Conference on Trade and Development 2009b). The Reserve Bank of India registered further outflows of US$10.6 billion in the first nine months of 2009 (Reserve Bank of India 2009, 2010). This growth is even more remarkable when contrasted with the meager US$124 million of OFDI stock that India held in 1990 (United Nations Conference on Trade and Development 2009a). The recent OFDI spree of Indian multinational enterprises (MNEs) has been well documented by the business press.1 Also, major business consultancies have published various reports that explicitly or implicitly deal with Indian investments abroad.2 This topic has also attracted some attention from independent academic researchers. In the 1980s, Sanjaya Lall (1983) and Jamuna Agarwal (1985) looked into various aspects of Indian FDI. More recently, apart from Jaya Prakash Pradhan’s various solo and coauthored works (2004, 2007b, 2007a, 2008), other authors have dealt with Indian MNEs’ growing quest for overseas assets and operations.3 However, Indian MNEs’ increasing engagement in Germany has received little academic attention so far, despite the German print media’s regular reports on Indian investments (e.g., Hucht 2007, Steinkühler 2007, Reppesgaard 2008). Notwithstanding this lack of research, Indian MNEs

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have discovered in Germany a major host country for OFDI, as the following sections will show. This chapter seeks to provide an overview of the current state of Indian investment and business activities in Germany. We will present the results of an empirical survey conducted with Indian subsidiaries in Germany in order to identify their primary motives, experiences, and investment plans in the medium term. The results of the survey are based on interviews with senior level managers, both of German and Indian origin, of 21 Indian subsidiaries in Germany. The study covers 17% of all active Indian subsidiaries in Germany, thereby giving useful initial indications regarding the issues concerned, and impetus to future research in this field. The study shows that Indian subsidiaries operating in Germany have generally performed well, and intend to further strengthen their operations, including research and development (R&D) activities. Nonetheless, subsidiaries are also faced with several challenges, including, but certainly not limited to, cross-cultural issues that need to be mastered. There are also industry differences in the motives, experiences, and location selection criteria of Indian MNEs. This chapter is structured as follows: after this brief introduction, we will discuss Indian OFDI in Germany, based on extensive desk research and empirical evidence, and also determine the scope of the study. Section B presents the results of our empirical survey regarding various characteristics of Indian OFDI in Germany, such as employment effects and technology transfer. The final section sets out our conclusions, a brief discussion of the limitations of the study, and some ideas for future research.

A. Indian Outward Foreign Direct Investment in Germany India and Germany share a long tradition of economic relations, dating back to the early sixteenth century (Kundu 2005).4 Such historical trade connections notwithstanding, Indo-German trade languished at very low levels for a long time. In 2000, India ranked thirty-sixth as a source of imports into Germany, and fortieth as an export market, behind countries like Romania and Slovakia (Statistisches Bundesamt 2010b). In recent years, however, the trade volume has greatly expanded, growing from approximately €5 billion in 2003 to over €13 billion in 2009, according to Germany’s Federal Statistical Office (Statistisches Bundesamt 2004, 2010a), as set out in Figure 8.1. By the end of 2009, India was ranked as Germany’s twenty-sixth largest trade partner in terms of imports, and nineteenth largest partner for exports (Statistisches Bundesamt 2010a). Although the trade balance in this period slowly but consistently tilted in Germany’s favor, Indian exports nearly doubled, from €2.6 billion to €5.1 billion (Statistisches Bundesamt 2010a). Since Indian exports are seen to be positively correlated

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Indian Investment in Germany 16,000 14,000

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Exports Imports

12,000 10,000 8,000 6000 4000 2000 0 2000 Figure 8.1

2001

2002

2003

2004

2005

2006

2007

2008

2009

Germany’s trade volume with India (2000–2009), in € millions.

Source: (Statistisches Bundesamt 2009).

with Indian OFDI (Pradhan 2007a), it is not surprising that Germany has become a major focal point for Indian MNEs in their pursuit of growth opportunities. Judging by the number of mergers and acquisitions (M&As) in the period 2003–2007, Germany has averaged just behind the United States and the United Kingdom as a target host country for Indian OFDI (Thakur and Böhmer 2008). According to one Deloitte report, India has even emerged as the single largest source of OFDI from developing countries into Germany, with Indian MNEs involved in 32 M&A deals between 2001 and 2006 (Deloitte 2007).5 A study by IBM Global Business Services states that Indian investments “accounted for 3% of total inward investment in Germany” in 2008 (IBM 2009b). According to the Indo-German Chamber of Commerce, more than 240 Indian firms were “already engaged in a business in Germany” in 2007, and their number was “constantly growing” (Indo-German Chamber of Commerce 2007). One problem with most figures and firm directories that we reviewed was that they very often incorporated all businesses, including restaurants and travel agencies, run by persons of Indian origin living in Germany. Moreover, many authors and news media tend to include firms owned by persons of Indian origin as “Indian” MNEs, even if the persons concerned are not Indian citizens, or the MNE has its registered headquarters outside India. For instance, Arcelor Mittal, which is majority-held by India’s U.K.-based business tycoon Laxmi Mittal, is very often reported as an “Indian” MNE, even though it is headquartered in Luxemburg. Even before merging with Arcelor, Mittal Steel was headquartered in Rotterdam

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and was legally a European firm, even though Mr. Mittal continues to hold an Indian passport. Taking our cue from the Organisation for Economic Co-operation and Development’s definition of FDI (Organisation for Economic Co-operation and Development 2008: 40), we consider only subsidiaries in which the Indiabased parent MNE holds a majority stake.6 Minority stakes, holding companies, and noncorporate investments—for example, by nonresident Indian citizens based in Germany, or by government agencies or nonprofit organizations such as trade and tourism promotion bodies—have been excluded from the scope of this study. For the purpose of this study, only those MNEs whose corporate headquarters are located in India are considered “Indian.” We were able to identify 123 such Indian subsidiaries in Germany that were active as of October 2008. More than half of all Indian parent MNEs were in the information and communication technology industry, which includes information technology (IT) and IT consultancy. Life sciences (pharmaceuticals and biotech) and automobile industry MNEs also had a significant presence. A breakdown of Indian MNEs active in Germany is provided in Figure 8.2. The above-mentioned 123 Indian MNEs owned, or had a majority stake in, 167 German subsidiaries. As can be seen in Figure 8.3, the state of Hesse, where Frankfurt is located, has attracted the highest number of subsidiaries of Indian companies (29%), followed at some distance by North RheinWestphalia (home to Cologne and Düsseldorf), Bavaria (home to Munich), and Baden-Württemberg (home to Stuttgart). A relatively large presence of Others, 6% Automobile & Parts, 11%

Travel & Logistics, 4%

Bank & Finance, 2%

Textile & Chemicals, 3%

Pharma & Biotech, 12%

Manufacturing, 10%

ICT & Consultancy, 52%

Figure 8.2

Active Indian MNEs (majority stakeholders) in Germany as of October 2008. a

Source: Survey conducted by authors. a

n ⫽ 123.

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Other states, 13% BadenWürttemberg, 17%

North RheinWestphalia, 18%

Bavaria, 18%

Hamburg, 5%

Hesse, 29%

Figure 8.3

Subsidiaries of Indian MNEs in Germany’s federal states as of October 2008. a


n ⫽ 167.

Indian subsidiaries in the Hanseatic City of Hamburg is also remarkable, as Hamburg is a city-state with a population of about 1.7 million. The 167 Germany-based subsidiaries of Indian MNEs provided employment to approximately 20,000 people on an annual, full-time average, as a study of available data suggests.7

B. Survey of Indian Subsidiaries in Germany In order to gather firsthand information on the activities, motives, challenges, and experiences of Indian subsidiaries in Germany, an empirical survey was conducted. For this purpose, seven research issues were identified on the basis of an extensive literature review. Apart from the literature on OFDI from emerging markets in general, and India in particular, as mentioned in Section A, scholarly works on the internationalization of firms and theories of multinational enterprises (e.g., Kumar and McLeod 1981; Dunning 1992, 1994; Dunning and Narula 1996) were consulted for the purpose of identifying and formulating the research issues. Questions related to the motives and challenges in regard to the internationalization of R&D activities were drawn from a work by the authors and Stephan Buse (Tiwari, Buse and Herstatt 2007). In addition to the literature-based inputs, the opinions of ten experts from India and Germany were sought so as to better reflect practical issues and concerns. The experts represented various institutions that are, in

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many instances, the first points of contact that an Indian MNE might have when deciding to invest in Germany.8 The research issues for the empirical survey were as follows: (i) Which factors motivate Indian MNEs to invest in Germany? To what extent have Indian MNEs been able to realize their intended motives? (ii) What is the preferred mode of initial investment for Indian MNEs to enter Germany? Have there been subsequent investments by those MNEs? (iii) How do Indian MNEs select the location for their subsidiaries in Germany? (iv) What are the technology implications of these investments for the MNEs in question, and for the home and host countries (i.e., for India and Germany)? (v) What is the employment effect of Indian subsidiaries in Germany? (vi) What are the challenges that Indian MNEs and subsidiaries typically face during the investment process and in day-to-day operations in Germany? (vii) What are their future plans in Germany (as a proxy for satisfaction measurement)?

Subsequently, a questionnaire was prepared that incorporated the research issues identified. The questionnaire was tested with two Indian subsidiaries in Hamburg in the form of a pilot study.9 The survey was conducted in July–August 2008 and targeted seniorlevel management in Germany-based subsidiaries of Indian MNEs. After careful research applying the scope criteria specified earlier, 148 Indian subsidiaries were contacted by post. The survey questionnaire was also made available online and in the form of a PDF document to facilitate participation. Twenty-five of the 148 subsidiaries could not be traced by the Postal Department, possibly an indication of the closure of their operations.

1. Characteristics of Respondents Altogether, 21 valid responses (17% of the total sample) were received. Among the respondents—all members of senior-level management—were seven Indians, 12 German nationals, and two other European citizens. The breakdown by industry was as follows: information and communication technologies (11), automotive and automotive components (6), wind energy (2), pharmaceuticals (1), and logistics (1). Except for three Indo-German joint ventures,10 all of the other respondents were wholly owned subsidiaries of India-based MNEs. The oldest subsidiary in the sample had been active in Germany since 1991, whereas the two newest ones were established in 2008. Ten subsidiaries were founded as greenfield investments while, 11 had been acquired. The 21 respondents had 43 subsidiaries or branches of their own in Germany. In all but one case, the subsidiaries were active in the same industry as their parent MNE. Twenty respondents employed a total of 3,225 full-time employees on average in the last fiscal year. The largest respondent in the sample employed 610 employees, and the smallest only one employee.

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Figure 8.4 shows annual turnover of the subsidiaries in Germany in millions of euros in the previous fiscal year at the time of the survey. Twelve of the 21 respondents (57%) had a turnover of up to €10 million; one-third of all respondents had a turnover of over €50 million; and four respondents had a turnover between €100 and €250 million.

2. Activities in Germany Most respondents (81%) were engaged in the production of goods and/or services in Germany. About half (43%) engaged in R&D. The respondents generally engaged in multiple activities. However, two respondents were involved only in marketing, and two others only in R&D. There were no significant industry differences in this regard. Figure 8.5 provides a breakdown of Indian MNEs by business activity.

3. Characteristics of the Parent MNE Seven of the MNEs (33%) had their corporate headquarters in Karnataka, six in Maharashtra, followed by Delhi (4), Tamil Nadu (3), and Andhra Pradesh (1). As can be seen in Figure 8.6 below, most Indian MNEs active in Germany were relatively large firms in the Indian context.11 Forty percent of them had an annual turnover in the billion euro range, and two of them even had annual revenues exceeding €5 billion. However, there were some small-sized MNEs whose annual turnover did not exceed €10 million. The two smallest MNEs were in the IT industry. 14 No. of firms 12 10 8 6 4 2 0 up to 10

10 to 25

25 to 50

50 to 100

100 to 250

Figure 8.4 Annual turnover of survey respondents in fiscal year 2007 in Germany, in € millions. a Source: Survey conducted by authors. a

n = 20; x axis: annual turnover.

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Rajnish Tiwari and Cornelius Herstatt 18 16

Firms

14 12 10 8 6 4 2 0 Production Figure 8.5

R&D

Marketing

After-sales

Business activities of Indian MNEs in Germany as of July 2008a .


n = 21; multiple activities possible.

> 5000, 10% up to 10, 10% 10 to 50, 5% 50 to 100, 5%

1000 to 5000, 29% 100 to 250, 24%

500 to 1000, 14% Figure 8.6

250 to 500, 5%

Group turnover of the whole MNE in fiscal year 2007, in € millions. a


n = 21.

Of the 19 respondents who chose to disclose the compound annual growth rate for their whole group for the past three years in terms of sales, more than one third (37%) reported that their group had grown by over 50% a year; another 37% had grown by 25% to 50% a year. None of the Brian Harley


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17 respondents to the question regarding operating profitability of the whole MNE on a three-year average reported any losses. Six MNEs had an operating profitability between 15% and 25%; another five MNEs between 25% and 50%.

4. Size and Modes of Investment Ten of the 19 respondents who chose to disclose the amount of the initial investments by their Indian parent MNE reported the sum to be under €5 million. In about 90% of the cases, the initial amount did not exceed €30 million. However, 12 respondents (57%) reported that the Indian MNE had made further investments. In six cases, the Indian MNE went on to acquire further assets in Germany, while in four instances greenfield investments were made. In one instance, the capacity of the subsidiary concerned was further expanded, while in another case, a new joint venture (JV) was entered into. The subsequent investments, in many instances, involved significant amounts, so that the amount of total investment may be significantly larger than the initial investment, as can be seen in Figure 8.7.

5. Investment Motives The respondents were asked to evaluate the importance of 18 possible motives for investing in Germany. The importance of individual motives

not disclosed, 10% 1000 to 5000, 5%

up to 5, 29%

100 to 250, 5%

50 to 100, 10%

30 to 50, 5% 5 to 15, 14%

15 to 30, 24% Figure 8.7 Total investment by the Indian MNE in the Germany-based subsidiary through July 2008, in € millions. a Source: Survey conducted by authors. a

n ⫽ 21.

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Table 8.1 Top investment motives for Indian MNEs in Germany (with industry breakdown) Motive (1 ⫽ not at all relevant; 6 ⫽ highly relevant)

Overall (n ⫽ 20)

Automobile (n ⫽ 6)

IT (n ⫽ 10)

Foster proximity to customers/ suppliers

5.5

4.8

5.8

Develop products/services for Germany

4.8

4.5

5.2

Understand and adapt to German markets

4.5

4.0

5.2

Build a base for Western Europe

4.5

4.5

4.5

Acquire new technologies

4.1

5.0

3.3

Develop global products/services

3.9

4.8

3.1

Competitors’ presence in German market

3.8

3.7

3.9

Access to infrastructure for advanced R&D

3.6

5.0

3.1

Access to skilled manpower

3.6

4.2

3.0

Acquisition of a reputed brand

3.3

4.0

2.8

Source: Survey conducted by authors.

in the investment decision could be evaluated on a scale of 1 (“not at all relevant”) to 6 (“highly relevant”). Additionally, the respondents were given the option of stating other individual motives. Proximity to customers and suppliers was the most important reason for Indian MNEs investing in Germany, evaluated on average at 5.5. Developing products suitable for specific German market demands followed next, with an average ranking of 4.8. Market-seeking motives clearly dominate the picture, as seen in Table 8.1. The table 8.1 clearly demonstrates that there is industry divergence in the motives of Indian MNEs in Germany. The automobile industry MNEs displayed an unmistakable preference for technology-seeking motives, as opposed to the preference for market seeking by IT MNEs. Technology acquisition was evaluated at an average value of 4.1 for all respondents, but with significant differences between automobile MNEs (average of 5.0) and IT MNEs (average of 3.3), signaling that technology seeking is as yet not uniformly relevant in the overall context of Indian MNEs in Germany. One motive that is common to all of the respondents is that they are motivated by the presence of their competitors in Germany, and seek to neutralize this advantage of their rivals through their own investments.

6. Realization of Investment Objectives The survey respondents were asked to choose from the list three primary motives for the investment in Germany, and to evaluate their realization

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on the previously mentioned scale of 1 (“not satisfied”) to 6 (“fully satisfied”). The evaluation of the three primary motives revealed a high level of satisfaction with their actual realization—5.3, 5.5, and 5.3, respectively. More remarkable, perhaps, are those motives which (some) MNEs failed to realize. One small-sized IT subsidiary had stated its primary motive for the investment in Germany as “to build a base for business in Eastern Europe,” and evaluated its realization after less than one year of operations as 1 (“not satisfied”). Another midsized IT subsidiary (with a turnover in Germany in the range of €100 to €250 million) stated “understand and adapt to German market,” “proximity to customers,” and “build a base for business in Western Europe” as its three primary motives, in that order. The realization of these motives was ranked at 3, 4, and 4, respectively, which reveals some signs of dissatisfaction. The motive “understand and adapt to the German market” was one which overall received a somewhat subdued response (4.8), especially in comparison to other motives such as “proximity to customers” (5.5) and “acquire new technology” (5.3). Summarizing, one can say that while most respondents were able to realize their primary motives for investment, there were isolated cases of dissatisfaction.

7. Criteria of Location Selection Survey respondents were asked about their location selection within Germany. For this purpose, they were asked to evaluate the influence of ten preidentified factors on their decision making, on a scale of 1 (“not at all relevant”) to 6 (“highly relevant”). Additionally, they had the opportunity to state other factors and evaluate them. The results are presented in Table 8.2. Table 8.2

Criteria influencing the location decision within Germany

Criterion (1 ⫽ not at all relevant; 6 ⫽ highly relevant)

Overall (n ⫽ 20)


IT (n ⫽ 10)

3.9

2.7

4.0

Proximity to customers

3.8

2.5

4.7

Availability of skilled labor

3.8

3.8

3.1

Accidental (e.g. owing to acquisition target)

3.8

4.3

2.9

Air connectivity to India

3.0

2.3

3.7

Cosmopolitan society

3.0

1.8

3.5

Presence of research institutions

2.9

4.0

2.8

Government incentives (e.g., subsidies)

2.3

3.2

1.9

Presence of the Indian community

1.8

1.5

2.2

Presence in an industry cluster

Source: Survey conducted by authors. Note: For actual geographic distribution of Indian-owned Germany-based subsidiaries, see Figure 8.3.

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As with investment motives, the location selection within Germany revealed remarkable differences between industries. Whereas IT MNEs looked for customer proximity and the presence of an industry cluster, automobile industry MNEs described their locations as “accidental,” for example, because the acquisition partner was already based in that location. One factor that was important for automobile but not IT industry MNEs was the presence of research institutes and universities. Automotive industry MNEs also showed some preference for the availability of skilled labor in the region and government support and subsidies.12 Neither of these factors mattered much to IT MNEs, probably because they conduct a significant part of their production offshore in India, and have a relatively high share of expatriates. The presence of an Indian community in the region, surprisingly, was not considered an important criterion by the respondents, in any of the industries surveyed.

8. Job Shifts Investments in the form of acquisitions frequently have an effect on the number of jobs in the parents and subsidiaries of the MNE, as business processes are reorganized and tasks are shifted between the headquarters and global subsidiaries. In the following section, we describe the employment impact of Indian OFDI in our survey sample. Seventeen respondents answered the question about the shifting of fulltime, “regular jobs”13 between India and Germany. Eight reported that there was no shift in jobs following the Indian investment; the other nine reported that jobs had been shifted between the two countries. Table 8.3 shows the flow of jobs in both directions. A total of 324 jobs were reportedly moved between headquarters in India and the subsidiary in Germany. Overall, Germany recorded a positive net job balance, as it gained 14 jobs more than it lost to India. Job shifts can be observed in all three activity fields (production, management, and R&D). Interestingly, R&D is the only field in which shifts did not take place in both directions. R&D-related jobs were moved from India to Germany, but not the other way round, possibly a sign of the strength of Germany’s attractiveness as a knowledge-based economy. Considering that the respondents employed 3,225 people in a full-time, regular capacity, the

Table 8.3 Shift in full-time, regular jobs between India and Germany as of July 2008 Direction From India to Germany From Germany to India Balance for Germany

Production

Management

R&D

Total

143 150 –7

21 5 +16

5 0 +5

169 155 +14


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45 Expatriates

40 35

(In %)

30 25 20 15 10 5 0 up to 5%

> 5–15%

> 25–50%

> 50–75%

> 75–100%

Figure 8.8 Share of Indian expatriates in the workforce of Germany-based subsidiaries as of July 2008. a Source: Survey conducted by authors. a

n ⫽ 20; x axis: share of expatriates.

displacement of 155 jobs does not seem very significant, especially since there is a small, positive balance for the host country.

9. Indian Expatriates Overall, the share of Indian expatriates in the workforce of the German subsidiaries seems to be moderate. Forty percent of the respondents reported that the share of Indian expatriates in their workforce ranged between zero and less than 5%. Generally speaking, IT subsidiaries had a higher number of expatriates than those in other industries. Also, greenfield investments usually saw more expatriates coming from India than was the case with M&A deals.

10. Technology Transfer The respondents were asked whether there had been flows of process technologies (production and organization techniques) and product technologies (design) from one country to the other. IT subsidiaries in particular brought their own process and product technology from India to Germany. However, most MNEs reported an active transfer of technology in both directions. The transfer flows were found to be mutual and generally not in a single direction. However, the two wind energy subsidiaries in the sample reported exporting product technology to their parent companies in India without importing any technology.

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11. Investment and Operational Challenges in Germany Table 8.4 describes the extent of various problems faced by Indian subsidiaries in Germany. The factors were evaluated by the respondents on a scale of 1 (“no problem at all”) to 6 (“a major problem”). Difference in work culture was, somewhat surprisingly, ranked as the foremost problem by all the respondents. There were, again, industry differences in the perception of the problems faced. Whereas the IT industry subsidiaries were most concerned about problems with getting work permits and visas for their expatriates, automobile subsidiaries were more concerned with high operational costs. Generally speaking, IT subsidiaries were more prone to problems than their automobile industry counterparts. A possible explanation could be that the staff of IT subsidiaries generally comprised a higher share of Indian expatriates, and were accordingly faced with the problem of “foreignness” in a country with a native language other than English. Automobile industry subsidiaries were mostly acquired by Indian MNEs and left with German management, and so there are fewer expatriates involved in day-to-day operations. Not surprisingly, there was a significant difference in how both groups evaluated the challenge of integrating Indian expatriates into the sociocultural environment of Germany: whereas automobile industry subsidiaries ranked the problem as rather mild (2.2), IT subsidiaries ranked it significantly higher (4.0). Interestingly, Indian and German/European respondents had certain differences in their perceptions of problems faced by their companies. For instance, Indian managers saw language problems more critically (3.8) than did their German colleagues (2.3), who obviously had a home advantage.

Table 8.4 Challenges encountered in the investment process and day-to-day operations in Germany (with industry breakdown) Challenge (1 ⫽ no problem; 6 ⫽ major problem)

Overall (n ⫽ 21)


IT (n ⫽ 10)

Difference in work culture

3.9

3.3

4.0

High operational costs

3.8

3.8

4.6

Obtaining work permits for expatriates

3.8

2.7

4.7

Finding qualified personnel

3.7

2.7

4.2

Social integration of expatriates in Germany

3.2

2.2

4.0

Language problems

2.8

1.8

3.9

High attrition rates among employees Attrition rates

2.7

1.8

3.0

Finding a suitable partner and location

2.0

1.3

2.6

Government approval process in Germany

1.9

1.7

1.9


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12. Performance of Indian Subsidiaries in Germany Notwithstanding the problems faced by the subsidiaries, most of them reported positive growth experiences. Most respondents reported high compound annual growth rates in terms of sales for the past three years, as shown in Figure 8.9. About two-thirds of all respondents to this question recorded a compound annual growth rate of over 25%, some even in excess of 100%. No significant industry or size-specific differences were observed in this regard. The same was also true for growth in terms of employment.

13. Planned Investments In corroboration with the reported positive performance, most respondents (19 out of 21) said they had plans for further investments in the short to medium term (two to three years). Augmentation of production capacities was the highest on the agenda, with 11 of 19 respondents planning investments in this area. Nine MNEs each planned investments to strengthen their R&D and/or marketing capabilities in Germany. Figure 8.10 shows the volume of planned investments. Nearly half (47%) of the MNEs planned investments not exceeding €15 million; 18% intended to invest more than €50 million. Cumulative investment plans point to an amount in the range of €270 million to €600 million. Nearly two-thirds (63%) intend to undertake

30 CAGR 25

(In %)

20

15

10

5

0 up to 5%

>5–15%

>25–50%

>50–75%

>75–100%

>100%

Figure 8.9 Compound annual growth rate of the subsidiary in Germany (2005–2007), in terms of sales. a Source: Survey conducted by authors. a

n = 16; x axis: share of respondents.

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Rajnish Tiwari and Cornelius Herstatt 6 Planned investments 5

4

3

2

1

0 up to 5 Figure 8.10 € millions. a

5 to 15

15 to 30

30 to 50

50 to 100

100 to 250

Short-to-medium term further investments plans as of July 2008, in


n ⫽ 17; y axis: no. of firms

M&A deals, followed by greenfield investments (47%), and joint ventures (37%) (multiple, further investments possible).

14. Summary of Survey Results In this chapter, we have described the results of our empirical survey in detail. We set out below the main findings of the survey, in relation to the research issues identified and described above: (i) Motives and their realization: Market and technology seeking (industry differences in investment motives); impressive realization to date (measured as compound annual growth rate in terms of sales and headcount). (ii) Preferred initial investment mode: Brownfield investments are more common; wholly owned subsidiaries are preferred, compared to majority stakes or joint ventures. (iii) Criteria of location selection: Presence of industry clusters and proximity to customers (however, industry differences exist); in the case of M&As, also “accidental” choices. (iv) Technology implications: Strong exchange of product and process technologies between home and host countries; in the case of wind energy technology, transfer from Germany to India. (v) Employment effects: Job movement between India and Germany; India gains more production jobs, Germany gains more jobs in management and R&D; positive net effect for Germany. (vi) Challenges and problems: Differing work cultures, getting work permits and visas for expatriates, and high operational costs pose major challenges

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(industry differences exist); differences of perception between Indian and German managers. (vii) Future plans: Most MNEs plan further investments in the next two to three years to augment production, R&D, and marketing; acquisitions are the preferred mode for further investments.

Conclusions This study has shown that Indian MNEs have discovered Germany as an attractive host country for their investments. It provides unique insights into the motives, operations, experiences, and future plans of Indian MNEs, as most studies to date have worked either with case studies or with secondary data, such as newspaper reports. The study indicates that Indian subsidiaries in Germany have generally performed well, and intend to further strengthen their operations there, including in the area of R&D. At the same time, Indian subsidiaries have been associated with positive employment effects for Germany. Nonetheless, subsidiaries are also faced with several challenges, including but not limited to cross-cultural issues, which need to be met. It seems imperative to offer cross-cultural training to employees in both countries so as to better coordinate day-to-day business interaction, and increase the efficiency of workflow. Also, there should be greater emphasis on student and internship exchange programs between the universities and firms of the two countries, to overcome such barriers. Moreover, industry differences must be kept in mind when devising strategies to overcome these challenges. Because this explorative study is based on a relatively small sample, the findings necessarily have a tentative character. Nevertheless, there are convincing reasons to suggest that the findings are generally accurate, as they are in conformity with expert opinions and available reports (KPMG 2008, Pradhan 2008, Thakur and Böhmer 2008). The findings provide a useful base for formulating hypotheses regarding FDI flows from developing to developed countries; for looking into various aspects of international business such as technology transfer, employment effects, globalization of innovation, and R&D; and finally, for analyzing the motives, location selection, and problems faced in host countries. It would be interesting to look into similar issues in other major destinations of FDI from India, such as the United Kingdom, the United States, and the Netherlands. Also, industry-specific determinants of success seem to be a promising research issue. Finally, a similar study of FDI from other developing countries, such as China or Brazil, would provide interesting comparisons, and may contribute to a better understanding of this kind of OFDI. In summary, we may say that Germany—without this fact being properly reflected in the official statistics—has advanced to the position of a key destination for Indian MNEs in their spirited pursuit of growth opportunities

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in the form of market-seeking as well as technology-seeking OFDI, and this trend will probably continue in the foreseeable future.

Notes *

Rajnish Tiwari is a Research Associate at the Institute for Technology and Innovation Management (TIM) of the Hamburg University of Technology (TUHH). Prof. Cornelius Herstatt is the Director of the same institute. The authors are grateful to Jaya Prakash Pradhan of the Institute for Studies in Industrial Development, New Delhi, for providing historical data on Indian FDI flows to Germany. Thanks are also due to Jayachandran K. Mani who provided valuable organizational and research assistance for this project.

1. See, e.g., Financial Times (Leahy and Tucker 2006), Economic Times (Sharma 2007, Krishan 2008), The Economist (“Emerging-market multinationals: The Challengers” 2008), and Business Week (Lakshman 2008). 2. See, e.g., A.T. Kearney (Rothenbuecher and Hoyningen-Huene 2008), the Boston Consulting Group (Aguiar, Bailey, Bhattacharya et al. 2009), Deloitte (2007), KPMG (KPMG 2008, Thakur and Böhmer 2008), McKinsey (Sinha 2005), and PriceWaterhouseCoopers (2009). 3. See, e.g. Kumar (1996, 2007), Sauvant (2005), Gupta (2006), Khanna and Palepu (2006), Das (2007), Ghemawat and Hout (2008), Sauvant, Mendoza et al. (2008), and Duysters, Jacob, Lemmens et al. (2009). 4. Kundu (2005) also provides a brief history of Indo-German business relations. 5. Germany’s Central Bank, the Bundesbank, reported Indian FDI stock in Germany as €131 million at year-end 2006 and €242 million at year-end 2007 (Bundesbank 2009). The official data—for several reasons—do not seem to reflect the reality. For instance, India’s Dr. Reddy’s Laboratories Ltd. acquired Germany’s fourth-largest generic pharmaceuticals company Betapharm Arzneimittel GmbH for a publicly stated amount of €480 million in February 2006. This deal alone would change the FDI stock figure considerably. In 2007 wind-energy concern Suzlon Energy Ltd. acquired Hamburg-based REpower Systems AG for approximately €1.35 billion (“Suzlon revises payment schedule . . . ” 2008). Even though the actual payment was made by Suzlon in several instalments (Krümpel 2008), the value of this acquisition is not reflected in the official data. For an explanation of this discrepancy in the official data, see Pradhan (2008: 53) and Reserve Bank of India (2006: 100). 6. FDI, according to the Organisation for Economic Co-operation and Development (2008) “reflects the objective of establishing a lasting interest by a resident enterprise in one economy [ . . . ] in an enterprise [ . . . ] that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise,” e.g., “direct or indirect ownership of 10% or more of the voting power.” 7. Data in the form of publicly available annual reports were available for 63 subsidiaries, which provided employment to 17,227 people on an annual, full-time average during 2007. Industry- and size-adjusted estimates were made for the other subsidiaries (Tiwari and Herstatt 2009). 8. The experts consulted represented the following institutions: Hamburg Chamber of Commerce, Indo-German Chamber of Commerce, Hamburg Business Development Corporation, Indo-German Export Promotion Foundation, German-India Business Centre, Institute for Studies in Industrial Development (New Delhi), German Consulate General (Mumbai), Invest in Germany GmbH, ElGa Biotech, and KPMG.

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9. For further information on the survey’s preparation, see Tiwari and Mani (2009). 10. Respective Indian parent held a majority stake in the JV so that all respondents can be classified as subsidiaries of Indian firms. 11. Even though in global terms they may not qualify as “large” MNEs. 12. This was especially true of MNEs that opted for subsidiary locations in the Eastern part of Germany. On East Germany’s attractiveness for potential investors from India, see KPMG (2008). 13. The term “regular job” signifies that apprentices and interns are not included as a member of the regular workforce. Also contract labor (for instance, workers leased from an outsourcing agency) does not count here.

References Agarwal, Jamuna Prasad (1985), Pros and cons of Third World multinationals: a case study of India (Tübingen: Mohr). Aguiar, Marcos et al. (2009), The 2009 BCG 100 New Global Challengers (Boston: The Boston Consulting Group). Bundesbank (2009), “Bestandserhebung über Direktinvestitionen,” 10 Statistische Sonderveröffentlichung (Frankfurt am Main: Deutsche Bundesbank). “Suzlon revises payment schedule for Martifer’s stake in Repower” (2008), BusinessLine, Dec. 16, 2008. Das, Niladri (2007), “The Emergence of Indian Multinationals in the New Global Order,” 1(1–2) International Journal of Indian Culture and Business Management, pp. 136–150. Deloitte (2007), East meets West—Inbound M&A Germany: Emerging Market Perspectives (Berlin: Deloitte Germany). Dunning, John H. (1992), Multinational Enterprise and the Global Economy (Essex: Addison Wesley). Dunning, John H. (1994), “Multinational enterprises and the globalisation of innovatory capacity,” 23(1) Research Policy, pp. 67–88. Dunning, John H. and Rajneesh Narula (1996), “The investment development path revisited: some emerging issues,” in J. H. Dunning and R. Narula, eds., Foreign direct investment and governments: catalysts for economic restructuring (London: Routledge), pp. 1–41. Duysters, Geert et al. (2009), “Internationalization and technological catching up of emerging multinationals: a comparative case study of China’s Haier group,” 18(2) Industrial and Corporate Change, pp. 325–349. “Emerging-market multinationals: The Challengers” (2008), The Economist, Jan. 10, 2008. Ghemawat, Pankaj and Thomas Hout (2008), “Tomorrow’s Global Giants? Not the Usual Suspects,” 86(11) Harvard Business Review, pp. 80–88. Gupta, Ashwani (2006), “Emergence of Indian Multinationals,” 8 Technology Exports, pp. 1–6. Hucht, Margarete (2007), “Indien boomt: Fremde Arbeitskulturen in Deutschland” 89 Hochschulanzeiger. IBM (2009a), Annual Report: Global Location Trends (Somers, NY: IBM Global Business Services, IBM Corporation). IBM (2009b), Annual Report Germany: Global Location Trends (Ehningen: IBM Global Business Services, IBM Deutschland GmbH). Indo-German Chamber of Commerce (2007), “Indian investments abroad—a performance overview,” Annual Review (Mumbai: IGCC), pp. 77–81.

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Khanna, Tarun and Krishna G. Palepu (2006), “Emerging GIants: Building WorldClass Companies in Developing Countries,” 84(10) Harvard Business Review, pp. 60–69. KPMG (2008), Eastern Germany as a Location for Indian Direct Investment (Hamburg: KPMG). Krishan, Sanjeev (2008), “India Inc becomes an M&A force,” The Economic Times, Jan. 25, 2008. Krümpel, Mark (2008), “Durchbruch für Inder bei Repower,” Financial Times Deutschland, June 6, 2008. Kumar, Krishna and Maxwell G. McLeod, eds. (1981), Multinationals from developing countries (Lexington, MA: Lexington Books). Kumar, Nagesh (1996), “India: industrialization, liberalization and inward and outward foreign direct investment,” in J. H. Dunning and R. Narula, eds., Foreign direct investment and governments: catalysts for economic restructuring (London: Routledge), pp. 348–379. Kumar, Nagesh (2007), “Emerging TNCs: Trends, patterns and determinants of outward FDI by Indian enterprises,” 16(1) Transnational Corporations, pp. 1–26. Kundu, Kunal Kumar (2005), German FDI to India: Untapped potential (Frankfurt am Main: Deutsche Bank Research). Lakshman, Nandini (2008), “India’s Global M&A Boom,” Business Week, May 15, 2008. Lall, Sanjaya (1983), “Multinationals from India,” in Sanjaya Lall, ed., The new multinationals: The spread of Third World enterprises (Chichester: Wiley), pp. 21–87. Leahy, Joe and Sundeep Tucker (2006), “On the march: how corporate India is finding the confidence to go global,” Financial Times, April 10, 2006. Organisation for Economic Co-operation and Development (2008), OECD Benchmark Definition of Foreign Direct Investment, 4th Edition (Paris: Organisation for Economic Co-Operation and Development). Pradhan, Jaya Prakash (2004), “The Determinants of Outward Foreign Direct Investment: A Firm-level Analysis of Indian Manufacturing,” 32(4) Oxford Development Studies, pp. 619–639. ——— (2007a), “How do Indian Multinationals Affect Exports from Home Country?” Working Paper, July 2007 (New Delhi: Institute for Studies in Industrial Development). ——— (2007b), “Outward foreign direct investment by small and medium-sized enterprises from India,” in United Nations Conference on Trade and Development, ed., Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment (New York: UNCTAD), pp. 67–80. ——— (2008), Indian Multinationals in the World Economy: Implications for Development (New Delhi: Bookwell). PricewaterhouseCoopers (2009), “Eastern Approaches: Maximising success with Emerging Market acquirers,” Crossboarder (London: PriceWaterhouseCoopers). Reserve Bank of India (2006), Reserve Bank of India Annual Report 2005–06: Report of the Central Board of Directors on the working of the Reserve Bank of India (Mumbai: RBI). Reserve Bank of India (2009), “India’s Balance of Payments Developments during the Fourth Quarter (January–March 2009) of 2008–09 and 2008–09 (April–March),” LXIII(7) Monthly Bulletin (Mumbai: RBI), pp. 1039–1065. Reserve Bank of India (2010), “Indian Investment Abroad in Joint Ventures and Wholly Owned Susidiaries: 2009–10 (April–September)” LXIV(1) Monthly Bulletin (Mumbai: RBI), pp. 47–55.

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Reppesgaard, Lars (2008), “Indische Unternehmen buhlen um Partner,” Handelsblatt, Mar. 3, 2008. Rothenbuecher, Juergen and Joachim von Hoyningen-Huene (2008), The Rise of Emerging Markets in Mergers and Acquisitions (Chicago: A.T. Kearney). Sauvant, Karl P. (2005), “New sources of FDI: the BRICs. Outward FDI from Brazil, Russia, India and China.” 6(5) Journal of World Investment & Trade, pp. 639–710. Sauvant, Karl P., Kristin Mendoza, and Irmack Ince, eds. (2008), The Rise of Transnational Corporations from Emerging Markets: Threat or Opportunity?(Studies in International Investment) (Cheltenham: Edward Elgar). Sharma, Shantanu Nandan (2007), “What’s firing up India Inc’s dreams?” The Economic Times, July 1, 2007. Sinha, Jayant (2005), “Global champions from emerging markets” 26(2) The McKinsey Quarterly, pp. 26–35. Statistisches Bundesamt (2004), Außenhandel: Rangfolge der Handelspartner im Außenhandel der Bundesrepublik Deutschland 2003 (Wiesbaden: Statistisches Bundesamt). Statistisches Bundesamt (2009), “Atlas der Außenhandelsstatistik,” available at http:// ims.destatis.de/aussenhandel/Default.aspx (last visited Feb. 23, 2010). ——— (2010a), “Außenhandel: Rangfolge der Handelspartner im Außenhandel der Bundesrepublik Deutschland 2009” (Wiesbaden: Statistisches Bundesamt). ——— (2010b), “Export, Import, Globalisierung: Deutscher Außenhandel und Welthandel, 1990 bis 2008” (Wiesbaden: Statistisches Bundesamt). Steinkühler, Karl-Heinz (2007), “Inder investieren in Deutschland,” Focus, Mar. 21, 2007. Thakur, Amitabh and Johannes M. Böhmer (2008), “On their way to becoming market Leaders: Insight into the mindset and motivation of Indian investors looking out for targets in Germany,” Going Public (Special Issue: Foreign Issuers), pp. 14–15. Tiwari, Rajnish, Stephan Buse, and Cornelius Herstatt (2007), “Innovation via Global Route: Proposing a Reference Model for Chances and Challenges of Global Innovation Processes,” Second International Conference on Management of Globally Distributed work, Bangalore, Indian Institute of Management, July 25–27, 2007. Tiwari, Rajnish and Cornelius Herstatt (2009), “The Emergence of Indian Multinationals: An Empirical Study of Motives, Status-quo and Trends of Indian Investments in Germany,” Working Paper No. 56 (Hamburg: Institute of Technology and Innovation Management, Hamburg University of Technology). Tiwari, Rajnish and Jaychandran Kandiappan Mani (2009), “Emergence of Indian Multinationals in Germany: Results of a TUHH Study” (Hamburg: Institute of Technology and Innovation Management, Hamburg University of Technology). United Nations Conference on Trade and Development (2009a), “Country Fact Sheet: India,” World Investment Report 2009 (Geneva and New York: UNCTAD), available at http://www.unctad.org/Templates/Page.asp?intItemID=3198&lang=1. United Nations Conference on Trade and Development (2009b), World Investment Report 2009: Transnational Corporations, Agricultural Product and Development (Geneva and New York: UNCTAD).

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9 The Surge in Indian Outbound Foreign Direct Investment to Africa: A New Form of South-South Cooperation? Parthapratim Pal*

Introduction The emergence of the so-called Asian Drivers has been one of the most important features of the global economy in the last decade. The rise of China, in particular, and to some extent the rise of India also, have attracted significant attention in the media and literature in recent years (Kaplinsky and Messner 2008, Nayyar 2008). The growing influence of China and India has been felt particularly strongly in Africa, where these two developing countries now account for a significant amount of trade and foreign direct investment (FDI) flows. China is heavily involved in infrastructure development in Africa. Although the Indian presence in Africa is much less pervasive, India is trying to improve its economic relations with Africa. At the India-Africa Forum Summit, held in New Delhi in 2008, Indian Prime Minister Manmohan Singh said that India would invest heavily in development projects in Africa to bolster economic ties, pledging more than US$500 million for projects in Africa (Singh 2008). The Indian private corporate sector has also been investing significantly in Africa in recent years. Indian multinational enterprises (MNEs) are entering the African market both through greenfield FDI and the mergers and acquisition (M&A) route. Between 2000 and June 2009, 38 Indian MNEs completed 52 M&A transactions in Africa, amounting to around US$2.8 billion.1 However, outward FDI (OFDI) from these developing countries to Africa is not an entirely new phenomenon. China has had economic and political associations with Africa since the Cold War era, and has been involved in a number of infrastructure projects across Africa. India also has a fairly long history of engaging in FDI in Africa. This trend started during the 1960s,

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when a few Indian MNEs started moving into Africa to take advantage of business opportunities in many of the newly liberated African countries (Pradhan 2008). Interest in Africa was strong because of the historical business links established between Africa and India during the colonial period. The presence of a sizeable Indian population on the African continent was also a factor. A fact that is perhaps not very well known is that, though Chinese FDI to Africa is growing rapidly, India still has a higher share of total FDI stock in Africa than any other developing country. Whereas India has a 3.6% share of the FDI stock in Africa, China’s share is 1.8% (United Nations Conference on Trade and Development 2009: Table 9). In the last ten years, there has been a significant surge in FDI flows from developing countries to Africa. China, in particular, has made a significant entrance into the African market, and Chinese FDI, aid, and debt flows to Africa are increasing rapidly. These additional capital flows from developing countries may be useful for a region like Africa, which is constrained by low development and scarcity of investible resources, to improve its economic development. However, the extent of these potential development effects will depend upon the nature and quality of FDI that Africa receives. Also, perhaps more cynically, these investment flows can be seen as a rerun of the exploitative behavior of MNEs from other countries since the twentieth century, where these companies extracted raw materials from Africa only to use them to produce manufactured goods in developed countries, some of which, in turn, were imported back into African countries. Given these issues, this chapter investigates the phenomenon of increased OFDI from India to the African continent, and tries to establish whether such investment flows are mutually beneficial in nature. It explores and analyzes the trends, patterns, and motivations of Indian OFDI into Africa (with comparisons to trends in Chinese investment), and discusses their likely impact on the region.

A. Indian Investment in Africa Until the 1990s, Indian OFDI in Africa was concentrated in a small number of African host countries, and the volume of investment was small. During the period 1961–1989, Indian MNEs made investments totaling only about US$73 million in African host countries, as shown in Table 9.1 (Pradhan 2008). But the table also clearly shows that African nations were the host countries for a very high share of total Indian OFDI in those years. In addition, Table 9.1 indicates that the pattern of investments by Indian MNEs in Africa seems to have gone through a structural change in more recent years. Average outward investment per Indian MNE to Africa has shot up in the period 2000–2007. This can be explained by the fact that, although India has had business interests and investments in Africa for a long time, this involvement was largely driven by small and medium enterprises and traders. The recent wave of OFDI from India to Africa, however, is driven by larger Indian MNEs. Most of these MNEs have made

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257

Trends in Indian OFDI flows into Africa (1961–2007)

Period

OFDI in US$ millions (percentage of developing region-bound Indian OFDI)

No. of Indian MNEs investing in Africa

No. of African host countries

1961–69 1970–79 1980–89 1990–99 2000–2007a

13 (60.0) 35 (42.0) 25 (21.9) 317 (16.8) 2,968 (33.8)

3 11 24 152 245

3 3 9 17 26

All Years

3,358 (30.8)

398

28

Source: Pradhan, Jaya Prakash (2008), “Rise of Indian Outward FDI: What Implications Does it Hold for Host Developing Countries?” 29 Economía: teoría y práctica (Iztapalapa, Mexico: Universidad Autónoma Metropolitana), pp. 9–49, based on unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre, Government of India and unpublished MNE-level information from the Ministry of Commerce. a Data for 2001 is limited to January through March, data for 2002 is limited to October through December, and data for 2007 is limited to January through March.

significant investments in the extraction industries of various African host countries. As investments in these industries are lumpy, they have pushed up the average size of Indian investments in Africa. It is also notable from Table 9.1 that India’s OFDI to Africa has experienced very strong growth in the early 2000s. Total Indian OFDI to Africa was around US$25 million for the period 1980–1989, and increased to US$317 million in 1990–1999. For the period 2000–2007, this figure jumped to US$2.9 billion, which represents an almost tenfold increase over the previous decade. However, a careful look at the host country breakdown indicates that a majority of the investment has gone to a single country— Mauritius. Mauritius accounts for more than 72% of total Indian OFDI to Africa (Pradhan 2008). According to the same database, among the 398 Indian MNEs that invested in Africa between 1961 and 2007, 233 invested in Mauritius alone. The overwhelming importance of Mauritius may at first appear puzzling, because Mauritius is not a large economy (its GDP is around 10% of the combined GDP of sub-Saharan African countries) (World Bank 2007). With a population of 1.2 million, it does not appear to offer a big market for Indian MNEs. Equally remarkable is the fact that Mauritius is also the top home country for Indian inward FDI (IFDI). According to India’s government statistics, for the period from April 2000 through December 2009, around 44% of total IFDI in India came from this small sub-Saharan African country. The United States, which is in second place, accounts for only 8% of the total (Ministry of Commerce, Government of India 2010). This surprisingly high share of Mauritius in both Indian IFDI and OFDI is at least partly a consequence of India’s Double Taxation Avoidance Agreement with Mauritius. 2 It is likely that, to take advantage of this agreement, a significant amount of Indian domestic capital is being round-tripped

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through Mauritius. Therefore, caution is warranted when analyzing the surge of FDI from India to Africa. However, even after excluding Mauritius, OFDI from India to Africa has increased significantly since 2000. The breakdown of India’s OFDI to Africa by sector and industry for the period 2000–2007 shows that more than half of the total amount of investment has gone into the chemicals and the oil and gas industries, as shown in Table 9.2. These two industries have attracted investment of US$930 million and US$576 million over the period, respectively. It should also be noted here that the data in Table 9.2 do not include all OFDI from India. The amounts shown in the table represent mostly greenfield OFDI flows. These data may also underreport greenfield OFDI because the Reserve Bank of India, which is the primary data source for India, only includes the initial value of OFDI, and not the subsequent amount transferred. Moreover, due to restrictions on the maximum amount of overseas investment by Indian MNEs, 3 many MNEs have raised capital outside their home country when investing abroad. As the Reserve Bank of India data only reports money outflow from India, any money raised abroad by Indian companies will not be reported in data it provides. Hence Table 9.2 may underreport actual OFDI by Indian firms.

Table 9.2 Breakdown of Indian OFDI to Africa by sector and industry (2000–2007), in US$ millions Primary Oil and gas Agriculture Ores and minerals

594 576 18 0.1

Manufacturing Chemicals Rubber and plastic Transport equipment Basic metal and fabricated metal products Machinery and equipment Computer, electronic, medical precession Textiles and apparel Food, beverages and tobacco Gems and jewelry Manufacturing—other Services Software and IT Financial services Transportation Film, entertainment and broadcasting Services—others

1,556 930 263 119 60 54 41 34 23 17 15 817 323 229 162 60 43

Source: Pradhan, Jaya Prakash (2008), “Rise of Indian Outward FDI: What Implications Does it Hold for Host Developing Countries?” 29 Economía: teoría y práctica (Iztapalapa, Mexico: Universidad Autónoma Metropolitana), pp. 9–49.

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Another distortion in the data is that the total investment amount involved in an overseas M&A transaction is not transferred immediately in the same year, but it is usually spread out over a period of time. There are also many examples of large sums being raised in international markets by Indian MNEs through various financial instruments and structures, including special purpose vehicles, for overseas acquisitions.4 Therefore, it is possible and likely that OFDI by way of M&A accounts for a larger part of Indian OFDI than OFDI by greenfield investments financed with money transferred from India. This is supported by Table 9.3, which reports some of the acquisitions by Indian MNEs in the oil and gas industry in Africa. As can be seen from the table, some of these M&A deals were very large and, if these values were taken into account, the figures for OFDI by Indian MNEs in the oil and gas industry in Africa would be much higher than reported in Table 9.2. The other major target industry into which significant amounts of Indian FDI have been directed is the chemical industry. Though Jaya Prakash Pradhan’s data (Pradhan 2008) do not provide the breakdown of

Table 9.3 Some major Indian investments in the oil and gas industry in Africa (2002–2008) Indian MNE

Host country Year

Value of acquisition, in US$ millions

Oil and Natural Gas Corporation (ONGC) ONGC

Sudan

2002

766

Sudan

2003

136.5

Gail India

Egypt

2004

Gail India

Egypt

2004

ONGC

Angola

2004

HPCL

Kenya

2005

Reliance Industries

Mauritiusbased

2007

Essar Oil Ltd.

Kenya

2008

Details

25% stake in the project from Talisman Energy Company in Greater Nile Project

100% interest in assets of two Sudanese oil interests 9.7 19% in Egypt-based urban gas distribution company Fayum Gas Co. 19 15% in Egypt-based natural gas company Nat Gas 600 50% stake in an offshore oil field 500 67% stake in a Kenyan petroleum refinery Value undisclosed Majority stake and management control in Gulf Africa Petroleum Corporation (GAPCO) 764 50% stake in Kenya Petroleum Refineries Ltd

Source: MAPE Advisory (2006), “India Inc Goes Abroad: Indian Companies’ Foreign Acquisitions— Jan 2000 to Mar 2006,” background paper for the Indian Institute of Management Calcutta Alumni Association Seminar on India Inc Going Abroad—Investing and Managing Internationally at the Leela Palace, Bangalore, Apr. 19, 2006, newspaper reports and company communications.

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investments in the chemical industry, a look at the MNEs in this area indicates that a significant share of Indian OFDI into the chemicals industry is in fertilizer companies in Africa, which are downstream industries of petroleum refineries, or which use other natural resources abundant on the continent. Tables 9.2 and 9.3 show that a large proportion of Indian OFDI in Africa has been in infrastructure. Several of these investments are tied to investments made in the extraction industry. In other cases, Indian construction and telecommunication MNEs have made investments in Africa in order to build roads, ports, and telecommunications systems in several African host countries. Given the experience of these MNEs with working in a developing country environment, some expect them to be better suited to African conditions (Broadman 2008). In addition, marketseeking OFDI from India is also present in Africa. Several auto industry majors, such as Tata Motors and Mahindra & Mahindra, have investments in Africa. Broadly speaking, it can be said that Indian OFDI in Africa is resource-seeking, though market-seeking and efficiency-seeking investments are also present. Regarding the form of ownership of investments, investment has been made by various means, including through joint ventures (JVs), through the establishment of wholly owned subsidiaries, and by way of acquisitions. These are shown in Table 9.4 and 9.5. From the Indian perspective, the implications of this increased presence in Africa are manifold. Recent studies indicate that Africa is coming out of a period of long-term economic stagnation. A World Bank study by Arbache and Page (2010) identifies that, since the mid-1990s, there has been a trend break in the African growth rate, and an acceleration in growth rate is now registered broadly across several types of countries, including oilexporting and resource-intensive countries and large- and middle-income

Table 9.4

Form of ownership of Indian MNE investments in Africa (1961–2007)

Period

Total

Joint ventures (percentage share of joint ventures)

Wholly owned subsidiaries

Percentage share in joint venture

1961–1969 1970–1979 1980–1989 1990–1999 2000–2007a

3 12 16 195 594

3 12 14 73 153

0 0 2 122 441

100 100 87.5 37.4 25.8

All Years

820

255

565

31.1

Source: Pradhan, Jaya Prakash (2008), “Rise of Indian Outward FDI: What Implications Does it Hold for Host Developing Countries?” 29 Economía: teoría y práctica (Iztapalapa, Mexico: Universidad Autónoma Metropolitana), pp. 9–49, based on unpublished remittance information from the Reserve Bank of India, published reports of the Indian Investment Centre, and unpublished MNE-level information from the Ministry of Commerce. a Data for 2001 is limited to January through March, data for 2002 is limited to October through December, and data for 2007 is limited to January through March.

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Indian acquisitions in Africa (2000–2009).

Year

Indian Acquisitions in Africa Value (US$ millions)

2000 2002 2004 2005 2006 2007 2008 2009a All years

261

Percentage of developing region-bound Indian acquisitions

No. of acquisition deals

No. of acquiring Indian MNEs

No. of host African countries

11 771 797 55 429 111 188 451

68.8 31.1 35.9 7.5 31.0 3.4 26.7 84.9

2 2 8 6 9 6 15 4

1 2 4 5 8 6 13 4

2 2 6 5 2 4 6 4

2,813

24.8

52

38

15

Source: Pradhan, Jaya Prakash (2008), “Rise of Indian Outward FDI: What Implications Does it Hold for Host Developing Countries?” 29 Economía: teoría y práctica (Iztapalapa, Mexico: Universidad Autónoma Metropolitana), pp. 9–49. a

Data for 2009 is from January to June.

economies, as well as coastal and low-income countries. For Indian MNEs, the obvious advantages of the increased presence in Africa are access to the African market, and improved access to energy and mineral resources, to satisfy increasing domestic demand. Also, it is important to remember that, like their developed country counterparts, Indian MNEs need to develop a portfolio of assets to improve their international competitiveness. It is expected that locational assets will help Indian MNEs improve their competitiveness and efficiency, both locally and globally. Such efficiency gains may contribute to industrial transformation and upgrading of value-added activities, improved export performance, higher national income, and better employment opportunities for the Indian economy. On the flip side, OFDI essentially implies that the generation of productive capacity within the economy is forgone, and certain multiplier benefits are exported. The net benefit accruing to the domestic economy from OFDI will thus have to be weighed against these possible costs. It must be mentioned here that, given the foreign exchange inflows into India in the recent past, some amount of capital outflow makes exchange rate and monetary policy management easier for policy makers. 5

B. Why Chinese and Indian MNEs Are Investing in African Host Countries The newfound Indian interest in Africa seems to have certain similarities to the recent Chinese experience in Africa. Since the mid-1990s, Beijing has taken an active interest in African economies. Both economic and strategic

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factors are responsible for this. Kurlantzick, Shinn and Pei (2006) point out that, from an economic point of view, China has identified Africa not only as a source of new energy and raw material supplies to meet its growing industrial demand, but also as a potential market for its exporters. The Chinese government has taken a number of steps to promote trade and investment links with Africa. To facilitate its investment in Africa, China has given priority to industries such as (1) industrial processing, which includes electronics, machinery, and garments; (2) agriculture; (3) natural resources; and (4) infrastructure and real estate development. Among these industries, most of the investment has gone into extractive industries, such as energy and minerals. Because of the surge in FDI in the extractive industries, total IFDI in six African oil-producing countries—Algeria, Chad, Egypt, Equatorial Guinea, Nigeria, and Sudan—amounted to US$15 billion in 2005, representing about 48% of inflows into the region (“At Last some Improvement” 2006). China has signed no less than 28 Bilateral Investment Treaties with African countries. A recently published policy document titled “China’s African Policy” states: The Chinese Government encourages and supports Chinese enterprises’ investment and business in Africa, and will continue to provide preferential loans and buyer credits to this end. The Chinese Government is ready to explore new channels and new ways for promoting investment cooperation with African countries, and will continue to formulate and improve relevant policies, provide guidance and service and offer convenience. African countries are welcome to make investment in China. The Chinese Government will continue to negotiate, conclude and implement the Agreement on Bilateral Facilitation and Protection of Investment and the Agreement on Avoidance of Double Taxation with African Countries. The two sides should work together to create a favorable environment for investment and cooperation and protect the legitimate rights and interests of investors from both sides.6

This policy focus has contributed to the increase in Chinese trade and investment in Africa over the last ten years. Trade between China and Africa has increased from US$11 billion in 2000 to US$40 billion in 2005. Reports indicate that in 2008 trade between China and Africa increased to a record US$106 billion.7 Furthermore, Chinese investment in Africa is also growing rapidly. According to official Chinese data, China invested about US$5.49 billion in Africa in 2008 (Ministry of Commerce of the People’s Republic of China 2009). Harry Broadman (2007a) estimates that about 700 Chinese enterprises are currently operating in Africa (Broadman 2007b). It is, therefore, not surprising that China is on course to become the continent’s largest economic partner. One interesting aspect of China’s involvement in Africa is its use of a multipronged strategy to improve its linkages with African host countries. Along with investing heavily in Africa, China is also increasing

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its outreach by providing many African countries with concessional aid and other forms of overseas development assistance and economic support (van de Looy 2006, Lum 2009, Lum et al. 2009). Lum points out that although Chinese economic assistance to Africa, Latin America, and Southeast Asia grew significantly during the period 2002–2007, Africa received the largest year-on-year increases, and showed the clearest growth trend. China has also taken an active interest in the debt relief of certain highly indebted African countries (Kurlantzick, Shinn, and Pei 2006). Furthermore, it is using military aid and promoting softer ties with African countries, with increased emphasis on education, science, culture, health, and social issues, to cement its relationship with these countries (Brautigam 2008, Lum et al. 2008). According to Lum et al.: Early in the present decade, China’s economic boom prompted a renewed push to accelerate the development of relations with Africa. Chinese-African economic and political ties are now rapidly burgeoning and take many forms: trade agreements, commodity acquisition and production deals, and scientific, educational, technological and—in a few cases—security cooperation. China is also offering increasing amounts of development aid to Africa. (2008: 114)

These relationship-building measures have been quite successful, and have also had positive spillover effects on Chinese investment. Close ties with African host countries have ensured that Chinese MNEs are granted oil exploration rights in a number of African countries such as Sudan, Nigeria, and Gabon. Foster et al. (2008) point out that China’s oil companies have secured oil exploration and drilling rights in Angola, Chad, the Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Ethiopia, Gabon, Kenya, Mali, Mauritania, Niger, Nigeria, São Tomé and Principe, and Sudan. Chinese MNEs have also been actively involved in various infrastructure- and real estate-related projects all across Africa. Linden Ellis estimates that by September 2006, there were 259 China Exim Bank projects in 36 African countries, and 79% of its commitments in Africa were in infrastructure (2007). These investments not only help the African host countries improve their poor infrastructure, but also help promote Chinese OFDI in Africa. Indian investment in Africa appears to be driven by similar economic factors. Like China, India regards Africa as a possible source of raw materials and energy for its industrial growth. This is not surprising, as the Indian government sees maintaining energy security as a major policy priority. Currently, India is the fifth-largest consumer of energy in the world, accounting for about 3.75% of global consumption. With rapid economic growth and industrialization, India is expected to double its energy consumption by 2030, overtaking Japan and Russia in the process of becoming the world’s third-largest consumer of energy, after the United States and China (International Energy Agency 2007).

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Given stagnant domestic oil reserves, Indian oil MNEs are pursuing the option of acquiring oil and gas assets overseas, and have established a presence in a number of host countries, including Nigeria, Russia, Sudan, Libya, Egypt, Qatar, Côte d’Ivoire, Vietnam, Myanmar, Cuba, and, more recently, Brazil. As Africa has proven oil reserves of about 16 billion metric tons and gas reserves of about 14 trillion cubic meters (United Nations Conference on Trade and Development Secretariat 2007), it makes sense for Indian oil MNEs to establish their presence in Africa. This emerging partnership is likely to be mutually beneficial, as it will allow India to enhance its energy security, while African host countries can benefit from “better investments, institutions, technology, environmental sustainability, local content development, human resources development and employment generation” (Puri 2007). Against this backdrop, it is quite natural that Indian MNEs are queuing up to get a piece of the African energy industry pie. The overseas division of India’s state-owned Oil and Natural Gas Corporation (ONGC), ONGC Videsh, has aggressively sought stakes in exploration and development across the continent. In 2005, teaming up with the world’s largest steelmaker Mittal (now Arcelor Mittal), ONGC Videsh formed a new entity, ONGC Mittal Energy Ltd. Reports indicate that this new entity agreed to a US$6 billion infrastructure deal with Nigeria, in exchange for extensive access to some of the best Nigerian production blocks. ONGCMittal will invest the money in setting up a refinery, a power plant, and railway lines in Nigeria (“ONGC-Mittal to invest 6 bn dollars in Nigeria” 2006). In 2003 ONGC Videsh acquired a 25% stake in Sudan’s Greater Nile Oil Project, despite the resistance of the China National Petroleum Corporation, which has a 40% ownership in the enterprise. ONGC Videsh has subsequently acquired minority interests in three other blocks in Sudan. Reports indicate that ONGC Videsh has expressed an interest in purchasing stakes in two more oil blocks in Sudan (“India wants more oil concessions in Sudan” 2007). ONGC also recently obtained permission to conduct geological studies in the exclusive economic zone of Mauritius.8 In Côte d’Ivoire, ONGC Videsh and Oil India have drilled for oil in an offshore well oil block, with an investment of US$12.5 million. These MNEs have identified hydrocarbons and mining as the most targeted investment areas for Indian trade and industry in Côte d’Ivoire. Essar Oil bought 50% of Kenya Petroleum Refineries for an undisclosed amount. The purchase was made through a subsidiary, Essar Energy Overseas, and the shares were bought from existing shareholders, including the Shell Petroleum Company (which owns 17% of the business), Chevron Global Energy (16%), and BP Africa (17%). Other African host countries that Indian oil MNEs are planning to enter include Burkina Faso, Equatorial Guinea, Ghana, Guinea-Bissau, and Senegal. In total, African oil currently accounts for about 11%–12% of India’s oil imports, a figure that is set to rise in the coming years (Ministry of Commerce,

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Government of India 2010). It is not surprising that energy researchers have found that India has focused development lending initiatives on the resourcerich countries of West Africa, whose national oil companies are keen to enter into deals with Indian MNEs (Mitchell and Lahn 2007). Hydrocarbons are not the only natural resources sought by the growing Indian economy. Vedanta Resources, a publicly traded metals conglomerate founded in Mumbai in 1976, has invested more than US$750 million in Zambian copper mines,9 and the Liberian Parliament recently ratified a 25-year deal authorizing Arcelor Mittal to launch a US$1 billion iron ore mining project, which will eventually employ 20,000 people (“Liberia: Despite Obstacles . . .” 2007). In Senegal, a joint public-private Indian group has invested US$250 million for a stake in a colonial era enterprise, Industries Chimiques du Senegal, which owns rock phosphate mines and plants to produce phosphoric acid used in agriculture (Archean 2010). Tata Steel is in the process of finalizing a 650 million rand (US$84 million), 120,000 metric ton per annum ferrochrome project in Richards Bay, South Africa (Agrawal 2009). Extractive industries aside, Indian MNEs are also eyeing a broad array of industries in Africa. The Indian multinational group Tata is involved in engineering, chemicals, services, and IT and communications.10 Another Indian MNE, Reliance Industries, has a strong presence in the telecommunications and oil refining industries in Africa. Recently, a number of Indian telecommunications MNEs, such as Bharti, Tata Indicom/VSNL, and Reliance Infocom, have shown a marked interest in the African telecommunications industry. Dabur India set up its new manufacturing facility in Nigeria in 2007 (“Dabur sets up new manufacturing facility in Nigeria” 2007). The new facility was set up by African Consumer Care, a subsidiary of Dabur International. The plant, representing an investment of around US$4 million, will manufacture a range of toothpastes for African markets. The production line at the new facility will be expanded to introduce newer toothpaste variants, and manufacture a range of skin care, home care, and household disinfectant products. Also, in various stages of building their African businesses are major pharmaceutical MNEs like Ranbaxy, Cipla, and Dr. Reddy’s; fast-moving consumer goods MNEs like Marico and Emami; construction MNEs like Punj Lloyd and Shapoorji Pallonji; and liquor MNE UB Group. In the banking and financial services industry, the State Bank of India has acquired a 51% stake in Mauritius-based Indian Ocean International Bank Ltd., as part of its strategy for overseas expansion into the rest of Africa (“SBI plans aggressive foreign expansion . . .” 2008). Tata Consultancy Services and Infosys are also increasing their investments in Africa (“Infosys Offers Finacle Solutions for East African Banks” 2010). It should also be mentioned here that certain Indian MNEs have been present in Africa for decades, including the Tata Group and Mahindra & Mahindra. Both Tata and Mahindra vehicles have been exported to Africa

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for the last 30 years or more, but the revival of the African economy has heightened their interest in the last few years.11 The above evidence indicates that Indian MNEs are becoming more aggressive in their investments in African host countries, and that there are certain similarities between the Chinese and the Indian experiences in Africa. However, there are also significant differences between the policies and strategies adopted by these two home countries regarding OFDI. The Chinese government actively promotes OFDI and, according to the United Nations Conference on Trade and Development (UNCTAD), Chinese MNEs regard their government’s policies as an important push factor in their internationalization (2006). Until 2003 the Indian government maintained a cap on the total annual amount of OFDI and, though this ceiling has been removed, the government does not provide many incentives to promote OFDI. UNCTAD points out that Indian MNEs tend to be more attracted by supportive host country incentives and FDI policies, and by favorable conditions of competition in the host countries (2006). As an indicative benchmark, it can be pointed out that compared to the 28 Bilateral Investment Treaties signed between China and African countries, India has signed only five Bilateral Investment Treaties (Broadman 2007a). There are also significant differences in the ownership of Indian and Chinese MNEs. The Boston Consulting Group published a report in 2006 on OFDI of the top 100 MNEs from rapidly developing economies.12 An update of this report was published in 2009, which saw a few changes in the composition of the top 100 companies in the list (Boston Consulting Group 2006, 2009). According to the 2006 report, there were 44 companies from China and 21 from India. In the 2009 report, there were 36 companies from China and 20 from India. The 2006 report shows that more than two-thirds of all large Chinese MNEs were state-owned or state-controlled. The majority of the remaining MNEs had mixed ownership, and only four privately-owned MNEs were included in the list. In contrast, the Indian MNEs on the list were predominantly owned by private owners, strategic investors, and the general public. Only one Indian MNE on the list was state-controlled. These differences clearly highlight the fact that Chinese policies are better coordinated, and that the Chinese state plays a more proactive role in OFDI. In fact, in their quest to secure supplies of energy and raw materials, Chinese economic policies are complemented by parallel and sustained Chinese diplomatic efforts in African countries. These efforts, coupled with the fact that China has become a generous donor of overseas development aid to Africa, indicate that China has managed to formulate a more comprehensive and long-term policy. In contrast, Indian initiatives to gain the trust of African governments have been largely driven by private investing companies themselves. However, lately, some initiatives have been taken by the Indian government to develop Indo-African economic relations. New Delhi hosted the

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India-Africa Forum Summit in April 2008 in order to promote wide-ranging cooperation and partnerships in economic and other spheres. After the summit, the Prime Minister of India announced that India would expand unilateral duty free preferential market access for exports from the 50 least-developed countries. Among these 50 countries, 34 are African. India also offered credit amounting to US$5.4 billion to African countries, and promised project financing of US$500 million over the following five years (2008–2012) (Singh 2008). Yet, in comparison, China is far ahead. Wang (2007) mentions that, by 2006, China had contributed about US$5.7 billion to more than 800 aid projects in Africa. China’s overseas development aid to sub-Saharan Africa may have amounted to US$1–1.5 billion annually for 2004–2005. China has significantly increased assistance to Africa over the years. Wang estimates that Chinese debt relief and net overseas development assistance (not including debt relief) to Africa was close to US$2.3 billion in 2006 (2007). Brautigam (2008) suggests that China has given aid worth around US$5.7 billion up to 2006. It is also estimated that China Exim Bank has approved more than US$28 billion for projects in Africa (Brautigam 2008: Table 2). During the November 2006 Forum on China-Africa Cooperation in Beijing, Chinese president Hu Jintao pledged to double China’s aid to Africa by 2009. It is doubtful whether any other developing country will have the financial clout to emulate the Chinese government’s policy in Africa. However, it is important for OFDI home countries to develop comprehensive economic cooperation packages with target host countries. This is particularly true if a home country is focusing on increased OFDI in the extractive industries, as is the case for both Indian and Chinese OFDI in Africa. Because of the special characteristics of the extractive industries, certain additional considerations need to be taken into account. First, as UNCTAD points out, most investments in extractive industries are capital-intensive and risky, and tend to have long gestation periods (2007). Therefore, MNEs need to have a longer-term perspective in mind. Secondly, mineral extraction can have considerable environmental and social impact. The investing MNE needs to address these issues. Finally, given growing global demand, the energy industries (oil and gas) are increasingly viewed as strategic industries in developing countries. Therefore, many host countries take into account factors other than mere economic considerations when authorizing FDI in these industries. Chinese OFDI policy, which is much broader in scope than Indian policy, is better geared to addressing these concerns.

C. The Benefit to Africa It is important to assess how the emerging presence of Southern MNE investors affects African host countries. To do this, it will be useful to consider the basic problems faced by African countries. In his 2007 book, Paul

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Collier highlighted several factors that hinder development and growth in Africa, which he calls “traps.” According to Collier, poorer African countries are caught in four basic traps: (1) the conflict trap, due to continuing civil war in many African countries; (2) the natural resources trap, because “resource rents make democracy malfunction” and give rise to “a new law of the jungle of electoral competition . . . the survival of the fattest”; (3) the trap of being “landlocked with bad neighbors”; and (4) the trap of “bad governance in a small country.” These four basic traps create three more traps which prevent African countries from benefitting from globalization. These are: (5) the trade trap, which arises because it is cheaper to open manufacturing facilities in places where they are already concentrated, and so the poorest economies, even with their lower wages, cannot compete with the Asian export centers; (6) the investment trap, which arises because international investors expect returns to be low and unpredictable in poor countries with questionable governance and stability, which reduces the availability of financing for investment in those countries; and (7) the self-confidence trap, which arises because some African governments that may have the possibility to break into new global markets “will not even try because they lack belief in themselves and expect to fail” (Collier 2007). It is notable from Collier’s list that the natural resources trap, combined with poor governance and a lack of political stability, leads to a situation where African countries do not receive adequate investment. Even if some developed country MNEs are willing to invest in these countries, they generally ask for overly generous terms and conditions. Because of the unequal bargaining power between MNEs and host country governments, investment negotiations often result in suboptimal outcomes for the host country. For these countries, domestic resource mobilization is usually not an immediate solution, because in most African countries, the domestic savings rate is low. In fact, sub-Saharan Africa has the lowest savings rate of any developing region (World Bank 2009). To make matters worse, investments in extractive industries are lumpy, with long gestation periods. This makes it difficult for these countries to generate their own investments in extractive industries. Finally, the requisite technical ability and skills may not be locally available. Against this backdrop, the availability of investment from other developing countries opens up new options for African countries. These Southern investors provide a wider pool of capital, technology, and management skills to draw from. Also, the technology used by Southern MNEs is likely to be better suited to developing countries. It is not surprising that the Africa Foreign Investor Survey 2005, conducted by the United Nationals Industrial Development Organization, found that Southern investors seem to create more employment than their Northern counterparts (2005). However, possibly the most significant benefit that the interest of Southern investors confers on the host country comes in the form of better bargaining power to negotiate with potential investors.

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In the World Economic Forum’s Africa Report of 2007, this was clearly highlighted: Africa’s global profile has been significantly enhanced by the keen interest taken in the continent, primarily in its raw materials, by China and India. The emerging South-South partnership has caused concern among the continent’s traditional trading partners in Europe and America, who have done business on the continent on their own terms, unchallenged, for many years. These relationships are under scrutiny in light of both the new South-South trading relations and of a new assertiveness by Africans themselves in setting their own development agenda. (2007: 16)

However, there are also allegations that Chinese and Indian investment patterns in Africa are replicating the colonial pattern of economic exploitation (Blair 2007). Resource-seeking investments from China and India in Africa result in the export of raw materials out of the host countries to the home countries, and African host countries are importing manufactured goods in return. Thus, African countries lose out on opportunities to add value and industrialize. The allegation is that such investments are not helping the cause of African development, and are merely old wine in new bottles. Though there may be some truth to these allegations, the advantages mentioned above may outweigh these concerns. Also, it is important to point out that Chinese and Indian MNEs are also present in nonextractive industries. In these industries, more Chinese and Indian MNEs are seeking to manufacture and export sophisticated components to the global market, such as those produced by the South African auto parts industry. Broadman (2007a) shows that in Africa, trade flows and FDI are complementary activities, rather than substitutes. More importantly, his findings point to the fact that: Chinese and Indian firms operating in Africa have been playing a significant role in facilitating this complementarity. For one thing, Chinese and Indian businesses tend to achieve larger-sized operations than do their African counterparts within the same sectors, and this appears to allow them to realize economies of scale. It is not surprising, then, that the evidence shows that, all other things equal, Chinese and Indian firms have significantly greater export intensity than do African firms. Moreover, the exports from Africa produced by Chinese and Indian businesses are considerably more diversified and higher up the value chain than exports sold by domestic firms. (28)

Broadman (2010) also hypothesizes that the resilience shown by the African countries during the recent financial crisis can be partly attributable to the positive effects from Chinese and Indian investment in the continent. As Chinese and Indian MNEs are creating new value-added and helping African countries move up the production chain, this is enabling many

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African countries to participate in the global trade networks that had previously been difficult for their domestic firms to access. In this context, it seems that the growing South-South trade is emerging as a viable alternative to the North-South trade, which dominated in the past. With growing income in many parts of the developing world, this may provide many countries from the South with access to significant markets. There might be some concerns about a lack of trade complementarity between developing countries, but developing countries are a diverse group, and exhibit enough variety in their export baskets to generate trade among themselves. Also, with increased industrialization, it will be possible for some developing countries to engage in intraindustry trade, and to allow their MNEs to exploit economies of scale. If Indian and Chinese MNEs help African host countries move beyond oil and natural resources, and develop a broader array of industries, this may lead to more sophisticated products being produced in Africa, enabling African countries to participate more fully in world trade and commerce. It is also notable that Broadman finds significant knowledge spillovers from Indian and Chinese MNEs to African firms (2007a, 2010). This may have significant long-term benefits for the industrialization process in Africa. John Page, Chief Economist for the Africa region at the World Bank, has said that “the knowledge that can be conveyed between Asia and Africa may turn out to be as important, or more important, than the trade and investment flows themselves” (World Bank 2006).

Conclusions Africa is considered to be the last frontier of natural resource exploration. In the years to come, it is expected that Africa will attract the attention of investors from across the world for its natural resources. In the past, African countries have not generally succeeded in obtaining favorable deals from their MNE investors, as the African host countries did not have strong bargaining positions in negotiating with former colonial powers. Now, the option to have investment from other developing countries opens up new alternatives for African host countries. The interest of Southern investors provides the host countries with better bargaining power to negotiate with potential MNE investors. Africa may also become an increasingly contested economic battleground. It is expected that, once the present global crisis subsides, there will be increased demand for commodities from fast-growing developing and developed countries. This is expected to push up commodity prices. As most African countries are commodity exporters, they should be in a position to take advantage of this rise, and to improve their longer term growth prospects. High resource bases and improved growth prospects will entail that, along with resource-seeking investment, African countries will also receive market-seeking investment from other regions. As discussed above, there are already signs of such investments from India.

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Given Africa’s prospects, it can be expected that India’s increasing presence in the extractive industries, infrastructure development, and manufacturing sector in Africa may put India in direct competition with China, Western countries, and other Asian countries. The new entrants will become a source of market rivalry, particularly for some developed countries that have enjoyed unrestricted access to African economies since colonial days. This increased competition is likely to benefit African host countries. From a wider perspective, increased trade and investment flows among developing countries can have a significant influence on power dynamics in international economics. Traditionally, developing countries have been dependent upon developed countries for trade and investment. Developed countries not only provided those developing countries with large markets for their goods, but they also acted as sources of foreign capital for capital-scarce developing countries. Developing countries competed among themselves for developed country market shares and capital. This dependency led to an unequal distribution of economic power, where developed countries had significant leverage and control over developing countries. Traditional development economics also points out that such arrangements forced developing countries into center-periphery relationships, in which developing countries become mere suppliers of raw materials to developed countries (Prebisch 1950, 1959). This affected industrialization in developing countries, and had a negative impact on their long-term growth processes. More recent experiences indicate that, as a direct result of this power asymmetry, developed countries have been in a much stronger position to dictate terms in many spheres of international economics, including international trade and investment treaties. It is readily apparent that most international trade agreements and investment treaties exhibit a clear bias in favor of developed countries. Increased economic integration among Southern countries can reduce this dependence on Northern markets and capital, and thereby reduce this power imbalance. As indicated by some authors (Kaplinsky and Messner 2008, Nayyar 2008), this also raises the possibility of Southern growth led by a few high-growth Southern developing countries.

Notes * Indian Institute of Management Calcutta. I am grateful to Prof. J.P. Pradhan for his inputs. 1. For source of these data, see Table 9.5. 2. For a more detailed description of India-Mauritius Double Taxation Avoidance Treaty, see Income Tax India (2010). 3. For a detailed description how the ceiling of overseas investment by Indian firms has changed over the years, see Reserve Bank of India (2009: Annex 1). 4. For example, Tata Steel floated special purpose vehicles in Singapore and the United Kingdom for its acquisition of Corus (“Corus accepts takeover bid by Tata Steel” 2006).

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5. See Chapter 3 for an analysis of the link between the Indian government’s OFDI policy and its foreign currency reserves. 6. The Forum on China-Africa Cooperation’s publication on “China’s African Policy” is a white paper discussing China’s policy toward Africa in detail (Ministry of Foreign Affairs of the People’s Republic of China 2006). 7. “Trade between China and Africa has broader prospects” (2009) quotes China Daily as the original source of this article. 8. A list of sites where ONGC Videsh is operating in Africa can be found at ONGC Videsh (2010). 9. The company website of Vedanta Resources (Vedanta 2010) says: “Our Zambian operations are comprised of four mines, one at Konkola, two at Nchanga and one at Nampundwe, a tailings leach plant at Nchanga and a smelter at Nkana. Our copper cathode production increased from 436,000 tons in fiscal 2006 to 446,000 tons in fiscal 2009. The production increases, together with higher copper market prices, drove revenue of our copper business from $2,241.3 million in fiscal 2006 to $3,311.0 million in fiscal 2009.” 10. Details of Tata group’s holdings in Africa are available at Tata in Africa (2010). 11. The foregoing information about Indian outbound FDI was gathered from various newspaper reports. The Reserve Bank of India does not publish the list of companies that have been approved to undertake outward FDI. 12. “Rapidly developing economies” are defined as developing countries which are experiencing high GDP growth rate. The Boston Consulting Group report indicates that this group includes Brazil, China, India, Russia, Southeast Asian countries, some Latin American countries like Chile, Argentina, and some countries from Middle East like Kuwait and the United Arab Emirates.

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——— (2010), “More Resilient Than Meets the Eye: Africa and The Global Economic Crisis,” 5(1) African Analyst. Collier, Paul (2007), The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It (Oxford: Oxford University Press). “Corus accepts takeover bid by Tata Steel” (2006), Rediff India Abroad, Oct. 20, 2006, available at http://www.rediff.com/money/2006/oct/20tata.htm. “Dabur sets up new manufacturing facility in Nigeria” (2007), myiris, Nov. 21, 2007, available at http://myiris.com/shares/news/storyShow.php?fileR=200711201851511 21&dir=2007/11/20. Ellis, Linden J. (2007), “China Exim Bank in Africa,” presented at China Environmental Forum, Woodrow Wilson Center for Scholars, Mar. 22, 2007, available at http://www.wilsoncenter.org/index.cfm?topic_id=1421&fuseaction=topics. event_summary&event_id=224956. Foster, Vivien William Butterfield, Chuan Chen, and Nataliya Pushak (2008), “Building Bridges: China’s Growing Role as Infrastructure Financier for SubSaharan Africa,” World Bank and Public Private Infrastructure Advisory Facility (Washington D.C.). Income Tax India (2010), “Section 90. Double taxation relief—Where agreement exists,” available at http://law.incometaxindia.gov.in/Directtaxlaws/act2005/ cirsec90.htm. “India wants more oil concessions in Sudan” (2007), Sudan Tribune, Nov. 7, 2007, available at http://www.sudantribune.com/spip.php?article24617. “Infosys Offers Finacle Solutions For East African Banks” (2010), Banking Business Review, Mar. 29, 2010, available at http://bankingsoftwaretechnology.banking-businessreview.com/news/infosys_offers_finacle_solutions_for_east_african_banks_ 100329. International Energy Agency (2007), World Energy Outlook 2007 (Paris: International Energy Agency), available at http://www.iea.org/weo/2007.asp. Kaplinsky, Raphael and Dirk Messner (2008), “The Impact of Asian Drivers on the Developing World,” 36(2) World Development, pp. 197–209. Kurlantzick , Josh, David Shinn and Minxin Pei (2006), “China’s Africa Strategy: A New Approach to Development and Diplomacy?” Carnegie Endowment for International Peace, Dec. 12, 2006, available at http://www.carnegieendowment. org/events/?fa=eventDetail&id=941. “Liberia: Despite Obstacles, All Ingredients Are in Place for Mittal to Succeed” (2007), allAfrica.com, Oct. 18, 2007, available at http://allafrica.com/stories/200710181208. html. Lum, Thomas (2009), “China’s Assistance and Government-Sponsored Investment Activities in Africa, Latin America, and Southeast Asia,” (Washington, D.C.: Congressional Research Service), available at http://www.fas.org/sgp/crs/row/ R40940.pdf. Lum, Thomas et al. (2008), “Comparing Global Influence: China’s and U.S. Diplomacy, Foreign Aid, Trade, and Investment in the Developing World,” (Washington, D.C.: Congressional Research Service), available at http://www.fas.org/sgp/crs/row/ RL34620.pdf. Lum, Thomas et al. (2009), “China’s Foreign Aid Activities in Africa, Latin America and South East Asia,” (Washington, D.C.: Congressional Research Service), available at http://www.fas.org/sgp/crs/row/R40361.pdf. MAPE Advisory (2006), “India Inc Goes Abroad: Indian Companies’ Foreign Acquisitions—Jan 2000 to Mar 2006,” background paper for the IIM Calcutta Alumni Association Seminar on India Inc Going Abroad—Investing and Managing Internationally at the Leela Palace, Bangalore, Apr. 19, 2006.

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Ministry of Commerce, Government of India (2010), Export-Import Data Bank, available at http://commerce.nic.in/eidb/default.asp. Ministry of Commerce of the People’s Republic of China (2009), 2008 Statistical Bulletin of China’s Outward Foreign Direct Investment (Beijing: Ministry of Commerce), available at http://hzs2.mofcom.gov.cn/accessory/200909/1253869308655.pdf. Ministry of Foreign Affairs of the People’s Republic of China (2006), “China’s African Policy,” Forum on China-Africa Cooperation, Jan. 12, 2006, available at http:// www.fmprc.gov.cn/zflt/eng/zt/zgdfzzcwj/t230479.htm. Mitchell, John and Glada Lahn (2007), “Oil for Asia,” Briefing Paper (London: Royal Institute of International Affairs). Nayyar, Deepak (2008), “China, India, Brazil and South Africa in the World Economy: Engines of Growth?” Discussion Paper dp2008–05 (Helsinki: WIDER). “ONGC-Mittal to invest 6 bn dollars in Nigeria” (2006), Times of India, Jul. 7, 2006, available at http://timesofindia.indiatimes.com/articleshow/1714985.cms. ONGC Videsh (2010), Assets—Africa, available at http://www.ongcvidesh.com/Assets. aspx?tab=2 (last visited Arp. 11, 2010). Puri, Laxmi (2007), speech at the India-Africa Hydrocarbon Conference and Exhibition, New Delhi, Nov. 6–7, 2007. Pradhan, Jaya Prakash (2008), “Rise of Indian Outward FDI: What Implications Does it Hold for Host Developing Countries?” 29 Economía: teoría y práctica (Iztapalapa, Mexico: Universidad Autónoma Metropolitana), pp. 9–49. Prebisch, Raúl (1950), The Economic Development of Latin America and Its Principal Problems (New York: United Nations). ——— (1959), “Commercial Policy in the Underdeveloped Countries,” 49(2) American Economic Review, pp. 251–273. Reserve Bank of India (2009), “Indian Investment Abroad in Joint Ventures and Wholly Owned Subsidiaries: 2008–09 (April-March),” RBI Monthly Bulletin, July 2009. “SBI plans aggressive foreign expansion, buyout on agenda” (2008), Financial Express, Sept. 23, 2008. Singh, Manmohan (2008), “Prime Minister’s Opening Statement at the India-Africa Forum Summit,” Apr. 8, 2008, New Delhi, available at http://pmindia.nic.in/ speech/content.asp?id=665. Tata in Africa (2010), http://www.tataafrica.com (last visited Apr. 11, 2010). “Trade between China and Africa has broader prospects” (2009), Entrance China, Feb. 11, 2009 available at http://www.entrancechina.org/news.php?id=82717. United Nations Conference on Trade and Development (2006), World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (Geneva and New York: UNCTAD), available at http://www.unctad. org/en/docs/wir2006_en.pdf. ——— (2007), World Investment Report 2007: Transnational Corporations, Extractive Industries and Development (Geneva and New York: UNCTAD), available at http:// www.unctad.org/en/docs/wir2007_en.pdf. ——— (2009), Economic Development in Africa (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/aldcafrica2009_en.pdf. United Nations Conference on Trade and Development Secretariat (2007), Outcome of the India-Africa Hydrocarbon Conference and Exhibition (Geneva and New York: UNCTAD), available at http://www.unctad.org/en/docs/td418_en.pdf. United Nations Industrial Development Organization (2005), Africa Foreign Investor Survey 2005 (Vienna: UNIDO), available at http://www.unido.org/ doc/54113. van de Looy, Judith (2006), “Africa and China: A Strategic Partner,” Working Paper 67/2006 (Leiden: African Studies Centre).

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Vedanta (2010), Our Operations—Copper, available at http://www.vedantaresources. com/operations-copper1.aspx (last visited Apr. 11, 2010). Wang, Jianye (2007), “What Drives China’s Growing Role in Africa?” IMF Working Paper WP/07/211 (Washington, D.C.: International Monetary Fund). World Bank (2006), “Africa Emerges as China and India’s New Economic Frontier: Africa-Asia trade triples in five years,” World Bank News & Broadcast, Sep. 16, 2006, available at http://go.worldbank.org/C9W2KLLRW0. ——— (2007), The Little Data Book on Africa 2007 (Washington D.C.: World Bank). ——— (2009), World Development Indicators 2009 (Washington, D.C.: World Bank). World Economic Forum, Africa Competitiveness Report 2007, available at http://www. weforum.org/africacompetitiveness.

Brian Harley


Brian Harley

Index

Adelman, Irma, 62 Africa, Indian OFDI and benefits to Africa, 267–270 investment, 256–261 overview, 255–256 reasons for, 261–268 Agrawal, Aradhna, 5, 116–118, 126, 158 agriculture, 8, 195–197, 201–202, 212, 213, 252, 265 Aguiar, Marcos, 250 Alavi, Hamzi, 62 Altenburg, Tilman, 36 Anderson, Ulf, 35 Arbache, Jorge Saba, 260 Arcelor Mittal, 135, 264–265 Ariff, Mohamed, 204 Arnold, David, 49 Astapovich, A.Z., 61 Athreye, Suma, 15, 171 Aulakh, Preet S., 45 automotive industry, 136–154, 213 exports, 148–149 external networks, 145–147 financial resources, 142–143 internationalization through FDI, 149–152 Mahindra & Mahindra and Bharat Forge, 137–140 management skills and differentiation, 143–145 OFDI and, 172–174 technological innovation, 140–142 Aykut, Dick, 19, 204 Bajaj, Rahul, 79 Bajaj Auto, 38, 42, 49, 79, 89, 100–102 Balakrishnan, K., 65, 66

Balasubramanyam, V.M., 15 Balcet, Giovanni, 17, 111–157 Bangladesh, 134, 148 Banik, Arindam, 137 banking, 41, 42, 64, 65, 105, 127, 143, 169, 194–197, 200, 202, 205, 206, 207, 212, 213, 216, 222, 236, 263, 265, 267 Barney, J., 35 Bartlett, Christopher, 80, 154 Beausang, Francesca, 35 Becker-Ritterspach, Florian August A., 137 Berger, Suzanne, 81 Bharat Forge, 38, 49, 89, 103, 137–145, 147–149, 151–154, 156–157 Bharti, 33, 85, 265 bilateral investment treaties (BITs), 65, 74, 210, 262, 266 biotech industry, 93–96 Blair, David, 269 Bombay Stock Exchange, 84, 98, 123, 128, 179 Bomsel, Olivier, 82, 91, 93 Bonaglia, Federico, 80 born-global, 41, 44 Bouissou, Julien, 152 brand/brand name, 29–30, 85, 96, 99–101, 104–105, 119–121, 156, 198, 200 Brautigam, Deborah, 263, 267 Brazil, 3, 4, 83, 86, 90, 96, 101, 102, 132, 148, 191, 249, 264, 272 Broadman, Harry G., 260, 262, 266, 269–270 Brushieri, Silvia, 111–157

Brian Harley

278

Index

Buckley, Peter J., 12, 15, 26, 30, 31, 35, 39, 40, 42, 47, 48 call centers, 39, 210 Cantwell, J., 35 capital markets, 41–43, 46, 91, 169, 206 Castellani, Davide, 114 Caves, Richard, 30, 125, 173 Chandran, Rina, 96 Chappell, Lindsay, 149 Chaudhuri, Shekar, 116 Chaudhuri, Sudip, 174–175 chemicals, 6, 8, 11, 18, 83, 91, 94, 134, 139, 193–197, 201–205, 210, 212, 213–214, 218, 220, 258, 260, 265 Chidambaram, P., 50 China, 2–4, 16, 20, 25, 27, 30, 34, 79, 81, 83–86, 89–91, 95–98, 102, 106, 117, 132–133, 148–152, 161, 191, 194, 233, 249, 255–256, 262–271 China Exim Bank, 65, 263, 267 Chittoor, Raveendra, 124 Cipla, 33, 265 Cohen, Stephen, 61, 74 Cohen, Wesley, 35 Collier, Paul, 268 colonial period, 116, 256 commodities, 89, 160, 227, 263, 270 computer peripherals, 214 conglomerates, 16–17, 42–43, 45–46, 49, 50, 65–66, 74, 79–82, 86–87, 89–91, 96–99, 107, 138, 148, 153, 156, 197, 203, 214, 265 consultancy, 8, 11, 39, 83–84, 87, 91–93, 96–97, 99, 102, 200, 203, 205, 233, 236, 265 Contractor, Farok J., 115 conventional MNE theory, 58–60 Cuervo-Cazurra, Alvaro, 40 Daimler Chrysler, 145, 151 Dasgupta, Nandita, 187–225 debt relief, 263, 267 Delhi, 47, 214, 239 Desai, Ashok, 184 Dhar, Biswajit, 175–176 direct regulation, 66–68 Doshi, Bharat, 89 double taxation, 65, 257, 262 Dr. Reddy’s, 33, 38, 94, 180, 183, 203, 218–219, 265

Dunning, John, 30–32, 40, 44, 48, 50, 58–61, 73, 74, 112–114, 155, 172, 237 DuPont, 91 Einhorn, Bruce, 84 Elango, B., 39 Elliott, John, 142 Ellis, Linden J., 263 Emami, 34, 269 energy, 16, 19, 28, 59, 68–69, 80, 83, 85, 88–89, 92, 102, 139, 197, 203, 212, 214–216, 238, 245, 248, 261–267 entertainment, 8, 194–195, 197, 201–202, 212, 214, 219, 258 Ernst, Dieter, 35 Ernst and Young, 129, 224 Essar, 197, 212, 224, 259, 264 European Union, 7, 20, 48, 73, 83, 107, 158, 183, 199 Evans, Peter, 40, 70 Export-Import Bank of India, 41, 205, 206 extractive industries, 50, 122, 207, 256–257, 260, 262, 265, 267–271 fast-moving consumer goods, 214–215 Federation of Indian Chamber of Commerce and Industry (FICCI), 70–72, 74, 192 Fiat, 90, 100–101, 137 firm-specific factors, 11, 13, 17, 20, 31, 44–45, 48, 112–113, 123, 155–156, 198, 204–205, 224 food and beverages, 215–216 foreign exchange/foreign exchange reserves, 6, 40, 63, 66–67, 69, 72–73, 117, 169–170, 261 Foreign Exchange Regulation Act (FERA), 6–7, 117, 170, 183 Foster, Vivien, 263 Galama, Titus, 211 Gehl Sampath, Padmashree, 117 Gereffi, Gary, 36 Germany, Indian OFDI and activities, 239 characteristics of parent MNE, 239–241 characteristics of respondents, 238–239

Brian Harley

Index criteria of location selection, 243–244 Indian expatriates, 245 investment and operational challenges, 246 investment motives, 241–242 job shifts, 244–245 overview, 234–237 performance of Indian subsidiaries, 247 planned investments, 247–248 realization of investment objectives, 242–243 size and modes of investment, 241 survey of, 237–249 technology transfer, 245 Gerschenkron, Alexander, 34, 62 Gianfrate, Fabrizio, 126 Giddy, Ian, 31 Gilpin, Robert, 60, 61 Giraud, Pierre-Noël, 91 Giridharadas, Anand, 203 global financial crisis, 84, 88, 156, 269–270 globalization, Indian MNEs and all-out competition and partnerships, 100–101 biotech industry, 93–96 concentration of suppliers, 103 financial advantages and growing domestic competition, 84–85 firm-level integration into global trade, 85–89 industrial trajectories, 97–99 IT industry, 91–93 overall global competition, 99–100 overview, 79–82 partnerships, 100–103 scaling up technology and building brand names, 85 technology-focused geographic patterns in OFDI distribution, 82–84 Goldstein, Andrea, 19, 80, 152 Gomez, Edmund, 26, 47 Gopakumar, K.M., 175, 176 Gopinath, Shyamala, 168–169, 207 Goyal, S.K., 66 Great Wall Motors, 100, 102–103 greenfield investments, 15, 18, 79, 89, 92, 97, 120, 133, 134, 150, 190,

279

200, 212–214, 222–223, 238, 241, 245, 248, 255, 258–259 Hall, Peter, 80 Hansen, Michael W., 3, 15–16, 25–48 Hay, Françoise, 38 healthcare, 129, 167, 171–172, 194–197, 202–203, 212, 217, 220 Heeks, Richard, 184 Henley, J., 177 Hennart, Jean Francois, 30, 36 Herstatt, Cornelius, 233–250 Hindalco, 38, 49, 89, 203, 219 Hobday, Michael, 26, 35 home country government activities, MNEs and, 63–70 creating supportive environment and institutional facilities, 64–65 direct participation in OFDI, 68–69 direct regulation, 66–68 domestic development of ownership advantages, 65–66 role in OFDI, 69–70 Hong Kong, 2–4, 25, 30, 86, 113 Hosek, James, 211 Hoskisson, R., 40, 49 hotels, 216 Huang, Yasheng, 26, 80 Huchet, Jean-François, 82, 84 Hucht, Margarete, 233 Humphrey, John, 137 Hymer, Stephen, 30, 45, 58, 112, 158 Hyundai, 25, 88, 102, 137 IBM, 176, 233, 235 India-Africa Forum Summit, 255, 267 India Inc., country-specific theory, 39–43 country-specific explanations for OFDI, 40 Indian business system, 42 industries dominating India, 41 nature of Indian capital markets, 42–43 OFDI regulation, 41–42 relevance to India, 40–41 India-U.S. Economic Dialogue, 191–192 Indian multinationals (MNEs) acquisitions, 12–13 analytical perspectives on rise of, 15–17

Brian Harley

280

Index

Indian multinationals (MNEs)—Continued country-specific competitive advantages, 156–157 domination by knowledge-based industries, 14–15 firm-specific competitive advantages, 155–156 global business model and, 79–82 home country government activities and, 63–70 industry analysis of Indian out FDI, 17 origin and growth, 4–9 political economy perspective, 60–63 regional specialization, 13–14 regional studies on, 18–19 rise of, 26–30 specialization, diversification, and trajectories, 157 two-stage pattern of growth, 154–155 wholly owned subsidiaries, 9–12 information technology (IT) industry, 91–93, 216–217 Infosys, 25, 27, 38, 49, 84, 87, 91, 200, 265 infrastructure, 32, 62, 64, 72, 87, 92, 129, 137–139, 170, 191, 205–207, 217, 255, 260, 262–264, 271 internationalization, 1, 10, 15–17, 28, 32, 35–47, 61–62, 64, 74, 79–90, 97–99, 103–104, 106, 111–113, 126–127, 129, 131–135, 142, 145, 148–150, 153, 155, 157, 198, 204, 223, 237, 266 investment development path (IDP) theory, 31–34 inward foreign direct investment (IFDI), 26–28, 32–34, 38, 41–43, 46, 82, 88, 97, 111–112, 190–191, 207–209, 257, 262 irrigation components, 217–218 Jaguar, 88, 96, 100–101, 150–151 Japan, 17, 40, 49, 84, 86–87, 89, 92–95, 106–107, 111, 130, 136–137, 141, 146–147, 149, 159, 191, 208, 263 jewelry, 218 Jindal Group, 89, 203 Johanson, Jan, 10, 32

joint ventures (JVs), 6, 26, 63, 74, 80, 111, 168–169, 177, 190, 238, 241, 248, 260 Jonsson, S., 3 Judge, George, 183 Kale, Dinar, 121–122, 125, 132 Kaplinsky, Raphael, 255, 271 Kathuria, Sanjay, 137 Kathuria, Vinish, 17, 167–183 Khanna, Tarun, 26, 31, 40–42, 49, 80 Khurana, Rakesh, 66 Kim, Yeong-Hyun, 136–137 Kindleberger, Charles P., 30 Kochanek, Stanley A., 72, 75 Kojima, Kiyoshi, 40, 49 Korea, 2–4, 20, 25, 40, 59, 62, 73, 86, 106–107, 113, 191 Korzeneiewicz, Miguel, 36 Kshirsagar, Alka, 103 Kumar, Krishna, 237 Kumar, Nagesh, 26, 27, 29, 39, 41–42, 200, 214–216 Kumar, Niralma, 141 Kundu, Kunal, 234 Kundu, Swati, 212 Lakdawalla, Darius, 126 Lall, Sanjaya, 33, 35, 39, 49, 112, 140, 145, 152, 192, 205, 233 Land Rover, 88, 96, 100–101, 150, 156 latecomer theory, 34–39 accelerated internationalization, 37–38 asset augmentation through internationalization, 35–36 international asset acquisition, 38 low-cost innovation, 37, 39 organizational and strategic innovation, 36–37, 38–39 Latin America, 1–3, 7, 25, 40, 68, 86, 148, 213, 263 law, 29, 60, 123, 171, 208–209 Leahy, Joe, 91 Lecraw, Donald, 31 Lee, Jaeho, 34 Lemoine, Françoise, 90 Li, Peter P., 26, 35, 36, 40, 43 liberalization, 9, 16, 18, 29, 33, 64, 67, 82, 107, 111, 117, 120–121, 136–139, 156, 169, 171, 191–192, 198, 204–207, 211–212

Brian Harley

Index life sciences, 123, 129, 196–197, 201–202, 210, 212–213, 218–219, 221, 236 Lim, Linda, 40 low-cost, 16, 20, 34–35, 37, 39, 97, 99–104, 106, 113–114, 120, 125–126, 145, 172, 208 Lum, Thomas, 263 Luo, Yadong Tung, 36, 112 macroeconomic factors, 18, 86, 106, 204, 207 Madsen, Tage K., 37 Magdoff, Harry, 60 Mahindra & Mahindra, 42, 84, 89–90, 92, 98, 102, 106, 137–145, 147–157, 260, 265 Maini Group, 102 manufacturing, 6, 8, 11, 14, 17–18, 25–28, 33, 38, 41, 68, 81–84, 88, 116–120, 123, 129–135, 139, 149, 151–154, 157, 167, 170, 172, 178, 194–199, 203–205, 210–211, 214, 218–222 Marchick, David M., 201, 208–209 Maria, Augustin, 93, 95 Marico, 34, 214–215, 265 Maruti, 87, 136–137 Mathews, John, 26, 35, 36–37, 43, 80, 113, 114, 136 Mauritius, 83, 227, 257–259, 263–265 McGregor, Jena, 49, 54 media, 126, 190, 194, 195, 196, 197, 199, 201, 202, 212, 219–220, 233, 235, 255 mergers and acquisitions (M&As), 27, 29, 42, 46, 82, 85–86, 88, 90–91, 96, 99–100, 169, 187, 190, 192, 197, 199–203, 209, 212, 222–224, 235, 245, 247–248, 255, 259 Meyer, Klaus, 80 Milleli, Christian, 83, 91 mining, 139, 201, 203, 264–265 Ministry of Commerce of India, 71 Mitchell, John, 265 Mittal companies, 25, 38, 42, 235–236, 264–265 Monopolies and Restrictive Trade Practices Act (1969), 6 Moon, Hwy-Chang, 112 Moran, Theodore, 59

281

Morris, Sebastian, 65, 68, 74, 75 motives for investment, 18, 29, 34, 43, 45, 72–73, 241–244, 248–249 Narayanan, Pratish, 88 Narula, Rajneesh, 31, 32, 48, 50, 114, 135, 237 Nath, Kamal, 79 Nayyar, Deepak, 65, 169, 180, 255, 271 Nepal, 29, 148–149 New Delhi, 255, 266–267 Nicholas Piramal, 118–136, 156, 159 Nigeria, 68, 262–265 Nokia, 88 North America, 7, 81, 145, 178, 187–189, 191–193, 218–219, 221 OFDI data, 5, 7, 9, 27, 94–95, 118, 167, 179, 190, 192 OFDI stock, 3–4, 26–27, 83, 187, 233 Oil and Natural Gas Corporation (ONGC), 68, 89, 259, 264 oil industry, 9, 13, 19, 68, 89, 139, 207, 218, 258–260 oil-producing countries, 262–265 outsourcing/business process outsourcing, 39, 83, 103, 126, 216–217 outward foreign direct investment (OFDI), India and assessment of theory, 45–48 building brand names, 85 conventional MNE theory, 58–60 financial advantages and growing domestic competition, 84–85 India Inc., country-specific theory, 39–43 investment development path (IDP) theory, 31–34 latecomer theory, 34–39 MNEs and, 58–63 motives for investment, 45 overview, 25–26 path of, 30–43 political economy perspective, 60–63 rise of Indian MNEs, 26–30 role of home country context in shaping ownership advantages, 44–45 speed and direction of, 43–44 technology-focused geographic patterns, 82–84

Brian Harley

282

Index

overseas investments, 3, 6, 9–10, 16, 65, 68, 71, 169, 173, 206, 258 ownership-location-internationalization (OLI) framework, 31–32, 44–45 packaging, 9, 116, 195–196, 202, 212, 220 Pal, Parthapratim, 34, 255–271 Palepu, Krishna, 40, 41, 42, 49 Palit, A., 3 Pananond, Pavida, 40 Parthasarathy, Balaji, 176–177 partnerships, 100–103 competition and, 100–101 new value chains and, 101–102 technological innovation and, 102–103 patents, 15, 104, 113, 116–117, 120–121, 123–124, 135, 141, 155, 171, 175–176, 178, 197, 211 PBIT (profit before interest and tax), 180–181 Pedersen, Jørgen Dige, 3, 16, 57–73 Peng, Mike, 40, 49 pharmaceutical industry comparison to software industry, 179–182 differentiation, 125–127 exports, 131–132 external networks, 129–131 features and performance, 174–176 financial resources and managerial skills, 127–129 internationalization through OFDI, 132–134 investment in U.S., 220–221 Nicholas Piramal and Sun Pharmaceutical Industries, 118–121 OFDI and, 172–174 policy evolution facilitating OFDI, 171 technological innovation, 121–125 Piramal, Gitam, 66 Piramal, Nicholas, 118–136, 156, 159 Poddar, Tushar, 205 political economy perspective, 60–63 poverty trap, 268 Pradhan, Jaya Prakash, 1–20, 26, 29, 41, 83, 88, 116, 118, 135, 170, 172, 179–180, 187, 198, 201, 204–206, 208–210, 212, 233, 235, 249, 256

Prahalad, C.K., 49 Prašnikar, Janez, 129 Prayag, Anjali, 92 Prebisch, Raúl, 271 printing/publishing, 221 private sector, 88, 98, 143, 226 profit, 18, 31, 83, 95, 98, 103, 117, 120, 135, 142, 156, 199, 216 profitability, 18, 126–128, 169, 171, 173–174, 180–183, 206–207, 223, 241 public sector, 5, 15, 49, 213 pull factors driving OFDI from India access to new markets through U.S., 210 IFDI policy regime in U.S., 207–209 low value of U.S. dollar, 210 natural resources, 212 proximity to client base, 210–211 size of host country market, 209–210 technology, knowledge, and R&D, 211–212 Punj Lloyd, 34, 265 Puri, Laxmi, 264 push factors driving OFDI from India attitudinal or behavioral change among firms, 204–205 capacity to raise funds through borrowing, 206–207 changes in OFDI policies, 204 generation of corporate funds, 206 impact of FDI inflows into India, 205–206 Rajwade, A.V., 212 Ramamurti, Ravi, 3, 29, 34, 39, 40–41, 178 Ranbaxy, 33, 38, 94, 116, 171, 180, 183, 212, 265 Ranganathan, K.V.K., 75 Rao, C. Niranjan, 176 Rao, V.L., 64 Reliance Group, 34, 38, 85, 89, 91, 197, 219, 265 Renault, 90, 100–102, 138, 145–147, 151, 156, 161 Repower, 38, 82, 88, 250 Reppesgaard, Lars, 233 research and development (R&D), 9, 17, 19–20, 38, 61, 65, 69, 83, 90,

Brian Harley

Index 92, 97–98, 101–106, 114, 117, 119–125, 129–130, 133–136, 140–142, 150, 152–153, 171, 175–176, 180–181, 197, 199, 204–205, 208, 210–212, 224, 234, 237, 239–240, 242, 244, 247–249 Reserve Bank of India, 27, 72, 169, 206, 213, 233, 258 Richet, Xavier, 82, 98, 137, 153, 155 Roberts, Dexter, 101 Rosling, Alan, 96 Rostow, Walt, 74 round tripping, 9, 257 Ruet, Joël, 16, 79–107, 137, 153, 155 Russia, 2, 4, 28, 68, 75, 96, 130, 134, 149, 191, 263–264 Sauvant, Karl P., 1–20, 26, 41 Saxenian, Annalee, 41 Scott-Kennel, Joanna, 32, 34 services sector, 10, 14, 46, 194–201, 205 Seth, Keshav, 101 Shapoorji Pallonji, 34, 265 Sim, A.B., 37 Simon Golub & Sons, 218 Singapore, 2–4, 25, 30, 83, 86, 92–93, 95, 113, 128, 148, 220 Singh, Jitendra V., 34, 39, 40–41, 52, 226 Singh, JK, 5 Singh, Manmohan, 3, 24, 64, 255, 267 Singh, Neelam, 15, 136 Sivaramakrishnayya, Y.V., 74 size of MNEs, 181–183 small- and medium-sized enterprises (SMEs), 42, 198–199 software industry comparison to pharmaceutical industry, 179–182 features and performance, 176–178 OFDI and, 168–171, 178–180 overview, 167–168 policy evolution facilitating OFDI, 170–171 Soskice, David, 80 spillover effect(s), 34, 39, 87, 112, 205, 263, 270 springboarding, 112 Sri Lanka, 29, 148 Srinivas, Smita, 37

283

state-owned enterprises, 50, 63–65, 68, 75, 136, 209, 264, 266 statistics/sources of data, 25, 183, 249, 257 Stewart, T.A., 138, 142, 144, 151 Stopford, John, 61 sub-Saharan Africa, 257, 267–268 Sudan, 28, 75, 149, 259, 262–264 Sun Pharmaceutical, 118–129, 131–132, 134–135, 157, 211 Sutz, Judith, 37 Suzlon, 38–39, 82, 85, 88, 250 Taiwan, 2–4, 25, 59, 62, 86, 107, 113 Tata Group companies, 5, 25, 42, 81, 84, 89, 91, 96–97, 107, 137, 187, 203, 213, 215–216, 221, 225, 265, 272 Teece, David, 35, 36–37 telecommunications, 8, 26, 33, 85, 91, 170, 195–198, 202–203, 207, 210–211, 221–222 textiles, 4, 6, 8, 33, 38, 97, 99, 118, 195–197, 201–202, 212, 222, 258 Thakur, Amitabh, 235, 249 theoretical frameworks, emerging MNEs and alliances, acquisitions, leverage, and learning, 113–116 imbalance and springboard approaches, 112 linkage, leverage, and learning theory, 113 Tiwari, Rajnish, 3, 18, 233–250 Tolentino, Paz Estrella, 31, 35, 37, 40, 47 Toyota, 88, 102, 145 travel, 195–197, 202, 212, 222, 236 United Kingdom, 6, 83, 86, 90, 92–93, 95–96, 132, 149, 151, 178, 188–189, 191–193, 235, 249 United Nations Centre on Transnational Corporations, 59 United Nations Conference on Trade and Development (UNCTAD), 25, 34, 39, 85, 266–267 United States, Indian FDI and age of Indian MNEs, 195–197 agriculture, 213 automotive industry, 213

Brian Harley

284

Index

United States, Indian FDI and—Continued banking, 213 chemicals, 213–214 composition of OFDI, 194–195 computer peripherals, 214 entry routes for Indian OFDI, 200–203 factors driving OFDI from India to U.S., 203–212 fast-moving consumer goods, 214–215 food and beverages, 215–216 greenfield OFDI, 200 hotels, 216 Indian M&A scenario, 200–203 information technology (IT), 216–217 irrigation components, 217–218 jewelry, 218 life sciences, 218–219 media and entertainment, 219 metals, 219–220 overview, 187–190 packaging, 220 pattern of OFDI flows, 190–200 pharmaceuticals, 220–221 printing/publishing, 221 projects in U.S., 212–223 size distribution of Indian MNEs, 197–200 telecommunications, 221–222 textiles, 222 travel, 222

volume of OFDI, 192–194 U.S.-India Business Council, 191, 224 van de Looy, Judith, 263 Vedanta, 265, 272 Vernon, Raymond, 49, 58, 112 Vernon-Wortzel, Heidi, 35 Vohra, Dewan, 64 Volvo, 103, 145, 151 VSNL, 34, 96, 221, 265 Wang, Jianye, 267 Wang, Richard, 126 Wee, Kee H., 83 Wells, Louis T., 112, 154 White, Halbert, 174, 181 Whitley, Richard D., 26, 40 Winters, Allan, 50 Wipro, 27, 38, 83, 91–92, 201, 203, 211, 213, 216–217, 223 World Bank, 65, 260, 270 World Economic Forum, 79, 191, 211, 269 World Trade Organization (WTO), 117, 171 Wright, M., 45 Yeung, Henry Wai-Cheung, 40 Zanfei, Antonello, 114 Zeng, Ming, 37

Brian Harley

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