India's outward FDI has increased in recent years. It was $16.5 bn in 2010-11. Before the global crisis erupted, we had a number of high-profile takeovers by Indian firms. This gave rise to the view that India Inc was all set to conquer the world. India's low-cost advantage, the high growth rate of the Indian economy and the flood of liquidity, which translated into easy access to finance for Indian firms- these seemed to make an Indian onslaught on the west inevitable.
Much of this euphoria has faded since. When the crisis erupted, international finance evaporated for Indian firms leaving many an incomplete takeover in the lurch. Even otherwise, it hasn't been smooth sailing for a large number of takeovers. Students of finance will not be surprised: we know that the majority of acquisitions fail to enhance shareholder value. Making a success of an acquisition requires formidable managerial ability, a favourable economic environment and a reasonable acquisition price. Indian firms are running into limitations on all counts.
The Economist ran an interesting analysis of a four high-profile acquisitions a few weeks ago: Tata Steel- Corus, Tata Motors- JLR, Hindalo-Novelis and Bharti Airtel-Zain. Only two, Tata Motors and Hindalco, have seen an improvement in profit. The other two are struggling. In terms of return on capital, only Tata Motors scores. At the rest, return on capital is likely to be lacklustre for several years.
These four acquisitions accounted for a quarter of India's cross-border activity in the past decade. The smaller deals have not done uniformly well either. The Economist notes that Indian companies have a fundamental problem in doing jumbo deals: they don't want to raise much equity for fear of diluting controlling shareholders.
India Inc ruling the world? Not a chance. Corporate domination is a function of the importance of the economy in the world, as the Economist rightly notes. British firms dominated when the UK was a powerful player on the world stage; ditto for American firms. India still has a long way to go. The sensible thing for Indian firms to do is to attain world class parameters in India, then think of overseas ventures.