Wednesday, April 11, 2012

India Inc rules the world?

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.


Anonymous said...

Thank God, this should put an end to the petty posturing that Indian business is better than the West or that Westerners don't work hard, or, that the West is doomed, etc. Businesses when they cross borders need to do away with nationalistic fervor (misplaced or, even when true) and perhaps the next generation of business leaders from India will be more mature and symbiotic. What is beyond stupidity is that Indian superiority complex comes in areas like IT, wireless technology, etc which are developments out of painstaking research in the West over decades that was shared with the Eastern part of the globe at no cost whatsoever. Another thing that I hope will die quickly should be the glorification of "jugaad".

chandramouli said...

Dear Professor,
1. It appears that you are in agreement with the article of Economist, which is totally misguided.
2. In the first instance we have never claimed that “India Inc. rules the world” with the meagre outward FDI we have made. This is just to ridicule India. Even if a small investment is made by us the west responds this way as it feels that it is their prerogative to invest in the world and it is not the job of developing countries.
3. When such investments are made they are not made with a short term perspective. Today everything is looked at from a very short term perspective. The 4 major investments evaluated by Economists have not completed even 5 years. From my own practical experience, I have been investing in the stock market from 1984 and my tenure of investment was always 20 years plus. I had invested in all the primary issues and had held on to the same till date. The return is much higher than what I would have earned in real estate or gold. Had I looked at my investment after 5 years, I would have sold off the shares and lost all these appreciation in the shares, which I am bestowed with now. When I had looked at the management, scope of the industry, and the prospective growth of our economy, I knew that these are long term investments and I should not look at a five year tenure of investment. The same applies to these companies. Somehow, Economist article has grossly missed this point. It is premature to value these long term investments on a short term basis.
4. I tend to disagree that Indian firms are running into limitations as far as managerial ability, favourable economic environment and a reasonable acquisition price.
5. I agree India has a long way to go. But somewhere you have to make a beginning and the beginning in my opinion is good. Let us take a long term perspective and not be judgemental by taking an erroneous short term views.

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