Investing in the MNC
When he was finance minister, Manmohan Singh had once urged Indian firms to go forth and multinationalise. Tata Steel’s bid for Corus, a Britain-based metal basher three times its size, has brought to notice how dozens of firms are close to earning the label ‘Indian MNC’.
Leading the pack is the Tata Group. At present trends, by 2010, half its revenues could come from overseas — a key measure of a multinational. But it also meets the definition under other heads: most of the group’s biggest firms have a foreign foothold and its interests are spread over five continents.
The sheer size of Tata’s overseas purchases, and the fact that many are in traditional businesses — whether it is tea bags or steel — have grabbed the headlines. But it should not obscure the fact that the real wannabe Indian MNCs are concentrated in the pharmaceutical and infotech sectors.
Pharmaceuticals dominated outward-flowing Indian foreign direct investment last year in sheer worth, with infotech coming in second place. Mega-deals like the Corus bid or even wind energy-wallahs Suzlon buying a Belgian gearbox firm will bloat the figures in other sectors every now and then. But it is the Indian technology firms which are the consistent international players, buying small, but by the score.
A Crisil study, ‘Creating the Indian MNC’, calculated that in 2005-06, a score of Indian drug firms invested overseas. They only shelled out an average $ 61 million per deal, but collectively put pharmaceuticals at the top of the outward foreign direct investment heap.
That the technology firms are leading the charge overseas indicates that the Indian MNC is coming into existence in exactly the same way other MNCs have done. They achieve a certain competence and confidence, and then begin hard-selling that in markets outside their home country.
But companies jump across borders for all sorts of reasons: access to marketing networks or products, the need to get a hold of technology or specific resources.
Indian drug firms add a twist to the tale. After patent laws were tightened in 2005, the industry lifeblood of pirating other firms’ drugs dried up. One response: get into generic drugs markets overseas (all those ageing Westerners). But new medicines face layers of tests, clearances and red tape. Rather than master this tedious process, Indian firms just buy a local shop that already knows how to jump through the proper regulatory hoops. No market seems too small: Wockhardt just bought Pinewood Laboratories of Ireland for a remarkable $ 150 million.
Tech firms go overseas because they have to. Infotech services, says the Crisil report, must “move up the value chain in Western markets” as it is the “key to continued growth”. And as they get into overseas speciality markets like healthcare or retailing, getting a local face is useful. Crisil notes, in a reminder of how nascent is Brand India, that there remains a “lack of widespread awareness in Western markets about Indian software companies”.
A bigger question lies in why Indian manufacturing and other primary sector firms are going overseas. Very few are world-beaters.
One answer, and a telling one, is that many simply prefer to invest somewhere other than India — despite an economy growing at 8 per cent plus.
The Tata Group is quite explicit that going multinational is, at one macro-level, about avoiding dependence on India. The group nearly went under when the economy sputtered in 1999. Ratan Tata said in an address last year, “One of the major drivers of going international is to reduce our vulnerability to a single economy.”
Two Indian success stories, auto parts and commercial vehicles, are among those who don’t want to put all their eggs in a desi basket. Experience has taught them that their home market has severe ups and downs.
A further measure of how Indian reforms continue to lag is that, according to Unctad’s World Investment Report 2006, the amount of outward FDI is likely to top the amount of inward FDI this year. Even before Corus it was close: $ 7.2 billion out vs an expected $ 8 billion coming in.
Put it another way. Investment development theory argues that the relationship between how much FDI goes in and out of a country depends on its economic development.
The theory conventionally argues that countries go through five different stages. India’s present FDI situation — where FDI in and out are nearly on par — is a stage three phenomenon. However, as Unctad notes, the relationship between India’s per capita GDP and its net outward investment places it as a stage one country.
Possibly, the theory is a bit out of date. After all, leveraged buyouts and special purpose vehicles mean Indian firms use foreign capital to finance the bulk of the biggest overseas purchases. The Indian capital involved is minimal.
It may be true that some of the entrepreneurship being exported from India would have stayed at home if the domestic environment had been better. But it’s safe to say most outward FDI is natural and necessary.
Companies from developing nations, ex-Soviet republics included, going overseas are a clear international trend. The Unctad report, which focused on this theme, said such FDI totalled $ 133 billion in 2005, about 17 per cent of the world total. The accumulated stock of such investments is about $ 1.4 trillion, about 13 per cent of the world total. Needless to say, the chart-topper on both counts was China.
What is interesting is that much of this investment no longer takes the old-fashioned form of building new factories or wharves. The favoured path to the big wide world is mergers and acquisitions — just buy an existing firm. The UNCTAD report says such deals involving developing world firms reached an “unprecedented” $ 90 billion in 2005. “The recent increase was driven primarily by companies from developing Asia.” About half these deals were poor nation firms picking up ones in rich nations. ‘The New Global Challengers’, a report by the Boston Consulting Group on the “top 100 companies from rapidly developing economies”, found that merger and acquisition deals by such firms jumped from 15 in 2000 to 59 in 2005.
This path is a particular favourite of Indian firms. This is in large part because most are focused on getting the bits and pieces that they need to round off their production or supply chains. The Boston Consulting Group report, which has 21 Indian firms in its list of 100, notes that companies with strong consumer brands tend not to bother with buyouts. Indian firms are zero in the global brand game — unless they go and buy a foreign one.
Another reason to buy other than build: Indian banks won’t finance overseas moves. Buying an existing firm allows an Indian firm to use that firm’s assets to get funds from foreign banks. The Tatas have done exactly that in their Corus bid. Even then, they had to struggle to secure the necessary finance. Much more difficult would have been to set up a brand-new steel plant in Britain.
It is too early to say there is an ‘Indian model’ of overseas investment. Much of the character of this investment reflects the strengths of Indian firms in technology and upper-end manufacturing. A survey of Indian MNCs-in-the-making showed not one in the primary sector believed they were globally competitive. The Indian firms that made it
to the Boston Consulting Group list were also heavy on the silicon and test-tubes. And if they tend to be cautious — the Tatas have a ban on hostile bids — it partly reflects the lack of backing they get from India’s insurance and banking firms. The Indian MNC is doing well, but it will come into its own only when the rest of the Indian economy does.