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Made-in-India Multinationals

Ravi Ramamurti
October 9, 2008

The internationalization of Indian firms may seem like the logical extension of an historical trend that began in Europe after the industrial revolution, spread to America in the 19th and 20th centuries, and then took hold in countries like Japan and South Korea. That India would spawn multinationals once it embraced globalization may therefore seem unsurprising, even inevitable.

But there was nothing inevitable about the rise of made-in-India multinationals.

Yes, economic liberalization, including the relaxation of capital controls, created conditions that allowed Indian firms to internationalize. And, yes, outward foreign direct investment (FDI) from many developing countries shot up in the last few years because of a “perfect storm” of enabling external conditions, such as the Internet revolution, the globalization of services, the abundant supply of cheap capital in world markets (until recently), the de-verticalization of industries that followed outsourcing and offshoring, and a boom in commodity prices, which swelled the foreign exchange reserves of some countries. As a result, outward FDI stock of emerging economies soared from $365 billion in 1990 to $1,600 billion in 2007.

While these conditions may have been helpful or even necessary for the internationalization of Indian firms, they were not sufficient. In fact, in 2007, just fifteen emerging economies accounted for 93 percent of the total outward FDI stock of all emerging economies. Moreover, twelve of those countries were high-income or upper-middle-income nations, such as Brazil, Korea, Singapore, Hong Kong, and Taiwan, with per-capita incomes in the range of $6,000 to $30,000. India and China were in that elite group despite having per-capita incomes below $2,500 (at official rates).

Why did China and India nonetheless make the list of top-15 outward FDI countries? Economic size, no doubt, helped: after all, China and India are the 4th and 12th largest economies in the world, respectively (at official exchange rates). This allowed firms in these countries to build scale, move up the learning curve, and acquire experience that could be leveraged internationally. But in China’s case, the internationalization of its firms also relied heavily on state support and state funding—elements that were relatively unimportant in the Indian case.

The Boston Consulting Group’s 2008 list of the top-100 “global contenders” from emerging economies includes 41 Chinese firms, three-fourths of which were state-owned, and 20 Indian firms, none of which were state-owned. The Chinese government adopted an explicit “go global” policy in 1999, with the goal of getting 30-50 Chinese firms onto Fortune’s Global 500 list. The government steered funds to these budding national champions through state-owned banks. In contrast, the Indian government had no strategy to turn state-owned enterprises into global champions, although a few among them ventured overseas on their own, e.g. ONGC and IOC.

The other interesting difference between China and India is the relationship among inbound FDI and outbound FDI. There is a theory in international business that developing countries need inbound FDI from established multinational corporations (MNCs) in order to upgrade local firms, suppliers, and customers, before some of those firms can become MNCs in their own right. China’s experience is consistent with this theory: the country received about $500 billion in inbound FDI over two decades before outbound FDI started to rise in 2002; inbound FDI was four times outbound FDI even in 2006. In contrast, India’s inbound and outbound FDI took off at about the same time, at the turn of the millennium, and by some accounts the value of overseas acquisitions by Indian firms in 2007 may have exceeded the value of acquisitions in the opposite direction by foreign multinationals. Moreover, about two-thirds of the value of overseas deals by Indian firms in 2007 is estimated to have gone to the industrialized countries of Europe and North America!

So, what do these facts tell us about made-in-India multinationals? They tell us that the rise of Indian multinationals was founded largely on the capabilities of India’s private sector and the country’s deep entrepreneurial talent. Those strengths became apparent after India opened up in 1991. At the time, many observers feared that local firms would get run over by foreign competitors with state-of-the-art technology and well-known brands. In retrospect, that did not happen because Indian firms upgraded their products, plants, marketing, and distribution faster than foreign MNCs could figure out how to succeed in the complicated Indian market. The home-field advantage of Indian firms also turned out to be quite substantial.

But what followed in the late 1990s was even more surprising. Indian firms turned from defending the home market to attacking foreign markets, partly to counter the Indian economic downturn of 2002-03. With the Rupee falling, and with such events as Y2K and the post-Y2K boom in offshoring, Indian exports increased. Then, to top it off, several Indian firms began to make multi-million dollar, followed by multi-billion dollar, acquisitions, not just in other emerging markets but also in Europe and North America—a la Tata’s takeover of Corus and Jaguar-Land Rover. By 2005, Indian firms were playing offense, not defense. Pessimism about their prospects in an era of globalization gave way to optimism, followed by euphoria.

The strengths of the Indian private sector are seen also in the sectors in which made-in-India multinationals operate. In Brazil and Russia, the largest home-grown multinationals tend to be in the natural resource-based sectors (with notable exceptions, such as Brazil’s aircraft maker, Embraer). Six of the Top-10 Russian multinationals are in energy and other resource-based industries, and they account for 72 percent of the outward FDI stock of the country’s Top-25 MNCs. China’s leading multinationals include several manufacturing firms, such as Haier, Lenovo, and TCL, but a good part of the country’s outward FDI consists of investments to secure raw materials in Australia, Africa, and Latin America. China’s (state-owned) steel and aluminum companies, for instance, were several times larger than Tata Steel or Hindalco, but their internationalization mainly took the form of backward integration to secure raw materials rather than forward integration to secure customers and markets in the advanced economies. To be sure, Chinese attempts to do the latter ran into political opposition because the buyers were state enterprises from a Communist country. Indian takeovers did not arouse similar fears.

Unlike the other BRIC countries, India’s MNCs figured prominently in skill-intensive businesses, such as IT services, pharmaceuticals, and engineering, rather than natural-resource-intensive or labor-intensive businesses. In my view, this is because India’s technical skills are more advanced than its per-capita income would suggest, and its under-developed physical infrastructure has forced private Indian firms to compete in the middle of the skill-spectrum rather than at the bottom, where costs are paramount and China has a big edge. The Indian private sector has found ways to compensate for the country’s underwhelming public services, and the entrepreneurs behind the successful firms include many old names, such as the Tata, Birla, and the Essar groups, but also a host of new names, such as Sunil Mittal, Tulsi Tanti, Anil Agarwal, and Naresh Goyal. The depth and range of Indian entrepreneurs is impressive, even without counting the many NRI entrepreneurs, like Lakshmi Mittal or Vinod Khosla, who have built world-class companies outside India. Such wide-ranging entrepreneurship is lacking in the private sectors of Brazil, Russia, and even China.

While it is true that China’s reforms preceded India’s by at least a decade, observers overlook the fact that China’s indigenous private sector lags India’s by a decade or two. This is not because the Chinese are less entrepreneurial than Indians—just look at how well they have done outside China—but because the Chinese state suppressed them until only a few years back. In the long run, China’s private firms, such as Wanxiang or Great Wall Motor, may turn out to be more successful MNCs than behemoths owned by the Chinese government, such as Shanghai Automotive Industries Corporation or the Baosteel Group.

Looking ahead, what is the outlook for made-in-India multinationals? I think their future is promising, but by no means rosy. Acts One and Two in their evolution after 1991 went splendidly: they held their own in the home market and then internationalized swiftly. But Act Three, which is underway, will be much tougher and will really test their caliber. They will have to deliver on sales and profits forecasts made in rosier times, or else their stock prices will tumble and heads will roll.

The global economic environment has turned markedly adverse in the last year. Falling demand and prices are going to threaten the margins of firms pursuing the global-consolidator strategy in steel, chemicals, or aluminum. Digesting and integrating overseas acquisitions will be harder than expected, even if some Indian managers are sanguine on this front. Firms that have made opportunistic acquisitions in diverse market segments or geographical regions may be forced to focus their portfolios and sharpen their strategies. I am not sure that Indian MNCs can articulate clearly the foundations of their international competitive advantage. Rising salaries and the influx of Western MNCs into India will further heat up the local war for talent and raise costs for firms pursuing the labor-cost arbitrage strategy. Despite their self-image as culturally-savvy individuals, Indian managers will make their share of blunders in cross-border operations. More Indian firms will run into the kinds of challenges that Suzlon Energy and Ranbaxy have encountered in foreign markets with sub-standard product quality. And at least a few more entrepreneurs will follow Ranbaxy’s example by selling out to foreign MNCs and losing their independent status.

But, in the end, many of India’s privately-owned multinationals, answerable to private capital markets, will turn out to be nimble, creative, and self-correcting organizations that will find their place among the world’s multinational enterprises.

Ravi Ramamurti is Distinguished Professor of International Business and Director of the Center for Emerging Markets at Northeastern University, Boston. He is co-editor of Emerging Multinationals from Emerging Markets (Cambridge University Press, 2009), which includes a detailed analysis of the Indian experience.


India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.

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