"Building Sustainable Indian Multinationals: Agenda for Action"

A Thesis Presented to AIMA National Competition for Management Students

By Kamal Syal Vijay Bhargava

Abstract
Sustainable development has become an overall policy objective in India. The sustainability transition is seen as the process of coming to terms with sustainability in all its ecological, social, economic, and institutional dimensions. Indian Multinational companies have transformed very quickly from

small domestic players to competitive global powerhouses. Indian MNCs are still in an embryonic stage. The current paper discusses the challenges Indian MNCS will be facing with regard to its growth in the long run. The paper also discusses about building sustainable growth by addressing the domestic as well as international needs. We will also discuss the strategies which Indian Companies will employ to sustain the competition locally and internationally.

Introduction The Indian MNCs are the companies which are of Indian origin and spreading its wings to set up operations in various markets around the world. For Example Tata Steel,Hindalco Industries, Ranbaxy laboratories etc are some of the Indian MNCs.Indian MNC are private corporations primarily guided by the philosophy of the profit maximization.MNCs represent a network of private business enterprises having operations in many geographic locations. Indian MNCs need to build a core competency and possibly avenues to generate internal accruals or external finances for funding globalization plans. There are examples of several companies that have first built a robust and sustainable domestic business model by honing it through continuous experimentation in the home market and thus creating a core competency.

Indias dual economic structure and wide dispersion in productivity levels call for a broader interpretation of innovation. Innovation is defined to include both new to the world creation and commercialization activities and new to the market diffusion and absorption activities. The first use of existing knowledge in new market contexts to help underperforming enterprises come closer to the global frontier of knowledge. Innovative activities include products, processes, and business and organizational models new to the local environment. India is increasingly becoming a top global innovator for high-tech products and services. Still, India is underperforming relative to its innovation potential, with direct implications for long-term industrial competitiveness and economic growth.

Indian Companies has acquired a slew of foreign companies across a spread of sectors in their quest to go global. The rising tide of Indian investment overseas reflects the imperatives of operating in a globalised market place. Because of rising competition, Indian firms are now driven by the need to seek the cheapest resource mix and locate operations where these are available. Globalization also entails that they seek larger markets that transcend geographical barriers. Both factors translate into a strategy of larger overseas investment. Changes in the International regulatory environment, particularly developments in the intellectual property rights (IPR) regimes are also critical drivers for Indian companies forays abroad. The liberalization announced will enable the Indian companies to take advantage of global opportunities and to acquire technological and other skills for adoption back home in India.

About 90 percent of Indian workers are employed in the informal sector, and this sector is often characterized by underemployment, as well as low-productivity and low-skill activities. Although India has the benefit of a dynamic young populationwith more than half of the countrys population under 25 years old, only 17 percent of people in their mid-20s and older have a secondary education. To sustain rapid growth and help alleviate poverty, India needs to aggressively harness its innovation potential, relying on innovation-led, rapid, and inclusive growth to achieve economic and social transformation. Sustaining growth is a challenge because of both intensified external competition brought on by information and communication technology (ICT), spurred globalization and internal pressures linked to skill shortages

Reasons for going global: Following are the reasons that drive Indian Companies to spread their wings abroad: 1) Market distortions: In a world without tariffs and other distortions, exports and local production would be perfect substitutes. However, in the real world, distortions do exist and provides an incentive for firms to locate production facilities abroad. 2) Access to resources: Access to low cost resources has been another important reason behind foreign direct investments. In a number of instances, the availability of cheap, skilled labour has been an important driver. Resource seeking investments from India is largely geared to the oil and gas sector where investment is driven largely by the need to explore new oil reserves. Here destination of investment is determined by the location of oil fields. 3) Market access: The penetration of large markets often entails physical Proximity of a firm to these markets, a condition that a pure export strategy fails to satisfy. Firms, for instance, need marketing and distribution assets to access market and often the optimal strategy for successful penetration is to acquire a local marketing company or set up a marketing subsidiary. Indian pharmaceutical companies are following exactly this strategy, particularly in unregulated markets. For Indian software companies, the need for market access has entailed locating facilities in major markets to acquire domain knowledge of clients and setting up disaster recovery centres in case of systems failure. 4) Technology: The manufacture of certain products requires technology that is not available to the Indian companies. By acquiring companies abroad, they also acquire advanced manufacturing technologies that further help reduction in the cost of production. 5) Expanding product mix: Companies acquire to obtain a new product mix or to acquire products that will otherwise require huge investments and a long time to manufacture indigenously. For instance, Tata Motors acquired Korean Daewoo Commercial Vehicle Co Korea, the truck-making arm of Daewoo. With this deal Tata Motors Ltd. gets access to Daewoos 93 models in cargo, dump, mixer and tractor categories that it can introduce in other markets. 6) Averting domestic cycles: The cyclicality in some products, for example, commercial vehicles segment, earlier saw manufactures reel under losses during downturns. Diversification of markets helps companies hedge against the domestic cycles.

Challenges faced by Indian MNCs: Indian MNCs has to face the following challenges:

Manufacturing and Selling Challenges: Indian MNCs will face challenges such as Labor & sales cost vs productivity,after sales service, customer service,advertising & sales promotion Issues,handling product complaints & compliance to adverse events, Just-in-time inventory, shipping, storage, transportation and delivery, good distribution practices, inventory & receivables management.

IPR Challenges:Indian MNCs have to face various IPR challenges like Identifying Patented vs. out of Patent products,Patent situation, validity of Process/ Product/ method Patents in foreign country (e.g. reduction of PAT for Indian Cos. due to Product Patents) ,Royalty to Inventor, Compulsory Licensing ,Trademarks & Industrial Design,developing hard to copy technology,Infringement Issues, Litigation.

People and Organizational Challenges:

HR & Recruitment policies,Organization

structure, Business teams to support new business needs(defined, capable & mix of local & Indian),developing team of well-trained executives to transfer core skills & organizational structure ,incentive & compensation to such executives,selecting manufacturing, sales, R & D employees,developing distinctive capabilities.

Business Challenges: Indian MNCs will be facing many business challenges like business plan objectives(short & long term), local & Indian Govt. clearances,industrial policy & import policy of the country,financial policies, banking channels,incentives, export processing zones,local duties & taxes, selecting authorized agent/ partner/

distributor,negotiations & acquisition of local business,policies regarding ownership of property.

Managing cultural differences: It is an important challenge, as global business brings people from different culture together. They need to overcome cultural differences and collaborate with each other in order to succeed. In order to have a positive image of the Indian industry in the host nations overseas and across geographies by maintaining the highest degree of corporate governance practices.

Overseas staff postings: Indian-origin multinationals are facing various challenges while posting
an employee abroad including competitive salary packages, taxation and even spouse dissatisfaction.

Some of the most common challenges faced by employers of international assignees are those regarding competitiveness of expatriate packages, issues with different tax structures and of overall cost containment. Companies of Indian origin find themselves challenged by significant costs borne to offset international compensation inequity.

Political Challenges: Government Regulations which restrict Indian companies to enter into their market and expand business. There are also anti dumping measures which are restricting Indian companies to enter into global market.

Customer Knowledge: This is one of the biggest challenges which Indian MNCs will be facing while going into the global market. Problems like knowledge of business culture,
knowledge of local customer requirements, Knowledge of customer base, establishing

closeness to customer (fewer intermediaries preferred), and customer relationship management plans

Strategies for going Global

Indian companies are using all the tricks of trade to go global. The scale and business share may not be significant today, but Indian businesses are slowly but surely establishing themselves abroad. Following are the strategies used by Indian companies to go global:

Acquisitions: Acquisitions have been the major business strategy employed by Indian MNCs to expand and capture the markets. The International acquisitions help Indian companies by: 1. Providing proximity to global customers, and significant upside. 2. Giving access to technology and intellectual property, which can be exploited at a larger scale. 3. Allowing Indian companies to drive value from their cost competitiveness by international operations with higher cost structures. 4. Streamlining supply chains and securing raw material access. acquiring

Here are the top 10 acquisitions made by Indian companies worldwide: Acquirer Target Company Tata Steel Hindalco Videocon Corus Group Novelis Daewoo Electronics Corp. Country Targeted UK Canada Korea Deal Value ($ ml) 12,000 5,982 729 Steel Steel Electronics Industry

Dr. Reddys Lab Suzlon Energy HPCL

Beta Pharmacy Hansen Group

Germany Belgium

597 565 500

Pharmaceutical Energy Oil and Gas

Kenya Petroleum Kenya Refinery Limited

Ranbaxy Lab Tata Steel Videocon VSNL

Terapia SA Net Steel Thomson SA Teleglobe

Romania Singapore France Canada

324 293 290 239

Pharmaceutical Steel Electronics Telecom

Joint Ventures

The advantages of Joint Ventures are,

y

Indian Companies should each partner to benefit significantly from the comparative advantages of the other local partners that bring knowledge of the domestic market;

y y y

Familiarity with government bureaucracies and regulations In Better understanding of local labour markets and existing manufacturing facilities. Foreign partners can offer advanced process and product technologies, management know-how and access to export markets.

For either side, the possibility of joining with another company in the new venture lowers capitals from access to a new customer base and new markets.

For example: Ranbaxy laboratories limited, Indias largest pharmaceutical company formed joint ventures with pharma companies in Nigeria, US, China and Japan etc.

Value Innovation: Value innovation is created in the region where a companys actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Capturing the value of supplementary services: Indian MNCs should analyse their services and decide which must be offered as standard and which can be offered as option. Indian MNCs should also try to limit their standard packages to those services that are highly valued by all customers in a segment.

Exploiting the virtual value chain: Indian MNCs must create and extract value with information and must turn to the virtual world of market space. Each extract from a flow of information along the virtual value chain could constitute a new product or service.

Other Strategies: Organic Growth implies the growth in a natural manner by establishing a subsidiary and capturing the market. Merger implies acquiring and becoming as a single entity. These strategies are not much adopted by Indian MNCs, since in developed countries the Competitor will be already established and the gestation period etc are more. Also the rival will be having more technological advantage compared to Indian MNCs. Further it reduces one of the advantages of cheap labour. For those companies concentrating on making investments outside India, a mix of organic and inorganic growth has been the most common route towards globalization.

Conclusion:

When India opened up its markets in 1992, there were apprehensions that India Inc. may not be able to survive the challenges posed by the influx of foreign MNCs. But the India Inc. has not only survived the challenges, in their quest for expansion they are increasingly thinking globally. This is evident from the number of acquisitions and foreign operations done by India Inc. The Indian companies are on the buying spree overseas, the inescapable fact is that they are relative newcomers to the game of cross border acquisitions. There are several issues they need to tackle before they can claim success. They have to deal with regulations, market liabilities, cultural issues; strict norms on everything from environment to customer protection make the Indian acquirer vulnerable to a host of lawsuits and penalties. Indian MNCs need to proactively implement cultural sensitization programs and transparent practices so that cultural gaps and problems are minimized .Giving the financial logic for global entry will not only work. The Indian MNCs are hosting the flag of India Shining in the world.