Globalization and International Management 
 

Often the terms liberalization, democratization, market deregulation, privatization, welfare reform, and the general retreat of state from policy interventions have often been studied and associated with globalization (Reich, 1998). Globalization in modern times is marked by an increasing diffusion of commodities and ideas. Advanced technologies in communication and transportation have made it possible for people to transcend national markets earlier limited by geographic boundaries, leading to an ever increasing interdependence and integration. International Management (IM) issues are gaining significance across businesses. It is not only helping the firms to grow, but also redefining the way in which firms have been growing traditionally.

This surge towards internationalization has enabled IM issues to occupy a central role in the field of business research literature. The literature in IM can be categorized into three major streams viz. pure IM research, comparative management studies, and foreign domestic studies (Werner, 2002). Among the contemporary issues, the most widely discussed area is the rise of international firms from emerging economies. There have been several studies (eg: Hoskisson et al, 2000; Wright et al, 2005) which have emphasized the importance of emerging economies in international management and vice versa.

However, these studies have concluded that the multinational corporations (MNCs) from emerging economies have so far been able to obtain a strong foothold in similar economies, but are yet to create a mark in the developed markets. The primary reason for this has been attributed to the difference in institutional environment of emerging and developed economies and researchers have emphasized that the MNCs from emerging economies have to gradually ‘learn’ from their experience in such scenarios.

Rise of the Indian MNC

The economic crisis of 1991, which dragged us to a near-default situation in its interest payments is now well established as a watershed year in the history of our nation and marks the leap from an inward looking closed economy to a more open, globalized one. With the dismantling of the industrial licensing regime and liberalization of the Indian economy, the Indian industry was forced to challenge competition head-on. Widespread concerns were raised, both within and outside the industry about the ability of the industry to face the ensuing fierce competition. Concerns were even raised about the Indian industry being gobbled up by the large MNCs that had suddenly discovered one of the most lucrative markets in South-East Asia. After years of fighting competition, shedding flab and restructuring, Indian industry has not only defied the prophets of doom but also has gone a step ahead by taking competition to the enemy’s turf.

Data from finance advisors reveals that in 2002, 28 foreign companies got acquired by Indian companies. The figure climbed to 49 in 2003, 60 in 2004 and 100 in 2005. In value terms, the acquisitions were valued at US$209 million in 2002, US$1.8 billion in 2003, US$1.79 billion in 2004 and US$2.3 billion last year.  However, these figures only provide a conservative estimate as debt acquisitions and equity investments in other firms are not accounted for (Phillip, 2006). The government also created a favorable climate for acquisitions when in 2003 it allowed companies with proven track records to make investments in non-related areas. The annual US$100 million ceiling on pre-payment of external commercial borrowings was doubled and the 50% net worth ceiling on a company’s investments in acquiring shares in an overseas company was raised to 100%. (IBEF, 2004) .The result was a surge in acquisitions by Indian companies as shown in the chart below:

Sector wise trend of Indian companies’ global acquisitions is shown in the chart below: The following table highlights the major global acquisitions by Indian companies:

Rise of Indian MNCs: Strategic Drivers

Over the past two years major acquisitions in the pharmaceuticals and automobile sectors have taken place in Europe, metals and minerals firms have targeted the Asia-Pacific region while the US has been the hunting ground for IT and IT-enabled services. 

European automobile companies find Indian partners a win-win situation. It has become increasingly difficult for firms operating out of Europe to produce in a cost-competitive manner, an area in which Indian firms have a proven advantage. Auto component manufacturers are keen to leverage and optimize on this hard earned competitive advantage.

On the other hand given the consistent pressure from clients to achieve annual cost reductions, European firms see partnerships with Indian firms as a means to achieve that goal. Indian manufacturers are thus able to build capacities overnight as well as gain access to lucrative markets. 

The arguments advanced by pharmaceutical companies are similar. As it is easier to set up greenfield projects in US than in Europe, Indian pharma majors see the acquisition route as an attractive way to gain proximity to the regulated markets of US and Europe, while earning higher margins. Therefore Indian pharmaceutical companies are on the lookout for acquiring European drug manufacturers that have valid generic drug licences.
For the IT industry, the focus has always been on gaining size, access to domain knowledge and widening the customer base. This was evident with Polaris’ acquisition of Citigroup’s Orbitech or Wipro’s acquisition of Spectramind. (Phillip, 2006).

The Polaris-Orbitech merger added 1,400 employees to Polaris while making the revenues of the merged entity climb to US$125 million from an earlier US$60 million. Also, as the offshore delivery model gets widely replicated and margins get increasingly lesser, Indian IT companies are trying to move up the value chain in higher margin markets.

On a generic level, achieving synergies has always been the driver for mergers and acquisitions. There can be ten basic opportunities for strategic synergy that, in some way, act as strategic drivers for M&A activities of Indian MNCs. These are:
 . Efficient organizational growth
 . Increasing market share
 . Gaining entry into new markets or access to new distribution channels
 . Obtaining new products
 . Keeping pace with change
 . Capitalizing on political and regulatory change
 . Pursuing innovations/discoveries in products or technology
 . Lessening competition
 . Responding to or capitalizing on economic scenarios
 . Strengthening reputation or gaining credibility

Apart from above drivers, the rising value of Rupee and progressive liberalization of government policies that make possible various financing options available in addition to easy access to external commercial borrowings has also provided an impetus to overseas deals. Indian companies that are sitting on reserves of cash also see acquisitions as a means to enhance shareholder value when few opportunities to invest exist in domestic markets. Also, with import tariffs coming down, Indian companies have realized that domestic markets are no longer secure ad to compete they have to go global.
Sinha (2005) posits that operating in emerging markets provide a valuable learning experience when companies learn to deal with highly demanding yet price sensitive customers and navigate challenging distribution environments. This gives them the confidence to enter extremely different developed markets. This reinforces the earlier argument highlighting the need for ‘learning’ in the context of emerging economies’ entry in the developed markets.

Is the Trend Sustainable?

The current Indian MNCs appear to have reversed the trend of East India Company’s invasion in the seventeenth century. Unlike the East India Company that exploited the resources of the nation, Indian MNCs are venturing out with a healthy desire to add value not only to themselves but also to the markets in which they expand. However, there remain certain caveats. The most important of them is the ability of the firm to realign its structure and processes to the need of the foreign markets. Having entered an unknown territory, the Indian MNC needs to sustain its expansion in every way. This would also depend on the selection of the partner (or the target firm in case of acquisitions) and the mode of partnership. The mode of partnership, structure of MNC, and its processes would determine the extent of control exercised by headquarters.

Since the home market and host market are bound to have different regulatory and economic framework, the governance in the headquarters would be different from its overseas subsidiary. Another factor that would determine the sustainability is the degree of product diversification undertaken by the Indian MNCs.

Most of the recent acquisitions are cases of forward of backward integration; however, in future if the cases of acquisition based product-diversification take place, it would be important for the Indian MNC to have a competitive advantage in each industry and gain competence in each of their activities abroad. This would require the firms to deploy their resources in a manner which enables them to upgrade instantaneously alongside the network of firms they create in different markets. Moreover, the recent trend of acquisitions is moving from manufacturing to services (IT) sector. This change would require firms to shift focus from mere cost-competitiveness to absorbing technology from their foreign partners.
If the Indian MNCs take care of aforesaid caveats, their buying spree is likely to grow exponentially, given that they are already on the learning curve.

References:

Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). Strategy in Emerging Economies. Academy of Management Journal, 43(3), 249-267.
IBEF (2004). India Inc – The Global Buying, Spree, Indian Brand Equity Foundation Report retrieved from http://www.ibef.org/artdisplay.aspx?cat_id=391&art_id=4600 on September 19, 2006
Phillip, D (2006). The Advent of Indian MNCs, Indian Brand Equity Foundation Report retrieved from http://www.ibef.org/artdisplay.aspx?cat_id=268&art_id=9419 on September 19, 2006
Reich, S (1998). What is Globalization? Four Possible Answers, Working Paper#261, University of NotreDame – Kellogg Institute
Sinha, J. (2005). Global Champions from Emerging Markets, The Mckinsey Quarterly, 2005 (2)
Werner, S. (2002). Recent Developments in International Management Research: A Review of 20 Top Management Journals. Journal of Management, 28(3), 277-305.
Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. (2005). Strategy Research in Emerging Economies: Challenging the Conventional Wisdom. Journal of Management Studies, 42(1), 1-33. 

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Contributed by Vipul Singh ( This email address is being protected from spam bots, you need Javascript enabled to view it ) and Amit Karna ( This email address is being protected from spam bots, you need Javascript enabled to view it ), IIM Ahmedabad.

 

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