OVERVIEW

“India is now truly a land of opportunity.”

– John Redwood, Economic Competitiveness Policy Group, UK

“The economic dominance of the US is already over. What is emerging is a world

economy. India is becoming a powerhouse very fast.”2
– Peter Drucker, Management Guru

“India stands way ahead of other nations such as Mexico, Ireland,

China, Russia, Brazil, Philippines, Israel, Indonesia, Malaysia, and
Turkey when one looks at a basket of dimensions such as quantity and
quality of manpower and people strengths such as productivity,
quality, cost, and English language skills.”

“In this century India's economy will be larger than the United States.“
Bill Clinton, Former President of the United States

"India’s computer scientists are among the leaders of companies worldwide."

Bill Gates, Chairman, Microsoft Corporation

Hardly a day passes without hearing about the rise of India in the global
economy.Newspapers, magazines, television shows and internet keep on
reporting about it. Actually the reasons are many. A country – with the world’s
second largest population and one of the largest economies – has been growing
so fast for so long. With GDP growth averaging 6.1% over the last decade and
9.4% during 2006–2007,3 India has become one of the most promising and
fastest growing economies. This has raised fears – will India lead the world
economy; through its low cost, will it bid down wages elsewhere? While some are
cautious about India sustaining such an impressive growth rate, considering
India’s high public debt. While others seek lessons about how India did it. Just 16
years after ushering in economic reforms, India has come out of its sluggish
growth after independence. These reforms aimed at transforming India from an
underdeveloped and closed economy into an open and progressive one. It
buoyed foreign investment and increased earnings through services and industry.
These reforms cemented a robust economic growth, which is now one of the
world’s fastest. The real GDP growth averaged 8.6% since FY 2003 and is
expected to grow by an average of 9% a year through 2012.4 Since the
emerging countries have increased their contribution to the world economy, more
and more MNCs have started showing greater interest in them – with India on the
top, due to its large and attractive consumer base. India and China are also
being called as re-emerging countries because they have started regaining their
former prominence. Until the 19th century, these countries were the world’s two
biggest economies producing on an average 80% of the world GDP. However,
Europe’s industrial revolution and globalization dipped their contribution to only
40% by 1950. But with an annual growth of around 7% over the past 5 years,
compared to 2.7% in the rich economies, they have bounced back. According to
IMF forecasts, they are expected to grow at an average of 6.8% a year, while
developing countries will have a growth of a mere 2.7% in the next 5 years. If the
pace continues, than it is believed that the emerging economies will account for
two-thirds of global output in terms of purchasing power parity.5 Along with the
economic growth, Indian spending power too has grown significantly. Since 1985,
their real average household disposable income has roughly doubled. So even
household consumption soared, creating a new Indian middle class. India ranked
48 in the global competitiveness index and 31 in the business competitiveness
index 2007–2008 (Exhibits III (a) and III (b)). India has emerged stronger on the
global investment radar, much ahead of US and Russia. It was ranked the
second best FDI destination after China in 2007.6 India’s value proposition is
based on three major parameters – its low cost-high quality scalability model
giving it an edge over other emerging destinations; a quality pool of
knowledgeable English speakers; and the ability to focus on core competencies
and talent to strengthen and expand existing business offerings. Its market
potential and macroeconomic stability are the key drivers of FDI attractiveness.
However, compared to its close competitor China, a survey by AT
Kearney revealed that “investors favour China over India for its market size,
access to export markets, government incentives, favourable cost structure,
infrastructure, and macroeconomic climate. The same investors cite India’s highly
educated workforce, management talent, rule of law, transparency, cultural
affinity, and regulatory environment as more favourable than what China
presents. Moreover, they maintain that China leads in manufacturing and
assembly, while India leads for IT, business processing, and R&D investments.”

Respondents mark bureaucracy, lack of infrastructure and an ambiguous policy

framework as the key deterrents that adversely impact MNCs operating in India.
Indian government got to make their investment climates favourable. Right now
they need to improve and maintain both its soft and hard infrastructure. Hard
infrastructure includes country’s poor and insufficient roads, electric power deficit,
poor transportation, overcrowded airports etc. Soft infrastructure, like schools
and hospitals, help improve literacy and bring down infant mortality rate.

Almost 70% of Multinational Corporate (MNCs) participating in the first "CII-A.T.

Kearney MNC Survey 2005" have evinced a ‘high likelihood’ of making additional
medium and long-term investments in India. The investment outlook in the
medium term appears not to be dictated by their current performance in India,
with most companies indicating a medium to high likelihood of investment,
irrespective of performance.

Further, three out of every four MNCs state that their performance in India has
met or exceeded internal targets and expectations. Tailoring products and prices
to suit Indian tastes, appointing local leadership and indigenization are key
factors for success in India, in their experience.
Survey findings indicate that in a comparison with other emerging Asian
economies (China, Malaysia, Thailand, and Philippines), India is perceived to be
at par in terms of FDI attractiveness, even though current performance of MNCs
in India compares favourably (i.e. Indian operations are perceived to perform
better than those in most other SE Asian countries). While more than three-
quarters of the survey respondents ranked India higher than Malaysia, Thailand,
and Philippines in terms of MNC performance, they were more conservative in
their outlook on India’s FDI attractiveness relative to these economies.
India’s market potential, labour competitiveness and macro-economic stability
were unanimously highlighted as the key drivers of FDI attractiveness.

Global investors view India and China as two distinct markets:

Investors favour China over India for its market size, access to export markets,
government incentives, favourable cost structure, infrastructure, and
macroeconomic climate. The same investors cite India’s highly educated
workforce, management talent, rule of law, transparency, cultural affinity, and
regulatory environment as more favourable than what China presents. Moreover,
they maintain that China leads in manufacturing and assembly, while India leads
for IT, business processing, and R&D investments.

A key take-away from the study is that while India will attract global investor
interest due to the sheer size of its economy, there is much more to be done to
become more investor friendly and maintain investor interest. Respondents put
forth that bureaucracy, lack of infrastructure, and an ambiguous policy framework
are specific challenges that adversely impact MNCs operating in India and
influence perception of India vis-à-vis other emerging economies.

There was consensus amongst the MNC participants that the government needs
to rationalise policies (i.e. rationalise tax structure, reduce trade barriers); Invest
in infrastructure - physical and information technology and; Accelerate reforms
(political reforms to improve stability, privatisation and deregulation, labour
reforms), which in turn would help in accelerating additional investments.

MNCs’ RISING INTEREST IN INDIA:

With globalisation, trade barriers have come down and business giants have
spilled across the world. Emerging economies have been their lucrative markets.
With flaring global interest in Indian economy and its huge consumer base, many
Multi National Companies (MNCs) have started foraying there to extract the
maximum market share. Some viewed India as a high potential market, while
others wanted to exploit it as a low-cost manufacturing base. In spite of India’s
huge potential, MNCs have shown a mixed performance. Many, who were
remarkably successful elsewhere, have failed or yet to succeed. Indian market
poses special challenges due to its heterogeneity, in terms of economic
development, income, religion, cultural mix and tastes. On top is the heating
competition among local players as well as the leading MNCs. Not all companies
have been struggling to understand Indian consumer behaviour. Doing business
in India is at a turning point; market entry strategies, for example, that clicked
once don’t promise success always. Success in India will not happen overnight. It
requires commitment, management drive and focus on long-term objectives.
Proper business models are needed. They are not prescribed but need to be
derived from the mechanisms that enabled them to develop – the global
management processes (providing the global support and technology) and the
local management processes (driving local autonomy and capability). Critical
success factors for MNCs in India are highlighted in the Exhibit IV. MNCs need to
invest heavily on market research to analyse the local preferences and craft their
marketing and branding strategies accordingly.

Among the various MNCs having subsidiaries in India are Colgate, Palmolive,
Procter & Gamble, General Electric, IBM, Intel, Pepsi, Coco Cola, Microsoft,
Oracle, Unilever etc. Almost 70% of MNCs – that have participated in the first CII-
AT Kearney MNC Survey 2005 – have evinced a high likelihood of making
additional medium- to long-term investment in India. Apart from that, three out of
every four MNCs have met or exceeded their internal targets and expectations in
India. MNCs in India face a range of challenges. This book examines their much-
needed critical success factors. Through the experiences of some well-known
MNCs in India, the book explores how they keyed in rightly to benefit maximally
while others couldn’t.
Economic Liberalization:
Before economic liberalization, India’s dominant economic philosophy was one of
self-reliance. The objective was to produce the country’s requirements, to the
extent possible, within the borders of the country. This self-reliance became an
end in itself, leading to a very broad production base, but insufficient attention to
efficiency and productivity (Forbes, 1999).
The public sector was seen to be the fountainhead of industrial development and
accounted for as much as two-thirds of the fixed capital investment in the factory
sector. Public ownership was particularly stressed in those sectors where
technology acquisition was expected to involve the evaluation of a range of non-
commercial considerations (Tyabji, 2000). However, with a few exceptions, the
public sector failed to drive the Indian industrial sector on to a higher growth
trajectory and got bogged down by cost and time overruns, high costs, and a lack
of technological dynamism.
Though private industrial activity by both Indian firms and multinational
companies went on in parallel, there were tight regulations on inward capital
flows, expansion, diversification and the import of capital goods, intermediates,
and technology.
Technology imports were regulated on a case-to-case basis, and companies
permitted to import technology were often required to commit to progressive
indigenization through a “phased manufacturing programme.” The high effective
rate of protection (through physical constraints on imports and high import duties)
coupled with industrial licensing (that constituted a major barrier to entry) meant
that local industry felt little need to innovate (Forbes, 1999; Krishnan and Prabhu,
1999). Constraints on growth also acted as a disincentive to innovative
behaviour. (Forbes, 1999). With a protected market, and a high cost structure,
very few firms pursued exports or targeted external markets aggressively. Such
R&D as was done by industry was concentrated on import substitution and the
creation of local sources for inputs. The small scale sector was provided
reservation in many sectors and implicitly encouraged to make imitative products
through reverse-engineering and improvisation (Tyabji, 2000). Since small scale
industries enjoyed fiscal benefits like lower rates of excise duties and were
largely outside the purview of industrial regulation, there was a tendency to
fragment capacities and no incentive to grow to exploit economies of scale or
scope. The government dominated research and development activity. Over 80%
of the R&D done in India was financed by the government of India and conducted
within government research laboratories (Forbes, 1999). Much of this was in the
strategic sectors of atomic energy, defence and space research, resulting in
some of the most advanced capabilities in these areas in the developing world.
The government also created a network of forty laboratories under the aegis of
the Council of Scientific & Industrial Research to do work of relevance to
industry; however the links of these laboratories with the industrial sector
remained limited and such technological capabilities as were created remained
largely confined to the laboratories themselves. An effort was made in the early
1970s to formulate a national science and technology plan that would dovetail
with the economic planning process and help integration of the government’s
technology development efforts with industrial development, but this was short-
lived. to operate outside the government administrative framework and had the
advantage of politically-supported visionary leadership (Meemamsi, 1993;
Krishnan, 2003) to operate outside the government administrative framework and
had the advantage of politically-supported visionary leadership (Meemamsi,
1993; Krishnan, 2003).
Starting in the later 1950s, the central government created a strong infrastructure
of institutions of higher technical education through the Indian Institutes of
Technology (IIT) and the Regional Engineering Colleges (REC). At the state-
level, many governments created and funded government colleges of
engineering. Private involvement in higher technical education was limited and
restricted to a few states that experimented with “capitation fee” colleges. The
IITs recruited good faculty, typically Indians who had obtained doctoral degrees
from the United States, and provided a good environment for academic pursuits.
A very competitive entrance test ensured that the IITs got very bright students.
The quality of IIT education is excellent, the research output from its faculty good
but not outstanding but, as in the case of the national research laboratories, IITs
had limited interaction with Indian industry. IIT graduates found few opportunities
to use their technical knowledge in the industrial sector and tended to emigrate in
large numbers, principally to the United States. Those that stayed behind went
into the government research establishments or to management positions in the
private sector.
By the end of the 1980s, India had perhaps the strongest scientific and
technological infrastructure among developing countries, but little benefit of this
was accruing to the industrial production system. The economy was largely stuck
in the historical “Hindu rate of growth” of about 3.5% and India had fallen
significantly behind countries such as Korea that at one time had comparable per
capita incomes.
.
The Economic Policy Reforms:
Though the trigger was an economic crisis caused by a serious decline in foreign
exchange reserves due to the flaring up of oil prices, the new Indian government
that took office in June 1991 attempted to address the structural problems
underlying the crisis. While the broader objective was to stimulate economic
growth by attracting foreign investment, removing licensing and “monopoly”
controls, allowing imports and encouraging exports, an explicit focus of the new
polices was the development of an innovative capability in the economy. The
Industrial Policy Statement of the Government of India of July 24, 1991 had
among its objectives “injecting the desired level of technological dynamism in
Indian industry”, and “the development of indigenous competence for the efficient
absorption of foreign technology” and expressed the hope “that greater
competitive pressure will also induce our industry to invest much more in
research and development than they have been doing in the past...."
Successive governments have carried forward the reform process. Today, most
industries do not require industrial licencing. Automatic approval is given for
foreign investment, even up to 100%, in many industries (see Rathinasamy, et.
al. 2003 for details). Physical constraints on imports like actual user conditions
have been removed and duties have been reduced considerably though they are
still higher than in many other countries. Similarly, restrictions on technology
imports have been removed The focus of economic liberalization has shifted to
the states, the co-called “second phase of economic reforms” including the
creation of industrial and urban infrastructure, removal of barriers to use of land
and movement of goods, environmental clearances and rationalization of local
taxation. State governments have responded by competing for investments by
multinationals and large industrial groups.

In the subsequent sections of this paper, we investigate the evolution of the

Indian innovation system in response to these changes. Adherents to
dependency theory might expect the existing Indian innovation capabilities to
decline and be subordinated to the interests of the “centre”, i.e. the multinational
corporations headquartered outside India. Others might expect the Indian
innovation capabilities to benefit from both the spillovers resulting from increased
foreign direct investment and innovative activity undertaken by local industry to
survive increased competition. The Indian experience gives us a unique
opportunity to study what happens when an “independent” becomes more of an
“integrationist”

The Indian Innovation System after 1991:

The macro-picture of the Indian economy changed over the 1990s. Today, India’s
manufacturing sector accounts for approximately 17 per cent of real GDP, 12 per
cent of total workforce and 80% of merchandise exports. Total manufacturing
gross value added showed a trend growth rate between 1980 and 2000 of 6.8%
(compared to 12.8% in China and 11.2% in Malaysia). More interestingly, the
industrial growth during the 1980s and 1990s were roughly the same. The share
of manufacturing in GDP also remained roughly the same between 1990 and
2000 (Nagaraj, 2003). The service sector grew at about the same rate as
industry, 7.6%, during 1992-97, but in 1997-2001 services grew at an annual rate
of 8.1% compared to the 4.8% growth of industry (Acharya, 2002). The service
sector in India is larger than either the agriculture sector or the industrial sector. It
has been growing at least as fast as the industrial sector, and faster than the
agriculture sector, reinforcing its dominance.
FDI inflows into India are believed to be less than 10% of those into China during
the same period, Basic goods account for the largest proportion of the FDI
approvals accounting for almost 39%.

Government Support for Technological Innovation:

The large government scientific agencies in the atomic energy and space
programmes also have programmes to involve industry in developing
technologies and products for their programmes as well as commercializing spin-
offs. A recent and more ambitious effort has been to launch an initiative (called
the “New Millennium Indian Technology Leadership Initiative”) to attain a global
leadership position in selected niche areas by supporting scientific and
technological innovation in these areas

- Both revenue and capital expenditure on R&D are 100% deductible from
taxable income under the Income Tax Act.

- A weighted tax deduction of 125% is allowed for sponsored research in

approved national laboratories and institutions of higher technical education.

- A weighted tax deduction of 150% is allowed on R&D expenditure by

companies in government-approved in-house R&D centres in selected industries.

- A company whose principal objective is research and development is exempt

from income tax for ten years from its inception.

- Accelerated depreciation is allowed for investment in plant and machinery made

on the basis of indigenous technology.
- Customs and excise duty exemptions for capital equipments and consumables
required for R&D.

- Excise duty exemption for three years on goods designed and developed by a
wholly owned Indian company and patented in any two countries out of: India,
the United States, Japan and any country of the European Union.

Heterogeneity of Performance:

While these success stories are noteworthy, the overall performance of the
Indian industrial sector on the competitiveness front has been mixed. A study by
Unni, Lalitha and Rani (2001) shows that total factor productivity in both the
organized and unorganized sectors actually declined in the first half of the 1990s.
Another study by the McKinsey Global Institute (see Krishnan, 2002a, for a
critique) shows that the labour productivity of the modern sectors of the Indian
economy is only 15% of the globally highest levels. This study also shows that
while a good chunk of this may be due to the low wage levels in India that make
the use of new technologies that can improve productivity unviable, a level of
43% of the globally highest levels can be attained through better work practices,
investments in viable technologies and various organizational and managerial
improvements. The higher level of investments in China, Thailand and Malaysia
in the 1990s also suggests that investors do not perceive that India offers a
comparative advantage in manufacturing.

Both the two wheeler and pharmaceutical industries have also had visionary
entrepreneurs who were willing to make the investments and take the risks
involved in creating and launching new products.

The Growth of Services under Liberalization: The Case of the Software

Industry:
Though not dominant in size, the subsidiaries of MNCs have had an important
impact on the evolution of the Indian software industry. Early entrants such as
Texas Instruments and Hewlett Packard helped build the brand of India as a
software destination. They also inspired the model of offshore development
centres that was subsequently adopted by the large Indian software companies
(Arora and Athreye, 2002). They played an important role in the quality
movement – Motorola’s Indian software subsidiary was the first SEI CMM Level 5
certified facility in India. They have contributed to the development of manpower
through training programmes and by supporting academic programmes in local
universities. Some Indian MNC subsidiaries, notably those of Texas Instruments,
Oracle and Adobe, have developed complete products (Patibandla and Petersen,
2002). MNCs that have subsidiaries in India have only subcontracted relatively
insignificant projects to local software producers (Patibandla and Petersen,
2002). They have pushed up average salaries by offering substantially more than
Indian software companies. Their job opportunities may have also contributed to
the decline of Indians pursuing doctoral level qualifications in electronics and
computer science though these same job opportunities have slowed down brain
drain. The presence of local research and software development centres of
MNCs has contributed to the exposure of some of their employees to
sophisticated product and technology development and advanced managerial
practices. Some of these people have migrated to Indian firms, and a smaller
number have also become high technology entrepreneurs. However, in spite of
some complementary capabilities, there is little evidence of the development of
complete products jointly by the MNC subsidiaries and local high technology
firms. The lack of such development is attributed to the absence of a strong local
market and the way MNCs are managed in which the software subsidiaries are
typically cost centres reporting to the R&D and business managers of the MNC in
other countries. MNCs also have limited research links with local technical
institutions (Krishnan, 2002c).

Geographical Clustering :
Prior to economic liberalization, the Indian government offered distinct incentives
such as subsidies and industrial licenses to companies setting up their
undertakings in “backward areas” as a means of achieving balanced economic
development. The deregulation post-liberalization has seen a distinct clustering
of enterprises around large metropolitan cities - e.g. Bangalore has become a
hub for the software industry, and Chennai for the automobile industry. While
companies see clear benefits of locating in the vicinity of large cities (such as
better infrastructure, access to a pool of skilled manpower, good transportation
and logistics links), this agglomeration is putting tremendous pressure on the
urban infrastructure. Traffic congestion, pollution, water shortage and rise in the
cost of housing are all outcomes of this concentration. However, some
characteristics of high tech clusters such as specialization and alliances between
companies with complementary skills are beginning to emerge, albeit slowly.

The key factor that will determine the sustainability of the economic growth rate
depends on how much the country is able to invest in infrastructure.
Infrastructure development would require investments in agricultural
infrastructure, urban infrastructure, rural infrastructure, and industry
infrastructure. Such an investment would have dual benefits of sustaining the
current economic growth rate of 7 per cent per annum and would mitigate
poverty.

The present 7 per cent to 8 per cent growth in the economy has additionally been
facilitated by a change in the lifestyles of people. This, in turn, has been triggered
by the opening up of the economy which opened up various avenues of
spending. There is also a good potential for the future if one looks at the
demographic pattern in India where the median age of an average Indian is
about 27 years. These younger people will have a higher propensity to spend
compared to the not so young who have a tendency to save more. Secondly, the
existence of young people in the country is seen as a source for future capital
formation. There will be a lot of supply of young people in India but creating a
 demand for them will become equally important. The current euphoria that one
sees in the Indian economy is a result of the above-mentioned sustained growth
pattern. The future growth of the economy will be powered by the preponderance
of these young people who will contribute to the future growth of the country. We
must also keep in mind that there is a very active change in the lifestyles of large
sections of the population the effects of which are yet to fully play out on the
economy.

Few other factors:

• They got the opportunity of getting new market , as their domestic markets
are saturate .

• They are able to reduce the cost of manufacturing and increases the profit
margins .

• Availability of labors at lower wage rate and technical staff is in excess.

•
• Increasing GDP level

10
9.2
9 8.5 9.1

8 7.1 8.4
6.7
6.5
7 6 7.5
5.8 7.4
6 5.3
6.1
5
4 4.8
4.4 4.4
3 3.8

2 2.9 GDP Growth

1 Mfg Growth

0
98

00

02

5
01

03

06
-9

-0
-0
-
-

-
98

04
97

99

00

01

02

05
03
%
19

19

20

20

20
19

20

20

20
Economic Reforms:
FDI Policy
 Most sectors including manufacturing activities permitted 100% FDI under
automatic route (No prior approval required)
Industrial Licensing
 Licensing limited to only 5 sectors (security, public health & safety
considerations)
Exchange Control
 All investments are on repatriation basis
 Original investment, profits and dividend can be freely repatriated
Taxation
 Companies incorporated in India treated as Indian companies for taxation
 Convention on Avoidance of Double Taxation with 71 countries including
Korea

Future of India:
• Indian economy will be the fastest growing economy over the next 3 - 5
decades.

• In $ terms, Indian economy will be one of the largest in the globe.

• India’s per capita income in $ terms will grow by 35 times in the next 47 years
( i.e. 2050)

• Indian rupee is likely to appreciate by almost 300 % next 3 – 5 decades.

• India is a research hub to the world.

Benefits of Demographics:

• Huge Consumer Base

• Large and Cheap Labor Force

• Educated Labor Force

• Young Vibrant Population

• Technology and Globalization

INDIA IN 1998 INDIA TODAY

– Forex reserves >120 bn U S$

– Zero forex reserves – Current account surplus
– Huge current account deficit – Historical low interest rates
– High Interest rates – High stock market activity
– Poor Stock market activity – Low inflation
– High inflation – Substantial export growth
– Negligible exports – Self sufficient in food grain
– Agricultural output stocks
witnessed negative growth
 CONCLUSION:
All the factors indicate towards the better growth prospects of Indian .government
have also implemented such policies to attract FDI in India.One reason for such
policies is that MNCs are viewed as a channel through which technologies and
business practices from abroad can be transferred to the economies of emerging
countries. Many state government like Gujrat govt. and other state govt. also
taking giant strides to attract MNCs to their state to get involved in the growth of
the country. 'Multinational Companies in India' represent a diversified portfolio of
companies representing different nations. It is well documented that American
companies accounts for around 37% of the turnover of the top 20 firms operating
in India. But, the scenario for 'MNC in India' has changed a lot in recent years,
since more and more firms from European Union like Britain, Italy, France,
Germany, Netherlands, Finland, Belgium etc have outsourced their work to India.
Finnish mobile handset manufacturing giant Nokia has the second largest base
in India. British Petroleum and Vodafone (to start operation soon) represents the
British. A host of automobile companies like Fiat, Ford Motors, Piaggio etc from
Italy have opened shop in India with R&D wing attached. French Heavy
Engineering major Alstom and Pharma major Sanofi Aventis is one of the earliest
entrant in the scene and is expanding very fast. Oil companies, Infrastructure
builders from Middle East are also flocking in India to catch the boom. South
Korean electronics giants Samsung and LG Electronics and small and mid-
segment car major Hyundai Motors are doing excellent business and using India
as a hub for global delivery. Japan is also not far behind with host of electronics
and automobiles shops. Companies like Singtel of Singapore and Malaysian
giant Salem Group are showing huge interest for investment. the first Vice
Chairman of
TCS, while delivering a speech at the CII symposium in 1974 said, “Unfortunately
India could never participate in the industrial revolution because it lacked
financial capital. But, 20 years from now, there will be a knowledge revolution in
the world and India will participate in it because India has the highest knowledge
density in the world and it is for companies to harness this knowledge capital and
make Indians leaders in the knowledge revolution.”