By Harish Kandpal

19 June 2007

According to media reports, India’s economy finally hurdled across the trillion dollar barrier. It is secondary that India crossed the trillion dollar finishing line with a little help due to currency fluctuations in the Forex markets. This should in no way take the shine off what is a spectacular achievement. It is even more laudable that most of the strong growth took place with our own muscle, rather than due to a sudden inflow of foreign capital, as is the case with some countries in Asia.

Companies like Tata Steel and Hindalco paved the way for the first truly multinationals from India. Last year alone Indian companies completed acquisitions worth $10.4 billion abroad. There is however, still some pessimism in certain circles about the amount of foreign direct investment (FDI) that India attracts in comparison to some other nations most notably China.

However important external direct capital flows maybe, they still cannot replace internal resource mobilization and indigenous industrial thrust. Germany and Japan did not become great industrial powers on the bedrock of external capital.

German industrial leverage is based on their unique Mittal Steel and such type companies. These companies may not make it to any Fortune 500 list, but what they accomplish locally through their social infrastructure investment is unparalleled in the world. Many of these firms are closely wedded to their geographies thus providing those towns in which they are located, a much more personalized engagement in comparison to a giant company. They enjoy a very close coordination with the universities in that particular prefecture thus giving them an edge over any similar firm in any other part of the world. Universities in the Ruhr region are a fantastic example of such synergies. Such companies tend to be better engineered to respond to changes in the supply and demand cycle, as well as changes in technology.

The process of wealth creation in a society is inherently an alchemical one. It cannot be said with absolute certainty that investment from abroad will create long lasting wealth for the local community. Whatever little feedback is available from the studies conducted by sociologists on the impact of foreign investments on a particular site, has not been conclusive. While FDI does provide jobs in the short term, the local community or government, generally have to part with significant tax revenues in return for attracting the investor.

Encouraging a structure like the Chaebols which exist in South Korea to produce multinationals, is another classic example of poorly thought out economic planning. The failure of certain Chaebols like Daewoo was reason enough not to copy them. The cultural complex of South Korea is completely different from India. Rigid regimentation is a completely alien concept to India.

Running these octopus-like companies is both a logistical and managerial nightmare. Large companies are normally plagued by an elephantine bureaucracy with its own groups having clearly defined vested interests. That is what exactly happened in Daewoo’s case. One arm was profitable while another arm was ratcheting losses after losses. In fact the loss-making arm was borrowing money five times its equity in total –– Daewoo had 275 subsidiaries. In addition to the operational inefficiency, times have changed and the countries to which these large cabals exported cleverly came up with strong anti-trust laws to neutralize the rising Asian giants. Recently Samsung was penalized in a memory chip price fixing case by the EU antitrust commission.

In the West some large conglomerates have been adopting the honeycomb structure to run their large companies in which different subsidiaries act as independent cells in the honeycomb. This restricts the liability of the parent company in case of failure of the sister company.

For persistent growth of the economy the importance of banking cannot be overstated. Experiences across the border in Bangladesh cannot but help to illustrate the positive impact banking can have on all segments of society. Unfortunately democracy in lending is a relatively new concept though some banks like Nabard have pioneered it but it has never really caught on the way everybody would have liked. Banks play a very important role in helping the future Bill Gates’ and Gopinaths.

Only homegrown companies can help India to a pre-eminent spot in the world. Companies like Microsoft and IBM have for ages used Indian talent to grab business elsewhere. An Indian company could easily duplicate such a chain. India has also to make sure that all the sensitive sectors like ports, airports have sufficient Indian held crossholdings as they form the frontline of our core competitiveness.

India can also learn from the Japanese Keiretsu concept of horizontally integrated companies. In this alliance many different companies and their subsidiaries maintain a relationship around a central large bank. The Keiretsu concept is complicated in the sense that some of the members may be competitors in some areas but they retain an overall strategic equanimity and coordination.

Ultimately if India has to maintain its staying power in the international arena, it will have to come up with custom-made solutions for its own problems.

(Harish Kandpal is a marine engineering professional sailing in the merchant navy and is able to experience the global dynamics at first hand. He may be contacted at harishkandpal@yahoo.com)

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