Story Of The Week

Why do Indian companies lack ambition?

Written by: T K Arun

Editor, Opinion

The Economic Times

This might seem like a trick question to many. It slips in an assertion and then seeks an explanation for it, instead of asking if what is asserted is true in the first place. The assertion might seem misplaced, given the many global acquisitions that Indian companies have made and the daring several Indian start-ups show in venturing outside the Indian market, but it is not.

How many Indian companies make large acquisitions abroad? It is true that during 2005-07, Indian companies did seem to be breaking the mold and venturing abroad in large numbers. India’s outward FDI was $17.8 billion per year which was equivalent to 3.6% of the domestic gross capital formation. Since then, it has declined sharply. In-fact it shrank to $5.01 billion or 0.8% of GFCF in 2016, however it did recover to double that level in 2017. These figures are from UNCTAD’s World Investment Report 2018.

While on the other hand, China’s outward investment in 2017 was $196 billion in 2014 and a more modest $124 billion in 2017, representing 4.1% and 2.5% of its GFCF respectively.

Venturing abroad is but one measure of how ambitious Indian companies are. A vital indicator is the aggressiveness of Indian companies in entering the frontier areas of business, leave alone in defining that frontier.

A good indication is given by the telecom industry. India is the world’s second largest telecom market after China. It is thus, one of the largest markets in the world for telecom equipment, both the handhelds wielded by consumers as well as the network gear deployed by telecom operators. Where do Indian companies stand when it comes to exploiting this fast-growing demand at home? Suffice it to say that India is allowing an obscene trade deficit to grow with China because of handheld and component imports and has no place among leading suppliers of network equipment. (Although one must make honorable mention of Shyam Telecom-Vihaan Networks).

In quantum computing and quantum communications, Chinese companies and researchers are in the lead, with their American counterparts close on their heels. India is still a laggard.

In artificial intelligence, robotics, new materials, and manufacturing 4.0, which combines the above three factors with machine-to-machine communications (the internet of things), Indian companies are struggling to spot the trail, which has been blazed by companies in the US, Europe, and Japan, and increasingly trodden by the Chinese.

These results are an expectation corresponding to India Inc’s trivial spending on research and development. India ranks 57th (out of 126 countries) in the Global Innovation Index brought out by PWC, well below not just the advanced economies but also China, Vietnam, Thailand, and even Mongolia. According to GII, India’s R&D spending is 0.6% of GDP, China’s is 2.1% of GDP. China is performing exceptionally well given the fact that it has outstripped the US in both the number of patents applied for and in the number of research publications.


Source: The Guardian

A company like Huawei, Google or Amazon can spend 12-20% of revenues on R&D. Which Indian company spends serious money on R&D? They are happy to pass on expenditure on market research as tax-efficient R&D spend. This is partly responsible for Indian universities’ failure to emerge as hubs of knowledge creation. If US universities are hothouses of not only new research in basic sciences but also of applied sciences, it is because they get lots of funding from companies that outsource their research, apart from the government itself.

Indian companies believe they can buy technology or license it when they need. They used to knock off the technology developed elsewhere, before India’s patent regime became compliant with the Trade Related Intellectual Property Rights of the World Trade Organisation. There are only a handful of Indian Pharma Companies that even attempt to produce new molecules or new therapies.

Why did Indian companies never acquire the hunger to be at the cutting edge of innovation or to become world’s number One or Two? I do not think there are any settled answers. We can only speculate.

The policy environment in which Indian industry grew played a decisive role in stunting ambition. While Nehru’s Government talked socialism, in practice, it sought to nurture the feeble, domestic capitalist class with its narrow social base in one segment of the society for whom it was legitimate to risk money in order to make more money. The state gave Indian industry a captive domestic market by protecting it from foreign competition by the means of quantitative restrictions and high import duties. The state built up in the public sector the energy and transport infrastructure, steel and machine tool industries that were outside the capacity of Indian industry. It set up term-lending institutions such as ICICI, whose bonds were made eligible for commercial banks to meet their statutory liquidity ratio (SLR) obligations, so that the savings of the public could be mopped up by the banks, passed on to the term-lending institutions and, from there, channeled to the capital-starved domestic industrialists. The state also put purchasing power in the hands of a nascent middle class, through public investment, so that the produce of Indian industry would find takers.

All this cossetting made Indian industry gain expertise in obtaining licenses, rather than in running their businesses efficiently or investing in technological advance. Once you got a license, you got finance, you had a captive market, you had customers and you made obscene profits because you faced limited competition from within or without the country. The government that arranged all this called itself socialist, of course, because politically that was what was palatable to the masses.

The government of Korea did much the same thing, except for one crucial difference. Korea was a small market, so it forced the industry to export. Export success became the basic criterion for receiving state patronage and largesse. In order to succeed in the export market, companies had to excel in quality and be competitive in pricing. Samsung and LG have benefitted from these benign compulsions.

Then, when Indian politics turned corrupt, politicians allowed industrialists to overstate project costs and got banks to approve these inflated project costs and sanction generous loans for them — in return for a sliver of the cost padding, naturally. The industrialist made money in the process of setting up his industry. Why would he have an incentive to invest in R&D or turn world beater in his line of business? The rational thing to do was to launch yet another project and get an even bigger loan, making sure that the previous project was a going concern, even if just about, to remain eligible for a fresh loan.

The reforms of 1991 changed this to some extent. But not completely or fundamentally. India’s equity market reformed and grew in size and regulatory capacity. But the debt market remained stunted. Projects that should ideally have been funded by the debt market continued to be financed by bank loans, which meant a handful of bankers had to be persuaded about the virtues and virtuosity of ever bigger projects, rather than a variety of fund managers and analysts who would constantly sound off on the rating of bonds, depending on the viability of the underlying projects.

Stripping industry of easy pickings is the only way to incentivize them to excel. If no money is forthcoming from generous bank loans and easy capital supplied by greedy investors, if exports cease to be a method of milking the exchequer for concessions and doing efficient business becomes the only route to riches, Indian industry would discover ambition.


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