Impact Of Mncs On Indian Economy-688 156e51

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Acknowledgemen t Any accomplishment requires the effort of many people and this work is no different. We would like to thank Prof. ---- for giving us an opportunity for doing the project together and for helping and guiding us in completion of the project. We would also like to thank our parents and friends who have ed and helped us in the project and constantly motivated us in doing the project. Regardless of the source, we wish to express our gratitude to those who have contributed to this work even though anonymously.

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Index 1.

Introduction…………………………………………..05

2.

Foreign Direct Investment (FDI)……………………..09

3.

Shining Indian Multinational…………………………11

4.

Impact of MNCs on Indian Industrial Sectors………..13  Automobile Industry……………………………….14  Manufacturing Sector……………………………...16  Telecom Industry…………………………………..18  Research & Development………………………….21  IT Industry………………………………………….23  Food & Beverages Industry………………………..25

5.

Case-Study1: Impact of Glaxo-SmithKline Merger….27

6.

HP marks Indian Employment Milestone……………29

7.

Case-Study2: Pepsi Co……………………………….31 4

8.

India v/s China……………………………………….34

9.

Conclusion……………………………………………36

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Introduction Till 1991, India was more or less a closed Economy. The rate of growth of the economy was limited. The contribution of the local industries to the country’s GDP was limited that were the main cause of shortage of funds for various development projects initiated by the government. In an effort to revive the industries and to bring the country back on the right track, the government began to open various sectors such as Infrastructure, Automobile, Tourism, Information Technology, Food and Beverages, etc to the Multinational Corporations. The MNCs slowly but reluctantly began to pour capital investment, technology and other valuable resources in the country causing a surge in GDP and upliftment of the economy as a hole. This was the post 1991 era where the government began to invite and welcome giant MNCs into the country.

Opportunities for Developing Economies The opportunities for developing economies are significant as well. Through the application of capital, technology, and a range of skills, multinational companies' overseas investments have created positive economic value in host countries, across different industries and within different policy regimes. The single biggest effect evidenced was the improvement in the standards of living of the country's population, as consumers have directly benefited from lower prices, higher quality goods, and broader selection. Improved productivity and output in the sector and its suppliers indirectly contributed to increasing national income. And despite often-cited worries, the impact on employment was either neutral or positive in two-thirds of the cases. Foreign direct investment is already having a dramatic impact on the way companies do business and developing economies integrate with the global economy. Compared to its potential, however, it's just a drop in the bucket.

Impact On Developing Economies & Policy Implications: Investments by multinational companies (MNC) allow developing economies to share in the considerable benefits of the global economy. Official incentives, trade barriers, and other regulatory policies, though, can result in inefficiency and waste.

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Case studies reveal that in virtually all cases, MNC investment had a positive to very positive impact on the host country. Rather than leading to the exploitation of lower-wage workers, as some critics have charged, the investments fostered innovation, productivity, and an improved living standard. Therefore, government seeking those advantages would be advised to favor policies of openness, rather than regulation, when it comes to foreign direct investment.

The world's service provider •

•

The services sector, which has been growing consistently at a rate of 7 percent per annum, s for almost half of the country's GDP. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in 2007. Global investment banks, brokerages and ing firms have set up large research establishments in India. A growing number of US companies are hiring Indian mathematics experts to devise models for risk analysis, consumer behaviour and industrial processes.

Indian Exports Overview (in Rs. Crore) YEAR

EXPORTS

GROWTH RATE

1990-91

32558

17.7

1991-92

44042

35.3

1992-93

53688

21.9

1993-94

69751

29.9

1994-95

82674

18.5

1995-96

106353

28.6

1996-97

118817

11.7

1997-98

130101

9.5

1998-99

139753

7.4

1999-2000

159561

14.2

2000-01

203571

27.6

2001-02

209018

2.68

2002-03

255137

22.06

2003-04

293367

14.98

2003-04 (April-Jan)

222863.90

-

2004-05(P) (April-Jan)

274313.37

23.09

7

Gross Domestic Product (GDP) Year

Total GDP

1985-86 1990-91 1991-92 1992-93 1993-94 1994-95* 1995-96 1996-97 1997-98 1998-99

156566 212253 213983 225268 238864 861064 926412 998978 1049191 1112206

(In Rs. Crores)

Total GDP 1200000 1000000 800000 600000 400000 200000 0 1985-

1990-

1991-

1992-

1993-

1994-

1995-

1996-

1997-

1998-

86

91

92

93

94

95*

96

97

98

99

years

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The world's service provider •

•

The services sector, which has been growing consistently at a rate of 7 percent per annum, s for almost half of the country's GDP. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in 2007. Global investment banks, brokerages and ing firms have set up large research establishments in India. A growing number of US multinational companies are hiring Indian mathematics experts to devise models for risk analysis, consumer behaviour and industrial processes.

The brick and mortar companies India is not merely a provider of services. Besides being an outsourcing hub, it has grown into a global manufacturing hub. World corporations are now leveraging its proven skills in product design, reconfiguration and customisation with creativity, assured quality and value addition. About 20 percent of Indian automotive production in 2004 is exported to developed countries. India: A Services and Manufacturing Supplier to the World Sector

Company

Outsourcing Client

IT Services

Infosys Tata Consultancy Wipro

Goldman Sachs, Aetna, Northwestern Mutual, Arm Ex, DHL, Verizon GE, Honda, UBS, HSBC Transco, HP-Compaq, Nortel, General Motors, CISCO, Sony

ITES

Mphasis BFL

Citi group, Accenture, AutoZone, Capital One Dell, American Express, Capital one

Spectramind Pharmaceuticals

Cipla Shashun Chemicals Lupin Laboratories

Ivex, Watson Pharma, Eon Labs Eli Lilly, GSK Pharma Apotex, APP, Watson, Pharma

Manufacturing

Bharat Forge Tata Motors Moser Baer Essel Propack

Meritor, Caterpillar, Toyota, Ford, FAW(China) Rover Imation, BASF P&G, Unilever, Colgate

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Foreign Direct Investment FDI or Foreign Direct Investment refers to the investment of foreign currency and other valuable resources by Multinationals into the host country. FDI allows the host country to earn valuable foreign exchange that can be used for future imports or to pay off existing loans of the country. The Government of the host country controls the FDI levels in various segments of the economy such as Telecom, Retail, Tourism, Infrastructure, Research and Development, Automobile and so on. Perhaps the biggest advantage of MNCs is the influx of valuable Foreign Exchange. FDI is required by a developing economy such as ours to tap unexplored resources and put them to more productive use. A series of ambitious economic reforms aimed at stimulating foreign investment has moved India into the front ranks of the rapidly growing Asia Pacific region. •

•

The Finance Minister cleared 46 proposals of foreign direct investment (FDI) amounting to Rs 408.22 crore (US$ 93.4 million) in July 2004. With a half-billion strong middle class, consumer demand in India will grow sky high. According to some estimates, 487 million middleclass Indians will spend an additional $420 billion during the next four years.

It is evident. The investment scenario in India has changed. And the figures say that it is for the better. •

•

There has been a sharp rise in the number of FDIs approved in 2004. During the first seven months of 2004, between January and July, Rs 5,220 crore worth of FDI was approved. This figure, which s for only seven months of 2004, amounts to 96 per cent of the total FDI approved during the full year of 2003. The actual FDI inflow too is expected to sur last year's figure -during the first seven months of 2004 actual FDI inflow at Rs 9.503 crore was more than 80 per cent of what the country received in 2003.

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In a bid to stimulate the sector further, the government is working on a series of ambitious economic reforms. •

• • •

The Centre has divested some of its own powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board (FIPB) and has handed them over to the general permission route under the RBI. The FDI cap for aviation has been hiked from 40 to 49 per cent through the automatic route. The government has scrapped Press Note 18, which was acting as a deterrent to foreign investors. It has set up an Investment Commission that will garner investments in the infrastructure sector among others, and plans to increase the limit for investment in the infrastructure sector.

India's foreign exchange reserves rose $700 million to a record high of $120.78 billion in July 2004.

Comparison between India and China with respect to FDI India vs. China FDI Flows Chinese reform process Indian reform process 1977 1991 5 years since 1982 China 5 years since 1991 India USD 4508 m USD 4488 m 10 years since 1982 China USD 13791 m

10 years since 1991 India USD 15483 m

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Shining Indian Multinationals India Inc. is flying high. Not only over the Indian sky. Many Indian firms have slowly and surely embarked on the global path and lead to the emergence of the Indian multinational companies. With each ing day, Indian businesses are acquiring companies abroad, becoming world-popular suppliers and are recruiting staff cutting across nationalities. While an Asian Paints is painting the world red, Tata is rolling out Indicas from Birmingham and Sundram Fasteners nails home the fact that the Indian company is an entity to be reckoned with.

Some instances: •

• •

• •

•

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Tata Motors sells its enger-car Indica in the UK through a marketing alliance with Rover and has acquired a Daewoo Commercial Vehicles unit giving it access to markets in Korea and China. Ranbaxy is the ninth largest generics company in the world. An impressive 76 percent of its revenues come from overseas. Dr Reddy's Laboratories became the first Asia Pacific pharmaceutical company outside Japan to list on the New York Stock Exchange in 2001. Asian Paints is among the 10 largest decorative paints makers in the world and has manufacturing facilities across 24 countries. Small auto components company Bharat Forge is now the world's second largest forgings maker. It became the world's second largest forgings manufacturer after acquiring Carl Dan Peddinghaus a German forgings company last year. Its workforce includes Japanese, German, American and Chinese people. It has 31 customers across the world and only 31 percent of its turnover comes from India. Essel Propack is the world's largest manufacturers of lamitubes tubes used to package toothpaste. It has 17 plants spread across 11 countries and a turnover of Rs 609.2 crore for the year ended December 2003. The company commands a staggering 30 percent of the 12.8 billion-units global tubes market. About 80 percent of revenues for Tata Consultancy Services comes from outside India. This month, it raised Rs 54.2 billion ($1.17 billion) in Asia's second-biggest tech IPO this year and India's largest IPO ever. 12

•

•

Infosys has 25,634 employees including 600 from 33 nationalities other than Indian. It has 30 marketing offices across the world and 26 global software development centres in the US, Canada, Australia, the UK and Japan. Sundram Fasteners is not merely a nuts and bolts company. It believes in thinking out of the box. Probably that is why it decided to acquire a plant in China. The plant in Jiaxin city in the Haiyan economic zone has ensured one fact: that its customers who were earlier buying Sundram products in Europe and the US, did not have to go far from home to access the product.

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Impact of MNCs on Industrial Sectors

Indian

So far, we have analyzed the Indian Economy and the way in which multinational have added more value and increased the exports, GDP and productivity, resulting in all round development. Further more, we have the actual analysis of the effect of MNCs on various Indian Industrial Sectors. Certain important sectors are considered and the actual effect of MNCs i.e. the practical way in which they are affected are studied viz. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Cement Aviation Automobiles Auto Components Biotechnology Financial Services Food Industry Gems and Jewellery Healthcare Information Technology IT enabled Services Media & Entertainment Oil & Gas Pharmaceuticals Real Estate Retail Research & Development Science & Technology Steel Textiles Telecommunications Tourism & Hospitality Training & Education

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Impact Of MNCs on Automobile industry The present scenario is a highly transformed one. Multinational giants are vying with one other to launch their models. Big names of the vehicle industry like the Korean giant, Hyundai, General Motors, Mitsubishi etc. have already opened their . In other vehicle segments too, Volvo, Mercedes Benz, Audi etc. have carved out their niche. In the two-wheeler segment besides the other major MNC brands made available to the Indian consumers. As a result conducting business in the Automotive Industry has become more competitive and sophisticated, which increases the demand for multi skilled personnel. Employment opportunities are emerging with Manufacturers, Dealership Operations including Parts, Sales, Service, Leasing & Financing, as well as in the fast developing Automotive Aftermarket sector. On the other hand, Manufacturing in India has also come of age. The post liberation economical scenario has resulted in all the big names such as General Motors, Ford, Toyota, Honda, Suzuki, Mitsubishi, Mercedes-Benz, Fiat to come up with plants in India. The Indian automotive giants like Telco, Mahindra, Ashok Leyland, Bajaj are revamping their production strategies and launching new models designed and developed indigenously. This has opened up numerous opportunities or employment in this sector for trained and skilled professionals who are well versed in the latest manufacturing process. The growth curve of India Auto Inc. has been on an upswing for the past few years. The high growth observed since 2001-02 in automobile production continued in the first three quarters of the 2004-05. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 200304 was 15.1 percent. Consequent to liberalisation, the arrival of new and contemporary models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers appear to have stimulated the demand for vehicles and a strong growth of the industry. 15

The automotive industry is the barometer of any major economy and the same holds true for India as well. There has been a phenomenal growth in the automotive manufacturing sector in our economy.

India has become a launch pad Rising sales and strong growth prospects heightened the popularity of auto stocks in July 2004 as foreign institutional investors (FIIs) increased their stakes in key automobile companies like Mahindra & Mahindra, Ashok Leyland, Maruti Udyog, TVS Motors and Hero Honda. Global names such as Daimler Chrysler and Porsche have begun introducing their new offerings in India. DaimlerChrysler plans to launch the new Mercedes SLK roadster, which has just hit European roads, in India by October-November 2004. Porsche is bringing in the Cayenne and Toyota is planning a simultaneous release of its IMV. Note, these models are the latest cars zipping on international roads and not the dated versions that were ed on earlier.

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Impact on the Indian Manufacturing sector The resurgence of India's manufacturing sector has been quite magical. Not only are profits soaring, the sector is fast spreading its tentacles abroad as many Indian manufacturing firms inch close to becoming true blue multinationals. The Indian economy grew by 7.4 percent in the April-to-June quarter, FY2005, buoyed by growth in manufacturing and services. Manufacturing grew 8 percent in the quarter, compared with 7.6 percent in the previous quarter. The picture is about to brighten further. •

•

• •

According to a CII-McKinsey report, manufacturing exports from India are likely to grow to $300 billion in 2015 from $48 billion in 2003. The country would then have a 3.5 per cent share of the world manufacturing trade. To reach the $300 billion target, the industry has to clock a growth of 17 per cent every year as against the 11 per cent rate at which it is growing at present. Manufacturing exports from India grew 20 per cent in 2003 over the previous year. Of the total $300 billion, $70- $90 billion is expected to come from just four sectors - apparel, auto components, speciality chemicals and electricals and electronic products. India's exports in these sectors were $10 billion in 2002.

Manufacturing firms on expansion binge Manufacturing companies are planning to invest as much as Rs 200,000 crore over the next two years. • • • •

Of Rs 200,000 cr, Rs 100,000 cr will come from internal generation Half of this debt may come through the ECB route Most corporates are going for brownfield expansion Rising interest rates won't impact India Inc's investments 17

With annual outflows averaging at $1 billion, the country's ranking in UNCTAD's outward FDI performance index has already shot up from the 107th position in 1999 to the 61st spot in 2003.

The two most important destinations for Indian FDI last year were the US and the Russian Federation, ing for around 37 per cent of the total Indian overseas investments during last year, while Europe ed for 40 per cent of the total outflow.

Some large Indian investments • • •

ONGC's 25 per cent stake buy-out in a Sudan oil firm from Talisman Energy of Canada for $720 million (around Rs 3,312 crore) The Hinduja's purchase of controlling interest in C3, a call centre in the Philippines Msource's Spanish language centre in Tijuanna, Mexico

Manufacturing Outsourcing India is fast developing into a manufacturing hub for world corporations wanting to leverage the sector's proven skills in product design, reconfiguration and customisation with creativity, assured quality and value addition. About 20 percent of Indian automotive production in 2004 is exported to developed countries. While some MNCs enter into OEM deals to source components, others have Indian arms to supply to global markets. • •

•

GE has entered into an OEM deal with Thermax India to supply chillers for the latter's power systems. South Korean two-wheeler major Hyosung is making India the manufacturing hub for its 250cc cruiser bike, Aquila through a technical tie-up with Pune-based Kinetic Engineering. Ford Motor Company is aiming to source US$ 120-160 million worth of auto components from Indian manufacturers over the next two years under its India Sourcing Program.

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•

•

Global consumer electronics giant Matsushita of Japan has decided to source Panasonic colour television sets from India for its international market. Colgate is setting up a brand new toothpaste facility in western India which will be one of 15 such facilities across the world.

Impact on Telecom Industry One of the fastest growing sectors in the country, telecommunications has been growing at a feverish pace in the past few years. The speed of growth can be gauged by the fact that in 2004, ten years after private telephony was introduced in India, the mobile subscriber base had crossed the number of fixed line connections. •

•

•

•

•

While fixed lines touched 44 million at the end of 2004, the cellular base ed a 68 per cent growth to touch the 48-million mark. More than a third of these subscribers were added during 2004. The total telecom subscriber base, consisting of fixed as well as mobile s, ed a growth of 31.42 per cent to touch 92.76 million at the end of 2004. The gross telecom base stood at 70.58 million at the end of 2003. (According to the Telecom Regulatory Authority of India (TRAI), the growth in the mobile subscriber segment picked up in December 2004 after remaining at around 1.5 million per month for the previous two months.) The year 2004 ended with the tele-density reaching an all-time high of 8.62, as compared to 6.65 at the end of 2003, an increase of over 30 per cent. In the mobile segment, additions consisted of 1.42 million GSM subscribers and 0.53 million CDMA subscribers. The total of 19.51 million mobile s in 2004 marks an increase of 11.5 per cent over the 17.49 million additions made in 2003. Even in fixed line, 2.67 million subscribers were added as compared to 2.15 million new s during 2003, ing an increase of 24 per cent.

The non-voice market (message and data services) for mobile operators has also ed tremendous growth in 2004. According to a study by IDC, it had a growth of 139 per cent year on year in 2004.

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At present non-voice revenue contributes around 4.7 per cent to the total mobile services revenue, which is around Rs. 14,560 crore (US$ 3.3 billion). Analysts believe that if the current rate of growth is maintained, it could add up to amazing figures in the next few years. A study released by Ernst and Young says revenues from the sector could touch US$ 25 billion by 2007.

Telecom statistics January' 05

February'05

March'05

Total subscribers

94.92mn

97.03mn

98.08mn

Tele-density

8.80

9.0

9.08

Fixed line

45.15mn

45.54mn

45.90mn

Additions during the month

0.39mn

0.39mn

0.36mn

Mobile

49.77mn

51.49mn

52.17mn

Total additions during 1.77mn the month

1.67mn

0.73mn

GSM additions

1.27mn

1.13mn

1.24mn

CDMA additions

0.5mn

0.54mn

0.52 mn

Source: TRAI

Foreign interest The growth statistics combined with the government's decision to increase the foreign direct investment cap in the sector to 74 per cent is generating interest among global investors. While the government expects over US$ 800 million investment from foreign telecom companies in the coming year, a number of them are already here. •

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Japanese conglomerate Kyocera, which has acquired the mobile equipment division of CDMA technology pioneer Qualcomm, is setting up a mobile phone manufacturing plant in India, and expects to ship phones to Africa by the end of the year. It plans to start shipping to countries in South East Asia, Australia and New Zealand next year. Alcatel wants to make GSM mobile phones in India. The French major is planning a cell phone manufacturing facility in India with an annual capacity of 2.5-5m units to cater to the Asia-Pacific markets.

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• •

LG recently started assembling phones in India and Nokia plans to set up a manufacturing plant with an investment of US$ 100-150 million. Global handset major Siemens India Ltd is planning to invest over US$ 500 million in India in the next three to four years for setting up new factories and expanding its existing capacities.

Indian companies going global India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies. As the sector has been performing well, the bulging bottom lines of Indian telecom companies are making them invest in assets. •

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The Tata group's Videsh Sanchar Nigam Ltd. (VSNL) struck a $130million deal to pick up Tyco Global Network's (TGN) 37,208-mile (60,000 kilometre) submarine fibre optic network that connects northern Asia, America and Europe. As part of the TGN deal, VSNL also received a dark (uncommissioned) fibre that links Japan to Singapore and 200 employees of TGN. The Tyco cable has the largest capacity globally. It is of the order of 7 terabits on the Pacific route. Within days of bagging TGN, VSNL inaugurated its own 3,175kilometre, 5.12-terabit Chennai-Singapore submarine link. Tyco has supplied the optic fibre for the Chennai-Singapore link. VSNL's was the second submarine cable deal struck by an Indian company in 2004. Reliance Infocomm had also picked up FLAG Telecom for $210 million a few months before VSNL bought TGN. The Tata Group has also won a bid to acquire 26 per cent stake in South Africa's second network operator (SNO) that gives the company a mandate to develop and operate both national long distance (NLD) and fixed-line networks in the country. The development helped Tata gain a foothold in the South African market.

Technology advancements Among other tidings in the telecom sector are the technology upgradations being effected in Delhi and Mumbai. India will soon the elite club of countries that have 3G mobile services. The Mahanagar Telephone Nigam Limited (MTNL), the state-run telecom services provider, is setting up India's first 3G network in Delhi and Mumbai. The network, which will have 21

a capacity of 4m lines, will require a total investment of Rs 4,000 crore (US$ 914.9 million).

Impact on Research & Development India has emerged as the hottest destination for multinational companies (MNCs) starting or relocating their research & development (R&D) centres over the past two years. China comes next, though it continues to be the leading destination for MNCs relocating their manufacturing operations. These are some of the underlying trends that emerge from the Ernst & Young Transfer Pricing 2005 global survey that polled 348 multinational parent companies and 128 subsidiary corporations in 22 countries. Around 10% of the respondents reported either new or relocated R&D operations in the past two years. Of this, 27% identified India as the leading relocation destination for R&D, followed by China with 17%. The best-known Indian R&D companies are in pharmaceuticals and biotech sectors. Companies such as Ranbaxy, Dr Reddy's Laboratories, Sun Pharma and Biocon and Shanta Biotech are attracting interest from companies in the US and Europe, which are seeking a strong platform for development skills. Following in the footsteps of the information technology enabled services (ITeS) industry, which put India on the world map, yet another sector -Research and Development (R&D) -- is witnessing increasing vitality and growth. More than 125 Fortune 500 companies have opted to have their R&D base in India. The reasons for this are obvious. India's wealth of scientific talent is unmatched in the world. • •

India conducted its inaugural test flight for Saras, the country's first indigenous civilian light-transport aircraft, in August 2004. About 165 institutions in the country are engaged in genetic engineering research, comprising 55 in transgenic work, 25 in 22

•

•

therapeutics and 85 in basic research, according to the Department of Biotechnology. The country has already started commercial cultivation of genetically modified cotton in Gujarat and some southern states, with several other crops in various stages of getting approvals for commercial plantation.

India is the only developing country and sixth worldwide to manufacture and launch its own satellites in geo-stationary orbit and even plans a moon mission in 2008. It has also launched satellites for foreign customers such as and Korea.

Having proved its scientific mettle, India has begun to appear on the outsourcing radar with a monotonous regularity. Gone are the days when international companies retained R&D jobs at home and sent abroad work that were clerical and of a repetitive nature. Now, even innovation and design work have begun to move offshore, especially to India. More than 100 Fortune 500 companies — including Delphi, Eli Lilly, General Electric, Hewlett Packard, DaimlerChrysler and others — have put up R&D facilities in India over the past few years. •

•

•

GE's John F. Welch Technology Center in Bangalore is the company's largest such facility outside the US. With an investment of US$60 million, it employs 1,600 researchers and plans to raise the number of staff to 2,400. The DaimlerChrysler Research Centre in Bangalore is involved with fundamental and applied research in avionics, simulation and software development. Boeing is working with HCL Technologies to co-develop software for everything from navigation systems and landing gear to the cockpit controls for its 7E7 Dreamliner jet.

MNC products developed by R&D centres in India Companies

Products

Sun Microsystems’ India

Portal server, Web server, Identity server and

Engineering Centre

meta directory.

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Texas Instruments’ R&D Centre

Fully developed at least 20 products, including the Ankur Digital Signal Processor; Sangam, a bridge router for the DSL; and Zeno, which runs multimedia applications.

SAP Labs

The lab has produced some of SAP’s products meant for the global market, including the Channel Management Solution, which helps chip manufacturers negotiate prices with their dealers online; Dealer Portal for the automotive industry; mobile laptop solutions and oil and gas upstream solutions. The lab is also working on a solution for Value Added Tax (VAT).

i2 Technologies’ R&D Centre

The centre has fully developed a strategic sourcing solution for i2, besides delivering nearly eight manufacturer-industry templates and retail solutions from India.

Philips Innovation

It develops most of the software required for Philips products. Almost

Impact on IT Sector Information Technology enabled Services (ITES) by MNCs has probably generated the maximum number of sunshine stories in the Indian industry in the last few years. According to Nasscom, the software industry has overtaken the gems and jewellery as well as textiles industries, to become the number one exporter in the country. Currently India is the Power House, The world software Arena. IT is now an industry, which is growing by leaps and bounds both through participation by captive units of multinationals and third party providers of Indian origin. Some of them are the big home-grown IT Services companies like Infosys, Wipro and Tata Consultancy Services (TCS).

The Top Five The top five Indian IT companies based on FY04 revenues-TCS, Wipro, Infosys, Satyam and HCL Technologies-are the prime contenders in the race to the Fortune 500. While the first three have made it to the billion-dollar club, the remaining two are already half way through to that mark. According to Karnik, the way things are shaping up the companies that are most likely to make it are going to be the ones from the current top 10 because the dip-offs in size are sharp beyond the top 10. Experts feel that even within the top 10 the dip-offs start getting sharper after the top three to

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five companies. As a result, the likelihood is restricted to only the top five and, more specifically, to the top three. The top companies are indeed rapidly expanding their global outlook and reach, setting up centers across the world and competing with the top tier global IT companies. TCS is located across over 30 countries and serves clients in around 60. The global locations for Infosys, Wipro and HCL Technologies range between 10-20 countries. These companies serve some of the top clients globally including the likes of GE, American Express, Ericsson, Ford, Transco, Prudential, Deutsche Bank, and the Standard Chartered Bank. In the last two to three years, these companies have also been open to foreign acquisitions and JVs, to expand their global footprint. And the acquisition list is very long: TCS acquired Phoenix Global Services (technology solution provider); Wipro acquired Nervewire, a US-based financial services consultant and utilities' practice of consultancy AMS; Infosys acquired Expert Information Services of Australia and US-based Trade IQ product division of IQ Financial Systems, a Deutsche Bank-owned outfit; HCL Tech has acquired majority stake in Aalayance, a business integration firm with offices in San Jose, US. Leading the Charge 2004

S Ramadorai

Azim Premji

Nandan Nilekani

TCS Ranking: 1 Revenue: $1.6 bn Head Count: 43,000 Market Cap*: $21 bn

Wipro Ranking: 2 Revenue: $1.3 bn Head Count: 39,000+6300 Market Cap: $14.4 bn

Infosys Technologies Ranking: 3 Revenue: $1.1 bn Head Count: 35,000+ Market Cap: $19.84 bn

Some IT MNCs in 2004 Global Fortune 500 Name Revenues ($ bn) IBM 96.23 HP 79.9 EDS 20.6 Accenture 15.1 CSC 14.7

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Market Cap ($ bn) 149 63 10.7 23 8.6

Rules of the game But, will this be enough for our top three to the ranks of the likes of Wal-Mart Stores, BP, Shell Group, Citigroup, General Motors, BMW, IBM, HP, etc. While TCS, Wipro and Infosys may have crossed the psychological billion-dollar barrier, achieving the next few billion dollars is going to be a tough task, warranting a much more rapid growth. Karnik points out that along with organic growth these companies will have to go in for acquisitions to be able to achieve the required rapid growth. "The organic growth will continue to happen but that is not going to be good enough for rapid growth. Acquisitions will help these companies to add expertise in of both new markets and technologies," he adds.

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Impact On Food and Beverages Sector New Delhi: India's booming tourism sector and its rapidly growing Westernstyle fast food ts offer unlimited opportunities for foreign food and beverage exporters, as Indian food imports are likely to grow 6-7 per cent over the next few years, says a study. Eyeing the over 250 million-strong middle class, a US department study says the prospects for investment in Indian markets could be gauged from the fact that total Hotel, Restaurant and Institutional (HRI) service sector sales of F and B amounted to $ 8 billion during 2003-04. An upswing in the Indian hotel industry since 2003 following turnaround of the global tourism industry, positive impact of 'Incredible India' tourism promotion campaign and the world's increasing interest in India's rapidly growing economy are some of the main reasons cited for growth. Though Indian consumers, on an average, spend only 2.5 per cent of their food expenditure in hotels and restaurants, the HRI service sector is expected to grow by 6-7 per cent over the next few years. "Though new, unorganised and untapped so far, the HRI service sector in India has vast potential for growth as there are approximately 55,000 ed restaurants in the organised sector and in the range of 1,00,000 to 5,00,000 in the unorganised sector, comprising innumerable roadside eateries and tea/snack shops," the study noted. The institutional food service sector consists of food service facilities for Railways, government and corporate offices, education institutions, hospitals, prisons, armed services, and airlines. The Indian middle-class, which some estimate is 250 million-strong and growing at 30-40 million a year, is the main drivers of the economy, the study pointed out. The economy of the country is widely anticipated to double by 2010 (Merrill Lynch 2004) to become the world's third largest by 2050 (Goldman Sachs).

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According to the study, hotels managed to get a miniscule five per cent of total sales of Indian food service sector while restaurants and institutional caterers together cornered 52 and 43 per cent respectively. In recent years, the Indian hospitality industry has benefitted from a steadily growing economy and a booming tourism sector. Foreign tourist arrivals into the country in 2004 crossed 3.36 million, a growth of 24 per cent over the previous year. This growth is expected to remain strong over the next few years, the study said, adding that the Indian hotel industry was gearing up to cater to the food needs of the international visitors. A rapidly growing Indian economy (6 per cent annually over the last decade) has increased incomes of the consuming class. By 2007, approximately 22 per cent of households (44 million) are expected to have an average annual income of $3,150 (USD 17,300 on purchasing power parity basis) compared to less than seven per cent in 1995, the study pointed out. An expanding young population, more women in the workforce and increasing urbanisation HRI food sales, the study said, noting that close to 30 per cent of the population live in urban areas. This share was likely to grow to 40 per cent by 2025. Sixty-five million people are expected to enter the 20-34 year age group from 2001 to 2010 in India and the number of dual income households has been expanding rapidly in urban areas, the study observed. The eating-out culture is evolving fast in India, as more consumers seek variety in their food choices. Urban Indians are aware of international cuisines and an increasing number are willing to try new foods. About 4.5 per cent of urban consumers eat outside their home at least once a week, and about 12 per cent eat out once a month, it said quoting a survey. There has been double-digit growth in the Western-style fast-food outlets and coffee shops, both multinational chains (McDonald, Pizza Hut, Dominos etc) and Indian chains (Nirula's, Pizza Corner, Barista, Cafe Coffee Day). It is believed that the multinational and domestic multi-unit restaurant segment will drive the future expansion of the Indian restaurant industry.

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Most Indians still prefer Indian food, as regional cuisines offer many choices, it said, adding "vegetarianism" was still a widely popular culinary tradition in India. However, the younger urban population is increasingly shifting to Western-style fast food items, the study observed.

Impact of Glaxo, SmithKline merger on India Economy The merger of Glaxo India and SmithKline Beecham Pharma will create the second largest pharmaceutical company in India, based on the results for the year ended 31 December 1998, after Ranbaxy Laboratories, with its sales of Rs 1,382.06 crore. The new entity will have combined net sales of Rs 1,278.26 crore (not counting the sales of SmithKline Beecham Consumer Healthcare). Glaxo Wellcome holds 51 per cent in Glaxo India and Burroughs Wellcome India, while SmithKline Beecham is a 40 per cent of the UK-based parent.

Nutritional products will stay out SmithKline Beecham Consumer Healthcare, or SBCH, is unlikely to be a part of the merger in India. This is because the parent companies have decided to sell their worldwide nutritional business as part of their merger plan. SBCH India is a 40 per cent subsidiary of SmithKline Beecham plc. Glaxo India has already sold its consumer business to Heinz India, which comprised popular brands such as Complan and Glucon-D. SmithKline's consumer business in India comprises of nutrition drinks (Horlicks, and Boost, which together for a 63 per cent share of this market); oral care products Aqua Fresh toothpaste and tooth brushes; and over-the-counter products Crocin and Eno.

Large market share In of retail drug sales, the merger of Glaxo, Burroughs Wellcome and SmithKline Pharma would further widen the gap between the number one company and the rest of the top five drug companies in India. According to the IMS 1999 audit (Dec 98 to Nov 99), the merged entity will have 29

combined annual sales of Rs 1,084.87 crore and a 7.92 per cent share of the Indian pharmaceuticals market. Market leader Glaxo's IMS audited sales were Rs 879.36 crore, while SmithKline recorded a retail turnover of Rs 205.51 crore. SmithKline Beecham Pharma is ranked 20 in of retail sales. The emerging entity will have a combined annual prescription base of 23.5 million (IMS medical audit Dec 98 to Nov 99). Glaxo, along with its companies Burroughs Wellcome and Biddle Sawyer have a prescription base of 19 million, while SmithKline products generate 4.5 million prescriptions per year. The two companies complement each other very well in of therapeutic classes. Glaxo is the market leader in therapeutic categories such as cephalosporins, plain corticosteroids, anti-ulcerants and topical corticosteroids. SmithKline is the market leader in pure vaccines and has a sizeable presence in broad spectrum penicillins, anti-infective antidiarrhoeals and iron preparations.

Problems to be overcome The amalgamation of the two entities is likely to pose some problems for Glaxo, which is in the midst of a major restructuring excercise. Glaxo has split the product portfolio of Glaxo, Burroughs Wellcome and Biddle Sawyer into seven business units, based on therapeutic categories. "The existing imbroglio between the Burroughs Wellcome union and the Glaxo management is yet to be resolved before Burroughs Wellcome can be integrated with Glaxo. This may cause some delays," says Devinder Pal, chief executive of Mumbai-based Catalyst Pharma consulting. Glaxo spokesperson declined to comment on the merger, but a company source says that a board meeting was held today for preliminary discussions. Another important aspect of the merger is SmithKline Beecham's 100 per cent subsidiary in India – SmithKline Beecham Asia. While SmithKline Pharma has already announced its intentions to launch research products through this subsidiary, Glaxo products too may use this subsidiary to launch certain new products, analysts feel. Glaxo is also not averse to setting up another 100 per cent arm in India. Its chairman Sir Richard Sykes has already conveyed this during his recent visit to the subcontinent. 30

HP marks Indian employment milestone Hewlett-Packard has become the largest multinational IT employer in India

Beating more well-known contenders such as IBM, Intel and Microsoft, Hewlett-Packard has recently become India's largest multinational IT employer, with more than 10,000 employees. Measuring the size of multinational corporations (MNCs) in India is difficult, as most do not disclose country-specific revenue figures. Headcount provides one reliable standard, reported the Economic Times, an Indian daily. HP is in the process of acquiring the public stake of Indian software services exporter, Digital GlobalSoft (DGS), turning its current 51 percent stake into an acquisition. Including the DGS employees, IBM's headcount goes over 10,000 staff. DGS had a headcount of 4,400 by the end of September this year, with another 2,600 employees in software operations and 3,000 in HP's Global eBusiness, the back office division. With another 800 from sales and teams, HP's total rises to around 10,800 staff, reported the daily. This puts HP far ahead of its main rival, IBM, which has an Indian headcount of 6,000. However, IBM is growing quickly in India, and a rise to 8,000-plus is expected. Big Blue also has a relatively weaker presence in India compared to HP. Of the estimated 320,000 global employees, 6,000 is just under 2 percent, while HP has a smaller overall headcount of around 140,000, which makes its India operations for well over 7 percent of headcount.

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Other large foreign companies in India are also expanding. Accenture, the IT consulting and services corporation, wants to rise from its current 3,000 to rival HP with more than 10,000 employees within the next two years. While Microsoft officially says it only has 700 staff in India now, human resource recruiters in Bangalore told the Economic Times that Microsoft was aggressively recruiting for back-office operations, and that they expected it to hire 3,000 people by the end of 2004. Cisco has 3,000 now and Oracle will expand to 4,000 by the end of this year, and Intel plans to hit 3,000 in India in 2005. However, beating HP and the rest of the MNCs in India for IT employment by a broad margin is US-based General Electric (GE). The conglomerate has 22,000 employees in India, most of them working for GE's business-process outsourcing and call-centre operations. With Indian outsourcing a hot topic in the US and other source markets, the Economic Times said none of the IT MNC executives it ed were willing to comment on their hiring plans. Outsourcing is seen as a threat to US IT jobs.

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Pepsi Co. Case Study Pepsico has been an early starter in engaging farmers in India. With an elaborate contract-farming programme underway for the last 15 years, there have been learnings along the way for the cola and foods major. Pepsico’s Worldwide President and CFO, Indra Nooyi shares some of them with Chaitali Chakravarty & Bhanu Pande. An excerpt. Has Pepsi’s contract farming model changed in India? It hasn’t changed but evolved over time. In 1989, when Pepsi came into India, we set up a potato processing plant for our snacks business and a tomato processing plant in Punjab for exports. The latter was primarily set up to meet our export obligations. Pepsi’s entry into contract farming was triggered by the need to make available sufficient quantities of tomatoes & potatoes of the right quality for our domestic plant. To start with, there was no blueprint available either in India or internationally of an appropriate model which could be emulated to structure our contract farming initiative. In that scenario, starting from the basics of application research, we created a model which has evolved to its current form. However, when you take up contract farming for different crops in different areas, suitable modifications and adjustments have to be made to ensure it’s relevant to local conditions. Have the objectives changed? The objective of contract farming is to backward integrate the supply chain to ensure timely availability of right quality and quantity of materials. This basic objective has not undergone any change. Contract farming models rarely generate profits. Why then should an MNC expend so much time and energy on them? What are the collateral benefits of entering the rural economy?

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Contract farming in itself is not a business. It is an integral part of a business model which ensures that raw material is available at the right time conforming to the quality standards in required quantity at competitive prices. All this to ensure the profitability of the business. Our snacks business requires low sugar potatoes to produce the right quality of potato chips as such varieties weren’t grown in India. So we had to introduce the suitable varieties via contract farming. Our efforts were also made to increase productivity to ensure higher income for the farmer and to reduce our procurement costs. In order to succeed we had to undertake extensive trials of various varieties and evolve agronomic practices suited to local areas. We then put in place an extension team to transfer these learning’s to the farmers. Efforts to increase agricultural productivity also go a long way in improving farm incomes, thereby bringing our efforts in sync with the national priorities. Why has Pepsi not been able to scale up contract farming of various crops? The latest seaweed project started out with a different objective. But it suffered delays and is now being touted as a liquid fertiliser project. Doesn’t this show the lack of clarity with which MNCs enter contract farming in India? The contract farming programme gets scaled up in line with business needs. Our potato programme starting from Punjab has a footprint across the country to manufacturing capacities established in Maharashtra and West Bengal. Today, the number of farmers who participate in our contract farming programme is higher than what we started with, and many of the pioneers are still with us. Close to 50% of the potatoes processed by us come from our contract farming programmes. Do MNCs face any special hurdle entering the rural areas in contract farming? The seaweed contract farming project is a path breaking initiative as cultivation of seaweed in the open sea had never been undertaken before in India. Initially, effectiveness of the technology to deliver a viable and sustainable income model for the growers had to be established. Its efficacy had to be demonstrated to the funding and partnering institutions, who would manage the Self Help Groups undertaking this activity. Last, being a new activity, regulatory clearances were required, which could be granted only after due evaluation and observation of the trials. Only last month, due to the efforts of the CM of Tamil Nadu and her team, Self Help Groups have 34

been given the go ahead to take up this activity. Very soon it will work on a commercial scale. CSMCRI, which provided the technology for this while working on the process optimisation discovered an additional application of the weed. They discovered that it could also deliver a by product — a liquid plant growth nutrient. It made sense for us to acquire this technology for which CSMCRI had taken a global patent. We hope to now make available this organic and cost effective growth nutrient to the Indian farmers and we believe this will have a significant impact on the yields and their incomes. What kind of challenges, if at all, do you see in partnering with farm workers? Any successful initiative requires clear understanding of the ground realities of the terrain and the needs of its people; their resource base and their constraints. Any corporate, Indian or multinational entering this field has to make the effort and spend time and money to learn in order to build a successful partnership with the farmers. Indian farmers have no bias against the multinationals and our 10 years of successful partnership with the Punjab farmers is a testimony of the same.

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For investors, India is less risky than China NEW DELHI : India continues to be less risky than China as a business destination, according to a corporate study. India has been ranked 10th among 29 emerging markets in the latest country risk analysis by Economic Intelligence Unit (EIU), an information service arm of the Economist group. With a score of 39 out of 100 in the risk scale, India has got 'B' risk rating and has outranked China (41), Saudi Arabia (41), South Africa (45), Mexico (45), Brazil (48) and Egypt (49), who have got 'C' rating. However, Singapore (11, A rating), Hong Kong (21) continue to be the safest place for foreign investment, followed by Taiwan (25), Israel, Hungary and Poland (37), who have qualified for 'B' rating. Not surprisingly, Iraq is the most dangerous country to do business, with a score of 91 out of 100, followed by Argentina (76). A low risk rating is an important indicator of a country's global credit rating and the willingness of foreign investors to invest in a country. Industry representatives said India has an opportunity to gain from China 's slowdown. Experts said country risk report comes in handy as a decision making tool for MNCs to enter or expand in new markets. EIU country risk rankings combine measures of political risk (like threat of war) and economic risk (like size of fiscal deficits). They also include measures that affect a country's liquidity and solvency (debt structure and forex reserves). Some of the operational factors that are considered in determining country risk include security, political stability, government 36

effectiveness, legal & regulatory framework, macroeconomic conditions, financial & tax policy, labour market and infrastructure. EIU reviews the risk ratings of over 100 emerging markets on a monthly basis. Rapid growth, highly skilled labour and opportunities in outsourcing boosted India 's ratings. While change in government brings no decline in risk for India , EIU says that Manmohan Singh-led coalition must reforms to sustain current ranking. " India is watched closely by overseas investors on whether reforms will continue in the Left ed government. There is little awareness about economic policies adopted by Left in West Bengal ," says Amit Mitra, secretary general, Ficci. He said FDI investment will gather momentum. " India is as safe as what it was and change in government has not changed the situation," says N Srinivasan , DG-designate, CII. "Indian industry is upbeat and full of self-belief." Former RBI governor Bimal Jalan is confident that the country can handle any economic crisis. Compared to China , India has become marginally safer in 2004. This perception could be partly attributed to the strong external sector performance and reduced border-tension that India experienced a year back. EIU says that India is poised to grow at 8.3% in 2003-04 (April-March) and will grow at 7.3% in 2004-05 — owing to a "smaller harvest and hence less robust growth in personal incomes". It also predicted a slowdown in China . " China 's GDP is likely to grow by 9.4% this year and by 8.1% in 2005, with the slowdown being led by an easing of investment growth," projects EIU. India has an edge over other global competitors in outsourcing opportunities, R&D. China has scored over every country in cheap labour. Despite slowdown, China will continue to be among top emerging markets for FDI, but India is also becoming very attractive to global investors. EIU has projected FDI flows to India to touch $13 billion in 2008 from $5 billion in 2003. However, China is forecast to receive $58 billion in FDI this year. " India 's performance as one of the most attractive destinations for FDI is based on several criteria, considering Indian authorities' commitment to attract more FDI is yet to be fully matched by more investment-friendly policies," says EIU.

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CII says effective communication is key to reduce India 's risk further, saying, "The biggest challenge is spreading the right message to the global investing community." Jalan pointed out the need to reduce fiscal deficit.

Conclusion Multinational companies are like double-edged sword. The sword can harm if not handled properly. Similarly the Multinational companies have their own pros and cons. The extent of technology and management of know-how transfer by the MNCs depend to a large extent on their corporate strategy; for example, firms desiring to have a longer-term relationship with the suppliers (rather than those simply using the host country as a marketing/export base) will be more inclined to effect transfer technology. As pointed out in the World Investment Report, 2000, MNCs may restrict the access of particular s to technology in order to minimise inter competition. It is noted that MNCs are more likely to licence older technologies from which they have already derived significant rents than newer technologies on which there are still relying for market leadership. Further, they may hold back the upgrading of the technology or invest insufficiently in host-country training and R&D in accordance with their global corporate strategies. Therefore, arguing that FDI inflows and economic liberalization automatically facilitates technology transfer is being extremely naïve.

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Webliography www.ibef.org www.google.com www.cii.com www.ficci.com www.indoinfoline.com

Bibliography International Marketing Management - M.V. Kulkarni International Marketing - Francis Cherunilam 39