CHAPTER-2 INDIAN BUSINESS ENVIRONMENT AND MULTINATIONAL CORPORATIONS- AN OVERVIEW

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1 CHAPTER-2 INDIAN BUSINESS ENVIRONMENT AND MULTINATIONAL CORPORATIONS- AN OVERVIEW About the Chapter In this chapter, an attempt has been made to understand the Indian business environment constituting opportunities and challenges for MNC s operating in India. Beside this, chapter deals with the multinational corporations, definitions and typologies etc. Further an attempt has been made to identify the position of Indian MNC s at global level through various listing and reports. The rationale behind this is to understand the position of Indian business organisation in order to identify the areas in which their practices reflects the best practices of MNC s and to the extent there exist a gap inhibiting untapped potential and success. The main objective of this chapter is to understand the Indian business environment and Multi-national Corporations operating in India in order to present the picture of competitive position of Indian companies at global scenario and areas where improvements are needed. Content This chapter 2 has been sub divided in to: 2.1 Indian Business Environment 2.2 Multinational Corporations in India An organization's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage. - Jack Welch

2 2.1 Indian Business environment Amongst the developing economies, India is one of the prominent sources as well as destination of emerging multinational enterprises. More than two decades after liberalization era of 1990 s, India has made its mark in the world economy in many ways whether it is technology, research or business. It has emerged as a one ofattractive destination for investment and being the second largest economy in terms of population has significant presence at global level. According to Forbes (2014), India will soon outpace the growth rate of China. Many indicators suggest that India s economy is on growth track due to reduction in current account deficit, drop in inflation rate, currency stabilisation, improved corporate earnings (See graphs no.2.1, 2.2, and 2.3). The political stability and economic friendly government policies ensures acceleration in investment and productivity. Corporate are also looking for new ventures and removal of bottle neck and ease of doing business in India for further attracting FDI as well as portfolio investment. Graph-2.1 (Current Account Deficit) Graph-2.2 (WPI inflation rate) Graph-2.3 (Corporate Earnings ERR) (Source: Page 12

3 FDI is also getting impetus due to favourable economic conditions. Many large corporate like Wal-Mart etc are seeking opportunity in India. Thus, Indian business environment is expectedto take the position of hyper competitive market due to large untapped consumer base, cheap labour availability, increasing agriculture, favourable government policies and entry of new foreign players etc. In present scenario Indian Business environment is characterised by following: i. Current account ease ii. iii. iv. Currency stabilisation Favourable investment policy Stable government v. Unrealised Demographic dividend vi. Initiative for technological self sufficiency On the other hand, in global competitive index India again got the slip of 1 point having ranked at71 amongst 148 economies. Improvement are needed in the infra structural and institutional settings. Table 2.1 shows the ranks of Indian and other BRICS countries since 2009: BRICS COUNTRIES Table 2.1- of BRICS Countries from 2009 to 2014 ( ) ( ) ( ) ( ) ( ) Indian China Brazil South Africa Russia (Source: Compiled From Global Competitive Index from 2009 to 2015) Rank ( ) Due to the availability of large pool of natural as well as human resources India has always been categorized with factor driven economies. Due to the underutilisation or less efficiency, all resources are not creating the value. Table 2.2 clearly indicates that financial market development and market size indicators have shown improvement in index since However, every other indicator has found with downward trends. Major drops are found in efficiency enhancer drivers and innovation drivers. Page 13

4 Table2.2- Global Competitive Index and Rank of India in Relation to three Pillars since 2009 Rank / Score / Score Areas/ Pillars ( ) ( ) Rank/ Score ( ) Rank/ Score ( ) Rank/ Score ( ) Rank/ Score ( ) R S R S R S R S R S R S A) BASIC REQUIREMENT Institutions Infrastructure Macroeconomic environment Health and primary education B) EFFICIENCY ENHANCER Higher education and training Goods market efficiency Labour efficiency market Financial market development Technological readiness Market size C)INNOVATION AND SOPHISTICATION Business sophistication Innovation (Source: Compiled From Global Competitive Index from 2009 to 2015) Above condition indicates that gap exists between the thrust area and focus area of policy makers and strategists both in private as well as government organisation. So that available resources (human as well as financial) are not able to generate competitive advantage for country India. Present government has taken some initiative for the improving the focus area, structure and methodology of planning by replacing the Planning Commission with Niti Aayog. However single step or decision can t change the situation from the ground. There is a strong need of reform in policy formulation and execution framework. Many structural, administrative, technical and social changes are required to amend the situation, system and outcomes. In one of his article in Business Standard (September 18, 2014) Nitin Desai opined that A change in the structure of the Page 14

5 planning commission is not possible without a change in the process and content of the plan... Every initiative or policy decisions will be futile if alignment of policies and plans is not toward common goal and objectives. Strategic alignment is a dynamic process. Whether it is a company or country, alignment of its strategies and polices with intended goals and objectives is the key for accelerating the growth. In present scenario, cut throat competition among countries is fostering them to ensure strategic alignment at every level of policy framework whether it is internal alignment (Goals, objective, country s environment etc) or external alignment (Global market, competition, need, environment etc). No matter how well formulated strategy or policy is if it is not instrumental in achieving the overall objectives, in long term it is going to harm the competitive position. Contribution of business sector is immense for any country s growth and competitiveness. Prasad (2000) discussed the model of Farmer Richman (1965) in his book for describing the impact of country s factors on adoption of management practices and its effect on system efficiency. He further opined that management practices affect the efficiency of firm and eventually efficiency of whole system and country. Page 15

6 2.2 Multinational Corporations (MNC s) Business word is characterised by global competition.the most active players in international business are the multinational corporations [MNCs]. MNCs are the very essence of globalisation and liberalisation. Any talk about international business or about globalisation reflects on MNCs and their operations. As per Aswathappa (2008), An MNC is an organisation that engages in production or service activities, through its own affiliates, in several countries maintains control over the policies of those affiliates and manages from a global perspective With this global perspective, top managers allocate resources and coordinate among those affiliates in order to take the best advantage of favourable conditions throughout the world. On the other hand, Trans-nationality Index (TNI) measures spread of MNCs across the globe; TNI is made up of three ratios: total sale from foreign, foreign assets to total assets and foreign employees to total employees. There are various other typologies present in literature given by various authors like Perlmutter (1969), Doz (1980), Porter (1986), Prahalad and Doz (1987) etc. Summary of such typology is given below in Table 2.3: Table 2.3- MNC Typology S.No. Authors MNC Typology 1 Perlmutter (1969) Polycentric Ethnocentric Geocentric 2 Porter (1986) Multidomestic Industry Global Industry - 3 Bartlett (1986) Multinational Global Transnational 4 Prahalad & Doz (1987) Locally responsive Integrated Multifocal 5 Bartlett & Ghoshal (1989) Multinational Global Transnational 6 White & Poynter (1990) Geographic area Global product Matrix 7 Roth, Schweiger et al (1991) Multidomestic Global - 8 Wolf (1996) Single Market Strategy Integration Strategy Interaction Strategy (Source: Modified from Harzing (2000) Globalisation and liberalisation have given impetus to the emergence of various MNC s of developing nations like India. India is the land of opportunities. It is an important emerging economy in the globe. It has its known potential in many sectors and has global presence in various aspects. According to Som (2006) India is one of the most important emerging markets in the world, with a tremendous potential for sustained high rate of economic growth, and is increasingly becoming a key player in the world economy. Availability of low cost as well as skilled labour, huge customer base, access to technology etc has made Indian a most attractive investment land for foreign MNC s. Page 16

7 Liberalisation and deregulation further provided a positive force for FDIand large number of foreign MNC shave set up their operations in Indiaand thus liberalised and free market has created hyper competitive business environment in the country, causing the domestic firms to become equally competitive. According to Som (2006),...due to increasing globalisation, liberalisation of economic policies of various emerging countries, challenges of competition is enforcing the Indian MNC s to adopt the innovative HRM practices for fostering the creativity among employees so that Indian MNC s can retaliate the foreign MNC s in hypercompetitive market. FDI has been opened for various sectors with increasing caps which will give new impetus to Indian companies for adopting new ways of doing business make themselves competitive. Indian MNC s have excelled in various sectors like information technology, pharmaceuticals, textile and clothing, manufacturing etc. However, with the entrance of more foreign MNC s, the dynamics of doing business in India has changed. It has become imperative for Indian companies to line up their all resources and capabilities in best possible way for achieving the stipulated objective and goal of their corporate as well as business strategy (Competitive strategy). In view of Prasad (2000)...It can be observed that modern management concepts were first introduced by the subsidiaries and associated of multinational operating in India. Thus, entrance of foreign MNC s pave the way for domestic firms to adapt the new proven practices of managing resources for survival as well as growth. However, Som (2003) argued in his research paper that Most Indian companies still follow age-old practices and customs. Consequently, their HRM strategies are also based on the traditional industrial model, which involves several features like seniority based promotion, strong union influence, and strict job classifications. But this thought has to be revised in globalised hypercompetitive market as previously discussed that workforce and other resource, capabilities have been viewed as major input to firm s competitive strategies ( Grant 1991, Tan, 2006). Due to various economic and other environmental changes, Indian MNC s has to realise their full potential in terms of every resources to remain in competition. Eight Indian MNC s find ranking in Global 500 companies list. Indian Oil is the top Indian company ranked foremost among all Indian companies since 2012 (Table 2.4). Page 17

8 Table 2.4- Global Fortune 500: Indian Companies list Since 2012 FY to FY S. No. Company Rank (2012) Rank (2013) Rank (2014) Rank (2015) Revenue ($ bn) 1. Indian Oil Reliance Industries Bharat Petroleum Hindustan Petroleum State bank of India Tata Motors Oil & Natural Gas Tata Steel (Source: In one hand, the importance of India as an economy is increasing year by year, on the other hand, there were only 8 companies in global fortune 500 companies list (2012) and which with the passage of time have been reduce to severe. In one more listing Boston consulting group identified 20 Indian global challenger companies in Table 2.5 shows the list of 20 Indian Global Challenger companies: Table 2.5 Boston consulting group listed 20 Indian Global Challenger Companies (2013) 1) Bajaj Auto 11) M & M 2) Bharat Forge 12) MothersonSumi Systems 3) BhartiAirtel 13) Reliance Industries 4) Crompton Greaves 14) Sun Pharma 5) Dr. Reddy s Laboratories 15) Tata Chemicals 6) Godrej Consumer Products 16) TCS 7) Hindalco Industries 17) Tata Motors 8) Infosys 18) Tata Steel 9) L & T 19) Vendanta Resources 10) Lupin Pharmaceuticals 20) Wipro (Source: There are lots of opportunities available for Indian companies but due to the mismatch between strategic planning and execution expected results fall short of target.on the other hand, advancement in technology, increasing globalisation, liberalisation & deregulation are causing the structural as well as operational changes across the world. As market is becoming hyper competitive with various moves, companies are also taking different strategic postures to survive. Changes can be opportunity or threat as per the perception and action of Indian companies. Therefore, Indian MNC s are required to exploit their competency and capabilities for leaving a global foot print and prove that challenges are opportunity for them. Linking human resource with strategy in one the best way to create such competency map that will be difficult to imitate and serve as a sustainable source of competitive advantage for Indian MNC s. Page 18

9 In country like India, management of people is a major challenge. On the other hand it is attractive land for foreign investors and one of highest FDI recipient in global scenario. So, for MNC s (Domestic as well as foreign) operating in India, management of workforce is one of the major issue. Human resource management continue to be just another functional area which though has strong influence of social, cultural, economical and political factors (Bhudhwar & Khatri 2001), rather than strategic need of the organisation. It strategic importance is not yet perceived well in many companies. Liberalisation, increasing competition, Economic restructuring and market forces are changing the basic and inherent functions of all departments in the organisation as well as HR (Rao et al, 2000; Som 2002 etc). Whereas foreign firms have evolved with various SHRM practices for better performance Indian firms has not done this yet (Bhudhwar & Khatri, 2001).It is therefore imperative to properly align the HR policies and practices with strategies of the organisations to ensure long term sustainable performance. Page 19