Why local Before independence in 1947, the levers of the economy were in the hands of the British and they did not allow any Indian entrepreneur to grow except under the shadow of a British company. After 1947, the Indian preference for Fabian socialism expressed itself in the form of myriad controls. The first controls on foreign exchange were imposed in 1947. In 1955, export and import trade was severely restricted. Practically, nothing could go out and nothing could come in, unless one was willing to violate the law. There was an extensive licensing regime in the manufacturing sector that restricted capacity, production, product mix, marketing and prices. The regime also deprived Indian business of capital and technology but it gave the entrepreneur a captive market and protected his business against competition. It was not surprising that most businesses preferred to remain local. Nevertheless, under the surface, there was latent creative, innovative and entrepreneurial energy. What changed everything for Indian business was the shock of liberalisation. In 1991, in the space of six weeks, exports and imports were, by and large, made free; exchange controls were relaxed; licensing of manufacture was virtually abolished; and Indian business was put on notice that the earlier dirigiste model would make way for an open and competitive economy. Indian business responded in three different ways. In the first category, an entrenched group of largely family-owned businesses got together to oppose liberalisation. While some quickly withdrew from the group, others persisted and they now operate as small players. In the second category, many businesses quickly restructured and, in many cases, shed some businesses and focused on their core competence. They became lean and competitive. Younger family members took over, engaged consultants, brought in professional managers, accessed the capital market, introduced new products and services, and learned to operate in a competitive environment. In the third category, first-generation entrepreneurs turned up. They foresaw quite early the opportunity in India and were willing to take risks. Many companies currently in the list of the top 10 or top 50 did not exist 15 years ago.
Meanwhile, more policy changes were underway. Between 1991 and 1996, and again between 1996 and 1998, the laws and regulations governing the economy were overhauled. After some initial hesitation, more reform measures were undertaken between 1999 and 2002. The present government that assumed office in May 2004 has continued the process of reforms, especially in the infrastructure sector, capital market, the financial sector and taxation. Indian business has responded to these changes with remarkable agility and speed. One of the consequences of a fiercely competitive market economy is the need to remain close to the market. There is no room for sloth or inefficiency. This quest for market share also drives Indian business to go from local to global. The other factors that encourage Indian business to go global are the need to procure natural resources, ensure energy security, access new technology, seek patents, leverage R&D capabilities, obtain a new product mix, find a strategic partner, build complementary businesses, establish forward and backward linkages and enlarge the balance sheet and raise cheaper global capital.
Besides, many Indian companies are driven by innovation. To keep its competitive edge, such a business has to secure a global presence. Infotech and biotech companies are taking that road. There is also the desire to excel, and it is but natural that a world-class or a world-size company seeks a world presence. These companies have plenty in common: smart management, low costs and increasingly aspirations to join the elite ranks of multinationals.
It has helped that Indias GDP has been growing, on average, at the rate of 8.6% since 2003-04. Corporate balance sheets are larger and corporate profits are higher, giving Indian businesses the financial muscle to take on new challenges. Valuations have soared, enabling companies to raise large amounts of equity capital. The reforms in the Indian financial markets have led to efficiency gains in financial intermediation, and leading business houses are able to borrow cheaply in the Indian market. We have also allowed corporates to borrow abroad. I am aware of the so-called Investment Development Path theory, by which, in the initial stages of development, a country receives FDI flows.
Once a country reaches a certain level, outward investment takes place. I do not know if Indias current level of development and Indian companies outward orientation fit in with that theory. Till 2005-06, Indian firms outward investment was very modest. In that year, outward investment was $2.9 billion. In the next year, 2006-07, it shot up to $11 billion. FDI flows into India also shot up to a new high of nearly $20 billion in 2006-07. The two stages of accelerated FDI inflows and accelerated FDI outflows appear to have converged in India, marking a break with the conventional IDP theory. In my view, this is not unusual if we recall Michael Porters principle that it is not nations that compete, it is companies that compete. The acquisition urge has seized Indian companies, big and small.
This is an extract from Indian finance minister P Chidambarams Wharton Leadership Lecture delivered on September 27, 2007, at Wharton School, University of Pennsylvania, US