Birth of Indian MNCs

V SNL's acquisition of Tyco and Indian Oil Corporation's proposed $3-billion dollar deal to develop Iranian gas fields are only the latest in a series of investments by Indian companies abroad. The total value of acquisitions alone is already more than a billion dollars this year.

The encouraging aspect of this global expansion is that it is dictated, not by delusions of global grandeur, but by sound business logic. Indeed, shopping for companies abroad is part of a new trend that has swept across the larger "emerging economies".

Unctad's World Investment Report for 2004 draws attention to the fact that companies from economies such as Chile, Mexico, and South Africa have already become big outward investors, while firms in Brazil, China, and India are "about to take off".

According to Unctad, in 2003 China's stock of outward FDI already totalled $37 billion, compared to India's $5.1 billion. In short, globalisation has opened up new opportunities for Indian companies, opportunities which they are now in a position to seize""thanks to the changes in India's own business and economic environment over the past decade.

Were it not for the opening up of the telecom sector to private enterprise, neither the privatised VSNL nor Reliance Infocomm would have been there to buy up Tyco and Flag, respectively, and become global players. The fact that India has moved from a foreign exchange crisis to dollar plenitude also helps, of course.

Going global has many advantages in a world where relentless competition ensures that raw materials have to be sourced from least-cost locations, manufactured in factories of vast scale in order to keep costs to the minimum, and sold through outlets located close to the big markets.

Hindalco and Sterlite bought mines abroad because they wanted secure access to raw materials. Tata Tea's acquisition of Tetley was to get hold of a leading brand that brought with it millions of customers, and hence a readymade market.

ONGC Videsh is investing over $2 billion in oil fields in Sudan, Angola, and Russia and in gas fields in Vietnam, apart from bagging exploration contracts in other parts of the world, as part of India's quest for energy security""and it is an encouraging sign that public sector companies like ONGC and Indian Oil are able to do this.

The software services companies, meanwhile, have set up units in the US and Europe and have acquired companies there to access markets in these countries.

Infosys, for instance, talks about its "global delivery model" as being the key to its success. Pharmaceutical companies have a similar business model. And Bharat Forge has bought up forging companies in Europe because it aspires to become the world's largest forging company in five years, displacing Thyssen Krupp of Germany.

Sometimes there is a good technology and product fit, as in Tata Motors' takeover of Daewoo's commercial vehicles business (which specialises in heavier vehicles than Tata makes in India).

And access to the markets of the European Union is the reason why many Indian companies have taken over units in Europe (like Samtel's acquisition of an engineering unit in Germany).

Sometimes, the reason could merely be inorganic growth, since setting up additional capacity takes time""this was probably one of the reasons behind Tata Steel's acquisition of Natsteel.

Yet another reason is to ensure that a company is able to stay close to its customers""that would account for Sundaram Fasteners' decision to expand abroad.

The underlying messages however are most important: Indian companies have begun to think globally, and they have the confidence in themselves to believe that they will improve the performance of the companies they acquire. That is how multinational corporations are born.