Indian Multinational Firms

An important phenomena in recent years is the entry of emerging economy multinational firms on the global stage with important implications on the structure. These countries are China, South Korea, Brazil, Argentina, and India. In the Post-reforms era domestic market has become very competitive, driving Indian companies to acquire world class standards in technology and organization. A consequence of this is several large Indian firms investing oversea markets especially developed countries with both green field ventures and cross-border acquisitions. India’s endowment of largescale skilled manpower (human capital) provided comparative advantage both for exports and international investments. One of the underlying factors for Indian corporations (generally emerging economy multinational firms) investing in developed countries is to develop linkages with the world market in order to leverage strategic resources that in turn promote learning within the firm.

The Model

The chapter extends the theoretical model of Chapter 3 by introducing time dimension into strategic interactions between firms in terms of the Pre-reforms and the Post-reforms eras. New entrants into industries are mostly Transnational corporations with advantages in intangible assets in technology and brand names. Incumbent firms were taken to Indian firms with relative disadvantage in technology but advantages in institutional knowledge of Indian markets. This triggers intense competition between the Indian firms and Transnational corporations. Incumbents replaced outdated technologies with imports and mastered codified and tacit elements of technologies. Transnationals made efforts at acquiring knowledge of India’s institutions and adopting their technologies to local firms. We traced this with discussion of technological and organizational behaviour in the Post-reform era.

Introduction to Part 2

The chapter demonstrates the internal reforms undertaken in the mid-1980 and major internal and external reforms the early-1990 and their effect on product and factor markets and institutional conditions. It also shows inter-relationship between international trade and investment behaviour. The reforms allowed TNCs in most industries. It was argued the reforms in general resulted in positive outcomes because India possessed critical industrial and skill endowments and capitalist conditions. The reforms resulted in augmentation of economic growth rate between 6 and 7 per cent which increased market size. This, in turn, gave incentives TNCs to bring in their assets and compete in domestic market. Apart from product markets, the reforms improved competitive conditions in input markets such as labour in sectors like software and services and automobiles and electronics. Furthermore, supply chain conditions improved significantly with entry of Japanese and South Korean multinationals.

Analytical Framework and Qualitative Observations

It develops a simple theory of Cournot strategic interactions between firms as basic framework and discusses behaviour of firms from dimensions of market structure, technology, scale economies, and value-chains (subcontracting). It demonstrates how large firms derived monopoly power in the product markets and monopsony power in the input markets. This, in turn, made them inward oriented in search of monopoly power in the Pre-reforms era. On the other hand, small and medium scale firms faced highly competitive conditions and high transactions costs in the domestic markets especially in the sub-contracting linkages with large firms. This, in turn, drove relatively efficient small and medium firms to exports where they are price takers facing lesser degree of transaction costs. The chapter also traces how exporting small and medium firms realized efficiency in production processes.

Empirical Analysis of International Trade and Investment Behaviour of Firms

This Chapter develops econometric modelling to test for relationships between firm size and exports under theoretical factors of technology, organization, and economies of scale. We measured different and relevant variables. We specified the equations based on a carefully formulated hypothesis taking into account non-linearity in relationships between dependent and independent variables. It econometrically tested for the relationship between firm size and international trade behaviour from different dimensions. Large firms with domestic market power and better access to imports were less export oriented than medium and small-scale firms. Small firms in general adopted labour-intensive production practices in tune with comparative advantage. Small firms that faced inefficient subcontract relations and those that reached a critical technological size went in for export markets with efficient payments arrangements. Consequently, about 50 per cent of India’s exports were accounted for by small and medium scale firms.

Empirical Analysis

Econometric exercises were based on firm level panel data which covers a long-time dimension of the Post-reform era. Three industries were chosen Automobiles (AM), Auto-components (AC), and Two-wheelers (TW). These industries were chosen because of their high degree of exposure to Transnational corporations (TNCs). The results demonstrate that exports are explained positively by TE, firm size, and labour intensity, which implies that firms have become very competitive in the Post-reforms era and large firms started to play important role in exports. TE variable is explained positively by R&D, Imports, Technology purchases and vertical integration. This implies firms augmented their technological efforts in the Post-reform’s era. The result for Vertical integration variable implies India remains a high transaction costs economy. The estimated augmented production function in general shows exposure to international trade and investment results positive benefits to the Indian economy.

Empirical Analysis of Technical and Allocative Efficiency of Firms and International Trade Behaviour

We measured firm-level relative technical and allocative efficiency drawing from Farrell’s production frontier approach. Technical efficiency captures technology dimension of realization amount output for given level of inputs employed. It is determined by technological, organizational firms and consequent technical efficiency. It shows very large and small firms are relatively technically inefficient compared medium sized firms. And technical efficiency explained exports positively. These results support our main hypotheses. Firm-level allocative efficiency is optimum combination of inputs (labour and capital) given the input prices (wages and capital costs). We argued that India’s factor markets were fragmented: large firms pay lower price to capital and higher price labour in comparison small and medium firms. This, in turn, made large firms deviate from India’s comparative advantage in labour intensity. On the other hand, small and medium scale firms realized allocative efficiency in accordance with India’s comparative advantage.

Review of Literature

The chapter reviews fundamental theoretical contributions explaining determinants of international trade starting from comparative advantage, neo-technology theories, intra-industry trade, strategic trade policies and ‘New’ New Trade Theory. For developing economies, the Heckscher-Ohlin (H&O) Theory of Comparative Advantage in labour abundance is relevant. However, as countries start growing economically, neo-technology and intra-industry factors become relevant. The book traces the transition of international trade behaviour starting the Pre-reform era of import substitution to the Post-reform era of opening to international trade and investment. The conceptual discussion provides basic underlying theories in understanding international trade and investment behaviour of firms. It shows under what conditions international trade and investment are beneficial to a country. The discussion of the theories helps in formulating hypotheses for empirical testing in the following chapters.

Introduction to Part 1

International trade and investment across countries, both developed and developing economies, are a major source of economic growth by improving allocative efficiency of resources and rapid flow of advanced technologies. Several developing and socialist economies that pursued inward orientation since the last forty years started to open up their economies for international trade and investment. Countries that had initial endowment of industrial, technological endowments, and basic institutions have able to take advantage of this phenomenon. India fits this bill. It acquired basic industrial, technological, and capitalist institutions. The reforms operate on the basis of these endowments. The objective of the book is to trace out the underlying theoretical and empirical factors that demonstrate the effect of the reforms It explains the reason for dividing the book into two part: (1) International Trade Behaviour: the Pre-reform Era and (2) International Trade and Investment Behaviour: The Post-reform era.