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Globalization and Indian Industry
|by Bhushan Parulekar|
Globalization has been one of the most hotly debated topics in international economics over the past few years.
There are three familiar responses to globalization. First, that its novelty is grossly exaggerated. Globalization, the argument runs, has been around for a long time. The current phase is merely an intensification of a well-entrenched process, the basic features of which are much the same as before.
The second response is that globalization is not only novel but also extensive, touching everything, transforming everything within its reach. Therefore, it must be treated as the central organizing category of contemporary discourse. When evaluated, this response branches into two further sub-responses: either globalization (over-optimistically) is a universal remedy for all the problems of the world, or (over-pessimistically) it is the cause of all its maladies. The concern is that it has increased inequality and environmental degradation. However, the meaning of globalization is growing integration of economies and societies around the world, Poor and third word countries consider globalization as economical and cultural colonization and to some extent greed of developed nations is responsible to this.
The third response is an intermediate one, which sees globalization as introducing new structures without altogether displacing older patterns. From this point of view, globalization is a dynamic, open-ended and contradictory process that generates forces working in different, often opposite directions. Nevertheless, India has achieved a lot from Globalization. Using flows of goods and services, capital, people, and ideas, countries like India and china to grow rapidly with reduction in the poverty.
According to economist John Dunning, Multinational enterprises invest abroad for there reasons. First, they try to capture ownership-specific advantages (O) for instance patent rights, process and other strengths not available to competitors. Then they exploit location advantages (L): examples of this are presence of natural resources, cheap labor or cheap inputs. Lastly, they exploit internalization advantages (I) this is because some assets are better owned or employed by the firm instead of being bought from the market for instance an R & d outfit or a management structure.
From this building block, Dunning developed his theory of investment development path. Each country passes through five stages. The poorest countries that have nothing to draw foreign investment other than L advantage i.e. location of natural resources. As they get wealthier, a domestic market develops; it can be used as the magnet to attract foreign investment from multinational enterprises with O advantage. Eventually domestic firms come forward that can exploit domestic market just as well as foreign firms, and start using O advantage to invest abroad. In the fourth stage, outward investment comes to exceed foreign investment. In the last stage reached by the countries with highest incomes, both inward and outward investments are substantially balanced. Now where does India fit in this?
In the seventies, India was just emerging from the first stage. After 30 years from then, it has crossed second stage and going into the third one. Year 2003 was pivotal as it saw manifestation of India's global aspiration. The number as well as size of the foreign targets showed steep rise. Close to 50 overseas acquisitions, amounting $1.8billion took place last year, which was only $0.21 billion in 2002. The increase in average deal size is from $7.5 million in 2002 to $36.5 million in 2003.
India has adopted domestic policies and institutions that have enabled people to take advantage of global markets and have thus sharply increased the share of trade in their GDP. India has been catching up with the rich ones ' our annual growth rates increased from 1 percent in the 1960s to 5 percent in the 1990s. Now it is above 8%. Indians saw their wages rise, and the number of people in poverty declined.
Industry wise, the software and services sector lead the mergers and acquisitions charge overseas but now this list includes both old and new economy industries like auto ancillaries, pharmaceuticals, telecom, agro-chemicals and steel. There are thus no stereotypes that only new economy companies are invited to the mergers and acquisitions ball or that only the blue chip companies are partaking of the action. It is more democratic as smaller auto ancillary companies are also in the fray.
Thanks to the easier external profile, at this time, India clearly is tasting the fruits of globalization and the current liberal overseas investment regime will take the process forward. However, a far more important use of our reserves is for higher domestic investments. There are no prizes for guessing that it is only with higher investments that there can be faster GDP growth. In next two-three years, India must also work on improving delivery of education and health services. Indian government must provide social protection to a changing labor market. In addition, that the changes in climate due to industrializations will be especially burdensome for developing countries and poor people. There is broad agreement among scientists that human activity is leading to potentially disastrous global warming. India must demand effective international cooperation to address this problem.
I am sure in the next decade we should see our investment outflow increasing and our best companies going multinational.
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