From Bombay to Boston
The Wall Street Journal Asia — June 19, 2006

The Indian flag now flies outside the iconic Pierre Hotel on Fifth Avenue after the Taj Group took over management of the hotel in 2005. In Britain, the morning cuppa is likely to be of an Indian-owned tea brand since Tata Tea acquired Tetley in 2000, and Apeejay Surrenda bought out Premier Foods last year.

Indian businesses are suddenly visible in international markets, and not just selling software services or other exports. They're also investing and acquiring businesses. In 2005, Indian companies made 103 cross-border acquisitions, totaling $2.9 billion. These numbers are small by international standards, and the average deal size at $28 million is low. But the fact that Indian companies are making overseas investments at all has caught the attention of the business world. The numbers of deals has tripled over the past three years, and most observers expect it to continue to increase rapidly.

Cross border M&A is only part of the growth strategies of these businesses. Exports from India and greenfield investment have so far been much more significant growth drivers. India's exports have grown at double-digit rates in recent years despite the constraints of poor infrastructure, with particular success in software, pharmaceuticals, engineered goods, and gems and jewelry.

Indian businesses are now gaining the size and confidence to be announcing plans for major greenfield investments in overseas markets. Most eye catching is the Tata Group's proposal to invest $3 billion in four projects in Bangladesh, far more than the total foreign direct investment in the country to date. The projects, for which I am the chief negotiator on the Tata side, would add 1.9% to Bangladesh's gross national product and move its current-account balance of payments into surplus, according to an independent assessment by the Economist Intelligence Unit.

Through exports and outward investment, we are witnessing the creation of a group of new multinational companies owned and operated from India. In the next few years, more of these businesses will join the two Indian companies that have already made it into the Fortune 500 rankings, and some will begin to emerge as global leaders. These emerging Indian multinationals are mostly clustered in the IT, pharmaceuticals, automotive and metals sectors. They include companies such as TCS, Infosys, Wipro, Tata Motors and Tata Steel.

These firms have one common theme: the application of high-quality but low-cost human resources -- especially in technical and managerial talent. This typically costs only 25 to 50% as much as hiring similar talent in the West. The availability of skilled but cost-effective people underpins the 25% compound growth of the Indian IT industry. Similarly, low drug development costs drive the competitiveness of the generic drug industry based in India.

Until 1991, India was largely a closed economy with high tariffs and strict controls on foreign investment. Indian businesses were plagued by a "license raj," with a government permit needed before a company could engage in any kind of industrial activities. This changed with the economic reforms initiated in 1991 which boosted domestic competition by slashing tariff barriers and opening the Indian economy to foreign investment.

During the 1990s, Indian industry went through major restructuring to reduce costs, improve quality and face new foreign competition. The domestic market grew, enabling Indian industry to scale accordingly. At the same time, technology and policy changes, especially in liberalizing the telecom market, enabled the growth of new knowledge-based businesses which played to India's strength -- human capital.

India is often compared unfavorably to China on the pace and bite of its reform program. While Chinese reforms started with the agricultural sector, in India the 72% of its population that remains in the countryside has only partially benefited from reforms so far. Chinese authorities also focused on developing superb infrastructure, attracting FDI in manufacturing and encouraging exports. In India, by contrast, progress on this front has been much more tentative. Infrastructure remains inadequate, adding costs to industry and limiting exports. And attitudes toward foreign investment are often still ambivalent, due to strong domestic vested interests and hangovers from the socialist policies pursued in the past.

Yet India enjoys some real advantages over China in the soft infrastructure that underpins a successful market economy. While many aspects of India's policies from the 1950s to 1980s can be criticized the government did have the foresight to create the world-class Indian Institutes of Technology and Management, and institutes of higher-education. Today, these institutes provide the technical and managerial talent that fuels the country's economic growth. Even in the dark moments of the Nehruvian ice age of state planning, India retained a vibrant private sector economy with good, professional management. And the institutions that support private sector success were in place: creditworthy banks, functioning capital markets, professional firms offering auditing, legal advice, market research or advertising. All this is still under construction in China.

As a consequence, India's private sector has reacted to the challenges and opportunities of liberalization with staggering speed and success. Excellent, competitive Indian firms with low-cost positions are now in a strong position to seize the opportunities presented by an increasingly interconnected world.

Looking forward this trend can only speed up. Indian companies will grow bigger overseas and will gain the confidence to make bolder investments and bigger acquisitions. Indian knowledge-based businesses will capture a higher share of services business overseas, and deliver to customers both from India and internationally. Indian industrial businesses will invest in more ambitious greenfield projects in large emerging markets, and will buy larger companies in the developed world and apply India's lower cost advantages to improve competitiveness.

Today, the largest steel company in the world is run by an Indian citizen who chose to relocate to the West. And in the future, it's realistic to expect that just as many leading world businesses will be headquartered in Bombay and Bangalore, as in Beijing, Boston or Birmingham.

Mr. Rosling is an executive director of Tata Sons Ltd., the holding company of the Tata Group. He is responsible for the Tata Group's drive to internationalize.

Reprinted from The Wall Street Journal Asia © 2006 Dow Jones & Company, Inc. All rights reserved.