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The Rediff Interview/Michael Porter, head, Strategy Insititute, Harvard
'India still has a long way to go'
Manjari Raman |
December 29, 2004
Harvard Business School's Michael Porter is said to be the world's greatest authority on strategy and global competitiveness.
The overwhelming message from Porter is that it is still too early for India to think it has been successful -- or even partially successful. And there's a worry that India's globalisation story may be aborted by short-sightedness in policy or blindsided by misguided ambition.
Were Indian companies more likely to succeed at globalisation if government helped them -- or were they better off without policy support? Why were relatively-new industries like IT services and pharmaceuticals spawning the first Indian multinationals while long-time leaders like textiles and apparel floundering in dim obscurity?
Why did the US, Japan and the Netherlands display a higher propensity to nurture global corporations than other nations did?
What Porter says can be summed up in two words: tough love. Not only did he spare time from a hectic schedule to comment on India's competitive global standing, he took pains to be honest in his feedback.
As a frequent visitor to India and as head of the Institute for Strategy and Competitiveness at Harvard, Porter has a clear understanding of India's potential as well as Indian companies' latent aspirations for global growth.
At the same time, as the architect of the Business Competitiveness Index in the World Economic Forum's annual Global Competitiveness Report, he knows how far Indian companies have to go before they can rightfully claim their place in the League of Multinationals. He also knows, first hand, how hard it is to make Indian CEOs realise that a critique is not the same as criticism.
"India has a tremendous tendency for overstatement," says Porter, adding wryly: "I've made many presentations over the years in India. One thing I've noticed is that Indians don't take criticism well. They get very offended."
To compete in an aggressive global environment, Indian companies must not only learn to invite criticism, but also find ways to use it to strengthen strategy and twist into competitive advantage. In a no-punches-pulled interview, Porter reiterates the purity of his purpose while "critically" evaluating Indian's global competitiveness.
"I want to make sure (my opinions) come across as sympathetic and respectful. I have a deep affection for India," Porter says repeatedly in an interview with Manjari Raman.
Just as the interview is ending, he says it once more -- with feeling. "Indians come to the US and they thrive! They build great companies, they're global. Isn't that a wonderful metaphor for what we are talking about?" Indeed, it is.
Excerpts from an exclusive interview:
The Top 100 listings of global companies or global brands never had any Indian companies whereas companies from a few countries, like the US, the UK, Japan, Italy, France, and the Netherlands, tended to dominate the lists. Why do some countries spawn more global companies than others? Surely that has implications for India?
You're absolutely right! The ability of Indian companies to prosper and be competitive internationally has a lot to do with the home base, and whether India offers an attractive business environment. What we've learnt over and over again is that if companies don't have to compete at home and don't have a vibrant, dynamic environment at home, it's very, very hard for them to compete internationally.
What must be done so that Indian companies make it to the Top 100 global lists?
A good place to start is to think about the nature of the business environment in India and where India stands internationally. Certainly, India is on the right track and is improving its economic performance.
The growth in GDP per capita has been quite good. The growth in productivity is still low, but there is some evidence that it has picked up a bit. Although I did say in my presentation at Mumbai earlier this year that there seems to be a slight deceleration, it is not yet clear what we should make of that.
India's exports are growing, but that growth is dominated by growth in service exports and in particular IT-related services. India is doing quite well in IT-enabled services, but to a considerable extent, that's it!
It's a one-trick pony. India is getting tremendous international profile from IT service exports, but they aren't indicative of the broader economy. If you look at the India's export portfolio, the export clusters that are growing rapidly are jewelry and precious metals, textiles/apparel, fishing, construction, metal manufacturing and agriculture.
Interesting that you don't mention pharmaceuticals and automotive components where Indian companies are trying to be more global.
Pharmaceuticals are very small, and according to our data, the sector is growing at a slower rate than India's average growth rate of exports of goods. In automotive components, we do see India showing up on the list; in automotive products, India has a 0.15 per cent share of world exports, and it has not grown its share.
Components are one area that has been doing a little bit better, according to our data. India has a 0.3 per cent world export share in automotive parts and it has grown slightly. But automotive components exports from India in 2002 amounted to just $460 million.
Are you saying there is need to be cautious because the gains India has made so far are small compared to the global competitiveness of other countries?
India has a tremendous tendency for overstatement. I've made many presentations over the years in India. I've noticed that Indians don't take criticism well. They get very offended. Everybody feels they have to overstate the positives and understate the negatives.
I once gave a presentation to a group of senior managers attending the Advanced Management Program at Harvard Business School, and the Indian managers in the class were enraged although I made a very balanced presentation.
One point that ought to emerge from this interview is that India needs to learn to be more self-critical, more open, and much more honest about what needs to be done.
Isn't sensitivity to criticism a defense mechanism? One of the critical problems that companies in developing economies face when internationalising is quite simply, confidence. But your point is that by being self-critical, Indian businesses can go global faster than if they were defensive.
It's over defensive. In terms of the business environment, IT service exports are growing, but India's service exports, in general, are not growing that fast. Exports of goods are growing, but, again, not that fast, and the big areas in goods exports are still traditional clusters like textiles. There is certainly movement in the right direction, but the magnitude of that improvement is still tiny. In terms of assessing where India really is, we have to understand that there's a long way to go.
Where does a country's globalisation story begin? Does good government policy, which creates internationally competitive clusters which yield global companies, come first? Or do companies identify global competitive advantages, and need to be supported by sound government policy?
Theory would say that to build a competitive economy, first, you need to have sound overall contextual conditions, such as macroeconomic policy, a sound legal system, etc. Those are cross-context factors, and include macro, legal, social, and political factors. They need to be sound, stable, and trusted for an economy to be competitive. But in of themselves, those are not enough.
In order to have a competitive economy, you also have to have competitive firms. To have competitive firm, you need to have an efficient and appropriate business environment, which creates the right inputs, the right incentives, and the right competitive pressure to allow firms to improve their productivity.
Governments shouldn't work with individual firms--that's almost always a mistake. Government should work, first, to enhance and improve the overall business environment--the cross-cutting business environment that affects many clusters. Then, government ought to work with established or emerging clusters to remove the obstacles and constraints that prevent those clusters from becoming more dynamic.
If government does those two things, we find that exports and outward foreign direct investment follow. But it's inappropriate and inefficient for government to engage with individual companies.
Moreover, when it is engaging in cluster development, the government's role is really to support the efforts of all existing and emerging clusters to upgrade productivity rather than to make choices about which clusters need specific support. There has long been a tendency in India of distorted support through subsidies. The mentality needs to shift from "we need to support some clusters" to "we need to create a policy framework that allows all clusters to flourish."
Does that imply that government should give up traditional clusters in favor of emerging clusters that fit in better with the needs of the global economy at that point in time?
It would be a big mistake to ignore traditional clusters because they are a major asset. What needs to be done is to upgrade those clusters. In textiles and apparel, for example, government must ask: how can India move to the next level of technology? How can the quality levels improve? What are the constraints--does India need standards? What are the things that will allow Indian clusters to rise to a higher level?
I strongly believe that no nation should ever abandon any cluster. Indeed, the most important cluster that needs attention in India is agriculture because it's dominant in employment. If India could make its agriculture more productive, it could not only raise the standard of living, but it can also free up people who then can migrate into more productive uses in the rest of the economy.
Basically, while there are new clusters and emerging clusters, like bio-pharmaceuticals, there are also traditional clusters--and government should pay equally vigorous attention to all of them.
Let us consider the links between country, clusters, and companies. Why do you think it is important to have globally competitive companies in a country?
The way we define competitiveness is, companies that can be productive and meet the test of international competition. A company has to be globally competitive, or it's simply going to die. From a company's point of view, competitiveness is a matter of survival. Having competitive companies is the way a country supports a high and rising standard of living because those companies can afford to pay high and rising wages. They create new jobs. And by the way, India has a crisis of jobs in the formal economy.
When we think about cluster development, we can't think national; we have to think regional. The locus of economic development, particularly in a country of the scale and size of India, needs to be driven down to the state level, and within the state, down to the metropolitan and urban areas. The fact that some states are fairly advanced and organised in terms of that kind of thinking is one reason that India as a nation is successful.
It's not that India is successful; certain regions have been particularly successful, and those regions are driving the whole country. I don't see any systematic policy framework that works collaboratively between central and state governments to upgrade clusters on a national scale.
In the last two years, you have done competitiveness reports on Brazil, Russia, China, and India. Do those emerging nations display any common trends?
Emerging economies are becoming more significant players in the global economy. We are seeing increasing outbound foreign investment from the emerging economies, and India is an example of that. Foreign investment out of India is up to roughly $1 billion a year, and that's a meaningful amount of external investment by Indians. That would be one trend.
Secondly, the global economy has been shifting a little from the traditional West to the emerging economies in terms of sheer weight.
How does India compare?
There's quite an interesting story about India. Although the Indian business environment is improving in multiple respects, it has some fundamental weaknesses. Number one, the capital markets remain relatively weak and undeveloped. Number two, the physical infrastructure is abysmally ranked.
Indian firms face a really compelling logistical disadvantage over companies in China in terms of getting goods and services to market. But the most pernicious problems in India--which are still not being confronted head-on - are the pervasive barriers to competition.
A lot of Indian companies are investing abroad partly to, if you will, escape weaknesses in the domestic business environment, and to build assets and skills that are slow to develop at home. It's interesting that the most successful Indian clusters are ones where the government didn't really have any (contribution).
A fundamental shift is still required in the nature of the business-government relationship. That is still very much a work in progress.
Traditional belief is linked to getting to global scale in domestic markets and then going global -- but the Indian IT industry has hardly any home base and is focused on exports. What happened to building scale locally in that case?
That works where the local market is very open and competitive. India's been frozen.
So, Indian IT companies have bypassed the domestic market and preferred to seek opportunities in the global market because it is open and competitive?
Exactly. Bollywood's case would be the opposite. There is a lot of domestic demand and competition, and that's now internationalised too. Those are two very interesting symbolic cases, both of which weren't affected much by government policy, but have internationalised for different reasons.
India would have the opportunity to see more of the natural pattern if it could free up internal competition. But, right now, that natural growth has been stunted by the policy legacy.
Do you find that when there is a large domestic market, like in India, companies virtually have a disincentive to globalise?
In general, that's absolutely true, and it's certainly true for India. Firms can be fat, dumb, and happy at home. I remember cases like bicycles, where because the market was protected and sheltered, products were abysmal. The consumer had no clout and no choice.
Basically, India ended up with a frozen situation, where it had companies happy to make very good profits operating at home. But if India opens up its domestic market and has a lot of competition in the domestic market--as in the United States--then it will begin a more positive cycle.
Companies will get to ramp up and build some capability in the domestic market, and competition will drive them to start looking abroad. That dynamic could happen in India if the fundamental characteristics of the business environment are systematically addressed.
The other consequence of a large domestic market--which affects both India and China--is, what little foreign investment comes into India is not because India is a great business platform; it's there because of the consumers.
China has taken better advantage of that than India has because China is in many ways more open, more dynamic. We've seen many more companies come into China because that's such a dynamic place. The business environment is a bit more efficient, which is why multinationals use China as an export platform. But we don't see that much in India. The multinationals are there primarily just to do business in India and sell to the Indian market.
Another really big challenge for India, if she is going to develop the more advanced clusters, is the issue of intellectual property (IP) protection. Until India can be really credible on that, I think the growth of biotech will be limited.
In a way, globalisation is a great spur for Indian companies to address the IP issue. More Indian companies in emerging clusters are beginning to recognise the value of innovation, and how leveraging IP can increase returns by an order of magnitude.
All the metrics on innovative activity in India used to be horrendously low. In the last five years, we've seen a real pick up in innovative activity. The acid test is US patenting, and that supports your point.
Indian companies are starting to see that IP is valuable, and that protecting it is valuable. That gives them a lever with which to be competitive in the international market. It's crucial for that momentum to build, so that government policy can be improved in that area. What government should try to do is create a business environment that supports higher levels of productivity and innovation, and encourages company strategies based on productivity and innovation.
In the past, India's business environment was very inefficient and unproductive. The mentality of most companies was, "let's stay home, let's copy or imitate, and let's compete on price.' That didn't lead to many competitive companies. That explains your first question (on why more Indian companies don't show up in the top global lists).
Hopefully, there will be continued progress on the business environment and a continued mindset shift and a reallocation of competitive strategy among Indian companies. That combine will yield more clusters like Bollywood and IT services.
What are the common mistakes of emerging globalisers that you would caution Indian companies about?
Indian companies are starting to internationalise more, and have more international strategies. In some sectors, that is proceeding in a healthy way. In IT services, for example, companies understand that they have to move upscale and offer more advanced services. Some of their foreign investment is in getting closer to the customer, so that they can be more involved--not just in back-office business, but also in design.
Ideally, Indian companies should use international investment to upgrade their strategy over time. The big risk is that they will go and make a lot of acquisitions to be big and to claim that they have a global position without having any strategic clarity or focus about how they are going to be different from all the other companies in the global market.
Some Indian companies that are investing abroad are doing so with a really strategic focus. Others are just buying companies, so that they can say they are global.
Chinese outbound foreign investment is about five times as big as India's outbound foreign investment. Even though it's an important trend that more Indian companies are internationalising, in absolute terms, it's still relatively small.
You appear to be concerned that Indian business might harm their cause by celebrating their global success too soon.
India shouldn't want to overstate. People tend to look at current trends, and say, 'wow, isn't it a big deal?' Well, it's only a billion dollars a year; it's a trickle in terms of FDI. Indian companies are going to have to step up to a much higher level of internationalisation.
I also think Indian companies are bypassing some of their natural markets in internationalising. A lot of Indian companies should be starting with the region and then moving to Europe and North America.
For prestige and ego, perhaps, we are seeing too much of a focus on the advanced economies rather than on the gigantic opportunity in the region and Asia.
Imagine the year 2025. Are Indian companies on Top 100 global lists--or do US, European, and Japanese companies continue to dominate them?
It's up to India collectively, to determine the answer to that question. We should see Indian companies on those lists, as we see Samsung and Sony on them now. Thirty or forty years ago, they didn't exist, they weren't on lists, they weren't important.
There's every reason why Indian companies could become part of the global 100 or 200 or 500--but that is going to require change. Although the trends are positive, the magnitude of the changes that have taken place in the business environment and company strategy are still modest.
India is a complex democracy, with a complex governance process with a cumbersome, slow, and torturous reform trajectory. It remains to be seen whether India can sustain a rapid enough rate of progress, so that we see a South Korea or Japan kind of situation 30 or 40 years from now.
Going back to my earlier observation, the question is: can India be self-critical? Can Indian companies be self-critical? Can they overcome traditional mindsets and policy failures which held the country back for the last 40 years?
Only Indians can answer that question.