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BW Businessworld

Measuring Global Footprint

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In recent years, MNCs from emerging economies such as India, Brazil, and China have risen dramatically to attract global attention. Within the context of the debate around Asia's — and by extension India's— emergence as a regional leader, the Indian School of Business, Hyderabad (ISB) and Fundacao Dom Cabrall(FDC), a leading business school in Brazil, recently conducted a joint survey on Indian Transnational Companies. Transnational Companies (TNCs) — any corporation that is registered and operates in more than one country at a time — account for over a quarter of the world's GDP in 2010

This the first time a systematic ranking is being attempted in India using a globally accepted, multi-dimensional measure of internationalisation: the Transnational Index(TNI). The Transnationality Index combines three measures: Percentage of International Assets to Total Assets, Percentage of International Revenues to Total Revenues and Percentage of Overseas Employees to Total Employees, to determine the overall degree of internationalisation of companies.

The study offers valuable insights on the performance of Indian companies in recent years as well as their growing international presence by comparing Indian transnational companies to their global counterparts, analysing the factors that helped then achieve a higher degree of internationalisation and identify the industries which have higher degree of internationalisation compared to others. The research team comprises Prof. Raveendra Chittoor, a researcher on the internationalisation strategies of emerging economy who teaches a competitive strategy as well as a strategy implementation course in ISB, and Arun Chandra Patro, a research associate at ISB.

Source: TNI Report, ISB

Acording to the TNI report, in India, it is not possible to calculate the Transnationality Index and rank companies based on secondary data alone, as some of the measures are not publicly disclosed by firms. For example, the number of international employees or foreign assets cannot be obtained from public sources for all firms. Hence, the study incorporates a mix of primary and secondary research, to arrive at with the rankings. The ranking methodology is based on the framework (Transnationality Index) developed by the United Nations Conference on Trade and Development (UNCTAD).  Of the Top 100 firms ranked by their consolidated international assets collected from secondary data, the top 50 companies were asked to answer a questionnaire with information regarding their international activities. 33 companies responded to the questionnaire. The internationalisation measures were collected for the three financial years 2008-09, 2009-10 and 2010-11. The data collected through primary research was validated again using available secondary data and a composite TNI ranking was created.

A look at the result reveals that the top five companies have a TNI greater than 50 per cent which is comparable to transnational corporations from the developed countries. More than half of the top 15 TNCs are affiliated to business groups, a phenomenon unique to emerging economies, with companies from the Tata group dominating the list. A key driver behind the Tata group companies dominating this list could be Mr Ratan Tata's (Chairman of the Tata group) vision for the group companies to be global. Suzlon Energy and Bharti Airtel are some of the youngest companies in the list and have internationalised rapidly.

Source: TNI Report, ISB

Growing Inorganically
The study finds that, for expansion into developed countries, most Indian companies seem to prefer the M&A route. Companies affiliated to Business Groups — primarily Tata, Aditya Birla, Reliance, Mahindra and Mahindra and Godrej — account for more than 60 per cent of overseas acquisitions by value. Among other private players, Bharti Airtel and Suzlon Energy have donewell. Oil & Natural Gas Corporation which operates outside India through its overseas investment arm — ONGC Videsh is the primary public sector company among the major Indian transnationals.

The year 2008 witnessed more than 150 majority acquisitions as compared to 38 minority acquisitions. An industry wise break up of acquisitions yields that minority acquisitions dominate in industries such as the banking and financial services (BFS) and coal & power, whereas companies in industries such as FMCG and Telecom seem to prefer majority acquisitions.

Source: TNI Report, ISB

However, most firms have shown a reduction in TNI since 2008-09, as they seem to be consolidating their overseas investments and focusing more on the domestic markets for growth. Bharti Airtel, through its recent international acquisition of Zain (South Africa) has the fastest rate of growth in internationalisation over the last three years.

The survey has also generate a list for top 20 companies on the basis of the value of the international assets and top 20 companies ranked on the basis of the value of overseas revenues. Tata Steel tops in the former category while Reliance Industries ranks number one in the latter.

Source: TNI Report, ISB

Home And The World
The study documents that India's Outward Foreign Direct Investments (OFDI) grew from $ 1.0 billion in 2001-02 to $18.5 billion in 2007-08 at a compounded annual growth rate of over 60 per cent. The global economic crisis however slowed down the rapid internationalisation of Indian companies between 2008 and 2010. The crisis had its strongest effect in the financial year2 (FY) 2009-10, reducing OFDI by 26% as compared to 2008-09. With the economy recovering in FY2010-11, Indian companies resumed their process of internationalization and OFDI increased by 23 per cent over FY2009-10.

The Top 50 Indian TNCs were also affected by the economic downturn. While the total foreign revenues for the Top 50 companies remained unaffected in FY2009-10, their international assets reduced by 4 per cent  and the number of foreign employees4 by about 2per cent as compared to FY2008-09. FY2010-2011 saw a sharp rebound, as foreign assets (of the Top 50) grew by 29 per cent, international employees by 15 per cent and revenues by 25 per cent. This rebound may prove unsustainable considering the current economy. The total OFDI outflow in FY2011-2012 as on February 22, 2012 is estimated to be only $ 8.8 billion.

ISB is now collaborating with FDC, which has been leading a similar effort in Brazil over the last few years, to compare and contrast transnational companies from India and Brazil.