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Wednesday, December 29, 2004

Michael Porter :"India still has a long way to go"

(Via Mohan Srinivasan) Michael Porter says,it is way too early for India to think it had been successful — or even partially successful!!. We had recently covered in this blog India's lack of competitiveness and the gap that India needs to bridge to be competitive. Manjari Raman interviews Michael Porter for Business Standard and writes,Porter signalled that it was way too early for India to think it had been successful — or even partially successful. Concerned that India’s globalisation story might be aborted by short-sightedness in policy or blind-sided by misguided ambition, Porter prescribes a healthy dose of self-criticism. 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, and “ 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. Excerpts with edits and comments added:

On Indian Companies Not Being in Top 100 International Business : 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. 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 to be in 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. 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. The export clusters that are growing rapidly are jewelry and precious metals, textiles/apparel, fishing, construction, metal manufacturing and agriculture. Pharmaceuticals are very small, and as per dataa, the sector is growing at a slower rate than India's average growth rate of exports of goods. In automotive components, India shows 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. 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.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.
On How to globalize faster & better and Government’s role :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. 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."

On links between country, clusters, and companies and global competitiveness & country: competitiveness is defined as, 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.

On Trends in competitiveness of Brazil, Russia, India ,China economies and on Indian competitiveness: 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.Although the Indian business environment is improving in multiple respects, it has some fundamental weaknesses. A. the capital markets remain relatively weak and undeveloped. B. 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.
On why globalize , when there is a large domestic market : 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. Can't say anything more and better than this!!

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