1. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 The Globalization of Firms from India Andrew Delios (NUS) Shawkat Kamal (NUS) Ajai Gaur (ODU) 18 January 2008 NIDA, Bangkok, Thailand

2. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Issues Addressed Overseas expansion of firms from India General Trends Acquisitions in India’s FDI Performance of Acquisitions comparative absolute Future Directions

3. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Overseas expansion of firms from India  Part of a broader context of globalization and India ► Historical roots - restrictive set of interactions internationally ► Foreign entry by licensing and tech transfer ► Limited OFDI  Since onset of 1990s ► Increased participation by foreign firms in specific sectors in India ► Increased OFDI by Indian firms ► OFDI made across sectors and by multiple modes  What strategy is being used by Indian firms as they move abroad?

4. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 FDI from India – Annual Outflows

5. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 OFDI – Regional Distribution

6. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 OFDI – Sectoral Distribution

7. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions  Historically, acquisitions have been uncommon in South, East and Southeast Asia ► Joint ventures – common ► Exporting and importing – common ► Tech transfer - common  Yet, in 2000s, acquisitions being used commonly by firms from India ► and increasingly by firms from China  What is the implication of the use of acquisitions as an internationalization strategy by firms from India? ► Turn to performance implications to understand more about the strategy and outcomes.

8. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 International Acquisitions by Indian Firms 19862006

9. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions - motivations  OFDI can be undertaken for a number of motivations ► Market seeking investments ► Asset seeking investments ► Development of international networks  Each of these strategies in evidence for firms from India ► but these new, emerging multinational firms are playing a game of catch-up ► MNCs from other countries already have an international presence ► Hence, acquisitions emerge as a common strategy to build an international presence quickly

10. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Example – TATA Motors  Can be used to build an international presence  Rapidly  What is the strategic logic  What are the sources of value creation? 2003 -7% 2005 -2% 2008 ??%

11. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Performance of acquisitions  We used an event study methodology ► Sample - Indian companies had cross- border acquisitions during 2002-2006. ► 224 transactions: 127 different companies from 33 industries. ► We used BSE-500 ( represents nearly 93% of the total market capitalization on Bombay Stock Exchange Limited) as the market index for the calculations.  Calculating CAR ► Used the following formula to calculate the abnormal returns - ► The CAR was calculated using the following formula - α ^ β ^ AR it = R it - i - i R mt, (t = -7 to t= +7) CAR i =  t = -7 t = +7 AR it

12. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions by Indian Firms: 2002-2006 ReturnsMean change in valueGainersLosers CAR (-1,0)2.24%14381 CAR (-1,+1)2.80%15470 CAR(-3,+3)2.64%13193 CAR (-7,+7)2.53%121103

13. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Comparative Performance: HK and Singapore Acquirer Country Range of gains* Average gain* Average gain % Negative gains Positive gains Hong Kong -1,691 to 290 -70.54-1.36%4019 Singapore -3,417 to 169 -100.34-0.36%1923 * Values in million US$

14. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 ReturnsMean change in valueGainersLosers CAR (-1,+3)-0.03661631 CAR (-1,+2)-0.01771928 CAR(-1,+1)-0.01351730 CAR (0,+1)-0.00832225 CAR (0,+2)-0.01252027 CAR (0,+3)-0.03132027 CAR (-2,+1)-0.02281829 CAR (-2,+2)-0.02701730 CAR (-2,+3)-0.04581730 Comparative Performance: China

15. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions by sector Returns Average Change in Value ServiceManufacturingExtracting CAR (-1,0) 3.01%1.66%1.22% CAR (-1,+1) 3.42%2.37%1.41% CAR(-3,+3) 3.31%2.06%2.90% CAR (-7,+7) 2.43%2.67%1.78% Number 9911708 t-tests indicated difference in mean CAR to be significant (at 95% confidence interval) only between manufacturing and service and only in the case of CAR (-1,0). The other cases were not significant, even at 90% confidence interval.

16. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions by relatedness Returns Average Change in Value Same IndustryRelated IndustryNew Industry CAR (-1,0) 1.96%3.10%2.09% CAR (-1,+1) 2.45%3.10%3.51% CAR(-3,+3) 2.34%3.27%2.82% CAR (-7,+7) 2.64%2.06%2.77% Number 1315043 t-tests indicated difference in mean CAR was not significant (at 90% confidence interval) in all possible mean comparisons between the categories.

17. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Acquisitions by region Returns Average Change in Value Developed countryDeveloping country CAR (-1,0) 2.56%1.16% CAR (-1,+1) 3.14%1.64% CAR(-3,+3) 3.07%1.19% CAR (-7,+7) 2.85%1.45% Number 17351 t-tests indicated difference in mean CAR to be significant (at 90% confidence interval) in the case of CAR (-1,0) and CAR (-1.+1).

18. RECHARGE l REFLECT l REPOSITION Copyright NUS Business School 2008 Summary  Acquisitions a prominent part of OFDI from India ► Good distribution across industries and regions ► Achieving an increased prominence, strong growth ► Important component to OFDI and strategy of MNCS from India  Strategy and performance ► Performance strong on an absolute and a comparative basis ► Several market expansion motives related to good performance ► Market clearly rewarding international expansion strategy of Indian firms ►Need comparative analysis to other modes ►Need deeper analysis of strategy and performance of acquisitions