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Market Integration
India in the World Economy: Role of Business Restructuring

Raj Aggarwal
Review of Market Integration 2010 2: 181
DOI: 10.1177/097492921000200302
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India in the World Economy:
Role of Business Restructuring
Raj Aggarwal
As the size and importance of its economy increases, India is becoming more
integrated with the world economy. The process of deregulation and the eco-
nomic reforms started in the early 1990s seem irreversible and continue to
accelerate. In recent decades, transactions costs in India have been declining,
especially as India deregulates its business environment. Consequently, Indian
businesses are moving away from being widely diversified and vertically
integrated business groups and are becoming focused, efficient, and often
larger firms. In addition to the resulting corporate restructuring and increased
domestic M&A, many Indian firms are investing overseas and becoming
nascent multinationals. These changes mean that the global integration of the
Indian economy will continue to increase.
Keywords: India, world economy, M&A, Indian economy,

restructuring, BRIC India, finance
1. Introduction
The Indian economy has been on a deregulatory path since at
least the early 1990s and the process of economic deregulation
Acknowledgements: The author is grateful to T. Agmon, R. Dossani, D. Haake,

M. Serapio, S. Sjögren, and his colleagues for useful comments on earlier versions,
but remains solely responsible for the contents.
Review of Market Integration, Vol 2(2&3) (2010): 181–228
SAGE Publications: Los Angeles • London • New Delhi • Singapore • Washington DC
DOI: 10.1177/097492921000200302
182 RAJ AGGARWAL
and external opening seems to be accelerating. These changes

are forcing Indian business to become domestically and globally
competitive and it is forcing major changes in corporate struc-tures
and management cultures.
A number of trends and forces are accelerating this process. First,
India is increasing investments in communication and physical
infrastructure. Rapid implementation of internet-based technolo-
gies is occurring in India, allowing its organisations to connect effi-
ciently to each other and to the world. Second, deregulation and
global opening of the Indian economy are now firmly established
and unlikely to reverse (though its speed may vary) regardless of
the type of government in power. In addition, the levels of literacy
and education are rising rapidly in India. All of these changes speed
up business processes, eliminate many impacts of distance, make
prices more transparent, and generally reduce search and other dead-
weight costs of business transactions. Third, technology and super-
ior management know-how are spreading from a few pioneering
companies that are becoming globally competitive to the wider
Indian business environment.
Not only are each of these forces individually very powerful,
but they are mutually reinforcing, so the overall effect is now be-
coming transformational and exponential. As deregulation and
global opening of the economy forces many Indian companies to
become more efficient and globally competitive, they will inevitably
turn for assistance to new internet-based technologies and India’s
increasingly better-educated workforce. With technology, Indian
firms can not only better serve domestic markets but also start to
exploit foreign markets. Indeed, technology enables globalisation
and globalisation makes technology more profitable (Aggarwal
1999). In this process, the first few successful Indian companies
will serve as centres of excellence, as role models, and as sources
of management know-how for other Indian firms. This spread of
management know-how and technology is greatly aided by the
gradually increasing pace of economic deregulation in India. As the
use of technology spreads to second- and third-tier firms, it will fuel
further demand for technology and improve the efficiency of ever-
larger proportions of the Indian economy. These developments in
REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

India in the World Economy 183
the institutional and technological environment of business are

likely to provide an important boost to India’s long-run economic
growth rate.1
However, these mutually reinforcing positive developments also
mean a number of associated changes in the business environment
that are likely to be very disruptive. Most large Indian firms will
need to restructure and will be forced to become more efficient
and focused (not necessarily smaller) firms by redefining their
core competencies. Redefining and focusing on core competencies
is often a difficult and slow process. As some firms become more
efficient, they are likely to drive out firms that are slow to change or
that remain inefficient. However, corporate bankruptcies, especially
large ones, always have a tendency to get messy, frequently with
political fallouts. Many firms are also expanding globally with ris-
ing numbers and levels of cross-border mergers and acquisitions.
These globally competitive Indian firms will bring newly acquired
foreign technology and management expertise into their domestic
operations, thus putting further pressure on other domestic Indian
firms to remain competitive. Indian businesses certainly face a
period of accelerated change, but may also exploit many novel
opportunities.
This article briefly reviews the bases of recent Indian economic
growth in the next section with special emphasis on the deregu-
lation of the business and financial sectors in India. The role of
technology and its relation to declining transactions costs in India
is also analysed in this section along with the development of the
implications of declining transactions costs for business strategy
and structure. The third section covers developments related more
directly to the globalisation of the Indian economy and business.
This includes a brief review of the globalisation of the business
and financial sectors in India followed by a discussion of the rise
of domestic and cross-border mergers and acquisitions in India
and by Indian companies overseas. This section ends with a short
discussion of the nature and economic foundations of the emerging
set of Indian multinational companies. The last section covers some
concluding comments.
This article makes a contribution to our understanding of the
Indian economy by relating the internal process of economic

184 RAJ AGGARWAL
deregulation in India with increasing deployment of technology

and the resulting economic efficiency and how these internal
processes lead to the increasing pace of external mergers and
acquisitions and the globalisation of India business and economy.
In the past these internal and external processes have often been
viewed separately. This article also contributes by extending our
understanding of the nascent phenomenon constituted by the rise
of Indian multinational companies.
2. Growth and Focusing

of Indian Business Firms
India has been an important part of the world economy. After all,
Columbus was looking for a shorter route to the wealthy nation of
India when he accidentally found the native-American inhabitants
of the Americas, who, as a result, received the moniker of ‘Indians’.
As noted by a recent writer:
In the beginning there were two nations. One was a vast,

mighty and magnificent empire, brilliantly organized and
culturally unified, which dominated a massive swath of the
earth. The other was an underdeveloped, semi feudal realm,
riven by religious factionalism and barely able to feed its
illiterate, diseased and stinking masses. The first nation was
India and the second was England. The year was 1577. (Von
Tunzelmann 2007)
While India produced about 25 per cent of the world’s indus-

trial output in 1750, this figure fell to just 2 per cent by 1900
(Clingingsmith and Williamson 2004). As we all now know,
India and China fell behind while the Western countries surged
economically with industrial revolutions and economic growth
during the age of empires. The situation changed again in the latter
half of the twentieth century, following the decline of vast overseas
empires after World War II. The economies of Japan and then
Southeast Asia grew rapidly in the post-War era in the twentieth
century. Now that China and India are growing at even more rapid

rates, many contend that this is perhaps a reorientation of the world

economy so that Asia accounts for about half the global economic
output once again as it did in the eighteenth century.
India has been on a quest to increase its percentage of the
world economy, since the middle of the twentieth century, when
it achieved independence from its uninvited guests and when its
share of world GDP had declined to somewhere between 1 and
2 per cent. Indian economic growth was slow in the beginning and
was driven (or held back depending on your view) by the Fabian
socialists that came to dominate the post-independence Indian
government. Indian real GDP per capita is now rising on average
by approximately 7½ per cent annually, a rate which doubles real
GDP per capita within a decade. This figure contrasts dramatically
to the former annual growth of GDP per capita of just 1¼ per cent
during the three decades from 1950 to 1980. Faster growth has
resulted in India becoming the third-largest economy in the world
(after the United States and China and just ahead of Japan) in 2006
(when measured at purchasing power parities) accounting for
nearly 7 per cent of world GDP (OECD 2007). The modern Indian
economy is indeed quite different from what it was in the middle
of the twentieth century.
2.1 Deregulation and Indian Economic Growth

India today is a large and strategically important democratic
country with a growing service sector and significant industrial
(including nuclear and aerospace) capabilities. At over a billion
people, India has the second-largest population in the world and
is a major military and economic power in Asia. In the last decade,
India’s real economic growth rate has exceeded the growth rates
of most other economies (with the notable exception of China, its
neighbour to the north). Nevertheless, India faces many challenges
in maintaining its high growth rate.
2.1.1 Development Dilemma

While there already are some world-class businesses based in
India (such as Tata Motors, Reliance Industries, etc.), most Indian
businesses have until recently been better at dealing with the Indian

186 RAJ AGGARWAL
bureaucracy than with global competitors. This is now changing

and the deregulation of Indian business means that they now face
increased competition from not only other domestic companies but
also foreign companies. What are the forces driving this process of
deregulation and is it reversible?
India has the largest population and economy in South Asia but
it is surrounded by unstable and often hostile neighbours. In the
north, it has unresolved territorial conflicts with China—conflicts
that led to a humiliating defeat in the 1962 border war with China.
In the West, Pakistan and India, both nuclear powers, have fought
a number of wars and Kashmir remains a divisive issue. In the east,
Myanmar and Bangladesh are both poor and somewhat unstable
states. In the south, Sri Lanka has been unstable for decades with
an on-and-off war against the Tamils in its north. Within India
there are Maoists and other groups that continue to often violently
challenge the authority of the state in selected rural areas. These
external and internal military threats impose a huge burden on
the Indian economy.
India has large numbers of distinct linguistic and ethnic groups;
there is much poverty, and large regional variations in income and
wealth (e.g., Budhwar 2001). The 28 Indian states, many of which
are distinguished by linguistic and ethnic groups, are quite different
from each other, and very independent. As in the United States,
Indian states work in a confederacy with the central government in
New Delhi and New Delhi has little control over intra-state matters.
In spite of these variations, India has a well-established democracy,
and Indian cultural values seem consistent with the requirements
of a democracy. In contrast with other countries at low levels of
economic development, the level of interpersonal trust is high in
India exceeding the level found in many developed societies. India
also ranks with many of the developed countries in measures of
freedom and opportunities for self-expression (Inglehart 2000).
Reflecting these values and unlike most developing countries,
Indian democratic institutions seem robust having withstood
many shocks over the last half century. Thus, it is reasonable to
assume that Indian policies for economic development, including
the process of deregulation, must be consistent with, and can

depend on, a stable democratic political structure (Das 2001).

The 2009 reelection of the current governing party reinforced this
assumption.
However, in some ways in the early years India’s newfound
democracy proved to be a burden. At independence from Britain
in 1947, almost all of the Indian leadership received training
in England by (well-meaning) Fabian socialists. These leaders
were responsible for setting up the state machinery designed
for the bureaucratic control of the Indian economy—leaving this
bureaucratic machinery essentially unchanged until the 1980s. One
of the reasons why the Indian bureaucracy had been so draconian
is that until 1990 it was felt (incorrectly) that such bureaucratic con-
trol was the only way a democracy could keep in check inequitable
wealth distribution and defuse poverty-driven political unrest. A
high population growth rate requires ever increasing resources for
food and shelter, and as the Indian government tries to reduce the
number of people living in poverty, it must attempt to redistribute
some wealth through taxes and regulations. However, as these tax
and regulatory burdens increase, economic growth rates inevitable
drop. So any democratic Indian government faces the same basic
developmental dilemmas; how much economic growth should it
give up for a more even distribution of wealth and income, and
how much of this redistribution should be centrally planned and
how much be left to the markets?
2.1.2 Nature of the Indian Economic Growth

Indian economic success in recent decades (since the 1990s) has
been driven by a number of traditional macroeconomic factors.
Savings rose from 23.4 per cent of GDP in 2000 to 35.4 per cent in
2007. During the same period, investment rose from 24 per cent
of GDP to 36.3 per cent of GDP driving significant increases in
productivity. Though fiscal deficits have been coming down, suc-
cessive reductions have become harder to achieve. It is clear that
the government’s goal of achieving a zero revenue deficit by 2009
will not occur; meanwhile public debt has climbed to over 80 per
cent of GDP. However, external debt is low, with a large share
in long-term debt and so traditional pressures on the exchange
rate because of high external debt are nonexistent. In addition

188 RAJ AGGARWAL
India’s foreign exchange rate reserves in February 2009 were fairly

substantial at almost a quarter trillion (239 billion) US dollars (Jha
2009). The Indian workforce is younger than in most countries,
is getting better nutrition with the agricultural self-sufficiency
(and export ability), is increasingly literate (two-thirds in 2001
and rising), and is now better educated with rising secondary and
collegiate graduation rates.
Services and manufacturing industries dominate the Indian
economy, contributing 55 per cent and 28 per cent respectively
to GDP. While agriculture contributes the remaining 17 per
cent to GDP, 60 per cent of the population depends on it (while
declining in recent years, around 22 per cent of the population is
consequently still below the poverty line). Public-sector ownership
in industry is still extensive in India. In the so-called organised
sector of the economy, the generally underperforming state-owned
enterprises produce 38 per cent of business-sector value added
(OECD 2007).
Many Indian companies in manufacturing industries are pro-
ducing significant quantities of high-quality manufactured goods
for export markets. More interestingly, many global MNCs see
India as a base for developing low-cost manufactured products
for export to not only other developing countries but also the
developed countries. In addition to information technology com-
panies, this is increasingly true of companies in the consumer prod-
uct, automobile, two-wheeler, health care, and pharmaceuticals
industries. India is home to some of the largest R&D centres globally
by companies in these industries, such as General Electric, Ford,
Honda and Philips.2
While the Indian Railways is the largest system in the world and
is widely admired for its efficiency and profitability (the World
Bank seeks it as a partner in other developing countries), India
suffers from poor transportation and utility infrastructure (Lamont
2009; Bintliff 2009). There continue to be great shortages of electrical
power in India but many large businesses have already invested
in decentralised electric generation equipment. Nevertheless, for
the foreseeable future, there will continue to be great demand for
electrical power and for generating sets in India. India is planning
on significant increases in power generation capacity particularly

in green power generation. For example, while as of 2009 nuclear

energy accounted for only 2.7 per cent (4,100 megawatts) of total
power generation capacity of 152,000 megawatts, India is currently
building six nuclear reactors and is seeking bids for the construc-
tion of another six reactors to augment its current complement of
17 nuclear reactors.3 Similarly, as of 2009 even though India only
had about five megawatts of solar power capacity, the Indian State
of Gujrat is planning the world’s largest Solar power complex
of 3,000 megawatts and, according to the Ministry of New and
Renewable industry, subsidies for solar power will be increased as
part of the goal to have 20,000 megawatts of installed solar power in
India by 2020 (Leahy and Sood 2009; Sharma 2009). Similar strides
are planned in the installation of wind power in India (Suzlon, an
Indian wind power company is among the world’s five largest
wind power companies).
In addition, logistics and transportation services will also have
to grow very rapidly because of deregulation. This includes much
higher growth rates in air, rail, and road travel and transport. India
also faces significant challenges in its ability to manage national
water resources especially as its water table is falling rapidly due
to over-pumping. Over half of India’s annual precipitation occurs
in just 15 days of the increasingly unpredictable monsoon season.
In addition, there are wide regional variations and much water is
poorly managed. India needs to trap and store more water, channel
it to where it is most needed, and use it more efficiently. Also, a
large part of India’s food production is now wasted because of poor
transportation and poor distribution infrastructure. While India
has made significant progress in reducing the proportion of people
living in poverty, it has not done as well with improving the lives
of its vast rural population. As one example, there is little progress
in reducing malnutrition among children (who do not vote)—a
problem with serious long-term consequences. While India’s GDP
per capita grew fourfold between 1992 and 2006, malnutrition
among children below age three declined only slightly from
52 per cent to 46 per cent.4
Fortunately, there seem to be many market-driven developments
that are solving some of the problems faced by rural residents

190 RAJ AGGARWAL
in India. These include the use of internet technology to deliver

government services in rural India, the use of cell phones by rural
residents to obtain better prices for their production, and the rise
of rural warehouses run by the national commodity exchanges
that buy farm produce at close to national prices.5 With growing
worker shortages for IT jobs in the big cities, rural India has also
started to benefit from outsourcing jobs involving data entry
and other low-tech portions of the Indian outsourcing boom.6
In addition, the recently implemented public works–based National
Rural Employment Guarantee Act has been credited with the
surprisingly strong rural workforce demand even with the global
recession-related economic slowdown compounded by the poor
2008–09 monsoon rains (Samand 2009).
Regardless, there is little doubt that the middle class in India is
growing rapidly. India has always been one of the largest markets
for gold in the world and the Indian central bank became one of
the top 10 holders of gold reserves with its recent acquisition of
200 tons of gold (about 8 per cent of annual global gold production)
from the IMF. It has been estimated that India now has well over
100 million people living at the same standard as the US middle
class.7 Defined somewhat more liberally, the middle class in India is
now over 400 million and growing rapidly. In addition, as has been
noted elsewhere, the large numbers of poor people in India also
present a very large market for goods and services tailored to their
needs and buying power (Aggarwal 2006; Prahalad 2005). More
importantly, the rapid growth in this class has meant a significant
jump in the demand for consumer goods. As there are considerable
inefficiencies in the distribution and retail of these goods, there is a
great potential in India for large retail chains. Another area, which
is likely to witness great growth, is Banking and Finance, especially
as inadequacies in these fields are holding back much of India’s
development. Finally, Indian manufacturing is now becoming
world class and manufactured exports from India can be expected
to grow sharply in the future. Indeed, Indian exports of automobiles
not only exceed that of exports from China, but they are growing
faster and are directed more towards the developed markets such
as in Western Europe (Business Week 2009).

2.2 Deregulation of the Indian Financial Systems

Globalisation of the Indian economy has been critically facilitated
by its deregulation. India’s deregulation has not only enabled the
growth and expansion of their private sector, enabling it to be a
more effective competitor in the global arena, but it has also lowered
the many barriers to the globalisation of the Indian economy and
financial system.
2.2.1 Indian Banking System Deregulation

Indian banks are tightly regulated and India is considered to be
under-banked (Rosta 2009). While there has been a huge expan-
sion in rural credit availability from traditional money lenders
and microfinance institutions in recent years, India remains an
under-banked country and there are continuing but generally
inadequate efforts to deregulate Indian banking. Banking entry is
generally tightly controlled in India. Banking reform accelerated in
1990 from a position in which state-owned banks controlled 90 per
cent of bank deposits and channelled an extremely high propor-
tion of funds to the government, interest rates were determined
administratively, credit was allocated on the basis of government
policy, and approval from the Reserve Bank of India was required
for individual loans above a certain threshold. However, by 2006,
the share of bank deposits that must be lent to the government
through the mechanism of the Statutory Liquidity Ratio was
reduced to 25 per cent while the proportion of deposits that must
be deposited with the Reserve Bank through the Cash Reserve
Ratio is now 6½ per cent. Competition in the banking system was
also increased by allowing new private banks, including foreign
ones, to enter the market. At present, FDI and foreign portfolio
investment in public sector banks is limited to an aggregate cap
of 20 per cent; for private banks the limit is 74 per cent (but shares
with voting rights are capped) while for insurance companies the
limit is 26 per cent.
2.2.2 Deregulation of the Indian Financial Markets

The introduction of a new regulatory authority for capital markets
in 1992, the Securities and Exchange Board of India (SEBI), was a

192 RAJ AGGARWAL
key step in the reform of capital markets. In 1994, the government

encouraged the creation of the National Stock Exchange (NSE), a
competitor to the Bombay Stock Exchange (BSE). The new exchange
enabled participants from across the country to trade in one
market. The new exchange was one of the first stock exchanges in
the world to have a corporate structure so that it can have private
owners. It now has foreign shareholders (New York Stock Exchange
and various banks) up to the maximum (26 per cent) allowed by
Foreign Direct Investment (FDI) regulations. It rapidly became
the largest market in India and, the third-largest exchange in the
world, measured by the number of transactions. The NSE is also
now the eighth-largest derivative exchange in the world in terms
of trading volume.
In addition, other reforms such as new clearing and settlement
institutions were introduced to reduce trading costs in India. An
integral part of the new architecture was the creation of a centralised
counter-party for transactions. This was established as a subsidiary
of the NSE and resulted in the elimination of counter-party risk in
the market. At the same time, a 1996 law allowed the creation of a
new depository institution for holding all stocks in electronic form
greatly reducing settlement risk. Overall, these reforms created
a national market in shares, eliminating price differences across
the country. Transactions costs have fallen significantly in India
and now are comparable to those in OECD countries, leading to a
marked rise in stock market turnover (OECD 2007).
However, in contrast to equity markets, the government and cor-
porate bond markets are much less developed. The Reserve Bank
dominates the government bond market, which not only regulates
the market, but is also the principle issuer in the primary market.
The corporate bond market is regulated by the SEBI and, for public
issues, is subject to considerable documentation requirements,
resulting in the almost complete absence of traded corporate bonds
and the domination by private placements. The Indian bond market
is dominated by public sector issuers. Overall, total outstanding
corporate bonds amounted to 1.5 per cent of GDP in 2005, with the
total funds borrowed abroad by Indian companies amounting to
almost another 1 per cent of GDP (OECD 2007).

2.2.3 Deregulation of Risk Management

Trading in derivatives on the NSE started in 2000 and the Indian
market is now the 10th-largest market for futures contracts on
single stocks and indices in the world and the largest market for
futures on single stocks. This follows a 77-fold increase in the
turnover of equity derivatives between the years ending March
2002 and 2006. Overall, total turnover in over-the-counter debt
derivatives is estimated at USD 1 billion per day, with perhaps
double that turnover in currency futures. A significant offshore
market exists in the currency futures and a new exchange market
is being established in Dubai. A range of foreign exchange hedging
instruments has been introduced, including forwards, swaps and
options; however, FX futures contracts are still not permitted.
During this decade, a complete overhaul of the commodity
exchanges occurred. Markets were fragmented and illiquid, suf-
fering from being restricted to inessential products for a long
period. However, starting in the mid-1990s, the commodity market
regulators began to reform these markets. Initial attempts were
unsuccessful but three new markets were created in 2000, based
on the architecture of the NSE. These markets became viable even
more quickly than the new stock exchange. Although there are 94
commodities traded, gold and silver account for half of turnover.
By 2006, the gold market became the third-largest derivative market
for gold in the world (OECD 2007).
As this brief review indicates, the Indian equity markets are quite
well-developed and the value of Indian equity as a proportion of
global equity valuation rose more than twelvefold from about 0.2
per cent in 1989 to 2.5 per cent in 2007. India’s equity market is an
efficient allocator of capital. Bad management is punished severely
by the stock market, obliging companies to use capital efficiently
or perish. As a result, India requires much less capital per unit of
growth than many countries like China, where capital is allocated
mainly by the state.8 The successful development of the equity
market also helps to explain the change in the equity-debt mix
in the financing of listed Indian firms and the entrance of foreign
portfolio investment. There has been a shift from debt to equity in
recent years, from a 1.82 debt-equity ratio in 1992 to a 1.06 ratio in
2004 (Patnaik and Shah 2006).

194 RAJ AGGARWAL
2.3 Economic Deregulation and Technology

2.3.1 Deregulation and Recent Indian Economic Growth
The current process of economic deregulation started in the early
1990s. At that time, India faced a number of pressures to deregulate
its economy. First, annual economic growth had increased to about
5 per cent from the anemic 3–3.5 per cent annual rate of the prior
decades, but had stalled. Most importantly, India had borrowed
heavily to finance its growth in the 1980s and now faced critical
balance of payments crises with the prospect of international de-
fault for the first time since independence in 1947. Second, the Berlin
wall had fallen and many socialist and communist states had failed
by 1989 followed thereafter by a strong international movement
towards market driven economies. Among India’s neighbours,
the Soviet Union was falling apart; meanwhile, China was having
much success with the economic deregulation it had started in
the early 1980s. Third, even big business in India, that had long
accepted protected markets in exchange for draconian bureau-
cracy, now wanted opportunities for growth (e.g., Percy 1992). This
combination of internal and external pressure resulted in the first
wave of economic deregulation in India in the early 1990s, freeing
up enough of the large amounts of pent-up demand among Indian
consumers that it was considered a major success by government,
industry, and consumers (e.g., Joshi and Little 1996).
The initial success of deregulation in the early 1990s paved the
road for subsequent deregulatory moves, most of them meeting
with success. Consequently, by now all the major political parties,
business and industry, and consumer groups, are all committed
to the deregulation and the gradual global opening of the Indian
economy. Indeed, India is not only committed to membership in
the World Trade Organization (WTO), but also to a leadership role
in the organisation. However, as can be expected in any democratic
country, there continues to be much public debate in India about
the distribution of economic gains and the nature, sequence, and
speed of the deregulatory process. However, there is now little
doubt about the need to deregulate the Indian economy. A related
advantage of deregulation is the decline in corruption due to greater
transparency and reduction of bureaucratic power.9

2.3.2 Economic Role of Computer Technology

India has many resources that account for the extraordinary
success of its computer and software industry. India has a superb
educational system and graduates one of the largest numbers of
scientists and more than a quarter million engineers annually;
and many Indian engineering institutes are truly world class.10
In addition, English is the medium of instruction for higher edu-
cation, and with the revolution in electronic communications,
Indian knowledge workers, who earn much less than their coun-
terparts in the developed world, have easily become part of the
global economy. Finally, many non-resident Indians (NRIs) are in-
vesting in and moving back to India, and are actively participating
in transferring capital, technology, and managerial expertise from
the Western countries to India.
The Indian outsourcing (software) industry employed only
about 1.6 million people in 2009 (about one-tenth of 1 per cent of
India’s population) but it is a high-growth industry. In 1998, Indian
outsourcing revenues were about US$ 4 billion growing to US$ 60
billion by 2009 and are expected to double over the next five years
(Lamont 30 December 2009). While the Indian Software industry
is relatively small compared to other more traditional industries,
it seems to have had an influence on the Indian economy and the
Indian image overseas far greater than indicated by its size.
More than one-third of Fortune 500 companies now have com-
puter software development operations in India and this propor-
tion is increasing as more US, European, and Asian companies are
starting to follow this initial group. Further, because of its large
English-speaking population, India is becoming the back office
and customer service division for large numbers of European
and US companies who have been setting up these operations in
India. These activities are creating jobs and adding to domestic
economic growth. Indeed, India is seeing shortages of well-trained
and world-class management talent, along with escalating salaries
for qualified people.
Indian software companies have been able to raise substantial
amounts of money in global financial markets, such as New York,
London, and other financial centres. Table 1 lists the largest Indian

196 RAJ AGGARWAL
Table 1: Selected Indian ADRs∗ Traded in the United States
Company Symbol Business/Industry

Wipro WIT Information Systems/Software
Satyam Computers SIFY Information Systems/Software
Infosystems INFY Information Systems/Software
Silverline Technologies SLT Information Systems/Software
Rediff REDF Information Systems/Software
ICICI IC Financial Institution
ICICI Bank IBN Financial Institution
HDFC Bank HDB Financial Institution
Mahanagar Telephone MTE Telecommunications
Sterlight Industries SLT Industrial
Tata Motors TTM Industrial
Dr Reddy’s Laboratories RDY Pharmaceuticals
Note: ∗American Depository Receipts.
companies that trade as depository receipts in the United States. As

this table shows, software companies currently dominate this list.
In addition to the New York Stock Exchange and the NASDAQ in
the United States, securities of Indian companies also trade on the
London and other European stock exchanges. As global financial
markets become accustomed to Indian software companies, other
Indian companies are increasingly finding it easier to meet global
accounting and financial standards and raise money in global
markets. A great deal of this capital flows back to India, supporting
the Indian [currency] rupee. A strong rupee means the Reserve
Bank of India can keep interest rates lower than it could otherwise.
Such lower interest rates are likely to encourage growth throughout
the Indian economy.
In addition, the growth of any new technology or industry
creates a number of ripple effects—with these ripple effects being
larger for new technologies and increasing with widespread pene-
tration and adoption. For example, the rapid growth of the Indian
software and computer services industry has led to increased rates
of growth in other (e.g., supplier) industries, that is, in industries
such as telecommunications, computer hardware, and other
products and services consumed by the software industry that
has been widely considered a prime source of economic growth
(e.g., Helpman 1998; Mokyr 1990). Technology transfer from the

software and other leading edge industries will benefit some areas
and industries earlier than others. Additionally, there are likely to
be industry variations in initial increases in growth rates.
Driven by the software industry, the computer hardware indus-
try will also continue to see very high rates of growth. The growth of
the software industry will also continue to add to the infrastructure
pressures. For example, in the telecommunications industry, India
is rapidly being wired up with large amounts of fibre optic cable.
Indeed, among developing countries, the amount of fibre optic
cable installed in India is second only to China.11 Consequently,
most rural and urban centres in India will soon have broadband
access via fibre optics. The widespread availability of broadband
will lead to a major increase in economic growth rates as these com-
munities connect to each other and to the global economy. How-
ever, Indian consumers are not just waiting for broadband—they
are being increasingly connected to each other and the world via
the cell phone. Indeed, India is now one of the largest and fastest
growing cell phone markets in the world even though some feel
that the government is too slow to make regulatory changes in this
area.12 Nevertheless, cell phones have penetrated all parts of India
including rural areas that have limited or no access to landlines.
Not only is India leapfrogging old landline technologies, it is doing
so at shockingly low cost. Indian cell phone costs are the lowest in
the world, recently being as low as ` 0.30 (less than US$ 0.01) per
minute billed in one-second increments.13 In fact, the rural ubiquity
of inexpensive (90 per cent) pre-paid phones (as low as ` 100 or
US$ 2.17) has meant a great deal of economic empowerment and
growth in rural areas as, for example, farmers can now call for crop
prices in various nearby markets and obtain the best prices for
their output.14 This is one example of the numerous ripple effects
of high-tech penetration in a country.
2.4 Transactions Cost Economics and Changing Indian

Corporate Structure
2.4.1 Changes in Corporate Structure and Strategy
Commerce in India until recently was a mixture of heavily regu-
lated small and large private businesses and large state-run

198 RAJ AGGARWAL
businesses. In addition to large numbers of small businesses, the

Indian economy has also been characterised by the presence of
many large business groups. Unlike businesses in the Anglo-Saxon
countries like the US, UK, Canada, or Australia, the larger, private
Indian businesses can be characterised as widely diversified and
often vertically integrated business groups. For example, of the
largest 5,446 stock exchange listed companies in India, 1,821 or
about a third are group-affiliated companies. These group-affiliated
companies are on average 4.37 times the size of non-group affiliated
companies (Khanna and Yafeh 2007). While there is some evolution,
a changing mix of large business groups still dominates many
Indian economic sectors.
The Indian private sector has a long history—a history that
includes many prior periods of considerable change. Table 2
lists the 10 largest business groups over two 30-year periods
ending in 1999. As this table shows, these largest business groups
are becoming more important to the Indian economy, specifically
because the average size of these groups grew at a faster rate than
the Indian economy. Interestingly, being large was no guarantee
of continued success as there are few commonalities in these lists
of the top 10 business groups in India for 1939, 1969 and 1999.
Tata was the only one in all three lists while Martin Burn was in
the 1939 and 1969 lists and Birla was in the 1969 and 1999 lists.
All others were new in each list (Piramal 2001). Thus, the current
period of business change is not new. However, the rate of business
change in the next five to 10 years is likely to accelerate and much
turbulence will mark this period.
This dominance of group-affiliated companies is quite under-
standable as the Indian commercial environment has been much
less than perfect and the Indian markets for many corporate in-
puts have been quite inefficient (see Table 3). This has meant that
Indian companies found it more efficient to internalise many of
these markets, that is, not buy these inputs as needed from ex-
ternal suppliers, but manage them as internal company resources.
Consequently, many Indian business houses have been widely di-
versified and vertically integrated (e.g., Khanna and Palepu 2000).
However, as the Indian economy progressively deregulates and
feels the impact of new information technology, external markets

Table 2: History of the Top Ten Business Groups in the Indian Economy
Rank 1939 CAGR11∗ 1969 CAGR21∗ 1999

2
1. Tata (62) ∗∗ 7.3% Tata (505) 12.8% Tata (22,345)
2. Martin Burn (16) 7.8% Birla (456) 9.6% Wipro (18,439)
3. Bird (12) Martin Burn (153) Ambani (16,060)
4. Andrew Yule (12) Bangur (104) HCL (9,275)
5. Inchcape (11) Thapar (99) Ranbaxy (7,970)
6. ED Sassoon (10) Nagarmull (96) Bajaj (7,667)
7. ACC (Tata) (9) Mafatlal (93) Aditya Birla (7,114)
8. Begg (6) ACC-Tata (90) Hero (3,715)
9. Oriental T&E (6) Walchand (81) Satyam (3,210)
10. Dalmia (6) Shriram (74) Punj (3,173)
Avg. Size 2∗∗ 15 8.5% 175 14.4% 9,897
Source: Piramal (2001) and author’s calculations.
Notes: ∗CAGR: Compound Annual Growth Rate (1 = 1939–69, 2 = 1969–99); calculated for the average and for the groups that
survived in the top 10 from one period to the next.
∗∗Figures in parenthesis indicate asset base in 1939 and 1969 and market cap in 1999, on March 31, measured in Crores of
Rupees (1 Crore = 10 million).
200 RAJ AGGARWAL
Table 3: Relative Market Efficiency for Corporate Inputs in the Indian Economy
Market United States Japan India

Finance Equity Focused Bank Focused Underdeveloped
Wide Disclosure High Debt Ratios Illiquid
External Monitoring Group Monitoring Weak Monitoring
Market for Corporate Limited Market for Very Weak Market for
Control Corporate Control Corporate Control
Labour Business Education General Education Low Education
Highly Mobil Not Mobil Low Mobility
General Skills Firm-Specific Skills Low Skill Levels
Products Liability Laws Liability Laws Limited Liability
Enforced Enforced Weak Enforcement
Efficient Information Efficient Information Little Information
Activist Consumers Few Activists Few Activists
Regulation Low Moderate High
Predictable Predictable Less Predictable
Not Corrupt Low Corruption High Corruption
Source: Based on information in Khanna and Palepu (2000) and author analysis.
are increasingly becoming more efficient and the advantages of

vertical integration and diversification will decline and eventually
disappear (e.g., Rajan, Servaes and Zingales 2000). These changes
will force significant and sometimes sudden restructuring among
the large and major conglomerates in India. Next we consider the
forces driving these changes in corporate structure.
2.4.2 Transactions Costs and Corporate Boundaries

A business firm can be considered a nexus of formal and informal
contracts between various stakeholders, that is, customers, em-
ployees, suppliers, investors and other appropriate entities. These
formal and informal contracts govern the many tasks performed
by a firm. Some of these tasks are performed by units and entities
within a firm while others may be performed by units or entities
outside the firm.15 The firm manages internal tasks through
bureaucratic hierarchies or other internal mechanisms. External
tasks are managed through outsourcing contracts and market
processes. The number of functions and types of resources that the
firm acquires, develops, and manages internally versus those that
it hires or purchases externally depends on which total acquisition

costs are lower; total acquisition costs reflecting production costs

and the costs and risks of the transactions necessary to acquire such
resources (e.g., Coase 1937; Williamson 1985).
Transactions costs generally consist of search, negotiation,
contracting, and enforcement costs of establishing a business
relationship so that exchange of goods, services, and compensation
can take place. Contracts that eliminate all opportunistic be-
haviour are difficult or impossible to write because of bounded
rationality, performance measurement difficulties, and infor-
mation differences (asymmetry) between the parties to a contract.
Thus, some transactions are best carried out in a market economy
while others must be internalised and conducted within a firm. If
external markets for these resources are inefficient and associated
transactions costs are high enough, the firm will find it more pro-
fitable to internalise such markets by making such resources a part
of the firm (e.g., Caves 1980). Thus, the boundaries of a firm are
determined by the differences in external versus internal trans-
actions costs.
Transactions costs and market efficiency also depend on sup-
porting institutions that can provide the formal and informal rules
governing the exchange process (North 1990). Such institutions
reduce transactions costs by reducing uncertainty and by providing
a stable framework for forming ethical and other expectations
regarding the behaviour of participants in a transaction and limiting
incidents of opportunistic activity. Transactions costs are likely to
be higher in an uncertain and changing environment. The nature
and efficacy of social institutions, such as the legal system and the
ethical framework of a society, can play a critical role in reducing
uncertainty or the costs of search, negotiation, or contracting (e.g.,
LaPorta et al. 1997). Similarly, strong systems of public disclosure
of financial information, business monitoring, investor protection,
and corporate governance required by well-developed capital
markets can also reduce transactions costs (e.g., Levine 1997). As
many of these institutional features that reduce transactions costs
occur more frequently in high-trust societies, transactions costs are
likely to be lower in such high-trust societies (Fukuyama 1995).
In addition, poorly functioning markets for corporate control,
managerial talent, and technology can increase transactions costs.

202 RAJ AGGARWAL
High-trust societies are likely to have lower transactions costs and

large, well-diversified and vertically integrated business groups
are less likely to dominate commerce in such countries. Indeed,
empirical evidence suggests that business groups serve as risk
sharing mechanisms when capital markets are underdeveloped,
but not when capital markets are well developed (Aggarwal and
Zhao 2009; Khanna and Yafeh 2007).
2.4.3 Changing Transactions Costs

With economic deregulation, many expect transactions costs to
decline. Most deregulation reduces the costs associated with man-
aging the many business interactions within the bureaucracy. The
replacement of bureaucratic controls with market mechanisms
generally means the move towards more efficient organisations
and markets.16
In addition to the drop in transactions costs within the scope
of economic deregulation, transactions costs in India and in most
other countries are also dropping due to the rapid application and
implementation of new, internet-based technologies in businesses.
These new technologies can reduce transactions costs significantly,
as they certainly reduce the search and information costs involved
in transactions. In many cases these technologies can also reduce
negotiation, contracting, and monitoring costs associated with
business transactions. On the other hand, these new technologies
may demand larger scale for efficiency and the ability to leverage
network effects. Thus, the application and implementation of
these new internet-based technologies can be expected to lead to
significant changes in corporate boundaries in most countries. As
one consequence, corporate outsourcing has exploded with almost
no regard to physical distance. As discussed earlier, India benefits
greatly from this trend towards corporate service outsourcing.
2.4.4 Strategic Implications for Business Groups

As in many developing countries, large business firms in India
have generally been widely diversified and vertically integrated.
However, the advantages of wide diversification and vertical
integration are generally likely to disappear as markets become

more efficient and transactions costs decline. In such cases, the

disadvantages of a group structure may become a liability, for
example, bounded rationality in managing diverse operations,
sheltering of weak operations, and appropriation of minority
shareholders’ assets.
It should be noted here that while transactions costs reductions
point to more focused business organisations, other forces point
to increased advantages of size. It would be difficult for many
of the smaller participants in a market to have the economies of
scale necessary to deploy many of the new technologies, invest
in building national brands, or develop the R&D capabilities to
survive in a deregulated business environment. Thus, the ad-
vantages of increased economies of scale and scope, especially in
an increasingly deregulated, globalising, and growing economy like
India, may favour growth of company size. Thus, many business
groups may grow in size for scale and network economies, but
at the same time they will have to restructure and become more
focused.17 Given the increased level of competition due to economic
deregulation, such groups no longer should or can stay in many
unrelated businesses. But, such changes in business structure can
be very challenging indeed.
Not all markets in a country are likely to become efficient at
the same rate and firms would have to monitor these changes and
assess their impact carefully. In addition, such firms would have to
redefine their core competencies carefully in view of the changed
market efficiencies. However, this process of restructuring is un-
likely to be entirely smooth. As in the past, some large unfocused
business groups may become unprofitable and even disappear.
Some firms are likely to undertake strategic reassessments faster
and more accurately than other firms. Such firms are then likely
to drive many of the slower adjusting firms out of business. Thus,
there is likely to be consolidation in many industries as the smaller
less efficient players are driven out.
To support this, effective and appropriate bankruptcy procedures
and a well-functioning legal system that can enforce property
rights must be in place. However, failing firms, especially if they
are large, are likely to create political and economic disruptions,
and regulators and policy makers will have to stand firm under
these circumstances against calls to slow, stop, or reverse the

204 RAJ AGGARWAL
deregulatory process especially as there is little experience in India

with large-scale bankruptcies.
Indeed, major indications of the lack of necessary restructuring
in India are inadequate bankruptcy laws and procedures along
with the remnants of industrial regulation that still affect the
operation of Indian firms and constrain their flexibility to adjust
to new economic conditions. Along with lengthy, cumbersome
liquidation procedures, these regulations often hinder firms from
eliminating unprofitable product lines. As noted by the World Bank
(2005), India’s bankruptcy rate was, 4 per 10,000 firms, compared
with 15 in Thailand and 350 in the United States. If patterns in firm-
entry and exit are consistent with these observations, industrial
deregulation will be accompanied only very slowly by industrial
restructuring.
Another major channel for business restructuring is a liquid
market for corporate control in an environment of well-developed
financial markets. Friendly and hostile mergers and acquisitions
are an important tool for corporate restructuring.18 Well-developed
financial systems and capital markets need legal systems that clearly
define and enforce property rights, an independent accounting
profession and associated regulations to encourage high levels of
public disclosure, and market regulations to prevent self-dealing
and misuse of fiduciary responsibilities and encourage the fair and
equal treatment of all shareholders (e.g., Aggarwal and Harper
2001).
In addition to enforceable and well-defined property rights,
the development of financial and capital markets also depends on
a reliable and transparent system of regulation. Such regulation
is needed to ensure adequate and uniform disclosure, to prevent
self-dealing and other misuses of fiduciary responsibilities in the
financial industry, and to ensure fairness in financial markets and
the financial soundness of securities exchanges and firms in the
financial system. The orderly development of financial markets
generally involves the progressive introduction of trading in
securities of increasing risk and complexity. For example, the first
securities markets generally involve short-term securities issued by
the government, followed by trading in longer-term government
debt instruments, bonds and shares of well-known and large

private firms, bonds and shares of smaller lesser known private

firms, and then derivative securities. In addition to facilitating
corporate restructuring, efficient financial markets have been
shown to encourage economic growth (e.g., Levine 1997; Rajan
and Zingales 1998). While India may have adequate laws and
regulations in place, its judicial system seems very inefficient and
perpetually clogged, so that justice is certainly not swift in India.
Judicial enforcement of property rights is so slow in India that it
is often considered ineffective.
In many cases, corporate restructuring in India is likely to be
impeded by the lack of professional management especially in
family run firms. While the situation is changing, members of the
controlling families still run a number of large business houses.
Lack of professional management not only impedes restructur-
ing, but it also acts as a deterrent to potential changes in corporate
control. Economic deregulation and the development of financial
markets are likely to hasten the transition from family control
and management to non-owner professional management.19 Cor-
porate governance in India would have to improve as owners and
corporate managers are likely to find it increasingly difficult to
ignore the rights of minority shareholders as India financial mar-
kets develop and open up to foreign participation.
2.4.5 Implications for Indian Business Structure

The adoption of new technologies and advanced management
knowhow in India has been spearheaded by the development of
the globally active and competitive computer software industry
in India. Technology and management practices from this lead
industry leak out or transfer to other industries in India thereby
increasing their global competitiveness. These developments fur-
ther support and reinforce the process of economic deregulation.
Thus, economic deregulation and the adoption of new technologies
and superior management in India are mutually reinforcing forces
that are likely to accelerate. This improvement in the institutional
environment of business in India is equivalent to increases in
organisational capital; increases that supplement reinvestments in
the form of physical and financial capital. Thus, these changes can
be expected to boost the rate of growth of the Indian economy.

206 RAJ AGGARWAL
However, these institutional changes also mean significant and

often disruptive changes for large well-diversified and vertically
integrated business groups in India. As the markets for corporate
inputs become more efficient, the advantages of diversification and
vertical integration will decline, disappear and even reverse. With
such changes, Indian businesses will have to become more focused
and efficient (not necessarily smaller). This transformation of large
Indian businesses is unlikely to be entirely smooth, will require a
continuing firm commitment to economic deregulation, and clearly
has important implications for policy makers and managers in
business and industry.
3. Global Integration of Indian

Business and Economy
The integration of the Indian economy and its financial system,
with their global counterparts, has increased steadily, particularly
since the reforms of the early 1990s. This globalisation of the Indian
economy has been facilitated by the continuing deregulation
of the Indian financial system. Indeed, global integration could
not happen without such deregulation. For example, the Indian
government has committed firmly to the adoption of International
Financial Reporting Standards (IFRS) by Indian companies by
2011. An important mechanism that enables the globalisation of
the Indian economy is the growing market for corporate control
in India and the resulting rising incidents of M&A among Indian
firms. The skill sets and abilities developed in domestic M&A in
India are now being increasingly used by Indian firms to extend
their operations overseas. Such activity is an important part of the
globalisation of the Indian economy.
Globalisation of Indian financial markets is just starting. Move-
ment of capital in or out of India is generally prohibited, except
for specific exceptions the government allows. Inward FDI is
monitored, and foreign stakes are limited by industry, with owner-
ship caps ranging from 100 per cent in some sectors, 20 per cent–
74 per cent in other sectors, and zero per cent in Agribusiness, Real
Estate, and Retailing. Only Foreign Institutional Investors (FIIs)

approved by the Reserve Bank of India (RBI) are permitted to

invest in India’s listed stocks and bonds. The RBI caps individual
foreign portfolio holdings at 10 per cent of a firm’s total market
capitalisation. Foreign investment in government bonds is limited
(currently to US$ 1.76 billion), and total corporate bond ownership
by foreign investors is capped (currently at US$ 500 million). In
addition to Basel I regulations, the RBI reserves the right to restrict
both bank assets and liabilities that originate outside India. This
restriction typically restricts foreign exposure to 20 per cent of
a bank’s lending portfolio and 15 per cent of a bank’s liabilities.
Additionally, the Reserve Bank of India limits the number of
banks operating in India and their share to below 10 per cent of
India’s total bank assets. India’s foreign exchange regime can be
best categorised as a ‘dirty float’. Although the RBI reserves the
right to do so, it has never blocked remittances or the repatriation
of approved investments, loans, or licensing fees. Indian residents
and firms, on the other hand, cannot convert the rupee into foreign
currency to acquire assets or lend funds overseas without prior
government approval. Thus, while there are still restrictions on
cross-border flows of funds, these restrictions are being gradually
relaxed.
India is not only becoming a larger part of global economic
and financial systems, it is also becoming a larger exporter and
importer of goods, services, and financial flows. In contrast to the
situation in the latter part of the twentieth century, in the twenty-
first century these cross-border flows have now become a very im-
portant part of the Indian economy. This increasing globalisation
of the Indian economy is reflected not only in its cross-border trade
and investment, but also in the impact on India of the 2008 global
financial crises.
3.1 Globalisation of the Indian Economy

The Indian economy has undergone rapid globalisation since the
economic reforms of the early 1990s and these trends towards
greater globalisation of the Indian economy have accelerated with
continuing economic deregulation. Tariffs for imports have been
progressively reduced to the average level of ASEAN countries,

208 RAJ AGGARWAL
for example, the highest standard tariff rate was reduced from
35 per cent in 2001 to 10 per cent by 2007. While India’s share
in world exports of goods and services remains small, having
increased from about 1 per cent in 1990 to about 4 per cent in 2007,
their domestic role and the overall impact in India have been more
significant, where exports make up 23 per cent of Indian GDP
(OECD 2007). Indeed, the rapid growth of India’s trade represents
a structural change in India’s economy, with the share of external
trade in Indian GDP increasing from about 15 per cent in 1990 to
about 49 per cent in 2007 (De 2009).
The growth of financial integration has been even more rapid.
During the 1997–2007 decade, the ratio of total external trans-
actions (gross current account flows plus gross capital account
flows) increased by more than 100 per cent from 46.8 per cent
of GDP in 1997 to 117.4 per cent of GDP in 2007. Furthermore,
corporate borrowing from external sources has also increased
significantly. In addition, India is now increasingly the focus of
inward FDI from a range of countries. For example, India has
overtaken China as the top destination of outward Japanese FDI
(Economist 2009). Overall, in 2007 India received capital inflows
that amounted to 9 per cent of GDP as against a current account
deficit of 1.5 per cent of GDP in 1997 (Subbarao 2009).
3.1.1 Recent Global Crises and India

There is much evidence from the 2008 global financial crises that
India is well integrated into the global economy. While global and
national financial imbalance had been building for many years and
major signs of the impending crises were evident by March 2007,
the collapse of financial systems globally was marked at its peak by
the failure of the investment bank, Lehman Brothers, in September
2008. These crises, fuelled by rising levels of illiquidity and debt,
especially in the developed economies, and reflected in massive
current account imbalances, real estate, derivatives, and other
asset prices rose in huge bubbles in these countries. The financial
crises crested when these asset price bubbles started deflating in
2007 and 2008.

Regardless of their causes, these global crises had major im-

pacts in India demonstrating the Indian economy and its financial
systems increasing integration with the global economy and
financial systems. For example, global influences have become a
major factor driving the Indian equity markets. Along with the
fall of foreign investment flows into the Indian stock market, the
Indian stock markets declined from their peak in January 2008
of about 21,000 for the Bombay Sensex Index to about 8,500 by
October 2008. In 2008, driven most likely by home country liquidity
needs, developed country foreign investors had withdrawn, over
the same period in 2008, about half of their inflows to India that
occurred during 2007. During the same time, the Indian Rupee
also declined in value from about ` 38 to about ` 50 per US
dollar. Overnight, rates in the Indian money market tripled to the
15–20 per cent range at the height of the global financial crises.
Indian economic and export growth rates fell from 9 and 25 per
cent per annum in recent years to 6 and 3 per cent per annum re-
spectively in 2008.
Fortunately, due to stringent regulations and high capital
ratios (at 13 per cent of risk weighted assets), Indian banks were
mostly insulated from direct sub-prime and derivatives exposures.
Nevertheless, the foreign branches of Indian banks like ICICI Bank
and the State Bank of India had some minor mark-to-market write-
downs. Unlike China, the export dependence of the Indian economy
was a much lower, 20 per cent, aided by significant increases in
domestic liquidity by the Reserve Bank of India (about US$ 100
billion or a 10th of the Indian GDP) and a large fiscal stimulus (of
about US$ 60 billion) over about six months, India weathered the
global financial crises fairly well. The financial markets seem to be
well on the way to recovery and in the first nine months of 2009,
Indian companies raised US$ 15.5 billion in public equity offerings,
an increase of 27 per cent over a comparable year-earlier period.20
However, the domestic impact of these 2008 global crises made it
clear how well the Indian economy was now integrated into the
global economy.
In spite of the global integration of the Indian economy in recent
decades, India seems to have survived the recent (2008) global

210 RAJ AGGARWAL
financial crises quite well. The crises spread globally through

finance and trade, and India managed to avoid extremes in both
areas. Countries that relied heavily on exports—like Singapore,
Taiwan, and China—suffered when foreign demand collapsed.
India’s exports of goods and services never accounted for more
than approximately 20 per cent of its economy, compared with ap-
proximately 45 per cent for China, and 100 per cent (or more) for
some Asian countries. Also, India kept its current account deficit
to about 2 to 3 per cent of GDP and India built one of the largest
cushions of foreign exchange reserves (about US$ 315 billion). As
a result, when the crisis hit, India was able to reassure investors
and provide dollars to investors demanding dollars for their rupee
assets. These reassured investors kept their money in India. Indeed,
at the depth of the global recession, between March 2008 and
March 2009, India managed to grow at a rate of 6.7 per cent, well
above the rate of most other industrial countries (Subramanian
2009).
3.2 Indian M&A and Globalisation of Indian Business

Changes in corporate control, as in M&A, are important indicators
of economic health and integration. Such activity reflects the
critically important reallocation of capital in an economy to its most
productive uses. As discussed below, such activity has been on
the rise in India, especially after the economic reforms of the early
1990s. As a result, the national average rate of return to invested
capital in India has been much higher than in China and other
developing countries.
3.2.1 Indian M&A

The modern era of M&A in India dates from 1991. Additionally,
Indian M&A activity can usefully be divided into the pre-1991
era and the post-1991 era. In 1991 the Indian government liberal-
ised laws and relaxed constraints that had previously restricted
Indian businesses in making domestic or foreign acquisitions.
Amendments to the Monopolies and Restrictive Trade Practices
Act (MRTP) in 1991 dropped the need for government approval of

M&As in certain cases. The licensing regime underwent forward-

looking changes to correct what had previously led to the formation
of incompetent small industrial entities in sectors that were subject
to licensing (Srinivasan 2001). The FDI policy also underwent
changes resulting in only a few industries requiring government
approval for FDI.
Amendments to the Companies Act of 1956 made it possible to
transfer shares free of charge, effectively making it more difficult
for directors of a company to turn down registration of share
transfers. The Depositories Act of 1996 smoothed the progress
of the dematerialisation and book entry transfer for securities
in a depository. The RBI made it possible for Indian companies
to finance their overseas acquisitions by raising capital from
domestic banks in 2005. In 2001, the SEBI amended the Takeover
Code designed to protect the interest of all stakeholders, to reduce
any conflicts or abuses, and to smooth out the orderly progress of
M&A activities. The Foreign Exchange Management Act of 1999,
Competition Act of 2002, and Special Economic Zones (SEZs) Act
of 2005 are among the more recent acts that have also influenced
the takeover surge (Meisami and Misra 2008).
Consequently, there has been an explosion of mergers and
acquisitions (M&As) by Indian firms, both domestic and cross-
border. Starting in 1991, four sectors in India have experienced the
most detectable M&A trends after deregulation (see Srinivasan 2001).
First, the consumer goods sector in which firms desire quick gains
of market share and then the banking and financial industry where
‘size’ is an important factor due to higher capital requirements set by
the Reserve Bank of India (RBI, 2009), experienced many mergers.
Sectors overloaded with many small firms underwent consolidation.
Sectors needing high technology such as telecommunication and
pharmaceuticals grew dramatically and underwent major merger
activity. In addition, after the millennium the relaxation of these
regulations led to an explosion of IT, software, and service sector
acquisitions. As an example, the cell-phone industry in India is
now one of the largest in the world and has been growing at a very
rapid rate. Extensive corporate restructuring and M&A in telecoms

212 RAJ AGGARWAL
in India has meant that the largest five companies account for
75 per cent of the still exploding market.21 Overall, approximately
23 per cent of domestic takeovers by Indian firms are concentrated
in two industries; Chemicals and Allied Products with 15 per cent
of the takeovers and Business Services with 8 per cent of takeovers
(Accenture 2006).
Cross-border M&As for the first seven months of 2006 out-
numbered the total number of cross-border M&As in any previous
year in Indian history. About 75 per cent of total takeovers in India
have been cross-border since 2003. Furthermore, 94 per cent of
M&As by Indian companies are expected to be cross-border in the
next three years (Grant Thornton 2006). In cross-border takeovers,
45 per cent of takeovers occur in the same two industries as in
domestic M&A, with Business Services accounting for 25 per cent
of acquisitions and Chemicals and Allied Products accounting
for the other 20 per cent of acquisitions. However, since 2000, IT,
services, electronics, and high-technology industries accounted for
more than 50 per cent of cross-border takeovers. In addition, firms
operating in market research, human resources, and forest products
have also been active players in the cross-border takeover market
(Grant Thornton 2006). As an indication of recent trends, in 2007,
there were more outbound M&A deals than inbound M&A deals
involving Indian companies, having 240 outbound deals (worth
US$ 32.27 billion) and 108 inbound deals (worth US$ 15.61 billion).
Outward FDI from India was more than twice the inbound FDI—a
remarkable reversal compared to most other developing countries
where inbound FDI generally far exceeds any outbound FDI.
3.2.2 Stylised Facts for Indian Outbound FDI
Based on analysis of recent trends, there seem to be four main

reasons for Indian firms to engage in cross-border acquisitions.
These include the need to enter new markets to maintain growth, to
gain proximity with global customers, to expand market share and
customer bases, and to acquire raw materials and other resources
from foreign countries. Much Indian FDI is in other developing
countries such as in Africa,22 Middle East, and South-east Asia

(see Accenture 2006). In recent years, Indian FDI in the developed

countries has also increased significantly.23
Indian cross-border M&As have several distinct characteristics
compared to those done by firms in the west or from China. Indian
acquirers are often smaller in size relative to their counterparts in
other countries and usually target smaller firms. Many acquirers
do a series of small acquisitions frequently, utilising ‘a string of
pearls’ approach’. Since 1995 over 60 per cent of Indian M&As
took place in Europe and North America; during the 2000–06
period US firms followed by UK firms were the major target of
nine Indian acquirers. More recently, there has been an increasing
trend in the size of the firms acquired by Indian companies. For
example, from January through November 2006 the total value
of Indian cross-border M&As reached the US$ 23 billion level,
showing a significant increase compared to the same period in
2005 that was US$ 7.8 billion. Additionally, the portfolio of cross-
border M&As has become more diversified relative to the past,
with consumer goods and services, energy, pharmaceuticals and
healthcare accounting for 66 per cent of cross-border M&As from
1995 to 2005.
Many Indian firms participate in cross-border M&As to expand
their overall technical capabilities and to update their existing
knowledge base. In most cases, the knowledge and technical ex-
pertise learned abroad can help the acquirers in improving their
productivity in the domestic Indian market as well.24 This has
been achieved by Indian firms through two avenues: buying the
technology, or acquiring firms who already own that technology.
Acquisitions in developed markets have been attractive to Indian
firms due to their large customer base, advanced legal system,
knowledge foundation, and sophisticated technologies. More im-
portantly, acquisitions often prove to be the only way for Indian
companies to begin competing in these markets, due to the high
level of existing competition in developed countries.
However, to a lesser degree, Indian firms have also acquired
firms in less developed countries to help Indian firms gain easier
access to a target’s resources. These deals are profitable because of
a high demand for foreign investment in some of these economies,
and these deals have provided Indian firms with access to raw

214 RAJ AGGARWAL
materials and other resources. In some cases, Indian firms also

engage in cross-border M&As in countries where the demand for
their technology has not died out yet. Such acquisitions allow them
to diversify the risks rooted in increased competition at home.
Cross-border M&A can create excess value for Indian acquirers
relative to their competitors, by allowing them to save on labour
and production costs. Some Indian firms, especially in the pharma-
ceutical sector, strive to increase their market share by enhancing
their product range or to diversify the portfolio of their products
or services. One important reason driving the ‘urge-to-merge’ is
the pressure of domestic competition, which has increased greatly
in recent years. In any case, many Indian MNCs present tempting
acquisition targets and some have been acquired by MNCs from
other countries.25
Nevertheless, significant outward FDI from India is still in its
early stages and faces a number of challenges. For example, it has
been widely contended that many overseas acquisitions by Indian
companies have been driven by other than purely commercial
reasons. A case in point is the criticism of Tata Motors for being
driven by national pride to overpay for its acquisition of the
marquee brands, Jaguar and Land Rover. As an example of other
difficulties, attempts to acquire MTN, the South Africa based multi-
national wireless phone company, by Indian companies (first by
Reliance Communications and then by Bharti Airtel) have not been
successful, with the latest 2009 offer by Bharti Airtel seemingly
nixed by the South African government.26
3.2.3 FDI Theories Applied to Indian FDI

One of the primary questions in understanding global expansion
of firms is how they overcome the limitations of foreignness when
they cross borders.27 The reason for cross-border expansion is
that the gains from cross-border activity, generally in the form of
inexpensive raw materials or not otherwise available technology,
are greater than the costs of foreignness. A second explanation is
that the form brings certain advantages developed domestically
or elsewhere to the new country to overcome the limitations
of foreignness. These explanations have been widely explored
in the literature but mainly in the context of MNCs from the

highly industrialised countries. However, it remains to be seen if

traditional explanations work for firms from India—a relatively
poor and under-developed country but where services are already
the largest sector. Do these advantages of traditional MNCs also
apply to Indian firms as they expand internationally, especially
as the advantages of superior technology, management know-
how, or brand recognition, enjoyed by traditional MNCs from the
developed countries may not be readily apparent strengths for
Indian MNCs?
We consider three theoretical explanations for FDI and examine
how they apply to Indian outward FDI. We start with the two
main modern theories of FDI and examine how they may apply
to Indian FDI, the OLI paradigm (Dunning 1993, 2000) and the PTI
Uppsala model (Johanson and Weidersheim-Paul 1975; Johanson
and Vahlne 1977). In addition, we also examine a hybrid theory
developed especially for FDI from emerging economies (Aggarwal
and Agmon 1990).
The eclectic OLI paradigm of Dunning (1993, 2000) combines
the insights of industrial organisation, international trade, and
market imperfection theories to explain the internationalisation
process as governed by three general factors: the ownership ad-
vantages of the firm (O), the location advantages of the market
(L), and the internalisation advantages of conducting transactions
within the firm rather than on open markets (I). The ownership
advantages include the firm’s asset and knowledge power, such
as management know-how, international experience, and ability
to develop differentiated products. Traditionally, these were
considered to be directly related to size, which helps the firm
achieve scale economies, absorb the resource costs of international
competition, and enforce contracts while protecting its patents
(Buckley and Casson 1976). The location advantages refer to the
earnings potential and risks associated with specific markets;
the premise is that firms will first seek to enter larger markets
with the best growth potential and least risk (Herring 1983). The
internalisation advantages relate to the relative costs of integrating
the assets and skills of the firm with a foreign counterpart. Shallow
modes of entry (such as exports or licensing) tend to minimise these
costs, while deeper modes of engagement (such as FDI) involve

216 RAJ AGGARWAL
higher costs. Agarwal and Ramaswami (1992) describe how the

optimal entry mode will usually become a compromise between
the firm’s available resources, risk-adjusted expected net returns
and desired degree of control.
The PTI theory, sometimes referred to as the Uppsala model
(Johanson and Weidersheim-Paul 1975; Johanson and Vahlne
1977), differs from the transactions costs approach of the OLI
eclectic paradigm by focusing on the process through which firms
incrementally engage in foreign markets via a learning process. At
the early stages of internationalisation, firms have little knowledge
or experience of doing international business or of specific foreign
market conditions, implying these firms face a great deal of un-
certainty and risk. They respond to this challenge by gradually
building their international involvement and learning along the
way as they build their knowledge, experience, and commitment to
internationalisation. The PTI predicts that firms will initially enter
markets that are close to their home base (in terms of geographic,
legal, cultural, or other economic measures of distance) because the
costs, uncertainties, and risks are lowest there, and that they will
further internationalise over time by expanding their geographic
spread.
While the OLI paradigm focuses on discrete rational decision
making and the PTI emphasises organisational learning, both imply
that the internationalisation process will likely be a sequential one,
a process where firms initially internationalise into geographically,
culturally, and psychically close markets at shallow levels of entry
mode. As their OLI advantages increase over time, or as they learn
and gain experience and confidence according to the PTI, firms
will reach further afield at deeper levels of engagement. Aharoni
(1971) described this process in life-cycle terms with firms servicing
foreign markets with increasing commitment starting with exports
leading eventually to overseas manufacturing. Dunning (1993) also
outlines five stages of a firm’s internationalisation: from exporting
to direct sales, to initial foreign part production, leading over time to
new foreign production that deepens and widens the value-added
network, and finally to regional or global integration.
Finally, the Aggarwal and Agmon (1990) model emphasises the
supportive role of the state in explaining the outward FDI from

developing countries. In this model, the fixed natural comparative

advantage of a developing country is modified by government
intervention and investment in a non-tradable capital good such
as education and/or technology. This, in effect, creates a dynamic
long-term government directed comparative advantage for firms
based in such a country allowing them to move forward in a
product ‘life cycle of firm multinationality’ where shallow modes
of foreign entry such as exports by firms are followed by deeper
modes such as FDI to progressively develop overseas markets
(Aggarwal 1984).
The stylised facts on Indian FDI presented earlier in this article
seem to be consistent with the contentions of all three theories of
FDI. Many Indian firms invested overseas based on their location
advantages (L) such as having a low-production cost base in India
to support foreign operations of Indian firms (O) serving overseas
markets that were initially entered with FDI thus internalising the
cost advantage (I). Given that much Indian exports started with
neighbouring regional and culturally similar countries before ex-
panding further afield, clearly indicates consistency with the PTI
theory and a commitment to learn and gain experience before tak-
ing greater risks. Finally, Indian FDI would have been much lower
and occurred later, but for the heavy investments made by the Indian
government in R&D and world class technical education (e.g., the
Indian Institutes of Technology). This moved the comparative ad-
vantage available to Indian firms to favour outward FDI earlier
than it might have been possible otherwise—FDI from developing
countries being a later stage than FDI from the developed countries
in the life cycle of multinational firms (Aggarwal and Agmon 1990
and Aggarwal 1984).
While the discussion above is useful and even somewhat illu-
minating, the core question that all theories of FDI must address
concerns the mechanisms of how a company overcomes its liabil-
ity of being foreign when it engages in cross-border expansion.
In addressing this issue more specifically for outward FDI from
India and perhaps from other smaller and poorer economies,
we hope to develop new insights for the unusual MNCs created
when companies from relatively less developed economies become
MNCs. It is the contention here that Indian and perhaps other

218 RAJ AGGARWAL
MNCs from the poorer countries may enjoy at least four types of
advantages developed in their home markets that they can use
overseas to overcome the liability of foreignness.
1. Low Cost Production/Design Bases: Indian companies can and

do use the low cost domestic production and design bases as
a strength to extend their businesses internationally. Many
contend that this is the model that has been used by Indian
IT companies to successfully expand globally. In addition,
Indian mass production style medical procedures (like
open heart operations at Narayana Hrudayalaya Hospital
and cataract and eye operations elsewhere in India) designed
for low-income Indian consumers are now being taken over-
seas by India hospitals.28
2. Natural Endowment Driven Technologies: Indian companies
may have comparative advantage in certain technologies
useful for global expansion, such as non-fading dyes that
stand up successfully to bright sunlight, which can best be
developed in a country with India’s natural endowments.
Other examples of this would be the foreign distribution of
raw materials such as Palm Oil and cultural products such
as Bollywood movies.29
3. Low Cost Versions of Expensive Products: It has been noted
recently that Indian companies are able to create low-cost
versions of products developed and marketed for the poorer
consumers at the ‘bottom of the pyramid’ which can then be
modified slightly and adapted to compete successfully in
developed markets. There are many examples of the latter
including the ‘Nano’ automobile developed by Tata for the
Indian markets and now being exported to Africa, Southeast
Asia, and Europe.30 Another example is the inexpensive
Little Cool refrigerator with only 20 moving parts (no com-
pressor) and the Mac400 heart monitor developed by GE
India. Similarly, Suzlon is now the fourth-largest global
windmill company starting with designs developed for the
Indian market, and an Indian company now has the largest
fleet of electric cars on the road giving it an unequalled edge

to export electric cars overseas and license its technology to

GM for the Chevy ‘Spark’ built for the US market.31
4. Leverage Cultural and Institutional Understanding: Indian MNCs
can reduce the costs of foreignness by taking advantage of
cultural and institutional affinities—institutional structures
in many developing countries, especially in Asia and Africa,
are similar to the Indian institutional structure reducing the
costs and risks of operating in these countries for Indian
parent MNCs. In addition, in many of these countries Indian
diasporas are widespread, providing an initially friendly
consumer base for India companies (some Indian banks
initially expanded overseas mainly to serve overseas Indian
populations).
Outward Indian FDI has examples of each of these four areas of

advantages enjoyed by Indian firms. Firms from other developing
countries and from the smaller developed economies also reflect
these four advantages in their outward FDI activities. A detailed
analysis of this evidence and the nature of MNCs from developing
and small developed countries is beyond the scope of this article.
The focus of this article has been recent developments in the nature
and international integration of the Indian economy.
4. Conclusions
This essay is an assessment of the globalisation of the Indian
economy and the role played by market development with falling
transactions costs and, as a result, the rising levels of domestic
and cross-border M&A by Indian firms. These developments
started with the reforms of the early 1990s and the availability of
new technologies to Indian business. The rate of change facing
Indian business is likely to accelerate as these new technologies
and economic deregulations form a mutually reinforcing circle
of forces.
It is shown that both the adoption of new technologies and
economic deregulation will reduce transactions costs and make
product and financial markets in India more efficient. This
increase in market efficiency will then lead to changes in corporate

220 RAJ AGGARWAL
boundaries among Indian business firms and there is likely to be

consolidation within many industries. As most large business
houses in India currently are widely diversified, and in many cases
vertically integrated, these changes will inevitably lead to a pro-
cess of significant focusing, restructuring, and perhaps expansion in
focused areas to take advantage of scale and network economies.
However, these restructuring and consolidation processes are
unlikely to be entirely smooth, as many large business groups
will be unable to survive in the new, more competitive business
environment. India has little experience with large-scale bank-
ruptcies that are more common in countries like the United States.
Failures of large firms are likely to be politically and economically
disruptive. India will need strong financial markets and effective
bankruptcy laws, and a robust commitment to the process of eco-
nomic deregulation, to survive the significant restructuring of
its major businesses that is necessary for it to compete in global
markets. Thus, and unfortunately, it seems there is unlikely to be
any gains in this area without some pain!
Finally, the global integration of the Indian economy is accel-
erating, not only with declining transactions costs, but also with
the resultant rise of many Indian companies’ domestic and cross-
border M&A that have been fuelled by continued growth caused
by economic deregulation. Many large and some smaller Indian
companies are now becoming world class competitors and are
extending their global reach. Thus, it is clear that the globalisation
of the Indian economy has both macroeconomic and policy roots
as well as microeconomic company level drivers.
This article makes an important contribution to our under-
standing of the global role of the Indian economy by relating the
internal process of economic deregulation in India with increas-
ing deployment of technology and the resulting economic effi-
ciency; and how these internal processes lead to the increasing
pace of external mergers and acquisitions and the globalisation
of India business and economy. In the past these internal and
external processes have often been viewed separately. This article
also contributes by extending our understanding of the nascent
phenomenon constituted by the rise of Indian multinational
companies.

Raj Aggarwal is a Frank C. Sullivan Professor of International Business and

Finance, College of Business Administration, University of Akron, Akron.
E-mail: aggarwa@uakron.edu
Notes
1. There is now much evidence that the institutional environment is a
significant influence on national economic growth rates (e.g., Olson
1996). Further, as evidenced by the great success of non-resident
(overseas) Indians, the institutional environment rather than culture
seems to be more important for Indian economic success (Pauly
2000).
2. See, for example, Timmons (3 October 2009) and Leahy (2 October
2009).
3. See, for example, Pokharel and Bhattacharya (2009).
4. See Rieff (2009).
5. See, for example, Aggarwal (2006), Leahy (2 October 2009), and
Lambert and Littlefield (2009).
6. See, for example, Polgreen (2009).
7. There are various estimates of the size of the Indian middle class. These
estimates range from estimates of about 50–80 million that can afford
an automobile to over 300 million that can afford home appliances.
8. This is similar to the situation in the 1970s and 1980s when Japan
invested much more capital than the United States for each unit of
economic growth.
9. See Merton (2009) and Timmons and Bajaj (2009).
10. The elite Indian Institutes of Technology are now becoming well
known for graduating many CEOs of major US corporations and
many of Silicon Valley’s leading successes. See, for example, Ghosh
(2001).
11. See, for example, Jayaram (2001).
12. See Lamont (16 November 2009).
13. Indian cell phone providers mostly make money providing extra ser-
vices (such as movie songs, market prices, banking services) and not
from talk time. Indeed, there is talk that cell phone talk time may be
free soon (Leahy 11 December 2009).
14. See, for example, Kazmin (2009).
15. Some tasks may be performed jointly by units internal and external
to a firm. However, this detail is not critical to our analysis here.

222 RAJ AGGARWAL
16. In a deregulating environment like India, many social institutions that

reduce transactions costs may be in a state of flux. Old institutional
arrangements and frameworks become obsolete and it takes time to
build stable new institutional arrangements with exchange frameworks
temporarily exerting an upward pressure on transactions costs.
17. This is starting to take place. See, for example, on restructuring at Tata,
Joseph and Khandari (1999).
18. Domestic M&A is already surging in India. See, for example,
Merchant (2001).
19. However, the growth of financial markets in India is likely to be im-
peded by corruption (Aggarwal and Goodell 2009). Fortunately, lately,
there are many reports that the media in India is actively reducing
corruption by setting up many sting operations and exposing corrupt
officials.
20. See Leahy (7 October 2009).
21. As of 2009, these five companies in order of declining share (approxi-
mate share) were Bharti Airtel (24 per cent), Reliance (19 per cent),
Vodaphone-Essar (19 per cent), Tata (9 per cent), and Aircel (5 per
cent). See, Hookway (19 November 2009).
22. According to Financial Times, ‘This is Africa’ (14 September 2009),
India invested $ 1.88 billion in greenfield projects in Africa in recent
years. Also see, Pal (2009) and Freemantle and Stevens (2009).
23. For example, according to an Ernst and Young and FICCI joint report
released in June 2009, Indian companies bought 143 US companies in
2007–08 (94 deals) and 2008–09 (49 deals).
24. One example of this is the use of technology from the Tata acquisition
of Daewoo Commercial Vehicles of Korea in 2004 to upgrade Tata
‘Prima’ range of trucks made for the domestic Indian market.
25. A case in point is Ranbaxy Laboratories, an Indian MNC in the pharma-
ceutical industry, which was acquired on very attractive terms in 2008
by Daichi Sankyo, a Japanese pharmaceutical company.
26. See, for example, Timmons (2 October 2009) and Sharma and
Bellman (2009).
27. It should be noted here that the limitations of foreignness in FDI is
just a special case of the more general limitations of newness when a
firm expands into new markets or technologies.
28. See, Anand (2009). Another example is the global expansion of VNL,
an Indian telecom company that developed extremely low cost solar
powered telecom base stations initially for use in the poor rural
and remote parts of India (‘Global Business: Tech Pioneers’, Time,
28 December 2009, p. 6). Other examples include the exports of the

initially designed for low income Indian consumers of the Tata Nano
automobile and the Mahindra electric truck for urban markets.
29. Another example of this is the multinational nature of Indian IT com-
panies with English-speaking inexpensive workers like Wipro (with
operations in 53 countries) which has been outsourcing its Indian
projects to its workforce in Egypt (Leahy 12 November 2009).
30. In response to this Tata challenge, Nissan/Renault and Bajaj announced
a low-cost competitor to the Nano (Gulati and Relia 2009).
31. See, for example, Bellman (2009) and Bajaj (2009).
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India in the World Economy

Article · December 2010

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India in the World Economy: Role of Business Restructuring

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>> Version of Record - Dec 7, 2010

Keywords: India, world economy, M&A, Indian economy,

Acknowledgements: The author is grateful to T. Agmon, R. Dossani, D. Haake,

and external opening seems to be accelerating. These changes

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

the institutional and technological environment of business are

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

deregulation in India with increasing deployment of technology

2. Growth and Focusing

In the beginning there were two nations. One was a vast,

While India produced about 25 per cent of the world’s indus-

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

rates, many contend that this is perhaps a reorientation of the world

2.1 Deregulation and Indian Economic Growth

2.1.1 Development Dilemma

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

bureaucracy than with global competitors. This is now changing

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

depend on, a stable democratic political structure (Das 2001).

2.1.2 Nature of the Indian Economic Growth

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

India’s foreign exchange rate reserves in February 2009 were fairly

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

in green power generation. For example, while as of 2009 nuclear

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

in India. These include the use of internet technology to deliver

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

2.2 Deregulation of the Indian Financial Systems

2.2.1 Indian Banking System Deregulation

2.2.2 Deregulation of the Indian Financial Markets

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

key step in the reform of capital markets. In 1994, the government

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

2.2.3 Deregulation of Risk Management

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

2.3 Economic Deregulation and Technology

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

2.3.2 Economic Role of Computer Technology

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

Table 1: Selected Indian ADRs∗ Traded in the United States

Company Symbol Business/Industry

companies that trade as depository receipts in the United States. As

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

2.4 Transactions Cost Economics and Changing Indian

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

businesses. In addition to large numbers of small businesses, the

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

Rank 1939 CAGR11∗ 1969 CAGR21∗ 1999

Market United States Japan India

are increasingly becoming more efficient and the advantages of

2.4.2 Transactions Costs and Corporate Boundaries

REVIEW OF MARKET INTEGRATION 2(2&3) (2010): 181–228

costs are lower; total acquisition costs reflecting production costs