Time to talk about smart large firms

Raising the share of manufacturing in GDP from the current 17 per cent to 25 per cent by 2025 would require expanding India’s manufacturing value add (MVA) from $325 billion in 2015 to $973 billion in 2025 at the current GDP growth rate of 7.4 per cent. Do we have enough manufacturing firms that can take us to the target? If not, what type of firms do we need to nurture to achieve it?

A look at the development trajectory of top manufacturing countries suggests that such large-scale output can only be achieved through the nurturing of globally focused large manufacturing firms. We call these smart large firms.

China, the US, Germany, Japan and Korea are the five largest manufacturing countries accounting for 60 per cent of global MVA of $9.4 trillion. Most of this value was created by the large firms. In fact, the annual revenue of the top 102 manufacturing firms headquartered in these countries alone exceeded $6 trillion in 2014.

Corporates with more than 500 employees account for 66 per cent of US and 80 per cent of German exports.

Riding on large firms’ turnovers, China, between 1992 and 2014, increased its share in world trade from 2 per cent to 12 per cent. The intra-firm trade that accounts for about 50 per cent of international trade is carried out only by large firms. World over, smart large firms create large manufacturing output and exports.

Where does that leave the SMEs? Will not too many large firms eat up the small firms? The experience of top manufacturing countries reveals that the fate of large and small firms is tied up in most sectors. Both either flourish or remain anaemic together in a country. Large businesses depend on SMEs for supply of specialised components, parts or machineries, while SMEs gain in productivity, expertise and exposure through the flow of people, skills, technology and best practices from large firms. China, Germany, the US, Japan and Korea have both vibrant large and small firms.

Let us now look at the contribution of large Indian corporates in exports or employment creation. The share of exports in turnover is less than 10 per cent for the top 50 public limited companies in food, beverages, mining, paper products, chemicals, textiles, electrical machinery and electronics sectors. Equally anaemic is the performance on the employment front where large firms account for only 10.5 per cent of the manufacturing jobs in India.

Contrast this with Korea (29.6 per cent), Thailand (41.6 per cent), Malaysia (52.8 per cent), and China (51.8 per cent). Except in sectors such as petroleum refining, steel, pharmaceuticals and automobiles, we have a few smart large firms.

The fate of large and small companies in India too are tied in. The weak performance of large Indian firms translates into less flow of people, skills, technology and so on from large firms to SMEs.

This may be the major reason why most Indian SMEs are stuck with low productivity operations and pay low wages to workers. Data captures this powerfully: SMEs with less than 20 workers account for 73 per cent of manufacturing jobs but produce just 12 per cent of the manufacturing output.

So India needs to foster smart large firms in select sectors to meet its manufacturing and job creation targets and also ensure a vibrant SME sector.

We may adopt the following four-step programme:

Target the following three product groups for policy intervention and developing support infrastructure : factory machinery and innovation-driven products such as semiconductors, complex materials, machinery, and organic chemicals; electronics, computers, office machinery and telecom equipment; skill and labour-intensive products such as textiles, apparel, leather, toys and furniture. Together, these three product groups account for over 65 per cent of global MVA.

Create sector-specific integrated policy packages keeping in view the comparative offerings by other countries : Countries work assiduously to attract international firms. For example, Ethiopia could lure firms from China, Korea, Turkey and India (Raymond, Arvind Mills, Kanoria Textiles) to invest in its textile sector through a package of assured supply of high quality raw cotton and low land, labour and electricity costs.

This was topped up with the facility of zero duty access to US and EU markets through the trade agreements. In contrast, consider the hardship of Indian textile exporters who have to pay duties between 10 per cent and 18 per cent for entry into the US and EU markets.

Create world-class clusters : China emerged as the factory of the world through SEZs organised on cluster concepts. Computers, television sets, mobile phones and other electronics and telecom equipment manufactured largely with SEZs using the Global Value Chain model now account for 15 per cent of Chinese GDP.

Equally inspiring is the story of California’s wine industry which isn’t due to favourable climate or good soil quality. As the economist and academic Michel Porter noted: “Californian wineries thrive because they are surrounded by thousands of specialized companies that support the cultivation, production and marketing of wine by producing everything from bottles and labeling equipment to pesticides and advertising campaigns.” India needs to upgrade the existing systems and set up new coastal-based clusters.

Get one anchor company for each new cluster to kick-start the operations : India’s IT success story started with just two anchor firms in 1997 when British Airways and GE moved IT and other back-office operations to India.

Their success demonstrated that India was a reliable off-shoring destination and subsequently many firms set up operations in India. Today, IT exports are worth $100 billion. Anchor MNCs kick-start growth using their global network and persuading others to join.

Achieving the target will depend on the response of Indian firms or MNCs. Fortunately, all the elements needed are already present.

Government has announced many sector-specific initiatives, including those for the electronics and textiles sectors, and implemented ease of doing business reforms for improving trade and port infrastructure.

Most large global firms already have Indian operations. We may need to persuade some of these to become anchor manufacturers by addressing their specific concerns.

The writer is with the Indian Trade Service. The views are personal