India’s international engagement: Cost arbitrage or value addition

Abstract

NTRODUCTION: Today, India?s role in the world economy is very significant. Its moves, be it in terms of internal policy like that of education, Special Economic Zones (SEZ) for industrial development or external policy such as import duties and tariffs, concessions, etc, have profound implication for other countries. Therefore it is very important to understand what has driven this growth and what can sustain it. In the corporate world, there have been lots of firms going abroad with different objectives – growth from new markets, hedging risks by operating in different business cycles and so on. Therefore it is very pertinent for them to understand which industries to operate in as part of the internationalization strategy. This study aims to bring up some areas in which we have been successful as a country and others where we failed so that firms can understand the comparative and competitive advantages of the Indian economy today. MOTIVATION OF THE STUDY: Indian exports data is an indicator of the globalization efforts of firms from the country. A study of the structure of our exports and their drivers would bring out the latent advantages that India has developed over the last decade. From export of traditional products like tea, iron, etc, India has moved on to export pharma products, auto components, etc and compete with global firms. We find out if this shift has come from country-specific advantages or from competitive advantages of firms. If this turns out to be due to the latter, then it provides a clear guide for firms that intend to follow the path of the precedents. OUTLINE OF THE STUDY: This study explores the export growth in goods and services that India has seen in the last few decades and its drivers. It further analyzes what has changed in its composition and which sectors have contributed to the overall change. Four sectors (Gems and Jewellery, Petroleum Products, Software Services and Tea) are analyzed further to understand what led to the changes that were seen. Finally we identify some key success factors of the growth story and see if there is something to be learnt by the other industries. INDIA?S TRADE EXPORTS: India?s exports have risen significantly in the last 2 decades. The graph below (Figure 1) shows sluggish growth in exports in 1980s, which later rose dramatically in later part of 1990s. It grew with a CAGR of 18.73% from 1970 – 2008.