Resource allocation in Indian companies: An empirical study based on financial data from Annual reports of BSE 500 companies

Abstract

Resource allocation is a key strategic decision in most companies. Allocation of limited resources among competing businesses, projects, geographies or functional divisions is a very common problem that managers face quite regularly. According to Hax & Majlufi typical resources that require judicious allocation fall into three categories: 1) Financial. 2) Technological. 3) Human Resources. They also mention that such decisions are often centralized and cannot be delegated to lower levels of management since these department managers compete among each other for these resources in the first place. And also very high degree of formalization is not possible in this regard. Moreover the outcomes of such decisions also have very important and often long term implications. Timing and degree of commitment during entry as well as exit are often critical for success. And in this era of ever increasing shareholder scrutiny and corporate governance, top management cannot get away with lousy decision making. All these factors prove the importance of resource allocation as a critical strategic decision that managers at the upper level of management need to make. In Bower’s words, “The way resources are allocated in the firm shapes the realized strategy of the firm”ii. And the importance of this decision making increases with more number of competing opportunities available to the company as well as the amount of diversification already present within the company. Though this is a universal problem, this project aims at understanding the patterns of resource allocation in Indian companies. Indian companies are typically different from the companies in other countries in many ways. Historically, one of the major differentiating characteristics has been the widespread diversification (both related and unrelated) of Indian companies. Many of the existing businesses in India belong to erstwhile family run business houses with very high degree of differentiation. This happened for many reasons. Some of them are- the effects of License Raj during which Govt. had strict controls over the industries and having a commercial clout made it easier for companies to obtain licenses for other businesses. Also in the closed inefficient financial markets, often it was the companies who had the best resources and information to diversify portfolio and minimize risk by increasing footprints in countercyclical businesses. That is one of the reasons why the Indian investor has historically not penalized companies for unrelated diversification- a trend very uncommon in the developed economies. Hence a need was felt to understand the parameters and factors affecting the resource allocation process in Indian companies. This project aims at gaining a macro level understanding this resource allocation process.