How has the Indian Corporate Sector Responded to Two Decades of Economic Reforms in India? An Exploration of Patterns and Trends

Rakesh Basant and Pulak Mishra

No WP2012-02-02, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: In the context of various policy initiatives made during the last two decades to reform the Indian economy in general and corporate sector in particular, the present paper attempts to assess how the firms have responded to these policy measures and the resultant changes in the business conditions in a long run perspective. The paper finds that although the rate of growth of the Indian industry sector has not accelerated following economic reforms probably due to slow growth in agriculture and industrial productivity, investment in general and FDI in particular have shown considerable increase. Increase in competitive pressures during this period has forced the firms to adopt a variety of strategies. While reliance on mergers and acquisitions (M&A) has increased to restructure business and grow, the role of embodied and disembodied technology purchase has declined with firms relying somewhat more on in-house R&D. On the other hand, although strategies of building marketing and distribution related complementary assets continue to dominate the strategy of product differentiation, their role in a relative sense seems to have declined as these expenses as a proportion of sales show a declining trend. However, the emerging competitive pressures have raised the importance of sub-contracting/ outsourcing manufacturing, reducing the degrees of vertical integration. Interestingly, while cost-efficiencies do not show improvements, export orientation has increased across the industries significantly signaling enhanced global competitiveness of Indian firms, although imports have risen faster than exports. Overall, the observed trends of corporate response to economic reforms are interesting, but one need to systematically explore how M&A led consolidation and flows of FDI are linked to the adoption of various non-price strategies relating to technology and product differentiation. As economic reform deepens and competitive pressures build up, an analysis of these interactions would provide useful insights for understanding corporate behaviour and for making policy choices.

Date: 2012-02-28
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