Professional Documents
Culture Documents
9G>K:C:CIG:EG:C:JG>6A:8DHNHI:B76C@>C<DCI=:G7>G:H:GK:76C@<DK:GCDG9G9HJ776G6D
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Nation Building:
The SME Route
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from the editor’s desk
Dear Reader,
The Indian SME sector holds the key to India achieving its economic and social objectives
in the coming decade. A lot has been said about the promise it holds. But the sector faces
many challenges that need to be overcome before its true potential can be realised. Our
cover story for this issue, ‘Nation building: The SME route’ dwells on how India can bring
to fruition this enormous opportunity. A series of articles on the subject spell out the need
for an integrated entrepreneurial ecosystem, and bring forth perspectives on some of the
pertinent financing and policy related issues.
The ISB recently played host to the Governor of the RBI, Dr D Subbarao for an interaction
with the students. Dr Subbarao also made time, amidst his busy schedule, to do an
interview with the ISBInsight. Our ‘Leader Speak’ section captures Dr Subbarao speaking
to Professor Rajesh Chakrabarti on how the financial crisis impacted the Indian banking
sector, and the role of the RBI going forward.
Our Face to Face section has an interview with a new member on the ISB Executive Board,
Mr Lakshmi Narayanan, Vice Chairman of Cognizant. He spoke to Professor Amit Mehra
and Associate Dean Deepak Chandra on a variety of topics ranging from his views on the
Indian IT Sector, to leadership, and philanthropy.
We look forward to your views on this issue. Please send your comments and suggestions
to me at editor_insight@isb.edu
Sriram Gopalakrishnan
?I8 >CH><=I<& <L^ciZg%."&%
Winter 09-10
contents
20
Leader Speak
5
(&76C@>C<DCI=:G7>
Dr D Subbarao, Governor, Reserve Bank
of India talks to Rajesh Chakrabarti,
Assistant Professor of Finance at the ISB,
about the impact of the global financial
crisis and the Indian banking system.
Cover Story
Features
+IG6CH;DGB6I>DC6A '(>C8AJH>DC#<GDLI=#>C
:CIG:EG:C:JGH=>E >C9>6!:CIG:EG:C:JGH=>E (+L=N6G:L:>C6
SMEs enhance inclusive growth by the 86C8DCC:8II=:9DIH# G:8:HH>DC4
manner in which they evolve, leverage Targeted policies aimed at the poor Arguing against conventional wisdom
local resources, and innovate to create and small businesses will allow about the causes of the recession, the
products and services. A well-thought out entrepreneurship to become an engine of authors say that the inability of existing
SME-driven entrepreneurial ecosystem both inclusion and growth. But creating financial and legal institutions to cope
can take the industry and India, to the an overall business-friendly policy with the huge increase in the world’s
next level. framework is more likely to be effective labour supply in a very short time period,
than subsidies. led to the recession.
/;>C6C8>C<HB:h>C>C9>6
Small firms in India cannot rely on ',HB:G:K>I6A>H6I>DC/686AA (/K6AJ:8G:6I>DC>C
informal sources to come to their rescue ;DGE6GIC:GH=>E B:G<:GH6C968FJ>H>I>DCH
when access to formal sources becomes A look at the role of industry, government While the expected synergies from most
difficult. They may be excluded from all and academic actors in SME revitalisation. M&As are similar to begin with, the
capital markets at the same time. What ultimate success of the deal is determined
could be a possible remedy? by the implementation of marketing and
9Zh^\c8dkZg>aajhigVi^dc7nIgVeZoZrGZhdjgXZh/AZVgc^c\GZhdjgXZ8ZcigZVii]Z>H7
Eg^ciZY6i@VaV?ndi]^EgdXZhhEkiAiY
8DENG><=I!'%%,#>C9>6CH8=DDAD;7JH>C:HH>H7#6AAG><=IHG:H:GK:9#6AA6GI>8A:H=6K:7::C
8DENG><=I:97N>H76C9CDE6GID;I=>HB6<6O>C:B6N7:G:EGD9J8:9:>I=:G>CE6GIDG;JAA!
DG:A:8IGDC>86AANHIDG:9>CID6G:IG>:K6AHNHI:B!DG9>HH:B>C6I:9>C6CN;DGB:A:8IGDC>8!
B:8=6C>86A!E=DID8DEN>C<!G:8DG9>C<DGDI=:GL>H:L>I=DJI>H7ÉHEG>DGLG>II:CE:GB>HH>DC#
;dghjWhXg^ei^dchVcYVYkZgi^hZbZcihXdciVXi^hW^ch^\]i5^hW#ZYj
))@CDLA:9<:=D6G9>C<
Some individuals perceive knowledge
acquired during the course of one’s job
as their personal intellectual property
Gireesh Shrimali, Assistant Professor of
Information Systems at the ISB, plans
to combine his research interests in
computer networks and the environment,
and focus on the emerging field of Green
37
and hence do not share it with others in IT.
the organisation. A look at the impact of
incentives, personality types and gender Knowledge Sessions
on sharing this knowledge.
*,HIG6I:<>:H;DGH86A:
Face to Face
44
As part of the Khemka Forum on Social
Entrepreneurship, hosted at the ISB,
)-696EI>C<IDC:L a panel discussion on the challenges,
E6G69><BH strategies and roadblocks involved in
Lakshmi Narayanan, Vice Chairman of scaling up social enterprises was held.
Cognizant, talks to Deepak Chandra,
Associate Dean, Centre for Executive *.LDGA9D;A:69:GH In Brief
Education and Amit Mehra, Assistant Henry R Kravis, the Co-Founder, Co-
Professor, Information Systems, at the Chairman and Co-CEO, Kohlberg Kravis +&>C7G>:;
ISB, about leadership lessons, innovation Roberts & Co shares his views on the Management perspectives from the ISB
and issues affecting the technology sector. private equity industry
Book Review
*'7G6C9H!CDIA67:AH/I=:
;JIJG:D;6EE6G:A +(7DD@G:K>:L
Vikram Rao, Director, Aditya Birla A review of ‘The Aid Trap: Hard truths
Management Corporation Private about ending poverty’, a book by R Glenn
Limited, talks to ISB students about Hubbard and William Duggan.
branding, e-retailing and other issues
affecting the textile sector.
Transformational
Entrepreneurship
7N@G>H=C6I6CJ@J
6]da^hi^XVcY^ciZ\gViZY[dXjhdcHB:h!hjeedgiZYWnVcZcigZegZcZjg^VaZXdhnhiZb!XVcgZh]VeZ>cY^VÉhhdX^d"
ZXdcdb^XaVcYhXVeZ#
India has an inspiring growth story. In a time when most to a new problem: growing economic disparity.
developed economies are still reeling under the worst The gap between the “haves” and “have-nots” is
recession in decades, India is surprisingly untouched growing at an alarming rate despite macroeconomic
and has emerged resilient by posting commendable indicators that should be painting a rosier picture.
economic growth rates of over 6.5 percent in the FY For example, a recent report by an expert group
2008- 2009. This is even more remarkable when we headed by Suresh Tendulkar now estimates poverty
consider the unprecedented floods the nation had to at 37.2 percent, an increase of roughly 10 percent
deal with in the same year. India posted a near stellar over the earlier estimates of 27.5 percent in 2004-05.
7.9 percent growth in the second quarter of fiscal year Primarily, the major reasons for the gap are:
2009-10, with the manufacturing sector clocking an
even more impressive 9.2 percent. 1 Weak employment and employability,
There are several underlying assets that kept India i.e., the need to create gainful employment for
strong during this period: a large domestic market, hundreds of millions entering into the job market
and a strong industrial base, including SMEs, and in the coming decade. Efforts by the Indian
relatively speaking, less dependency on an export- government to increase the gross enrollment ratio
oriented market. These factors, together with a large to 30 percent (still lower than the 40 percent for
potential demographic dividend, natural resources, developed nations) from today’s ratio of about
and a well-functioning market economy, continue to 11 percent, alone adds an additional 70 million
give strength. with higher education looking for employment
India’s incredible growth story, however, not by the year 2020.
only amazes, it confounds. With so much going for it,
it still ranks very poorly on many global dimensions.
For instance, on the Human Development Index, it
ranks 132 out of 179 countries; on the Transparency
Index, it ranks 85 out of 180 countries, on the
6]da^hi^XVcYlZaa"i]dj\]i
Prosperity Index, 70 out of 104; on the Education djiVeegdVX]idYZkZade^c\
Index, 142 out of 176, and on the Global Hunger >cY^VÉhHB:hZXidg^hi]Z
Index, an embarrassing 66 out of 88. With high
overall GDP growth existing concurrently with poor bdhiZ[[ZXi^kZVeegdVX]id
performance on many metrics, India has graduated VYYgZhh^c\Y^heVg^in#
?I8 >CH><=I<* <L^ciZg%."&% COVER STORY
Cover Story
2 Unbalanced urban migration, and mitigating entrepreneurial enterprises account for a large portion
the large-scale migration of rural population into of new growth. In a study conducted by the US-based
urban areas Kauffman Foundation in 2009, one-third of the over
3 Micro solutions chasing mega problems, i.e., $14 trillion US economy came from new enterprises
the lack of scale and multiplier effect to current that were created within the last 25 years. Achieving a
approaches relevant in the Indian context. similar benchmark is far more critical for India. It is
Creating socio-economic equity within a high- also very much possible, if India takes a holistic and
growth environment is the pivotal challenge of the pragmatic approach to creating new enterprises, while
country in this fresh new decade. It will be key supporting the growth of the existing SME base.
to guaranteeing economic security with growth, India is aspiring to grow its economy by 9 percent
access to affordable health care, education and or more over the next decade. To achieve this level
clean environment to all its citizens. Without socio- of overall GDP growth, assuming a steady growth
economic equity, India’s hard fought successes will of 2.5 percent and 8 percent in the agriculture and
largely evaporate, and be replaced irreversibly with an services/manufacturing sectors respectively, the SME
entrenched, calcified system of stark disparities. sector (both existing and new enterprises) would
7di]Zm^hi^c\VcYcZlanXgZViZYZciZgeg^hZhXdjaY
Xdcig^WjiZVhbjX]Vh'-eZgXZcid[>cY^VÉh<9EWni]Z
nZVg'%'%!l]Zci]ZdkZgVaaZXdcdbn^hZmeZXiZYidgZVX]
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:cigZegZcZjg^Vaan [dXjhZY HB:h XVc need to quadruple its GDP contribution from the
VYYgZhh>cY^VÉhX]VaaZc\Zh current level of $200 billion. This would mean that
The solution to India’s challenges lies in reframing both existing and newly created enterprises could
the question on poverty: from eliminating poverty to contribute as much as 28 percent of India’s GDP by
fostering the creation of wealth by many across the the year 2020, when the overall economy is expected
nation. A holistic and well-thought out approach to to reach USD 2.8 trillions from the current base of
developing India’s SME sector is the most effective USD 1.2 trillion in FY 2008-09.
approach to addressing disparity. India can achieve its socio-economic objectives
Thus far, Indian SMEs have played a very by focusing on gainful employment for millions of
significant role in India achieving its current robust educated youth and by helping millions of others
overall economic growth. The SME sector currently transition from an overburdened agricultural sector
contributes to over 40 percent of exports, and creates to the small-scale manufacturing and service sectors
over 1.3 million jobs per year. About 60 million are
employed in this sector. In addition, SMEs enhance
inclusive growth by the manner in which they evolve, ;^\jgZ&/HB:Xdcig^Wji^dcidegd_ZXiZY<9E\gdli]^ci]ZcZmi
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Global multinational corporations have already focus on sustainable skills enhancement to support
understood India’s ability to be a unique laboratory micro and SME enterprises. While the physical size
for global innovations. A recent interview with the GE of these zones will vary from a few hundred to several
CEO Jeff Immelt discussed the concept of “reverse thousands of acres, they will all follow the same basic
innovation”, where products innovated locally in model. This model will focus on economic growth
India will be adapted and taken to scale in more and employability, coupled with environmental
developed markets, instead of the reverse, as has been sustainability and social viability driving their
traditionally the case. A similar approach can be used development.
in entrepreneurship as well.
>cY^V8Vc9d>i
8dcXZei^c6Xi^dc/H:OhVhVegdidineZ To accomplish these objectives, a set of
A perfect prototype to accomplish the stated social transformational initiatives along several dimensions
equity goals is to redefine the concept of SEZs. are needed. These initiatives would focus on defining
Usually this acronym stands for Special Economic and establishing an alignment between social vision
Zones, demarcated areas with economic laws more and economic vision driven by political vision. Social
liberal than the country’s typical economic laws, in vision focuses on people; the economic vision focuses
order to increase foreign direct investment, exports on achieving social equity while the political vision
and stimulate economic growth within that area. focuses on simplified but detailed governance at
Under the new vision of building social equity, they multiple levels. The focus must be on inclusiveness,
can be redefined as a network of coordinated Social accountability, partnerships, local governance, and
Equity Zones and Special Employability Zones, spread transparency.
across the country at village, mandal and district A holistic and integrated focus on building a
levels, covering all 625 districts nationwide and linked nationwide entrepreneurial ecosystem can reshape
with various industry clusters. These new zones will India’s socio-economic landscape in the next decade,
be primarily focused on sustainable social-economic and enhance its global standing enormously in all
development aligned with local resources and needs socio-economic dimensions of growth. Nation-wide
but with global aspirations. entrepreneurship development with appropriate
From standpoint of their execution, these zones scale, scope and innovation will make all the
will concentrate on building productive assets with a difference.
HB:h^c>cY^V[VXZbVcnX]VaaZc\Zh!WjieZg]VehcdcZbdgZ[dgb^YVWaZi]Vci]ZX]VaaZc\Zd[ÒcVcX^c\!Wdi]h]dgi"
iZgbVcYadc\"iZgb#I]^hVgi^XaZedgigVnhi]ZZcdgb^ind[i]^hX]VaaZc\ZVcYdjia^cZhVedhh^WaZeVgi^VagZbZYn#
Small and medium enterprises (SMEs) constitute an Rajan, Eric J. Gleacher Distinguished Service Professor
important segment of the economy in India and in of Finance, University of Chicago during 2007-08.
other emerging countries. For those countries, they In our ongoing research work, conducted
often serve as the ‘engines of growth’. Using data jointly with Franklin Allen, Nippon Life Professor of
from the Micro, Small, and Medium Enterprises Finance and Economics, The Wharton School, Rajesh
(MSME) Ministry of the Government of India, Chakrabarti, Assistant Professor of Finance, ISB, Jun
Shamika Ravi, Assistant Professor of Economics and Qian, Associate Professor, Boston College and Meijun
Public Policy, ISB has estimated that the MSME sector Qian, Assistant Professor, National University of
accounts for 8 percent of India’s GDP, 50 percent of Singapore2, we classify the sources of funds in four
total manufactured exports, 45 percent of India’s broad categories:
total industrial employment, and 95 percent of all t JOUFSOBM TPVSDFT OFU JODPNF BGUFS EJWJEFOET
industrial units1. The figures underline the importance depreciation, and provisions or funds set aside
of the sector. but not spent
The official definition of an SME differs for t FYUFSOBM mOBODJOH UISPVHI CBOLT BOE PUIFS
manufacturing and services sectors. Under the MSME financial institutions (FIs): debts and loans
Development Act 2006 of the Government of India,
a manufacturing firm with investments in fixed assets
of plant and machinery below Rs. 100 million (about
DcVcVkZgV\Z!i]Zn\didcan
US$ 2.2 million) qualifies as an SME; for firms in the &*eZgXZci[gdb^ciZgcVa
services sector, the ceiling is Rs 50 million (about hdjgXZh!^cY^XVi^c\i]Vi
US$ 1.1 million) in fixed assets.
SMEs in India face many challenges, but perhaps i]ZnVgZ[VgaZhhegdÒiVWaZ!
none more formidable than the challenge of financing, '*eZgXZci[gdbWVc`hVcY
both short-term and long-term. In this short article,
I’ll try to give the readers an idea about the enormity
;>h!VcY&%eZgXZci[gdb
of this challenge and outline a possible partial remedy. XVe^iVabVg`Zih#6hbjX]
My discussion is based partly on research underway Vh*%eZgXZcid[i]Z^gidiVa
at the Centre for Analytical Finance (CAF) at the ISB,
and partly on the work we did for the Financial Sector VccjVa[jcY^c\XVbZ[gdb
Reforms committee headed by Professor Raghuram VaiZgcVi^kZhdjgXZh#
?I8 >CH><=I<. <L^ciZg%."&% COVER STORY
Cover Story
t FYUFSOBM mOBODJOH UISPVHI NBSLFUT FRVJUZ BOE somber picture of the state of SME financing. Poor
debt raised from capital markets profitability and lack of access to formal capital
t BMUFSOBUJWFTPVSDFTPGFYUFSOBMmOBODJOHFRVJUZBOE markets and institutions result in heavy dependence on
debt raised from private sources including group alternative financing channels. Typically, funding from
companies, promoters/founders, and friends and those channels is considerably costlier than funding
family; trade credits, and other liabilities. Often, from formal sources. This creates a most unfortunate
though not exclusively, alternative financing is vicious cycle in the pattern of funding. High cost of
based on informal, non-contractual, relationships funding results in poor profitability. Poor internal cash
between the supplier and user of capital. As a flow generation limits ability to service formal bank
result, this type of financing is also called informal debt, and makes the firm less creditworthy from a
financing. bank’s point of view. This, in turn, leads to greater
We find that in recent years, large Indian firms dependence on alternative channels.
(the firms above the SME threshold by the official To supplement the information from secondary
definition) obtained about 47 percent of their total financial data, and to get first-hand opinions and
funding from internal sources, 19 percent from banks viewpoints of SME owners and managers, CAF we
and FIs, and 5 percent from capital markets. The conducted two sample surveys of Indian SMEs in
remaining 29 percent came from alternative sources. 2005, one in Hyderabad and the other in Delhi. By
For the SMEs, the financing pattern was radically design, the surveys included the smaller SMEs. The
different. On an average, they got only 15 percent evidence from the survey data is equally stark. For
from internal sources, indicating that they are far less the survey respondents in the start-up phase, the
profitable, 25 percent from banks and FIs, and 10 two most important financing sources were friends
percent from capital markets. As much as 50 percent and family and trade credit. In the growth phase,
EddgegdÒiVW^a^inVcYaVX`d[VXXZhhid[dgbVaXVe^iVabVg`Zih
VcY^chi^iji^dchgZhjai^c]ZVknYZeZcYZcXZdcVaiZgcVi^kZ
ÒcVcX^c\X]VccZah#Ine^XVaan![jcY^c\[gdbi]dhZX]VccZah
^hXdch^YZgVWanXdhia^Zgi]Vc[jcY^c\[gdb[dgbVahdjgXZh#
I]^hXgZViZhVbdhijc[dgijcViZk^X^djhXnXaZ^ci]ZeViiZgc
d[[jcY^c\#
of their total annual funding came from alternative for the firms that have been in business for five years
sources. Friends and family equity accounted for a or longer, the same two sources were again the most
huge proportion of their alternative finance, followed important. In other words, even for the SMEs that
by trade credit. In the same study, we survived for five years, formal capital markets and
also find that firm size is inversely related institutions remained inaccessible.
to dependence on alternative financing In another study that we just completed3, we find
sources; the smaller the firm, the higher evidence that is even more sobering. There is credit
is the proportion of alternative financing rationing in alternative markets. Credit providers are
in the total. reluctant to offer credit beyond a point, regardless
Our findings are based on an of the credit terms. To prevent voluntary defaults,
examination of the finances of a very the loan size is appropriately limited below what the
large sample of firms, over 12,000 in borrower desires and the interest rate is kept from
total. The dataset was compiled from rising to an excessively high level. While there is
the Prowess database of the Centre for widely documented evidence that firms in emerging
HVc`Vg9Z^hi]Z:mZXji^kZ
9^gZXidgd[i]Z8ZcigZ[dg Monitoring Indian Economy (CMIE), economies, especially the smaller firms, face credit
6cVani^XVa;^cVcXZ86;Vi the most reputed purveyor of Indian constraints in formal credit markets4, ours is the
i]Z>H7
corporate data. The findings paint a first study that documents similar access problems
for informal credit. Our finding that credit rationing working capital loans etc. can be securitised. Besides
exists in alternative credit markets has a major absence of clear regulatory approval, stamp duty is a
implication. It suggests that small firms in India, and major hindrance to the development of securitisation
possibly in other emerging economies, cannot rely on in India. This duty is payable on any instrument
informal sources to come to their rescue when access which seeks to transfer any rights or receivables at
to formal sources becomes difficult. They may be an ad valorem rate, which ranges from 0.1 percent
excluded from all capital markets at the same time. to 8 percent across the states in India. The process
Is there a market-based remedy, not interest of transfer of the receivables from the originator
subsidies or other types of handouts that are always to the SPV involves a stamp duty, which can make
distortionary and usually ineffective, that can ease the securitisation commercially unviable in several states.
financing situation for Indian SMEs? I proposed one Besides, there is the risk that stamp duty could also
to the Rajan Committee on financial sector reforms. be levied on the issue of securitised instruments by
It was accepted by the committee and included in the SPV to investors. Patil Committee on Corporate
its report5. As we have noted above, trade credit is Bonds and Securitisation (2005) recommended that
a critically important source of finance for Indian the Central Government should institute a process
SMEs. They could reduce their investment in working leading to a uniform and affordable stamp duty rate
capital, and thus their need for funds, significantly if across all states. The recommendation has not been
the receivables owed to them by large firms could implemented yet.
be securitised. In principle, such receivables, if
accepted, are essentially commercial paper with the
high credit ratings of the large firms. Further, the
resulting balance sheet clean – up would improve the &
H]Vb^`V GVk^! Æ:cigZegZcZjgh]^e 9ZkZadebZci ^c i]Z
creditworthiness of the SMEs concerned. B^Xgd! HbVaa VcY BZY^jb :ciZgeg^hZ HZXidg ^c >cY^VÇ#
Currently, a negotiable Bill of Exchange (BoE) '%%.'
issued by a buyer against goods received on credit '
;# 6aaZc! G# 8]V`gVWVgi^! H# 9Z! ?# F^Vc! VcY B# F^Vc!
provides a form of securitisation of trade credit. The Æ;^cVcX^c\;^gbh^c>cY^VÇ'%%.#
supplier can have the BoE discounted with a financial (
H# 9Z VcY B# H^c\]! Æ>ciZg"Ògb 8gZY^i/ 9d >c[dgbVa
intermediary in a private transaction. The supplier GZaVi^dch]^eh=ZaeÇ'%%.
and the intermediary can also endorse the bill in favor )
GZXZci hijY^Zh YdXjbZci ÆhjWhiVci^Va jcYZg"aZcY^c\Ç
of any other party. Currently, it is mostly banks that VcY ÆXgZY^i gVi^dc^c\Ç Wn >cY^Vc WVc`h id i]Z XdgedgViZ
deal in BoEs. Typically, they keep the acceptance and hZXidgh!^ci]Vii]ZaVhigjeZZaZciidVXdgedgViZWdggdlZg
discounting levels under the credit limit set up for n^ZaYhVh^\c^ÒXVcian]^\]ZggZijgci]Vci]ZXdhid[i]ZadVc#
the buyer. However, the nature of the transactions ;dg ZmVbeaZ! 6# 7VcZg_ZZ VcY :# 9jÓd '%%&! '%%) VcY
and the physical format of BoEs rule out a sizable 6#7VcZg_ZZZiVa#'%%(ÒcYi]ViWVc`XgZY^ilVhhXVgXZ
secondary market in them. A more formal process of l]^aZ ^ciZgZhi gViZh! i]dj\] ]^\] Wn ldgaY hiVcYVgYh!
securitisation involves special purpose vehicles (SPVs). VeeZVgZY id WZ WZadl Zfj^a^Wg^jb aZkZah [dg i]Z^g hVbeaZ
In this form, the individual loans or receivables are d[ Ògbh# I# <dgbaZn '%%, ÒcYh i]Vi i]Z Zcign d[ [dgZ^\c
assigned to an SPV (normally a trust) which in turn WVc`hYdZhcdigZaVmi]ZdkZgVaaXgZY^iXdchigV^cihd[>cY^V
issues tradable securities against the loans. Ògbh ZheZX^Vaan HB: Ògbh h^cXZ i]Zn dcan aZcY id i]Z
As yet, corporate trade credits are not securitised. bdhiegdÒiVWaZÒgbh#
The existing RBI guidelines do not make it very *
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ldg`46cYl]Vieda^Xndei^dchh]djaYWZejghjZY4
The challenge is to enhance economic participation arises: does special treatment work? Politicians in all
among those at the bottom rungs and facilitate their countries revere small-scale enterprises and provide
climb, without tripping up those who are at the higher many a subsidy in their name. However, the efficacy
rungs. of these subsidies seems mixed. One study in the US
Encouraging entrepreneurship in all sectors is concluded, “Policies designed specifically to help small
one way to address this dilemma. Entrepreneurs businesses do not always have the intended effect,”
contribute to economic growth by creating because they end up benefiting large businesses even
new industries, increasing productivity through more than small businesses, or do not meet their
competition, identifying viable new technologies, and objectives at all. As common sense would suggest,
working efficiently and intensively2. They serve as exempting firms below a certain threshold from
a conduit for the commercialisation of knowledge regulation hinders firm growth because firms near the
and contribute to economic growth over and beyond threshold for exemption, “adjust their size to avoid
the contributions of R&D and human capital3. the more highly regulated market6.”
Entrepreneurship also reduces poverty. Indeed, the In the Indian context, a team of RAND and
microcredit revolution aimed at the poor was based Indian School of Business (ISB) researchers recently
on viewing each person as a potential entrepreneur, examined the efficacy of policies in encouraging
thereby fuelling “tiny economic engines of a rejected entrepreneurship in a project supported by the the
portion of society4.” In other words, as a means of Legatum Institute. A state-level analysis showed that
wealth creation for the individual and the country, policies aimed at the micro, small, and medium
entrepreneurship spans the socio-economic and enterprises (MSME) sector – for instance, total
sectoral spectrum, from villager to venture capitalist, financial subsidy for MSMEs – had little or no impact
from handicrafts to hardware. on the growth of the MSME sector, whereas more
:cigZegZcZjghXdcig^WjiZidZXdcdb^X\gdli]WnXgZVi^c\
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VcY^ciZch^kZan#
No doubt, factors highlighted elsewhere, such general development policies such as expenditure on
as infrastructure and human capital, are also very infrastructure and access to finance had significantly
important for economic growth5. Indeed, they all more positive impact on the growth of this sector
aid entrepreneurship. However, entrepreneurship, across states over the last 15 years7.
which by its very nature embodies creative approaches When the research team looked at individual
to dealing with constraints, can take root even when entrepreneurial activity in a predominantly rural, low-
the above factors are still in the development stages. income sample, they found that individuals responded
Having many years of formal education is not a better to policies that are likely to have a direct impact
necessary prerequisite for becoming an entrepreneur, on them (such as human capital and technology
and this is highly relevant for a country where a assistance, and subsidy for capital and financing) while
large fraction of adults have minimal education. policies aimed at industries (subsidy for taxes, power,
Sowing the seeds of entrepreneurship among Indian and land, industry targeting, incentives for technology
farmers will increase agricultural productivity and clusters, Special Economic Zones, and Single Window
rural incomes, hasten industrial transformation, Clearance) had little or even a negative effect8.
and increase growth. Fostering entrepreneurship is When the effect of the Single Window Clearance
therefore a here and now policy option to stimulate (SWC) policy was examined in detail by the research
inclusive growth. team using firm-level data, they found that it had
the effect of reducing the time cost of regulatory
9dZhheZX^VaigZVibZcildg`4 compliance across all types of firms. However,
Given the potential of entrepreneurship to both reduce enterprises do not appear to have experienced a
poverty and increase incomes, a natural question significant net impact in terms of firm sales and assets
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Figure 1 shows the details. The 13 procedures from their human capital in other countries but are
needed on average to start a business in India take unable to do so at home, either because they do
30 days. The corresponding figures for Singapore are not have a conducive policy environment or do not
three each. The cost of starting a business in India have the requisite human capital11. As mentioned
is over 66 percent of India’s per capita income, and earlier, for the many uneducated adults,
the minimum capital requirement is a whopping 210 what is needed is not formal education,
percent of per capita income. (The respective figures but training aimed at starting and running
for Singapore are 0.7 percent and 0 percent.) While an enterprise effectively. A recent study
everyone would benefit from a lowering of these that provided thirty to sixty minute
burdens, the poor would obviously benefit more. It entrepreneurship training to poor, female
is also not surprising that financing assistance for the micro-entrepreneurs in Peru, found
poor is an oft-advocated policy. improved business knowledge, practices,
The effect of entrepreneurship on growth is more and revenues12.
markedly positive in developed countries, suggesting Clearly, targeted policies aimed at
that this may, in part, be due to low levels of human the poor and small businesses will allow
capital among developing country entrepreneurs10. entrepreneurship to become an engine of @g^h]cV7@jbVg^hV
HZc^dg:Xdcdb^hiViG6C9!
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would be a shame if Indians benefit entrepreneurially take so much time and money!
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>cY^V/ I]Z I^\Zg l^i] V [Zl B^hh^c\ and attention to the growth and revitalisation of
Hig^eZh the micro, small and medium enterprise (MSME)
The impressive growth story of India during the sector.
past two decades is well known. What is less
known is that the transformation from a primarily BHB:/I]ZHiZgd^Y
agricultural to a more diversified economy has been The MSME could be the steroid the Indian economy
slower than expected. As Arvind Panagariya noted needs at this juncture. The SME provides not only
recently in Business Standard, while the output the much needed boost for growth, employment
share of agriculture fell from 28.9 percent in and exports but more significantly, contributes to
1993-94 to 19.2 percent in 2004-05, the absolute geographical and social equity. About 60 million
number of workers employed in agriculture during persons are employed in 26.1 million MSM
the same period increased by 27.3 million. More enterprises (according to the fourth National
significantly, the output share of manufacturing MSME Census of 2006-07) and contribute about
during this period remained static at around 45 percent of manufacturing output and 40 percent
15.8 percent, with a marginal increase in its of total exports. Overall, the sector has provided
employment share from 10.4 to 11.7 percent. ten times as many jobs as large enterprises for the
The skilled labour intensive industrial growth has same level of investment.
not enabled a significant shift of workforce from Significantly, the MSME sector has maintained
agriculture to manufacturing. Further, the rate of a higher growth rate vis-à-vis the overall industrial
poverty reduction has been slower compared to sector during the past decade. According to the
China and Brazil. Confederation of Indian Industries (CII)-Outlook
While the Indian economy is robust enough to Survey, exports from these enterprises have been
sustain the growth momentum of nine percent or on the rise, despite increased cost of raw materials,
higher over the next decade, it needs to be fortified sluggish global demand and stiff international
with measures for diversification, accelerated competition. Today this sector produces a
employment creation and poverty reduction. wide range of products, from simple consumer
The mantra of “inclusive growth” should entail goods to high precision and sophisticated end-
expansion of growth and employment opportunities products. It has emerged as the major supplier
across the geographical, social and sectoral canvas. of mass consumption goods as well as producer
This could be realised through sharper focus on of electronic and electrical equipment and drugs
and pharmaceuticals. An impetus to the sector exceeded Rs 6,967 crores ($1.54 billion) during
is therefore likely to have a multiplier impact on 2007-08. This is in addition to the internally
economic growth. accumulated savings of over Rs 3,200 crores
($0.71 billion). However, the investment portfolio
8]VaaZc\Zh and the activity profile of these organisations
Notwithstanding ‘the small is beautiful’ rhetoric, reveal low returns on investment with little or no
the sector is confronted with a plethora of value addition. Consequently, the trillion dollar
problems and not all of them small. Nearly grassroots potential has remained simply that.
one-third of the SMEs in Andhra Pradesh (AP)
state are classified as ‘sick’ by the third national <dkZgcbZci/I]Z;VX^a^iVidg
MSME census. Despite a doubling of credit Recognising the importance of SMEs to growth
flow to the sector from Rs 1.27 lakh crores and employment, the government established a
($ 27 Billion) in 2006-07 to Rs 2.57 lakh crores legislative framework - through the MSME Act
($ 57 Billion) in 2007-08, credit - particularly 2006 - and an institutional framework through the
for operational requirements - continues to be MSME Ministry. The Prime Minister established a
a major constraint. Technological obsolescence, high-level taskforce for promotion of this sector
paucity of skilled human resources, scarcity under the chairmanship of his Principal Secretary.
of raw materials, infrastructure deficiencies, This taskforce’s report is currently under the
marketing bottlenecks, sub-optimal quality government’s review and hopefully will provide
standards, competition from large enterprises and the much-needed impetus to the SME growth by
management inefficiencies are some of the better addressing the challenges confronting the sector.
IZX]cdad\^XVadWhdaZhXZcXZ!eVjX^ind[h`^aaZY]jbVc
gZhdjgXZh!hXVgX^ind[gVlbViZg^Vah!^c[gVhigjXijgZ
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hiVcYVgYh!XdbeZi^i^dc[gdbaVg\ZZciZgeg^hZhVcY
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X]VaaZc\ZhXdc[gdci^c\i]ZhZXidg
known challenges confronting the sector. First- With an economy of $280 billion at purchasing
generation entrepreneurs, especially in the micro- power parity, AP is the third largest economy in
enterprise arena, are forced to swim in unknown India; with 86.6 million people, it is the fourth most
waters. Support systems for the nascent sector populous state. It is also the first state in India to
are not robust enough to respond with required create a legislative framework and establish a single
sensitivity and effectiveness. window to streamline the approval process for the
establishment of SMEs. With the participation of
JciVeeZYLZVai]Vii]Z<gVhhgddih the government, industry and the banks, AP was
Through the collaborative efforts of the also one of the first states in India to establish an
government, civil society, community organisations MSME Facilitation Council for quicker resolution
and academia, several states in India, with AP at the of conflicts. For the past decade, a comprehensive
forefront, have done outstanding work in fostering a policy framework has been in place for MSME
socio-economic powerhouse in the form of women development, with primary focus on fiscal
self-help groups (SHGs) and village organisations incentives and infrastructure support.
(VOs). In AP alone, 10.2 million women have The government – both central and state –
been organised into 850,000 SHGs in 35,500 have been implementing a slew of programmes
villages spread across the state. The credit flow to for MSME promotion. The national government
these organisations from the financial institutions is financing the National Manufacturing
Competitiveness Programme, the programme for programme – in partnership with the ISB, 540
Quality Management Standards (QMS) and Quality engineering colleges, technical universities and
Technology Tools (QTT), a programme for building the industry. R&D and academic institutions have
awareness on intellectual property regimes, support an important role not only in providing technical
for entrepreneurial and managerial incubation, assistance, technology development and capacity
and more. In addition, the Prime Minister’s development but also in enabling the establishment
Employment Guarantee Programme (PMEGP) of sustainable value chains and in designing and
seeks to support micro-enterprises and traditional testing sustainable and inclusive models, apart
handicrafts development. The government also from providing dynamic feedback to government
provides substantial support for clusters of MSMEs as well as industry.
by financing processing, storage and marketing Financial institutions, especially the Small
infrastructure. Industries Development Bank of India (SIDBI),
The AP state government has been providing have to ensure easy flow of credit to SMEs and
fiscal incentives in the form of VAT reimbursements, enhanced financing for technological development
power subsidisation, and registration fee waivers, in and upgradation, technical and managerial skill
addition to investment subsidies, interest subsidies development, and infrastructure development.
and support for quality certification, technology Collateral free credit and easy working capital
upgradation and entrepreneurship development. support to micro-enterprises are essential inputs.
The AP government is in the process of developing An SME Exchange, i.e., an institutional market
a comprehensive MSME policy for 2010-15, with to raise equity capital required for expansion,
ISB support and in partnership with the industry diversification and technology upgradation of
and the financial institutions. well-performing SMEs is another option.
Currently only about 8 percent of enterprises
6c6\ZcYV[dgEVgicZgh]^e are managed by women, but a significant number
The government can provide a proactive policy of technical graduates entering the job market
framework, create an enabling environment for are women. The contribution of women must
SME growth, facilitate approval processes for double in the next five years. Rural and traditional
new investments, offer fiscal incentives, technical enterprises contribute about 15 percent of the total
assistance and capacity development support for output and 40percent of the workforce employed
technology upgradation, quality certification, in the SME sector. The social capital formed
skill development of the technical and managerial by the SHGs in this arena could be harnessed
functionaries, and incentivise installation of energy- and nurtured through infusion of appropriate
saving and clean energy promotion technologies, technology and skills, managerial innovation,
process and systems automation, research and efficiency and productivity improvements, and
development and support for diversification of marketing support, unleashing a trillion dollar
well-performing SMEs. The government also has enterprise that has remained hitherto untapped.
a key role in facilitating equitable geographical Overall, there are more than adequate reasons
spread and outreach to traditionally disadvantaged for an optimistic prognosis. The economic growth
social groups. juggernaut of India will not only accelerate and
However, the government at its best can be sustain at double digit levels but also secure
a facilitator of growth and promoter of equity. inclusion of hitherto excluded regions, social
The role of the large enterprise is critical in groups and sectors through SME growth.
creating iconic models for emulation, stimulating
ancillarisation, skill upgradation and in improving
competitiveness. The AP government is considering
the launch of a skill development mission – duly 9g GVbZh] K EZcjbV`V ^h i]Z 8dbb^hh^dcZg! 9ZeVgibZci d[
taking advantage of the national skill development >cYjhig^Zh!8dbbZgXZVcY:medgiEgdbdi^dc!6cY]gVEgVYZh]#
ADB76G9D9>:G69
DcVgZXZcik^h^iidi]Z>cY^VcHX]ddad[7jh^cZhh>H7[dgVaZXijgZ!9g9HjWWVgVd!<dkZgcdg!GZhZgkZ7Vc`d[
>cY^VG7>idd`hdbZi^bZdji[dgVX]Vil^i]GV_Zh]8]V`gVWVgi^!6hh^hiVciEgd[Zhhdgd[;^cVcXZVii]Z>H7!VWdji
i]Z^beVXid[i]Z\adWVaÒcVcX^VaXg^h^h!i]Z>cY^VcWVc`^c\hnhiZbVcYi]ZgdaZd[i]ZG7>#
L]Vi Yd ndj i]^c` VgZ i]Z adc\"iZgb ^bea^XVi^dch regulating the financial sector. Regulatory arbitrage
VcYaZhhdchd[i]ZÒcVcX^VaXg^h^h4I]gZZnZVghYdlc across jurisdictions should be prevented.
i]Za^cZ!dcXZi]^c\h\ZiYdlcidcdgbVa^c>cY^VVcY Fourth, I think there is going to be greater
\adWVaan!ldjaYi]ZXg^h^h]VkZ[jcYVbZciVaanX]Vc\ZY coordination across countries in managing their
Vcni]^c\4DgVgZlZ\d^c\id\dWVX`idi]ZegZ"Xg^h^h policies. As we have seen, the G-20 was a very
ldgaY4 effective forum in managing the crisis, and now
There are important implications and lessons to in managing the recovery. Going forward, I think
be learnt from the crisis. First, we now know that G-20 will continue to be a prominent institutional
global imbalances need to be watched and that we forum. Emerging market economies are going to
cannot afford to have global imbalances build up to be important in the G-20. What they say, what they
unsustainable levels. Second, we also now know that do and intend what they don’t do, is going to be
decoupling does not work, that the whole world is important for how the global economy will evolve.
one, and that emerging economies will get affected And finally, I think there is going to be greater focus
by big developments in advanced economies. Third, on regulating risk and on pricing regulation of risk.
there is an important implication for the global
framework for regulating the financial system. It =dl l^aa WVc`^c\ WZ V[[ZXiZY4 >cY^Vc WVc`h ]VkZ
may not be possible to establish a global regulator VXijVaanYdcZkZgnlZaa^ci]Z\adWVaXdbeVg^hdc#L^aa
but there can be an agreement on a framework for i]^hh^ijVi^dc\^kZVcneZgbVcZciVYkVciV\Zid>cY^Vc
WVc`h\d^c\[dglVgY4
:bZg\^c\bVg`Zi There is a big debate about the utility and casino
models1. People say that one of the important and
ZXdcdb^ZhVgZ\d^c\id root causes for the crisis was the repeal of the Glass-
WZ^bedgiVci^ci]Z<"'%# Steagall Act in US. The repeal allowed investments
L]Vii]ZnhVn!l]Vii]Zn and non-traditional banking to be combined. There
is a powerful view that we must again divide them
YdVcY^ciZcYl]Vii]Zn into utilities and casinos.
YdcÉiYd!^h\d^c\idWZ I don’t think that is a realistic proposition.
^bedgiVci[dg]dli]Z However, as I said earlier, there is going to be greater
focus on pricing and regulation of risk. This will take
\adWVaZXdcdbnl^aaZkdakZ the form of demanding higher capital and leverage
COVER SPEAK
LEADER STORY L^ciZg%."&%
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Cover Story
ratios, liquidity ratios and expanding the perimeter has been a demand for liberalising the branch
of regulation to include not just banks but also near- authorisation policy of the RBI. I must also add that
banks. The regulators will focus on macro-prudential our branch authorisation policy was far less restrictive
regulation, not just on individual institutions but at than people believed it was, because we allowed banks
the collective systemic level. There is also going to be quite a lot of leeway in determining their branch
greater focus on financial stability because we have now expansion. However, in the recent policy, we have
learnt that price stability and macroeconomic stability relaxed this further – banks are now free to go and
do not necessarily guarantee financial stability. open branches anywhere upto tier III towns. We have
As regards the second part of your question, indicated that banks’ commitment to rural banking
Indian banks have remained safe and healthy during will be an important criterion in evaluating their
the crisis in part because of prudent and cautious requests for branches in urban areas. I believe this
regulation, and in part because of the relatively will encourage banks to go to rural areas.
limited globalisation of the Indian economy. In terms Having said that, I must also add that there is
of regulation, we have always been quite prudent a great deal of financial exclusion in the country.
in terms of demanding liquidity, mandating certain There are roughly 600,000 habitations in the country
leverage and in reckoning what sort of capital could and only about 30,000 are covered by a brick and
be counted as tier I capital2 in provisioning for risk. mortar branch. While it is just not possible to cover
The final part of your question was whether the remaining with brick and mortar branches, we
Indian banks have any advantage on the way forward. need to go for non-conventional methods, such as,
I think the crisis has shown that if the regulation is the business correspondent / business facilitator
prudent and proactive, you can reasonably expect to models (BC/BF)3 and Information Communication
maintain the safety of the system. The crisis has also Technology models. We have requested all banks to
shown that Indian banks are trustworthy and that work on plans to cover all villages with populations
they inspire confidence. above 2000 with banking facility.
>i hZZbZY Vi i]Z ]Z^\]i d[ i]Z Xg^h^h i]Vi ÒcVcX^Va G^\]icdl!\^kZci]ZY^hiVcXZgZhig^Xi^dchi]VilZ]VkZ!
gZ[dgbhldjaYegdWVWaniV`ZVWVX`hZVi[dgi]ZnZVghid i]Z 78$7; VcY di]Zg gZhig^Xi^dch egdWVWan gZYjXZ i]Z
XdbZWji^iadd`ha^`ZlZVgZWVX`idYd^c\gZ[dgbh#DcZ gZVX]!d[XdjghZ>jcYZghiVcYi]ZXdcigdagZfj^gZbZcih
d[i]ZbV_dghiZehgZXZcian]VhWZZci]ZVWda^i^dcd[i]Z VcY i]Z XVji^dc i]Vi \dZh l^i] ^i Wji ^h G7> deZc id
G7>a^XZchZgZfj^gZbZci[dgWVc`hdeZc^c\WgVcX]Zh^c hadlangZaVm^c\i]dhZVa^iiaZW^i4
gjgVaVgZVh#I]^hl^aaWZVW^\hiZe^cÒcVcX^Va^cXajh^dc# Absolutely. We have relaxed the distance restriction
L]Vi^hndjghZchZd[]dlbjX]^beVXii]^heVgi^XjaVg from 15 to 30 kilometres. We have also liberalised
bZVhjgZ l^aa ]VkZ4 9d ndj hZZ WVc`h iV`^c\ je i]^h the rules about entities that can be appointed as
deedgijc^in4 business correspondents. It has been suggested that
I do see banks taking up this opportunity. There there is no need for the RBI to decide the criteria for
?I8 >CH><=I<'& <L^ciZg%."&%
?I8 >CH><=I <'& <L^ciZg%."&% COVER STORY
LEADER SPEAK
Leader Speak
Cover Story
business correspondents and that we should leave it of the RBI. The RBI does not have, and does not
to the banks. I think that is the way to go forward and intend to have, a target exchange rate. We intervene
eventually we will get there, but I cannot say when. in the foreign exchange market only to manage
volatility. And what the crisis has in fact shown is that
I]Z adXVa VgZV WVc` ZmeZg^bZci lVh V h]dgi"a^kZY volatility in exchange rate can be more damaging than
dcZ! l^i] dcan [djg d[ i]ZhZ WVc`h hi^aa hjgk^k^c\# 6cn we believe. It can threaten your financial stability.
i]dj\]ihdci]Z^ggdaZ^cÒcVcX^Va^cXajh^dc4 So far as financial stability is a core concern of the
Note that we have commercial banks and we have RBI, managing volatility in the exchange rate remains
the cooperative sector. In the cooperative sector an important function. I think external sector
again, we have both, urban cooperative banks and management should continue to be with the RBI.
>cY^VcWVc`h]VkZgZbV^cZYhV[ZVcY]ZVai]nYjg^c\i]Z
Xg^h^h^ceVgiWZXVjhZd[egjYZciVcYXVji^djhgZ\jaVi^dc!
VcY^ceVgiWZXVjhZd[i]ZgZaVi^kZana^b^iZY\adWVa^hVi^dc
d[i]Z>cY^VcZXdcdbn
rural. Together, all these banks have a vast network. I]ZhZ YVnh! lZ hZZ V XdchX^djh bdkZ Wn i]Z
I believe that this network is sufficient to penetrate \dkZgcbZci!l^i]i]ZG7>d[XdjghZWZ^c\VeVgid[^i!
the hinterland, if the necessary policy framework is in idVha^\]ianbdgZXddgY^cViZY!^[cdijc^ÒZY!gZ\jaVidg
place and if the cost benefit calculations work out. So bdYZ# L]ZgZ Yd ndj hZZ i]Z >cY^Vc hnhiZb XjggZcian
the important thing is not really to experiment with WZ^c\adXViZYdci]ViheZXigjb49dlZcZZYidbdkZ
another model but to investigate what needs to be idlVgYhbdgZXddgY^cVi^dcdgbdgZjc^ÒZYgZ\jaVi^dc4
done in order to reduce costs and improve benefits. L]ViVgZndjgk^Zlh4
On the other hand, there are some questions In the current regulatory architecture, we have four
about the business model of local area banks. First, regulators in the financial markets. And there is also
are there economies of scale; second, concentration the High Level Coordination Committee for Financial
risk. Third, there are concerns about the ability of Markets (HLCCFM) which I chair and on which all
the low capital base of five crore rupees to absorb the the regulators and the government are represented.
losses. Fourth, can these banks first attract, and then At the moment, the HLCCFM is an informal body.
retain talent. So while I am open-minded, I am not Internationally, there is a debate about what would
certain that this model is something that we need to be the optimal regulatory architecture to take care of
push very hard. financial stability function. My view is that financial
stability cannot be entrusted to a committee. It has
Bdk^c\idVY^[[ZgZcihjW_ZXi!l^i]i]ZXg^h^hgZXZY^c\! to be the sole undivided responsibility of a single
i]ZgZ^hVgZhjbei^dcd[]dibdcZnÓdlh#=dlYdndj regulator because you need to act quickly. Oftentimes
i]^c` lZ h]djaY WVaVcXZ i]Z X]d^XZ WZilZZc XVe^iVa you also need to act by surprise and somebody needs
VXXdjci a^WZgVa^hVi^dc VcY XjggZcXn bVcV\ZbZci4 to be accountable. And that single regulator, I believe,
H]djaY XjggZcXn hiVW^a^hVi^dc gZbV^c V XdgZ [jcXi^dc should be the Reserve Bank or the central bank in
[dgi]ZG7>^ci]Z[dgZhZZVWaZ[jijgZ4 any country.
Yes, the currency function, to the extent of managing Sure, any system can always be improved further.
volatility in the exchange rate, should be a function Our HLCCFM system has worked well. However, we
COVER SPEAK
LEADER STORY L^ciZg%."&%<''
'' <?I8 >CH><=I
Cover Story
need to improve it in certain important respects in foreign exchange reserves, which includes both gold
order to make it more effective. and foreign exchange. So in proportional terms, gold
is relatively modest. We bought gold as the decision
LZ VgZ Vahd hZZ^c\ Vc ViiZbei Vi Xdchda^YVi^dc d[ of the International Monetary Fund (IMF) to sell it
i]Z WVc`^c\ hZXidg# I]Vi Vahd ]Vh ^ih dlc eajhZh VcY provided us with a rare opportunity to buy a large
b^cjhZh# I]ZgZ ^h Vc Vg\jbZci i]Vi lZ cZZY aVg\Z amount of gold outside the market mechanism in a
WVc`hidWZ\adWVaanXdbeZi^i^kZ#6ii]ZhVbZi^bZ!i]Z transparent manner at a price that is market linked.
Xg^h^h]Vhh]dlci]ZcZZY[dgVXZgiV^cX^gXjbheZXi^dc But our purchase of gold should be seen for what it
dcÈiddW^\id[V^aÉÒcVcX^Va^chi^iji^dch#L]ViVgZndjg is, which is that we invested a part of our reserves in
k^Zlh dc i]Z aZkZah d[ XdcXZcigVi^dc ^c i]Z >cY^Vc gold. Our decision was determined by three criteria -
WVc`^c\hZXidg4 safety, liquidity and return.
There is an argument that we must actively encourage
a few Indian banks to grow in size, because only then L]ViYdndji]^c`d[i]ZlVnlZ]VkZ]^hidg^XVaanWZZc
will they be globally competitive. A counter argument ]VcYa^c\ [dgZ^\c XjggZcXn gZhZgkZh VcY VhhZih d[ i]Z
is that if a few banks grow too big, they will be ‘too XZcigVaWVc`^c\ZcZgVa4
big to fail’, that oligopolistic patterns will emerge with We have had our foreign exchange reserve
just a few banks controlling the market. management audited by international auditors.
In India, this type of concentration is lower than They have certified that we follow the best practices.
in many other countries. Our policy towards banking In fact, the RBI managers who manage our reserves
consolidation has been to encourage voluntary and are much sought after for their expertise by other
organic consolidation, based on efficiency criteria, countries! That should be a testimony to our ability
market synergies, business models and so on. So far, to manage the reserves.
we have encouraged mergers between weak private
banks and strong private banks. The government, at
the moment, is working on consolidation of public
sector banks. My view is that we must facilitate this
process without actively making the marriage. We &
8dbbZgX^Va WVc`h YZVa^c\h l^i] YZedh^ih! VYkVcXZh
must leave it to the market and to the institutions to VcY eVnbZcih VgZ d[iZc k^ZlZY Vh Æji^a^inÇ Ä Xg^i^XVa id
manage this process. i]Z ZXdcdbn Wji hiVWaZ VcY adl"g^h` Ä Vh deedhZY id
^ckZhibZciWVc`hi]ViVgZa^`ZcZYidÆXVh^cdhÇVhi]ZnYZVa
>c ndjg aZXijgZ! ndj Wg^ZÓn bZci^dcZY dei^bVa l^i]g^h`nVhhZihVcY^ckZhibZcih#
Xdbedh^i^dc VcY bVcV\ZbZci d[ XZcigVa WVc` VhhZih '
;daadl^c\i]Z7VhZaVXXdgYh!WVc`hcZZYid`ZZeXZgiV^c
VcY i]Z gZXZci ejgX]VhZ d[ \daY i]Vi bVYZ ]ZVYa^cZh XVe^iVaVhVegdedgi^dcd[i]Z^gg^h`"lZ^\]iZYYZedh^ih[dg
VXgdhhi]Z\adWZ#Hdl]Vi!^[Vcni]^c\!h]djaYdcZgZVY hV[Zin# I]^h XVe^iVa gZfj^gZbZci Xdbeg^hZh bjai^eaZ i^Zgh
^cid i]Z \daY ejgX]VhZh4 6cY \d^c\ [dglVgY! l]Vi d[ ^chigjbZcih YZeZcY^c\ jedc i]Z^g a^fj^Y^in VcY eg^XZ
bZX]Vc^hbhYdndj]VkZ^cb^cY[dgVhhZibVcV\ZbZci hiVW^a^in#I^Zg&^hi]ZXdgZXVe^iVad[VWVc`#
^c\ZcZgVa4 (
7Vc`h ^c >cY^V ]VkZ [dg V [Zl nZVgh cdl hiVgiZY jh^c\
The purchase of gold should be seen as part of our 7Vc`^c\ 8dggZhedcYZcih 78h l]d hZgkZ Vh V\Zcih d[ V
constant and continuous efforts to manage our WVc`WgVcX]idgZVX]WVc`^c\hZgk^XZhideZdeaZ#7Vc`^c\
foreign exchange reserves. To put this in perspective, ;VX^a^iVidgh7;hVgZh^b^aVgZci^i^ZhÄWjh^cZhhZhdgC<Dh
we had 357 tonnes of gold before the purchase, and l]dbVnYdegZa^b^cVgnXgZY^ihXgZZc^c\VcYdi]ZghZgk^XZh
we added another 200 tonnes, making a total of [dgi]ZWVc`#>cWdi]XVhZh!i]ZWVc`eVnhXdbb^hh^dcid
557 tonnes. This is about 6.1 percent of the RBI’s 78hVcY7;h#
?I8 >CH><=I<'( <L^ciZg%."&%
?I8 >CH><=I <'( <L^ciZg%."&% COVER STORY LEADER SPEAK
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Features
(+ L=N6G:L:>C6G:8:HH>DC4
(/ K6AJ:8G:6I>DC>CB:G<:GH6C968FJ>H>I>DCH
)) @CDLA:9<:=D6G9>C<
I]Z \adWVa ZXdcdbn ^h ^c V gZXZhh^dc VcY jcZbeadnbZci gViZh VgZ hdVg^c\# 7ji i]Z ÒcVcX^Va Xg^h^h ^h V bZgZ
hnbeidbVcYcdii]ZY^hZVhZ^ihZa[!hVni]ZVji]dgh^ci]^hVgi^XaZ
effect of channelling savings into dollar-denominated urban working population increased by nearly
assets. In order to defend their currencies after 300 million, which is roughly 1.5 times the US
the 1997 Asian crisis, most Asian countries started working population. This enormous labour supply
building up dollar reserves as a buffer against future coupled with China’s exports acted like a sudden
macroeconomic shocks. The result was that the supply shock to the global economy. A shock of such
current account surplus of the BRIC (Brazil, Russia, magnitude is likely to adversely affect some and
India, China), NIAC (Hong Kong, South Korea, positively affect others in the short run, even when
Singapore and Taiwan) and ME (Middle Eastern oil everyone is better off in the long run. In order to
exporting countries) countries rose from $4billion understand these effects, let us dig deeper into the
in 1996 to $798billion in 2007 – roughly equal to labour shock and the new globalised world.
the US current account deficit of $788 billion in With the availability of abundant cheap labour
2007. in China, a lot of low-skill jobs moved from the US
This excess inflow of foreign investment into to China. This inevitably meant job losses for certain
US treasuries and mortgage pools from countries sections in the US. The other side of the coin was
like China was what led to cheap financing of that since the wages paid to these Chinese could be
government debt and mortgage debt. This, in turn, much lower than the wages of those who lost jobs
I]^hZmXZhh^cÓdld[[dgZ^\c^ckZhibZci^cidJH
igZVhjg^ZhVcYbdgi\V\Zeddah[gdbXdjcig^Zha^`Z8]^cV
lVhl]ViaZYidX]ZVeÒcVcX^c\d[\dkZgcbZciYZWiVcY
bdgi\V\ZYZWi#
facilitated lower taxes and cheap home equity in the US, the employees who retained their jobs in
loans. Easy loans translated into greater demand forthe US would get higher salaries now. In a nutshell,
houses and hence rising house prices, i.e., the realnewly hired Chinese and Americans who retained
estate bubble. Moreover, low taxes and rising house jobs were better off and Americans who were fired
prices made US households feel wealthy. With the were worse off in the short run. In the long run,
however, those employees who were fired could be
availability of easy debt, this spurred an increase in
consumption including imports. trained and employed in other productive activities.
To explore this phenomenon further, consider This would increase the productivity and the GDP
the case of the Oriental Dragon and various of the US in the long run. Moreover falling prices
macroeconomic interplays. due to Chinese production would soften the impact
of short-term adversity.
I]Z G^hZ d[ 8]^cV VcY AVWdjg Hjeean According to the argument we have outlined
H]dX` above, one should expect significant investment in
China has benefited the most from globalisation. It China and increased Chinese exports to the US.
is one of the most important creditors and trading In fact, a lot of Foreign Direct Investors (FDIs)
partners of the US. Adjusted for purchasing power in China came from South Korea, Taiwan and
parity (PPP), China’s economy was 12 percent of Japan, and the Chinese trade surplus with the US
the world GDP in 2007, up from 2 percent in 1980. increased rapidly. Another interesting phenomena
This meteoric rise has been made possible by recent accompanying China’s increased income was the
innovations in communications and transport. increase in savings as a percentage of Income. But
These innovations have helped open up the services Chinese markets could not absorb these savings. So
of China’s enormous pool of underemployed labour where did these savings go?
to the western world.
This export-led growth enabled the movement 8Ve^iVa;adlhIdJh
of large segments of China’s rural population The increasing savings from China and other emerging
to the cities. Between 1990 and 2007, China’s economies flowed into US treasuries and other
FEATURES L^ciZg%."&%<'+ <?I8 >CH><=I
Features
?I8 >CH><=I<', <L^ciZg%."&% FEATURES
Features
bubble has led to the worst recession since the Great I]ZLVn;dglVgY
Depression. The fundamental cause of the crisis is the labour
supply shock and not the glut in liquidity which is
L]n9^YI]Z7jWWaZ7jghi4 often blamed. A higher savings rate in the debt-
The export-led growth in emerging markets led laden developed nation and greater capital flows
to an increase in prices of intermediate goods and to the developing nation will correct the structural
commodities. The ratio of Producer Price Index (PPI) imbalances in global capital flows.
to Consumer Price Index (CPI) increased sharply In the US, institutions that allow households to
from 2005 to 2007, suggesting that there was very reduce their debt burden and policies that promote
limited pass-through of higher prices from producers household understanding of the public debt would
to consumers. This caused downward pressure on contribute to higher savings. Amongst the developing
wages in the manufacturing sector. world, China’s export-led growth strategy would
With this pressure on wages, some subprime be unsustainable in the long run and domestic
households defaulted on their loans, leading consumption will have to grow. The world will need
to downward pressure on house prices due to to find a better way of handling the influx of millions
foreclosures. Spreads on mortgage-based securities of rural labourers from China and India into the
(MBS) tranches started blowing out, putting subprime productive workforce.
originators in trouble. Re-pricing of risk dried up There are significant challenges that lie ahead of
availability of teaser rate loans to home-owners with us. There is trouble brewing in commercial real estate
Adjustable Rate Mortgages (ARMs). markets. Many regional banks could take a hit due to
All this had a downward spiral effect, excessive exposure to bad loans, resulting in further
resulting in dramatically increasing delay in recovery. Additionally, as firms economise in
numbers of foreclosed properties in the downturn, there will be increasing outsourcing
bank inventories. pressure on them to cut costs. This would only add
to the underlying structural problems accentuating
Di]Zg>ciZgcVi^dcVa:mVbeaZh the recession. Countries might be tempted to close
A number of other countries apart doors to outsourcing of manufacturing and other
from the US experienced current activities – while this may provide temporary relief,
account (CA) imbalances and extremely it will accentuate other structural problems.
BjY^i@Veddg^hVc low saving rates. Interestingly, every
6hh^hiVciEgd[Zhhdgd[
:Xdcdb^XhVii]Z>H7 country running a significant CA deficit The paper, ‘Why are we in a recession? The Financial
also suffered a housing bubble and a Crisis is the Symptom not the Disease!’ was adapted for
:gchiHX]VjbWjg\^h subsequent crash. These countries now ISBInsight by ISB alums of the Class of 2009, Rakesh
VHZc^dg:Xdcdb^hiVi
i]Z;ZYZgVaGZhZgkZ
have the mammoth task of stimulating Gupta and Sumit Popli.
7Vc`d[CZlNdg`# their economy while credibly promising
=ZlVhegZk^djhanVc
6hh^hiVciEgd[Zhhdgd[ to impose fiscal discipline, and all this,
;^cVcXZVii]Z@Zaad\\ without the benefit of a reserve currency
HX]ddad[BVcV\ZbZci!
Cdgi]lZhiZgcJc^kZgh^in at their disposal.
FEATURES L^ciZg%."&%<'- <?I8 >CH><=I
Features
Value Creation
in Mergers and
Acquisitions
7N @G>H=C6BJGI=N HJ7G6B6C>6C 6C9 HIJ9:CIH >C I=: 8DGEDG6I: 8DCIGDA!
B:G<:GH6C968FJ>H>I>DCH8DJGH:6II=:>H7
I]^hVgi^XaZYZiV^ahhdbZd[i]Z[VXidghXg^i^XVaidi]ZhjXXZhhd[VcB6!WVhZYdcVXdbeVg^hdcWZilZZc[V^aZY
VcYhjXXZhh[jaYZVah#
While mergers and acquisitions are a very important about the ingredients that go to make a successful
tool in a CEO’s strategic toolkit, value creation in transaction?
mergers and acquisitions (M&A) remains a mirage. Over fifty teams, comprised of five ISB students
Firms invariably tout “synergies” as the reason each, set about answering these questions in an
compelling them to seek this medium of inorganic elective course on Corporate Control, Mergers and
growth. Synergy implies that the whole is greater Acquisitions. Using frameworks learnt in class , the
than the sum of parts. In other words, a merger or teams picked and contrasted a successful deal with a
an acquisition makes sense only if it leads to certain failed one, to separate credible sources of synergies
operational and/or financial advantages that the from the dubious ones. Their findings provide
individual entities could not harness by themselves, illuminating insights into M&As as a potentially
6bZg\ZgdgVcVXfj^h^i^dcbV`ZhhZchZdcan^[^iaZVYh
idXZgiV^cdeZgVi^dcVaVcY$dgÒcVcX^VaVYkVciV\Zhi]Vi
i]Z^cY^k^YjVaZci^i^ZhXdjaYcdi]VgcZhhWni]ZbhZakZh!
i]ZgZWnXgZVi^c\kVajZ[dgh]VgZ]daYZghd[Wdi]
egdiV\dc^hiÒgbh#
thereby creating value for shareholders of both value enhancing, yet very challenging instrument of
protagonist firms. Academic research shows that corporate financial strategy.
firms invariably overestimate possible synergies from a In this article, we summarize the broad findings
merger or an acquisition – particularly revenue-based from these studies. Also, we pick two of the most
synergies. As a result, acquirers lose value on average insightful projects to highlight and illustrate the
while the targets rake in the moolah. specific findings unearthed by ISB students. The first
Given such damaging evidence on M&As, what of these groups comprised Dipali Gupta, Dushyant
are some of the factors critical to deal success? Could Sharma, Kamaldeep Raina, Manpreet Singh, Rashmi
contrasting a successful M&A transaction with a failed Gupta and Toshal Sakhare, while the second group
one unearth common themes? Could it inform us was formed by Rohit Bhagwat, Venkataprasad Vedam,
?I8 >CH><=I<'. <L^ciZg%."&% FEATURES
Features
FEATURES L^ciZg%."&%<(% <?I8 >CH><=I
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The differences in eventual outcomes arose from the concerns of various stakeholders through different
several avenues. First, Mittal Steel invested substantial communication channels. Similar transparency was
time and effort in due diligence before approaching absent in the communications of DaimlerChrysler.
Arcelor. Lakshmi Mittal made efforts to effect a The DaimlerChrysler merger was touted as ‘a merger
friendly merger before launching a hostile bid to take of equals’ but in 2000, the CEO of Daimler-Benz
over Arcelor. In contrast, Daimler seemed to have publicly said that the equal partnership was merely a
compromised due diligence to avail tax benefits ($1.3 psychological gimmick to close the deal.
billion every year) permitted under the German law, Finally, ArcelorMittal was able to derive value
for a fast track deal. from the synergies of the merger, which is evident
Second, in the case of ArcelorMittal, the from the increased levels of profitability compared
management consistently projected the deal as growth- to the pre-merger individual entities. In contrast, in
oriented rather than capacity rationalization, which 2007, the nine-year merger of the two auto giants -
assuaged concerns about layoffs, enabling employee Daimler and Chrysler came to an end with Daimler
cooperation while also retaining top talent. Several selling its 80.1 percent stake in Chrysler to Cerberus
channels were established to listen to and address the Capital Management.
concerns of employees.
In contrast, in the DaimlerChrysler deal, the Jc^iZY He^g^ih A^b^iZY VcY FjV`Zg DVih
employees lived with a perpetual fear of job cuts due BZg\Zgh
to lack of transparent communication. Top executives On the one hand, United Spirits Limited’s (USL)
of Chrysler started leaving even before announcement phased acquisition of Shaw Wallace & Company
of the merger. Also, the inequity in layoffs between (SWC) was a runaway success, thanks to effective
6gXZadgB^iiValVhVWaZidYZg^kZkVajZ[gdbi]ZhncZg\^Zh
d[i]ZbZg\Zg!l]^X]^hZk^YZci[gdbi]Z^cXgZVhZYaZkZah
d[egdÒiVW^a^inXdbeVgZYidi]ZegZ"bZg\Zg^cY^k^YjVa
Zci^i^Zh#
German and American employees resulted in a feeling consolidation and competitive advantages realized
of distrust in American employees towards their through operational, promotional and financial
German counterparts. synergies. On the other hand, Quaker Oats' acquisition
Third, in ArcelorMittal, all post-merger corporate of Snapple could be dubbed one of the classic disasters
bodies like the Board of Directors had equal in the history of M&A, due to overestimation of
representation from the two entities. The headquarters revenue and operational synergies, as also integration
of the new entity was moved to Luxembourg, the challenges due to incompatible cultures.
former headquarters of Arcelor. This helped create a When USL merged with SWC, it led to an entity
sense of trust between the two organizations. with a market share of over 55 percent. This leadership
In contrast, for DaimlerChrysler, the executives position resulted in greater pricing and bargaining
bodies formed were skewed in favour of the Germans, power. Further, margins were significantly improved,
which only got worse with the passage of time. The due to cost reductions resulting from consolidation
structure was to have a parallel management with of distribution channels and lower number of selling
two CEOs – Robert Eaton (Chrysler) and Juergen agents. As a result, the earnings before interest, taxes,
Schrempp (Daimler- Benz) and two headquarters – depreciation, and amortization (EBITDA) grew from
Auburn Hill (Chrysler) and Stuttgart (Daimler-Benz). 8 percent to 18 percent in first half of fiscal year
However these plans were not executed in spirit. 2006-07.
Robert Eaton left before his stipulated term got over In stark contrast, Quaker intended to combine
and the functional headquarters remained at Stuttgart. its distribution network with Snapple’s existing cold
This left Chrysler employees feeling shortchanged. distribution channel to achieve higher revenues
Fourth, ArcelorMittal made an effort to address through cross-selling. In addition, Quaker planned
?I8 >CH><=I<(& <L^ciZg%."&% FEATURES
Features
to capitalize on the presence of its energy drink, bank. USL paid approximately Rs 203 per share,
Gatorade, in international markets to sell Snapple. against the expected synergy inclusive value of Rs
However, these synergies did not materialize because 215.77, thereby retaining a significant portion of the
of resistance among the channels to cross-selling. The expected value creation. USL also received a tax shield
combination of two dissimilar distribution channels, benefit of Rs 50.9 million because of the losses made
cold and warm, instead led to increased costs. by SWC in fiscal year 2005.
SWC and USL were fierce competitors and The Quaker–Snapple deal on the other hand was
annually spent close to Rs 200 crores on promotional an all-cash deal. Snapple’s share value had plummeted
offers to grab each other’s market share. Post due to its various acquisitions. The deal reduced the
acquisition, their promotional expenses went down interest expense of the combined entity, but left no
drastically and their combined product portfolio and money on the table to provide Snapple an incentive
brand equity created formidable barriers to entry. In to integrate successfully with Quaker.
addition, SWC and USL positioned The integration of USL and SWC was a cautious,
their spirits as premium and mass brands phased process with employees given attractive
respectively to prevent cannibalization. incentives that helped achieve a smooth transition.
In the case of Quaker, Snapple In contrast, people problems were the key to the
and Gatorade together had 37 percent failure of the Quaker-Snapple deal. This was primarily
market share and were not in direct because Snapple was quirky, entrepreneurial and off-
competition. However, after acquiring beat while Quaker was more organized and Gatorade
Snapple, Quaker was in direct was considered a ‘lifestyle’ brand.
competition with larger players like It is evident from the above examples that while
Coke and Pepsi, and this forced it to USL systematically leveraged the resources and
@g^h]cVbjgi]n increase its promotional spending. capabilities obtained from acquiring SWC, Quaker
HjWgVbVc^Vc^hVK^h^i^c\
HX]daVg^c;^cVcXZVii]Z
The USL–SWC deal was financed Oats failed to do the same because of incompatibility
>H7# by borrowing $300 million from ICICI of resources and cultures .
FEATURES L^ciZg%."&%<(' <?I8 >CH><=I
Features
Knowledge Hoarding
7N<6JG6K76CH6A!E6AA6K>B6A6C>6C9HJB>IEDEA>
I]^h gZhZVgX] Vgi^XaZ add`h Vi i]Z ^beVXi d[ ^cXZci^kZh! eZghdcVa^in ineZh VcY \ZcYZg dc h]Vg^c\ ^ciZaaZXijVa
lZVai]#
In an increasingly complex and unpredictable world, scenarios depending on the particular experimental
the development, exploitation and management of condition to which they had been assigned. These
knowledge are the keys to building a competitive scenarios described opportunities to share acquired
advantage for modern organisations. Most knowledge with other co-workers that would
organisations have formal knowledge management enhance employee effectiveness and productivity.
initiatives that consists of information systems Responses were aggregated across the scenarios after
designed to hold and distribute codified knowledge. removing inconsistencies and formed the input for
While managing knowledge is ostensibly critical further regression analysis. We evaluated two types of
to professional firms, it is implicitly believed that personalities – Self Monitoring people and Empathetic
employees will share knowledge if they are provided people.
with adequate infrastructure and incentives (Zack Self-monitoring theory is a contribution to the
1999, O’Leary 2002). This research is an attempt to psychology of personality, proposed by Mark Snyder
investigate the impact of different personality types, in 1974. The theory refers to the process through
various incentives and the role of gender on ‘knowledge which people regulate their own behaviour in order to
hoarding’. Knowledge acquired during the course "look good", so that they will be perceived by others
of one’s job belongs to the organisation rather than in a favourable manner.
the individual. However, some individuals perceive
this as their personal intellectual property and hence
do not share it with others in the organisation. This >cYjhignHegZVY <ZcYZg
phenomenon of not sharing information is defined as
“Knowledge Hoarding”. ;ZbVaZ
',
GZhZVgX]BZi]dYdad\n BVaZ
,(
A sample of 207 Indian corporate employees with
an average experience of five years participated in
this survey. Respondents from a range of industries
Hd[ilVgZ$IZX]cdad\n'.#* GZiV^a$;B8<'#'
(spread indicated below) were invited to participate ;^cVcX^VaHZgk^XZh'%#- IZaZXdb'#'
in the study. They were chosen randomly and cut 8dchjai^c\&.#& =ZVai]XVgZ$E]VgbV'#'
?I8 >CH><=I<(( <L^ciZg%."&% FEATURES
Features
;^\jgZ'/H]Vg^c\jcYZgY^[[ZgZciXdcY^i^dchWnHZa["bdc^idgh
Empathy, which literally translates as in feeling, is
the capability to share another being's emotions and HZa[bdc^idghegZ[ZgbdcZn
feelings. &#*%
a^`Za^]ddYd[h]Vg^c\
developed by Lennox and Wolfe (1984) . %#*%
%#%%
GZhZVgX];^cY^c\hVcY>bea^XVi^dch %#-&#(&#-'#('#-
Based on the survey responses and subsequent focus "%#*%
BdcZiVgn
Cd>cXZci^kZ
group discussions with the respondents, we realised
H]Vg^c\dcVhXVaZd[* GZXd\c^i^dc
that the willingness to share knowledge is indeed a big "&#%%
a^`Za^]ddYd[h]Vg^c\ GZXd\c^i^dc
&#%%
BdcZiVgnGZXd\c^i^dc"WVhZY
>cXZci^kZh[V^a/ %#*%
%#%%
BdcZiVgnGZXd\c^i^dcCd>cXZci^kZ LdbZch]VgZaZhhi]VcBZc
We also observed that the willingness to share
6kZgV\Za^`Za^]ddYd[h]Vg^c\ knowledge varies between men and women.
FEATURES L^ciZg%."&%<() <?I8 >CH><=I
Features
;^\jgZ)/6kZgV\ZA^`Za^]ddYd[H]Vg^c\Wn<ZcYZg
A^b^iVi^dch
6kZgV\Za^`Za^]ddYd[h]Vg^c\ Employees do not share knowledge either intentionally
or unintentionally. For the purposes of this study, we
%#+%
have limited the research to intentional knowledge
a^`Za^]ddYd[h]Vg^c\
%#*%
%#)% retention in corporate organisations.
%#(% The study is also limited to two personality types
%#'%
%#&%
and in the future, can be replicated across
%#%% other personality types.
BVaZ ;ZbVaZ
8dcXajh^dcVcYLVn;dglVgY
6kZgV\Za^`Za^]ddYd[h]Vg^c\
This study has shown that organisations
may be mistaken in believing that
employees will share information if
;^\jgZ*/6kZgV\ZA^`Za^]ddYd[H]Vg^c\Wn<ZcYZg>cXZci^kZh knowledge management systems are made
<ZcYZghea^i[dg>cXZci available. Our research has highlighted
%#%-
the importance of understanding the
<VjgVk7VchVa^hVhijYZci
%#+%
motivations for knowledge sharing d[i]Z>H7!8aVhhd['%&%#
a^`Za^]ddYd[h]Vg^c\
Eg^dgid_d^c^c\i]Z>H7!
%#)%
amongst employees. Managers need ]ZlVhldg`^c\l^i]V
%#'%
to understand the interaction between ;dgijcZ*%%d^aVcY\Vh
Xdchjai^c\Ògb#
%#%%
different drivers such as personality,
Cd>cXZci^kZ GZXd\c^i^dc
"%#'%
gender, and incentives, amongst other
"%#)%
BdcZiVgn things, to foster a strong culture of
BVaZ ;ZbVaZ
knowledge sharing in an organisation. Our
study further suggests that organisations
need not resort to costly monetary or
Women typically share less than men. This is recognition-based incentives for sharing
probably because historically, women in India to encourage free flow of knowledge.
have been discriminated against in boardrooms, This research is a continuation of ongoing
which has forced them to be over-competitive, so studies on designing effective knowledge
that they prefer to use knowledge as a weapon to management systems. It may be read in EVaaVk^BVaVc^^hVhijYZci
d[i]Z>H7!8aVhhd['%&%#
differentiate themselves from their counterparts. conjunction with other studies done in Eg^dgid_d^c^c\i]Z>H7!
h]ZlVhldg`^c\VhV
Women may be wary of forging close ties and the past, especially in the Indian context, XdchjaiVcil^i]VaZVY^c\
sharing knowledge with other male colleagues in for a more holistic outlook. Xdchjai^c\Ògb#
the workplace. The graphs above (figures 4&5) The research can be extended further
indicate the same. by looking at the impact of other factors
such as the nature of the organisation,
This finding again illustrates the fact that more employee’s association with teams
and more female team members need to be and organisations, family background,
included in knowledge management initiatives. religious beliefs etc, on sharing of
intellectual wealth in an organisation.
In addition, when we tried to explore the
interaction between gender and different incentive The authors wish to thank Dishan Kamdar,
structures, we realised that in the presence of Associate Professor of Organisational Behaviour Hjb^iEdea^^hVcVajbcjh
d[i]Z>H7!8aVhhd['%%.#
monetary incentives, women are less likely to and Associate Dean, Academic Programmes at =Z^hXjggZcianldg`^c\Vh
share knowledge. This could possibly be because the Indian School of Business (ISB) for his VbVcV\ZbZciXdchjaiVci
l^i]VaZVY^c\Xdchjai^c\
75 percent of the women as per our survey were guidance and mentorship Ògb#
high on empathy and they possibly associate
“guilt” with money. One key implication from this
finding is that organisations need to understand
“intrinsic” factors of motivation which drive men
and women to share knowledge.
?I8 >CH><=I<(* <L^ciZg%."&% FEATURES
Cover Story
Face to Face
)- 696EI>C<IDC:LE6G69><BH
*' 7G6C9H!CDIA67:AH/I=:;JIJG:D;6EE6G:A
AV`h]b^CVgVnVcVc!K^XZ8]V^gbVcd[8d\c^oVci!i]Zndjc\Zhi>c[dgbVi^dcIZX]cdad\n>IhZgk^XZhXdbeVcnid
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>cY^VcHX]ddad[7jh^cZhh>H7VcY6b^iBZ]gV!6hh^hiVciEgd[Zhhdg!>c[dgbVi^dcHnhiZbh!>H7!VWdjiaZVYZgh]^e!
X]VaaZc\ZhVcYdeedgijc^i^Zh^ci]Z>I^cYjhign!ZYjXVi^dcVcYi]ZgdaZd[e]^aVci]gden#
organisation, the leader has to immediately display a etc are big. This is not to say that it is uninteresting
mindset of size and scale, and act as if he or she is the to look at the telecom market here, but from a new
leader of a very, very large company. applications perspective, it is a good idea to look at
The last stage is continuing the established developed markets. I have to be in the developed
message, sustaining that growth and letting the markets to understand Android and Google phone.
organisation’s leadership develop. This will then set the stage to apply them here.
Second, the type of innovation provides the
8]VcYgV/=dlY^Yndj\dVWdjii]ZhZ[djghiV\Zh4 opportunity. For example, GE has developed a new
For the last two stages, we needed a fresh perspective ECG machine and they say it costs Rs 19,000-20,000
from outside the context of the IT industry, to per ECG and Rs 25,000 for the machine. The key
get a sense of what it means to lead a large, global opportunity for companies like us is if we can develop
organisation. Such a requirement can be fulfilled by software where ECG-generated images can be shared
an external mentor who has that perspective. In our on a global basis.
case, it was Ram Charan.
In the earlier two stages, the transition was helped BZ]gV/ I]Z >I ^cYjhign ^c >cY^V ^h hZZ^c\ ^cXgZVh^c\
largely by the customers that we worked with. The way XdbeZi^i^dc [gdb 8]^cV VcY AVi^c 6bZg^XV# I]Zn ]VkZ
to do it is to identify about four or five customers with WZiiZg^c[gVhigjXijgZi]Vc>cY^V!VcY:c\a^h]"heZV`^c\
whom you have been extremely successful and have ZYjXViZYeZdeaZVgZVkV^aVWaZ#>i]VhVahdWZXdbZbdgZ
built a relationship. You take their advice on why they Xdhian id deZgViZ dji d[ >cY^V# Hd ]dl Yd ndj VXijVaan
work with you; what they find different about you that bV^ciV^ci]Z\gdli]d[i]ZWjh^cZhh^ci]Z[VXZd[i]^h
they don’t get elsewhere. This can help you focus and XdbeZi^i^dc4
strengthen your advantages. Internally, there is often a In the face of competition, the one advantage that
reluctance to share your problems with customers but India has in the model of outsourcing is innovation
that is the best source to get the most innovative ideas. itself. If you look at the evolution of the outsourcing
DkZgi]ZaVhi[ZlnZVgh!ZbZg\^c\bVg`ZihVgZ
gZVaan\gdl^c\^ch^oZWji^ccdkVi^dchi^aa]VeeZch
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8]VcYgV/ L^i] i]Z \adWVa bVg`Zi WZXdb^c\ bjai^" industry in India, particularly the IT sector in the
edaVg!l^aalZhZZY^[[ZgZcibVg`ZiX]VgVXiZg^hi^XhVcY late 1970s and early 1980s, it was staff-linked. The
aZVYZgh]^eXVeVW^a^ingZfj^gZbZcih4 demand was for the talent to be physically present at
Over the last few years, emerging markets have the client site.
really been growing in size but innovation still The next stage of evolution was offshore
happens predominantly in the developed world. The development, where things would be kind of thrown
application of innovation happens in both worlds, over the wall. Texas Instruments setting up in Bangalore
but perhaps far more rapidly in the developing. is a great example of that. Then it became onsite and
So strategically, we look at both markets. But for offshore, with teams there and teams here going
developing the corporation’s capabilities, you need to back and forth. Next it became a very collaborative
have one foot firmly in the markets where innovations onsite offshore, thanks to the availability of improved
take place. communication systems.
Now the next stage people are talking about is
6b^iBZ]gV/NdjiVa`VWdjia^iiaZ^ccdkVi^dc]VeeZc^c\ even more collaborative. The customer works with
^cZbZg\^c\bVg`Zih#7jidcZXVci]^c`d[i]ZiZaZXdb four or five partners and wonders why the partners
^cYjhign! [dg ZmVbeaZ! l]^X] ^h VXijVaan W^\\Zg VcY can’t collaborate and provide solutions based on a
bdgZ YZkZadeZY ^c 8]^cV VcY >cY^V i]Vc ^c i]Z JH# Hd common knowledge platform? The customer doesn’t
XVc dcZ ZmeZXi bdgZ ^ccdkVi^kZ VXi^k^in ^c i]^h hZXidg want to be worried about who is doing what.
[gdbZbZg\^c\bVg`Zih4 All this is predominantly driven by the Indian
In terms of the market size, yes, India and China offshore industry, not by the developed world or China
>c8dckZghVi^dc/6b^iBZ]gV!AV`h]b^CVgVnVcVcVcY9ZZeV`8]VcYgV
6hadc\VhlZXdci^cjZid^ccdkViZdci]ZbdYZa!lZl^aa
]VkZVh^\c^ÒXVciVYkVciV\Zi]Vil^aadjilZ^\]VcnXdhi!
adXVi^dcdgdi]ZgeVgVbZiZgh#
etc., because we have the history and the experience BZ]gV/ 9d ndj [dgZhZZ kZcYdgh XdaaVWdgVi^c\ Vi V
of this evolution. So as long as we continue to innovate higViZ\^X aZkZa! idd! [dg ZmVbeaZ! Vaa^VcXZh d[ kZcYdgh
on the model, we will have a significant advantage that W^YY^c\[dgXdcigVXih^cdgYZgidbV^ciV^ci]ZXdbeZi^i^kZ
will outweigh any cost, location or other parameters. ZY\Z4
At a strategic level, it is possible if the companies are
BZ]gV/ I]Z XjggZci hiViZ d[ Zkdaji^dc d[ i]Z >I very differentiated. For example, if company A is
^cYjhign!l^i]kZcYdghXdaaVWdgVi^c\[dgXa^Zcih!^hkZgn fantastic in defining the requirements and consulting,
^ciZgZhi^c\# > XVc i]^c` d[ bjai^"hdjgX^c\ YZVah ^c i]Z company B is terrific in development, company
gZXZcieVhil]ZgZbjai^eaZkZcYdghh^\cZYjeidldg` C is a great testing company and so on, then it is
id\Zi]Zg![dgZmVbeaZ!67C6bgdÉhbjai^"hdjgX^c\YZVa# possible for them to strategically collaborate with one
L]VildjaYWZi]ZdeZgVi^dcVaX]VaaZc\Zh^cZmZXji^c\ common programm. But generally, this can happen
hjX]gZaVi^dch]^eh4 only if the customer involves strategic consultants like
Multi-sourcing happened earlier but in a more McKinsey’s, BCG, Bose Allen, or Bain, and says, not
hierarchical manner. There would be a prime only will I buy your consulting report but I want you
contractor who would sub-contract. Now clients pick to be responsible for the implementation. Strategic
up different vendors, and divide up the work based on collaboration can happen only if it is driven by the
their specialisations. market.
However, models and tools are still emerging for
effective operational collaboration between multiple BZ]gV/NdjVaajYZYid^ccdkVi^dcWZ^c\Yg^kZcWnhdX^Va
vendors. Once this happens, multi-sourcing will be XdaaVWdgVi^dc#I]Z]dbZeV\Zd[8d\c^oVcih]dlXVhZhV
far more efficient. It is only a question of time. The XdaaVWdgVi^dceaVi[dgb#8VcndjiVa`Va^iiaZW^iVWdjii]Vi
key thing you need is a common knowledge base on VcYVWdjiLZW'#%4L]Videedgijc^i^Zh^hi]^hiZX]cdad\n
which vendors can work with a set of common tools. XgZVi^c\4=dlXVc>cY^Vc^cYjhigniVe^cid^i4
Right now, each vendor has their own toolset to This is a platform that we developed purely for the
sculpt the project, as it were. Once they have to use purposes of collaboration on the model of 2.0. We
this common toolset, this common knowledge base, call it Cognizant 2.0. The primary idea was to build a
the differences will go away and they will collaborate knowledge management system. The philosophy was
much more. that it was okay to make a mistake, but not okay to
repeat that mistake. This means that any lesson learnt good projects, and equip them with better skills, then
has to go some place where it is available for every they will be far more confident and will develop better
other employee in the collaboration. That was the students, than if you bypass them.
idea on which this whole platform was built.
The customers came along and saw our developers 8]VcYgV/I]ZgZ^hVadid[Y^hXjhh^dcVWdjiXgZVi^c\V
working on this Cognizant 2.0 platform. They wanted ldgaY"XaVhhZYjXVi^dc^c[gVhigjXijgZ^ci]^hXdjcignVcY
their teams to use the knowledge base and collaborate. i]ZgZ\jaVi^dcidhjeedgii]^hk^h^dc#L]ViVgZhdbZd[
Then, that also expanded. The customer has captives i]Zi]^c\hi]VihjX]gZ\jaVi^dccZZYhidadd`^cid4
in Philippines and in India. They want those people The lesser the regulation in the area of education,
also working on Cognizant 2.0. So this is almost like a the better. No regulation would be ideal. It is like a
social network, in a development context. market. There are students who are willing to pay to
>WZa^ZkZi]Vi^[ndj\Zii]ZiZVX]Zghidk^h^i\ddY
XVbejhZh!VcY\ddYXdbeVc^Zh!\Zii]Zbidadd`Vi\ddY
egd_ZXih!VcYZfj^ei]Zbl^i]WZiiZgh`^aah!i]Zci]Znl^aa
WZ[VgbdgZXdcÒYZciVcYl^aaYZkZadeWZiiZghijYZcih!
i]Vc^[ndjWneVhhi]Zb#
There is still a barrier in adoption. It is OK for get skills, and acquire some talent. And as long as the
customers to use it, but the fear is the customer might student has some ability, the institution can provide
be working with other vendors. What if one company’s that talent at the right price and so on, there is no
intellectual property goes into the other? I would like need for regulation, for somebody to come in and
to break that barrier. If you don’t allow others to use talk about exploitation. I would say the government
the technology, they will develop it anyway. Then you should get away from the business of education and
can get stuck fighting in this area. Instead of that, allow much greater freedom.
why don’t we focus on the next Cognizant 3.0, which
gives us some unique advantage, and open 2.0 for 8]VcYgV/ AZi jh iVa` VWdji i]Z gdaZ d[ e]^aVci]gden ^c
everybody, including competitors. ZYjXVi^dc# >cY^Vc aZkZah VgZ XZgiV^can cdi XdbeVgVWaZ
id l]Vi ndj hZZ ^c i]Z JH dg ^ciZgcVi^dcVaan# =dl
8]VcYgV/Bdk^c\dc!l]ViXVcVc>IhZgk^XZhXdbeVcn XVc hjX] e]^aVci]gden WZ [VX^a^iViZY4 L]Vi h]djaY
Yd ^c >cY^V id \V^c VXXZhh id WZiiZg fjVa^in ]jbVc e]^aVci]gde^hihZmeZXi4L]ViXVcZYjXVi^dc^chi^iji^dch
gZhdjgXZh4 Ydidedh^i^dci]ZbhZakZh4
One way is to focus on students after they graduate If you want to do new research, or set up a centre to
and enter the company, and then train and develop research a new area, no student is going to pay for
them. But we have not focused on the training and it. The government may not be willing to pay for it
development of teachers. A majority of the IT teachers either. The people who will benefit from it and may
in engineering colleges don’t know what this industry fund it is industry. So philanthropy can work in areas
is about; they don’t know what is happening in IT where the highest level research and new innovation
companies. And yet we are asking them to develop in unchartered waters happens. And the next level
people who are company-ready or employment-ready. higher education will have to be in a neutral area. It
I believe that if you get the teachers to visit good will have to be paid for by the recipients, with perhaps
campuses, and good companies, get them to look at some government funding.
>cV[gZZ"l]ZZa^c\Y^hXjhh^dcl^i]i]ZhijYZcihd[i]Z>cY^VcHX]ddad[7jh^cZhh>H7!K^`gVbGVd!9^gZXidg!6Y^inV
7^gaVBVcV\ZbZci8dgedgVi^dcEg^kViZA^b^iZYiVa`hVWdjigjgVabVg`Zih!Z"gZiV^a^c\!i]ZZcignd[[dgZ^\ceaVnZgh
VcYdi]Zg^hhjZhV[[ZXi^c\i]ZiZmi^aZ^cYjhign#GVd]ZVYhi]Z6Xgna^X;^WgZVcYDkZghZVhHe^cc^c\Wjh^cZhhZhd[
i]Z<gdje!l^i]\adWVadeZgVi^dch^cI]V^aVcY!>cYdcZh^V!:\neiVcYi]ZE]^a^ee^cZh#
>H7>ch^\]i/ Ndj ]VkZ WZZc ^c i]^h ÒZaY V adc\ i^bZ# focus of PRL, from the minute the customer walks into
EaZVhZh]VgZl^i]jhV[ZlaZhhdch[gdbndjg_djgcZn# the store, through lifestyle display of merchandise,
K^`gVb GVd/ Philip Van Heusen (PVH) of the US, store layout, ambience, the consistency of store
one of the largest shirt makers in the world, had experience, the touch and feel, store personnel, and
just bought over the Calvin Klein (CK) brand and all outdoor communications and events that relate to
company. I went to meet up with the CEO of PVH the brand.
to solicit the franchise for CK in India. I took him This was indeed an eye-opener. When I got back
through Madura’s credentials, including the brands to India, I asked the President of Madura to develop
we had built in India. At that time, he retorted the concept for three “romance the customer” (RTC)
that what we had in India were “labels” and not stores, one each for Louis Philippe, Van Heusen and
“brands”. Allen Solly. The whole exercise was to conceptualize
I]ZVchlZga^Zh^chjeZg^dgWgVcYWj^aY^c\!l^i]
bZgX]VcY^hZVcYgZiV^abVcV\ZbZciVi^ihXdgZ#
However, when PVH later saw how we developed and then execute. This was indeed the beginning of
Louis Philippe, Van Heusen and Allen Solly in India, the journey of moving from product brands to retail-
they agreed that these were truly strong brands. India represented lifestyle brands.
definitely has the talent and capability for brand The President of Liz Claiborne, who I met in
building. the early 1990s, made a very valuable comment. He
On another occasion, I happened to meet the said, “Vikram, nobody needs one more shirt. But you
President of International Licensing for Polo Ralph need to make them believe they do, and sell them
Lauren (PRL), again with a view to solicit their many. So think through carefully how you are going
franchise. We took along a business plan presentation. to go about it.”
After the presentation, he said, “what you have shown The answer lies in superior brand building, with
me are mere numbers. In no way did you tell me merchandise and retail management at its core.
how you will create an experience in the store to truly
‘romance’ the customer.” 6aa i]ZhZ WgVcYh lZgZ YZkZadeZY [dg jgWVc bVg`Zih!
“Romancing” the customer is the most important nZiZkZceZdeaZ^cgjgVaVgZVhVgZcdllZVg^c\i]Zb#
I]ZcjbWZgd[ndjc\ L]Vi h]djaY WZ i]Z eg^X^c\ [dg V h]^gi ^c i]Z gjgVa
>cY^Vchl]dlVciidlZVg bVg`Zi4
We can make a customized shirt for Rs 199. But
WgVcYh]Vh^cXgZVhZYVcY then we need to look at net margins after costs of
i]ZhZVgZXdchjbZghl]d distribution, brand building and more importantly,
discounts on leftovers. So to understand what will sell,
XVcWjnWdi]ViY^hXdjci we need to study demographics and psychographics.
VcYVahdVi[jaaeg^XZ#L]Zc In India, in the same season, there are four
i]Zna^`ZhdbZi]^c\!i]Zn different seasons in each of the four regions. The
colours that sell in Kerala don’t sell in Bangalore. It is
VgZcdiVaa\d^c\idlV^i[dg not easy to manage this.
Y^hXdjcihVaZhid]VeeZc#
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i]VcZhiVWa^h]ZYjgWVcbVg`Zih#Hdl]ViYdndji]^c` Zci^in VcY ndj ]VkZ hiVgiZY Vcdi]Zg hidgZ XVaaZY I]Z
^hi]ZhXdeZ[dggjgVaWgVcYh46cYYdlZcZZYY^[[ZgZci 8daaZXi^kZ[dgide"ZcYXadi]Zh4
WgVcYh[dggjgVabVg`ZihdgXVclZZmeVcYdcZm^hi^c\ Except for The Collective, which is a retail brand, all
dcZh4 these other concerns are distribution channels. Retail
First of all, many of the regional brands already cater is a vehicle to sell, to make our brands stronger. Planet
to interior areas. National brands have evolved a Fashion is a retail arm which offers all of Madura’s
‘regional brand’ strategy, which goes out into second brands under one umbrella in the suburbs of A and
and third tier towns. Peter England has 2700 stores B cities.
and sells in over a 100 towns.
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I]Vi bZVch i]Vi jcYZg i]Z BVYjgV jbWgZaaV! EZiZg hVaZh#BdhiWgVcYh]VkZ^cXgZVhZYi]Z^gdkZgVaaegdYjXi
:c\aVcY ]Vh i]Z ]^\]Zhi VlVgZcZhh VcY VXXZeiVW^a^in# eg^XZWZXVjhZi]ZnVgZbV`^c\bdgZhVaZh^ci]ZhVaZ
7ji ^i ^h hi^aa Xdch^YZgZY eVgi d[ i]Z Za^iZ \gdje# >i ^h eZg^dY#
hZaa^c\^chZXdcYi^ZgX^i^Zh!Wjil]ViVWdjii]ZadlZg]Va[ Therefore, the brands have to be stronger. There has
d[i]ZengVb^Y4:kZgnWgVcY^h^ciZgZhiZY^c^c^i^Vi^kZh to be a certain set of loyal customers who will wait to
i]VigjgVaeZdeaZXVcgZaViZidVcYgZXd\c^hZVhÆdjgÇ buy fresh merchandise, and go and buy what’s new.
WgVcY#9dndji]^c`BVYjgVl^aaVahd\di]VilVn4 The number of young Indians who want to wear
No. I think the kind of distribution, culture, attitude brands has increased and these are consumers who
and the focus that you require are quite different. can buy both at discount and also at full price. When
they like something, they are not all going to wait for >c>cY^V!Z"gZiV^a^c\^h
discount sales to happen. Va^iiaZW^iXdbea^XViZY#
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In India, e-retailing is a little bit complicated. >i^hcdicZXZhhVg^anVX]dgZ#
Shopping is an outing here. It is not necessarily a
chore. It is also a pleasurable pastime. So, in that Bdk^c\dc!l]Vi^hndjgiV`Zdc[dgZ^\cY^gZXi^ckZhibZci
context, e-retailing will take some time, more so ;9>^ci]ZVeeVgZahZXidg46adid[eZdeaZVgZadWWn^c\
in apparel which is a touch-and-feel game for the V\V^chi^i#L]Vi^hndjgde^c^dc4
consumer. I am on the consumer’s side. I am all for consumerism.
Not as a retailer, as an individual.
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d[ ndjg WgVcYh VgZ kZgn lZaa"`cdlc Vh Xdb^c\ [gdb 6hVgZiV^aZg4
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relationship is between the mono brand (be it in Hd]dlYdndj\dVWdjiWj^aY^c\i]ZhZWgVcYh4
product or retail) and the consumer. Multiple It’s a combination of print and events. Retail itself is a
messages will take away the strength of the brand- tool. What happens at the store is the key. The impact
consumer relationship in many ways. is made there.
Green Systems
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i]ZZXdcdb^Xhd[^c[gVhigjXijgZ!eVgi^XjaVgani]ZiZaZXdbVcYZcZg\nhZXidghVcYeaVchid[dXjhdci]ZZbZg\^c\
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Knowledge Sessions
*, HIG6I:<>:H;DGH86A:
*. LDGA9D;A:69:GH
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i]ZlVn[dglVgYidegdbdiZ^cXajh^kZ\gdli]#6eVcZad[^cYjhignaZVYZghbZiidY^hXjhhi]ZX]VaaZc\Zh!higViZ\^Zh
VcYgdVYWadX`h^ckdakZY^chXVa^c\jeWjh^cZhhZh^ci]^hXdciZmi#I]^hgZedgi^hWVhZYdc^YZVhegZhZciZYYjg^c\
i]ZeVcZaY^hXjhh^dc]ZaYVheVgid[i]Z@]Zb`V;dgjbdcHdX^Va:cigZegZcZjgh]^e!]dhiZYVii]Z>cY^VcHX]dda
d[7jh^cZhh>H7#
Introducing the panel topic, Ajit Rangnekar, Dean, available for them. Considering the deficit, what
Indian School of Business, argued that three things would happen to the rest? “It is only through
mattered when looking at business models for social entrepreneurship and the stimulation of new jobs
enterprises – speed, scale and size of the impact. and new opportunities that this deficit can be turned
“I do not believe that the over six billion people into an opportunity,” he averred, “because then
on this earth are going to wait forever to get their these young people themselves become an asset and
share of the world’s growth,” he said. He added that are a dividend, not a deficit anymore.”
while it was great to work on one project affecting Nandita Sengupta, Senior Assistant Editor, The
10,000 people, it was important to figure out how Times of India, said that the stories that had made
to do it for a billion people, and how quickly. The it to the news over the past few years had a lot to
size of the impact was important, Rangnekar said, do with low cost schools, low cost maternity clinics,
because “we should not be in the job of making a low cost housing, insurance for the poor and so on.
marginal change to the lives of people. We should These were all individual small enterprises scattered
be in the job of transforming the lives of people.” around the country and they brought choice to the
Dr Pawan G Patil, Chief Economist and poor. In all these stories, the question was always,
Chief Economic Development Officer, Silatech, why stop here? Why not take it bigger? Why didn’t
said more thought was needed about the 1.3 billion it work on a national scale?
young people entering the labour market within According to Manish Sabharwal, CEO,
the next 10-15 years, with only 300 million jobs TeamLease, it was essential to understand if an
enterprise was a baby or a dwarf. Both babies
and dwarfs are small but a baby can grow, while a
LZh]djaYcdiWZ^ci]Z dwarf will always stay the same size. The difference
between the two is not just money but DNA,
_dWd[bV`^c\VbVg\^cVa template, components, standardisation, technology
X]Vc\Zidi]Za^kZhd[ and human capital. The six elements that helped
eZdeaZ#LZh]djaYWZ^c in differentiating a baby from a dwarf were
opportunity, team, organisational design, strategy,
i]Z_dWd[igVch[dgb^c\i]Z risk and resources, with opportunity being the most
a^kZhd[eZdeaZ# important.
6eVcZaVii]Z@]Zb`V;dgjbdcHdX^Va:cigZegZcZjgh]^e
Don Mohanlal, President and CEO, The Nand were between the ages of 18 and 24. By 2012,
and Jeet Khemka Foundation, cited statistics to more than a billion people in south Asia would have
explain what scaling meant in the Indian context. mobile phones. So it was not just scale in India, but
In India, every time a new moon came around, he size and scale that mattered.
noted, there were another million people added. Dr Nachiket Mor, President, ICICI Foundation
He pointed out that the state of Uttar Pradesh for Inclusive Growth and Chairman, IFMR Trust,
was bigger than Russia, Maharashtra was bigger said it was also important to take into account
than Germany, Andhra Pradesh was bigger than India’s diversity when thinking about scaling. “I
France and Tamil Nadu was bigger than the United think it’s a mistake that we often make in regarding
>i]^c`^iÉhVb^hiV`Zi]VilZd[iZcbV`Z^cgZ\VgY^c\i]^h
VhVh^c\aZXdjcign#7jii]ZgZVa^in^hl]Vildg`h^c7^]Vg
bVncdiVXijVaanldg`hdbZl]ZgZZahZ#
Kingdom. Seven hundred million people lived in this as a single country. We think that Bihar and
rural areas and yet India was home to 41 cities with Andhra Pradesh and Tamil Nadu are one country,”
at least a million people, which had witnessed an he argued. “But the reality is what works in Bihar
increase of 50 percent in just the last two decades. may not actually work somewhere else.” Politically,
Some 200 million of those people still lived in until the 1950s, India was not one country, he
slum settlements. This had enormous implications said. The British, the Mughals, Ashoka all ruled
for their access to healthcare, basic education and other rulers, and never the people directly. It was
services. only in the 1950s that a single political entity was
The other aspect of the sheer size of India was created.
the so-called demographic dividend. More than half Mor further distinguished between replicating
of the population would be under 25 by the year and scaling. He said that solutions from what
2015. Nearly two-thirds of the current population worked in a given state could then be used to
was under 35. This was the world’s largest school replicate the journey in another state. He also said
of young people. Only 11 percent received higher that sometimes the competitive advantage of a small
education in the 17-23 age groups. And in the last business lay in the fact that it was small. If you tried
parliamentary elections, 100 million eligible voters to scale it, you actually lost that opportunity.
World of Leaders
6ii]Z^cVj\jgVaÆ>H7LdgaYd[AZVYZghÇheZV`ZghZg^ZhZkZci]dhiZYWni]Z>cY^VcHX]ddad[7jh^cZhh>H7!=Zcgn
G@gVk^h!8d";djcYZg!8d"8]V^gbVcVcY8d"8:D!@d]aWZg\@gVk^hGdWZgih8dbeVcn@@G!CZlNdg`!^ciZgVXiZY
l^i]VhZaZXi\gdjed[>cY^VcWjh^cZhhaZVYZghVWdji]dl]ZhiVgiZY]^hZciZgeg^hZ!i]Z_djgcZnhd[VgVcY]^hk^Zlh
dci]Zeg^kViZZfj^in^cYjhign#
Kravis started his career in the 1960s, buying up Kravis, Kohlberg and Roberts decided to talk to a few
small companies for Bear Stearns. “They were called insurance companies that they had worked with while
bootstrap acquisitions in those days,” he recalled. “No at Bear Stearns. “And they said, ‘look we love you,
one was doing what is now called private equity.” In absolutely we are going to support you but we want
1976, Kravis, along with colleagues George Roberts to be the investment committee,’” Kravis recounted.
and Jerome Kohlberg, decided to focus 100 percent The three entrepreneurs decided against the offer.
of his time on these acquisitions. The senior partners After figuring out the overhead for their venture,
at Bear Stearns rejected their offer of half of the unit Kravis, Kohlberg and Roberts worked out a plan
the group wanted to call KKR. This pushed the three to get $ 50,000 each from any eight entities, for a
into starting off on their own. total of $ 400, 000. In return the trio would make
After trying to raise a $25 million for a fund, a commitment to work on the project for five years,
during which period, the investors would have the
right to see every transaction and decide if they wanted
to expand their investments. And if they did decide to
invest, KKR would get 20 percent of all future profits
from the project.
The three soon found the magic eight. Among
them was the First National Bank of Chicago. After
7jilZidaYVaad[djg
dg^\^cVa^ckZhidghi]ViZkZc
i]dj\]ndjYdcÉi]VkZid
ejijeVcnbdgZbdcZn!6h
adc\VhndjVgZVa^kZ!ndj
XVcXdbZ^cVicd[ZZhVcY
cdXVggnWZXVjhZndjlZgZ
=ZcgnG@gVk^h i]ZgZid]Zaejh\ZihiVgiZY#
KNOWLEDGE SESSIONS L^ciZg%."&%<)- <?I8 >CH><=I
Knowledge Sessions
7jh^cZhhaZVYZghVii]ZiVa`
Eg^kViZZfj^ingZVaan]VhidWZkVajZ"VYYZY!>i]Vhid]VkZ
deZgVi^dcVa^begdkZbZcihVcY^i]VhidWZVWdjiWZ^c\
VigjZeVgicZgl^i]i]ZbVcV\ZbZciVcY]Zae^c\i]Zb
\gdl!l]Zi]ZgndjVgZ^cVb^cdg^inedh^i^dcdgl]Zi]Zg
ndjdlc&%%eZgXZcid[i]ZXdbeVcn#
buying three companies in 1977, their first full year, in a minority position or whether you own 100 percent
Kravis, Kohlberg and Roberts decided to raise their of the company.” In every case, the management will
first fund for $25 million. They managed to raise be the future owner in one form or another. The
$10 million more than that. “But we told all of our alignment of interests is important.
original investors that even though you don’t have to KKR is today an integrated global firm. “We want
put up any more money,” Kravis said, “As long as you to make money, and we want to have good returns,”
are alive, you can come in at no fees and no carry Kravis said. “But the culture and the values are the
because you were there to help us get started.” KKR most important. (They) keep the firm going; (they)
now trains their people to not forget those who helped keep it growing.”
the group along the way. “If I were to write a blueprint for a company’s
Fast forward to the present. KKR has bought financial system, the most important things that I
170 different companies across a range of industries, would include are regulation and transparency,”
worth around $425 billion. Kravis described what Kravis further advised. He said that people wondered
KKR did as financial engineering. “(We would) buy why there was an economic crisis and the reason
a company and we would leverage the investments was that a lot of people were at fault. “This was not
tremendously.” Among the high and low points of his something that happened over time but was being
career, he included the RJR Nabisco deal, the dotcom built over the years. So what I’m worried about is that
era, losing money on Spalding Sporting Goods and we need some regulations.” Kravis said that we need
investing in the Safeway chain of supermarkets. much more transparency than there is today. “But we
“Private equity really has to be value-added,” are going to have so much government interference in
Kravis said. “It has to (have) operational improvements Europe and the US that this could stifle innovation,
and it has to be about being a true partner with (the) and innovation is what makes any country, capital
management and helping them grow, whether you are markets and corporation very great,” he concluded.
In Brief
GDP versus GDH
COVER
IN STORY
BRIEF L^ciZg%."&%
L^ciZg%."&%<*%
*% <?I8 >CH><=I
Cover Story
?I8 >CH><=I<*& <L^ciZg%."&%
?I8 >CH><=I <*& <L^ciZg%."&% COVER STORY IN BRIEF
Cover Story
Book Review
After the success of the Marshall Plan in reviving The Aid Trap: Hard truths about
the economies of Western Europe after the Second ending poverty
World War, large-scale aid programmes have been
expected to kick-start economic development in 7nG<aZcc=jWWVgYVcYL^aa^Vb9j\\Vc
poor countries. For 40 years, aid was an important
weapon of the Cold War. Allegiances were bought and GZk^ZlZYWnGZjWZc6WgV]Vb!8a^c^XVa6hh^hiVci
sold on the basis of aid packages. After the collapse Egd[Zhhdgd[7jh^cZhhVcY:mZXji^kZ9^gZXidg!8ZcigZ
of the Berlin Wall, the aid industry changed track, [dg:bZg\^c\BVg`ZihHdaji^dch8:BH!>H7
employing morality to market itself. Books like The
End of Poverty by Jeffrey Sachs, and the bully pulpits EJ7A>H=:GH/8dajbW^VJc^kZgh^inEgZhh
of rock stars hammered the message home. CZlNdg`0'%%.
However, critics have challenged the preaching in
recent times. The Aid Trap by Glenn Hubbard and EV\Zh/'&'
William Duggan of Columbia University asks the
question - does development aid ever Plan, which was not merely a conventional aid
work? The road to hell, they argue, is programme, but also a mechanism to revive
paved with the best intentions. Most commercial activity in Western Europe. The
poor countries remain poor despite surpluses generated were used by governments to
the aid dollars that have poured in over fund infrastructure. So, why not create a similar
50 years. According to them, the only mechanism for aid to developing countries today?
thing that has ever worked effectively The taxes levied on increased business activity can
to reduce poverty is the growth of pay for public services and social safety nets for the
business. vulnerable.
The authors start with a historical The devil obviously lies in the details. Unlike
framework for capitalism, tracing back the original version, a new Marshall Plan will need
commercial activity to the ancient an unprecedented level of international cooperation
civilizations of Mesopotamia, India, and coordination. The Second World War primarily
Egypt and China. Modern capitalism destroyed physical infrastructure, so pouring money
originated around the Mediterranean, into promoting business worked because the required
and spread across Western Europe. policy reforms were macroeconomic. In developing
But if commerce demonstrably created widespread countries, the lack of human infrastructure is a hard
prosperity in Europe, America and Japan, why should problem to tackle, especially in the short term. The
it be any different in developing countries? other problem with many developing countries is
Any developing country that has more non- that they are led by kleptocrats, ironically kept in
business actors (like NGOs) than businesses will not power by economic aid. Not even this version of the
get very far in creating wealth. And yet this is exactly Marshall Plan can work in such conditions. So we
the sort of approach that finds wide currency among need strong incentives for governments to sign on
western governments, and multilateral institutions. and implement basic policy changes.
What can be done to change the status quo and make Despite these objections, my hope is that The
aid more effective? Aid Trap will, at least, provide additional points of
The authors suggest that we revisit the Marshall reference for future aid policies.
COVERREVIEW
BOOK STORY L^ciZg%."&%<*' <?I8 >CH><=I
Indian School of Business
Gachibowli
Hyderabad 500 032
India
www.isb.edu