Mar 30, 2012

The multinational disambiguation

There are these terms, multinational, transnational, international and global that are used mostly interchangeably while talking about organizations that have their presence in multiple nations. I have seen such interchangeable usage even in policy documents.
It helps to understand the demarcation between these terms, now that many of our Indian firms are going international in a big way. It doesn't sound good when we use 'multinational' as an umbrella term for all.
To form a schema, let's assume we have two axes, the horizontal one being the pressure to localize (develop products to cater to national tastes) and the vertical axis being pressure to standardize (to take advantage of economies of scale), then we can define the terms as follows.

International/Exporting organization: The organization that has low pressure to localize and low pressure to standardize is the international organization. It's a firm that grew locally, became big and started exporting in order to utilize it's extra production. As it sees demand for its products, it simply ships them abroad and pockets the margin. It might have some dedicated agents selling its products abroad or might be giving it to local distributors there. Most of the big Chinese manufacturers are of this nature. They export abroad but have virtually no international expansion plans despite being a major supplier of goods.

Multi-domestic or Multi-national organization: The organization that has high pressure to localize its products and low pressure to standardize at a global scale, is the multi domestic organization. Unilever is a good example. It has multiple units in different countries, where it has localized products, that cater to local requirements. It has local strategies, local competitors and for all practical purposes, all these country levers act like an independent organization at local levels.

Global organization: Apple. Dell. They think about one product, or a group of products, that are of same specifications and are sold as a standard product across the world. They have low pressure to localize and have high pressure to standardize in order to keep the costs low. They go all out to optimize the value chain in order to do so. They might have manufacturing bases at different places but have one strong central administration that sets the strategy.

Trans national organizationThese are the most challenging ones from strategy making point of view. They have high pressure to cater to local tastes as well as high pressure to standardize in order to utilize economies of scale. They go around the world, optimizing the value chain for their products, sourcing from the cheapest possible suppliers, working on maintaining the quality and meet all the requirements while optimizing to keep costs low. The best examples here are the automobile giants such as GM, Toyota and so on. They are present in many countries, trying to leverage global economies of scale and catering to local and global markets. The international production networks are driven primarily by such organizations. Tatas and Mahindras might be trans-national in true sense in the future.

It is wrong to strictly compartmentalize the organizations like we did above. Most of the organizations are in flux, migrating from one to the other forms, based on the strategic goals. However, it helps to keep this distinction in mind in order to form a schema about what we mean when we use these terms.

Mar 28, 2012

This carbon business

There is enough literature on Green house gases and global warming, the efforts to curb warmingCarbon trading, the old Kyoto and the Latest Conference of parties (COP 17) on the internet. So I won't go into the general discussion about climate change talks and India's stand. I recommend Google for more. There's so much information about the 6th element of the periodic table that I would recommend it for the 1st place. If ever they create a periodic table based on the popularity on the internet, that is!

What I am going to talk is slightly off topic. But not irrelevant. I will work backwards. Suppose there comes a time when the following comes true. 

There is a consensus among a group of developed countries to impose a measurable Carbon labeling or say an Ecolabel, on all the products. It's imposed irrespective of whether the product is manufactured locally or internationally. All products need to strictly mention the amount of carbon emissions during making of the product, and the customer is given a choice to choose products based on, say, a number that tells how much is (s)he harming the environment by choosing it. Something like the Bureau of Energy Efficiency star rating system we have. We know how much the device is inefficient. Also, there is a foodmiles for food stuff, and service-miles for services consumed. All processes involved in manufacturing need to be measured for carbon footprints mandatorily. 

What would happen? 

My take is this (you are welcome to comment!) :

1. There will be a huge demand for Carbon auditors, carbon lawyers, carbon process experts and carbon consultants. They certify processes, measure carbon emissions, consult organizations and nations on how to benefit out of it, split hair over legal carbon provisions, and hang around in general, over the matters carbon in nature. 

2. Developing countries will suddenly find a huge carbon barrier for merchandise trade, which would seem initially impossible to cross. Slowly some of the aggressive and agile organizations, and nations, will learn, cope, understand and will reclaim some of the lost trade by adhering to standards. However, the process might blunt the competitive edge irreparably. 

3. The biggest damage would be due to the lack of technology to cope with the carbon requirements. Who would buy a two star air conditioner, when you see a five starred one sitting next to it. A little premium would not be minded. And what if the market bans the two starred ones altogether. It's similar analogy here. Developing countries would make noise about common but differentiated stuff, but then, there's this excuse of  Green climate fund that never helped much. 

4. The Indian IT/BPO/Offshore services sector will first look puzzled. But smart as it is, it will produce overnight experts on Carbon-'everything'. You name it, we have it in carbon. And these carbon professionals will make a mark. 

5. All that WTO and related efforts achieved over a period of time will come to a naught. The developed world, perceiving that it was losing the competitive advantage, will regain the lost ground through the back door. The trade might shrink overall, but then, between North and South, it might simply wind up for all practical purposes. 

6. The primary foodstuff being exported from developing countries will show up having huge food-miles on the supermarket shelves. Would one still consume them or prefer to replace with the local substitutes? I would say, it would depend on perception of people. And given that people are very sensitized (and can be sensitized through advertisements and information in text books in schools), I would go with the substitution theory. 

If this shouldn't happen, then, it makes a lot of sense to ensure that trade and climate issues are not mixed up. Developed world is trying it's best to get it into WTO (21st century issues) and UNFCCC.  Global warming is an important issue, but trade barriers are not the answer to reduce emissions. And implementing uniform reduction  targets and fixing equal responsibility on all countries, is akin to behaving like the schoolmaster who punishes the entire class when a small group of kids explode a cracker in the class. 

Mar 24, 2012

Niryat Bandhu - Handholding experiment for new exporters

Niryat Bandhu scheme is being devised by DGFT office. The last foreign trade policy (you can find it here) talks about this scheme in the following words:

"‘Niryat Bandhu’ - A scheme for International Business Mentoring 
We are devising a novel ‘Niryat Bandhu’ scheme for mentoring first generation entrepreneurs. The officer (Niryat Bandhu) would function in the ‘Mentoring’ arena and would be a ‘Handholding’ experiment for the Young Turks in International Business enterprises. Under the scheme, officers of DGFT will be investing Time and Knowledge primarily to mentor the interested individuals who want to conduct the business in a legal way. Over time, it would be expected to develop a class of businessmen who carry out the international business in an ethical manner."

It is an excellent idea. The way forward for our economy is through entrepreneurship. One of the challenges is to provide a conducive environment for start-ups to prosper. There are many steps taken by various departments. I personally find the website by National e-governance plan on Doing business in India a very good place to start for a new entrepreneur. It addresses all the aspects of business, right from setting up a new business, development and expansion in India and abroad, and even closure of business. The links within this site takes one to all the relevant websites of various departments that come in picture while conducting business. 

However, there is a need for professional help, in person, for new entrepreneurs who want to expand business abroad. The jungle of rules and laws, implemented by various departments, can confuse any new entrant making him dependent, at times, on shady middlemen who might do the work in ways that might not be optimum for the business. At such times, having an angel guide, who is from within the government, and who can mentor in these areas would go a long way. This kind of interface and handholding was long overdue. 

What stands out in the paragraph are the words 'mentoring', 'handholding', 'investing time and knowledge' and 'conducting business in a legal an ethical manner'. 

I hope the scheme is elaborated in the coming foreign trade policy and we see it develop into a full-fledged part of the foreign trade policy of India. Let a million businesses bloom.

Update on Jan 2014: The Niryat Bandhu scheme is being implemented by various DGFT offices across India. To start with, they are conducting monthly introductory programs for new entrants into foreign trade. No fee is charged for these programs. DGFT offices are also actively collaborating with universities, colleges and trade associations to further develop the program under Niryat Bandhu. Laudable. 

Mar 21, 2012

Services data - some efforts by GoI

The services data availability is an issue that is being discussed for some time now in the policy circles. The chapter on services sector in India in the latest economic survey acknowledges it. To quote it verbatim, section 10.18 reads:

"In last year’s Economic Survey, the weaknesses related to availability and quality of services data were highlighted. To reiterate, these are difficulties in compilation of an index of services sector production, non-representation of many service sectors in the calculation of the wholesale price index, limited availability of published data on pricing of services, and limited data on trade in services. Even where data are available, they suffer from deficiencies related to definition, method of collection, suitability for pricing, and construction of indices. The recent efforts in streamlining data in the services sector (Box 10.1), though welcome, need to be accelerated in a coordinated manner with the help of experts in the field."

And under Box 10.1, the relevant portion on trade data reads:

"Trade in services data: In the current system, the data on international trade in services are not available country-wise, at disaggregated level and as per W-120 classification needed for the General Agreement on Trade in Services (GATS) negotiations. The RBI has started releasing data on trade in services with a lag of 45 days from April 2011.
While the RBI has been providing data on services at a more disaggregated level in recent years, it has also started releasing disaggregated quarterly data on trade in services beginning the first quarter of 2010-11. Data availability in trade of some major services is as follows.
Data related to transportation services are derived from authorized dealers (AD) reporting under the Foreign Exchange Transaction through Electronic Reporting System (FETERS) purpose code. Currently, freight and passengers are not segregated but are clubbed together and shown according to the modes of transport in BoP statistics. Data related to travel are also derived in the same way with data on the receipts side being deficient while on the payments side they are adequate. The travel receipts for BoP are based on the Ministry of Tourism’s data on tourist arrivals. In India’s BoP, the telecommunication, computer, and information services category is presented separately under the heads communication, software, and news agency. Data on credits and debits under each category are also captured through FETERS. With regard to computer services, data are presented as software services and credit data are sourced from NASSCOM due to deficiencies in FETERS data. Data on the debit side of software services are from FETERS. The Survey on ‘Foreign Collaboration in India conducted and published by the RBI contains foreign affiliated statistics (FATS). FATS measure turnover, export and import of goods and services, value added, and employment of resident (inward) and non-resident (outward) affiliates of multinational enterprises. At present, under the guidance of an Expert Group on Strengthening of Institutional Mechanism for Regular Collection and Compilation of Data on International Trade in Services set up by MOSPI, two pilot surveys in international trade in services have been initiated—one for the health sector and another for education. The Expert Group will submit its final report after completion of these pilot surveys."

The above paragraphs show how the data is scattered and how mammoth a task it is for the department which decides to collect and collate the services data. However, the steps must be taken as the share of services in GDP as well as in foreign trade is going to only increase in coming days. Availability of good database is a perquisite for any analysis and  informed policy making.

Mar 20, 2012

Service trade of India - Economic Survey 2011-12

The services sector covers a wide range of activities from the most sophisticated information technology (IT) to   simple services provided by the unorganized sector, such as the services of the barber and plumber. National Accounts classification of the services sector incorporates trade, hotels, and restaurants; transport, storage, and communication; financing, insurance, real estate, and business services; and community, social, and personal services. In World Trade Organization (WTO) and Reserve Bank of India (RBI) classifications, construction is also included.

The data available in the survey is computed mainly from RBI. RBI segregates the services trade data into the major heads of Travel, Transportation, Insurance, GNIE (Govt. not included elsewhere) and Miscellaneous. The Miscellaneous head includes important sub-heads which are Software and Non-software services. Under Non-software, business service, financial service and communication are included. There is also a section on services sector in India in the survey which throws light on the sector specific topics, including trade.

One must remember that not all services are traded. However, more and more services are becoming tradeable due to developments in technology.

Global trade in services has more or less mirrored the trend in merchandise trade, and, by corollary, international demand. World exports of services have shown consistent rise in the 2000s decade with a healthy average annual growth of around 9.5 per cent, except in 2001 and 2009— periods of global slowdown and economic crisis.

Some points from the survey chapter:

  • The total trade in commercial services is around USD 3.7 trillion and is dominated by the developed western countries in terms of share except for China, India, and Singapore. Source - International trade statistics 2011. 
  • The services trade (as well as merchandise trade) in world, has not reached pre-crisis levels yet. However, the rapid bonce back is happening in Asia, where services exports rose by 22 percent in 2010 led by India and China. 
  • Top 5 exporters and importers of commercial services are the EU(27), the US, China, Japan and India with the same ranks both in exports and imports of commercial services. 
  • For year 2010-11, services exports from India was 132.9 billion dollars and services imports was 84 billion dollars. 
  • Services exports from India grew by 38.4% in year 2010-11 and imports by 40% 
  • For the year 2011-12 (apr-sept, i.e. half year), services exports was USD 58 billion and imports was USD 36.6 billion. 
  • The percentage shares of top five heads for India are: Software 45.2%, Business services 15.9%, Travel 12.9%, Transportation 12.8% and financial service 4.2%. 
  • The value of trade in USD Billion for 2010-11 for the above heads are: Software 55.6 billion, business 24.1 billion, travel 15. 3 billion, transportation 14.3 billion and financial services 6.5 billion dollars. 
  • In imports, the top five heads for India are: business services (34.3%), transportation (20.7%), travel (19.1%), financial services (10.9%), insurance and communication (2% each). 
  • A consistent increase in surplus on account of India's service exports has been a cushioning factor for financing a large part of the trade deficit on the merchandise account in recent years. 
  • For the past five years, services trade surplus has financed around 41% of our merchandise trade deficit. 

Mar 19, 2012

Merchandise trade of India - Economic survey 2011-12

The International trade chapter from the latest Economic Survey can be found here.
Interestingly, there is a new chapter on "India and the Global Economy" in this survey, which I believe should be of interest to anyone who wants to talk about international trade with respect to India.
I am going to highlight some of the points from the above chapters in this and the following blog. I believe these points are of general interest while we talk about India's trade. One can refer the chapters for more details. This blog will focus only on merchandise trade. The next one will talk on services and general points. 
  • India's merchandise export regained the pre-crisis levels in 2010-11, but is showing lesser rate of growth in the current year (Apr-Jan 2011-12). This is due to significant slowing down, in dollar terms, since Oct 2011 due to Euro zone crisis. The last quarter (Jan -Mar 2012) data is awaited to get the final picture.  
  • After a long time, the trade deficit situation improved. The net terms of trade, which measures the unit value index of imports, declined to -14.3 percent. Simply put, exports grew faster than imports in 2010-11. This trend might not hold for 2011-12 again. 
  • India exported goods worth US $ 243 billion, registering a growth of 23.5% during April-Jan 2011-12. The top 5 products and shares of exports are Engg Goods (22%), Petroleum products (21%), Gems and Jewellery (16%), Primary products (12.7%) and Chemical and related products (11.6%). 
  • India imported goods worth US $ 392 billion, registering a growth of 29.4% during April-Jan 2011-12. Of the imports, POL contributed USD 118 billion, Non POL imports was at USD 273.5 billion (of this, Gold and silver worth USD 50 billion, capital goods and raw materials for industries worth USD 223 billion)
  • Trade deficit for April-Jan 2011-12 is USD 149 billion, which is higher by 40% compared to same period last year. This is alarming. The main reason is rise in Gold and silver imports which grew by 54%. 
  • India was 13th biggest importer and 20th biggest exporter in the world in 2010. India's share in global trade in 2010 was 1.5% which improved to 1.9% in first half of 2011. 
  • Electronic goods have displaced leather manufactured products from 5th position in manufactured sector exports since 2008. There has been a gradual shift in India's manufactures exports from labor-intensive sectors like textiles, leather, handicrafts and carpets to capital and skill intensive sectors. 
  • India has managed to diversify it's trade market significantly in recent years. In the last decade trade share with Asia and ASEAN improved from 33% to 58%. Share of EU and Americas decreased from 43% to 31%. This has helped us in weathering global crisis originating from EU/US. 

Mar 18, 2012

Should exchange-rate be a consideration in long term Foreign Trade Policy making?

We know that the Dollar/Rupee exchange rate plays an important role in trade dynamics of India. The question is, can the foreign trade policy of India take this into account while the policy is in making. If yes, what are the things that can be taken up at a trade policy level. And why? 

To give a brief background, exchange rate in India is currently a concern of central bank (RBI), and trade policy formulation is commerce ministry's work. Of course, there are interactions at certain levels between ministry of finance, commerce and RBI. Going by the statements that make it to the press from commerce ministry, it seems exchange rate is something about which commerce ministry is helpless and the most it can do, in cases when exchange rate starts hurting, is to request for additional sops for exporters. It happened whenever rupee appreciated during the past few years(e.g. see this, somewhat old, but typical response). It's more of an ad-hoc lobby work which pressurizes the Govt to dole out.

The overall thinking of the Government currently seems to be that exchange risk is something that the industry must factor in while doing business. To expect the Govt. to bail out every time exchange rate fluctuates is not reasonable. Hedging, maintaining foreign currency accounts and other such measures to offset currency risks should be taken by exporters/importers.

Now, the bigger question is, can the Foreign Trade policy be linked to the exchange rate in such a way that there are incentives built-in to offset the exchange rate risk? Currently, an exporter gets various incentives for exporting, none of which are directly linked to exchange risk. And if yes, should there be a difference in short term and long term approach towards this?

The further question that follows from this is, in the long run, does it help to have such incentives in place at all? The exchange rate, after all, is a reflection of the fundamental strength of the economy, which in turn, is reflected by exchange of goods, that set the rate in the long run. Of course, in the short run, there might be a mismatch between the fundamentals and going rate due to capital flows, speculations, expectations, holding decisions and so on. However, in the long run, the competitiveness and the relative advantages enjoyed by an economy determines the trade pattern and volume.

So what would happen if the industries are left to adjust to the emerging exchange rate autonomously?
If we do that, we might find that in case of currency appreciation, some industries might come under trouble.  Some might not be sustainable. Such sectors might protest, form lobbies and meet ministers with requests to help them. How should the minister go about it? Should he adopt a policy to oil the wheel that squeaks and give doles based on the noise?

I feel that the best way to approach it is to have an analysis regarding sensitivity of individual industrial sectors to determine the effect of strong rupee. Based on this, one can design a system to take care of adverse affect of currency movement by giving incentives to that sector to improve competitiveness and productivity, so that they survive in the long run.

And in the short run, give some doles to the lobbies. Because, if the baby is crying, it must be hungry. And, to survive in the long run, you must first survive the short one.