Switzerland has certain associations in the official Indian mind - that it is where rich Indian ruffians park their money. It is not only Indians who hold this view; the US government also thinks like that. It has the muscle to fight a little economic war with Switzerland and force it to give data on Americans' assets in Switzerland. But there are many tax havens - mostly undistinguished little countries with low income tax rates. They do not enjoy Switzerland's prosperity. What distinguishes Switzerland is the freedoms that investors enjoy, whatever their nationality; they can be entirely sure that they can withdraw their money at a moment's notice. Freedom of capital movement is an important factor behind Switzerland's economic success. This column was published in Business Standard of 4 June 2001.
THE CHANGING WORLD OF THE 500
In the Financial Times
list of the world’s 500 largest companies, there is only one Indian company.
No, it is not Reliance; it is still Wipro on the basis of market
capitalization. That is one big company for a nation of a billion people.
Germany has one for every 4 million people; France, for 2 million; Britain, for
1½ million; and Switzerland has one for every 600,000 people. Why? Not because
Switzerland is a small country. There are many small countries – indeed, many
big countries – that do not figure in the list of 500 at all. All companies
start in a single location; as they expand, they have to make up their minds
where to go. For companies in a small country like Switzerland, the choice is
obvious –they have to expand abroad. For companies in India, the choice is less
obvious; but they face it too. Wipro could never have got to its present size
within the Indian market alone; the world market made all the difference.
But it is not a matter of choice
alone; clearly, a country’s policies also matter. Indian companies can never
expand to world class as long as they have to live with Indian exchange
controls. What distinguishes Switzerland from even its European neighbours is
that it has had a fully convertible capital account for almost a century.
During World War II, all the belligerant countries introduced exchange
controls; Switzerland did not. Indeed, it did not have to; as World War II
engulfed other countries, their terrified citizens parked their money into
Switzerland.
What gives Swiss firms the
strength to operate all over the world? Many of them are in banking and
insurance: for instance, UBS, Credit Suisse, Zurich Financial Services, Swiss
Re, Swiss Life. Indian companies are more or less excluded from making their
presence in these areas because they were nationalized. The old Imperial Bank
or New India Insurance could have harboured the ambition of joining the biggest
500; but nationalization confined them to the tiny Indian market. ICICI may get
there one day – if it manages to shake off its socialist inheritance. Reliance
will get there sooner because it is now in oil refining; it will leave behind
the government oil companies that have had a captive market for 50 years. They
too could, if they were privatized. Total was an oil company owned by the
French government with a market cap of $3 billion. It was privatized and it
absorbed Elf Aquitaine as well as Petrofina, the Belgian oil company. Today, it
is the world’s 33rd largest company with a market cap of $103
billion – 80 per cent of which is owned by foreign shareholders. This single
company has attracted into France 8 times the foreign investment that the whole
of India attracted through the 1990s; and in its expansion, the foreign
investors have freed it from the constraints of the French government as well
as the French capital market. Because of the privatization of companies the
French government owned, the market cap of French companies in the top 500
today exceeds that of German companies. India’s government companies could also
be national champions – if they could get out of the government’s embrace.
Another area of Swiss strength is
pharmaceuticals, exemplified by Novartis, Syngenta and Clariant. The basis of
strength here is research and development. Indian companies should have a very
good chance in this industry. Unfortunately, the Patent Act of 1970 diverted
their energies into copying other companies’ patents. Today, a number of them
have turned their attention abroad. But every time they try to sell anything
abroad, some or other foreign company challenges them in court for patent
breaking. Patents expire after 16 years; and it is often questionable whether a
drug is the same as another patented drug or not. But Indian companies do not have
the financial muscle to engage their foreign competitors in courts abroad; so
they give up. Such is the cost of thoughtless nationalist legislation passed
thirty years ago.
Ten years ago, oil companies
topped the list of the 500. Today, Exxon and Royal Dutch-Shell are still in the
top 25. But the largest company in the world is General Electric, the classic
conglomerate whose market capitalization of $482 billion exceeds India’s GDP.
However, the way to get to the top has not been conglomeration, finance, oil or
drugs. In the 1990s it has been information and communication technology (ICT),
or technology, media and telecommunications (TMT) as FT calls it. TMT companies
have been massacred in the stock market slump of last year. But Microsoft is
still number two in the world with a market cap of $363 billion; AOL Time
Warner, Intel, NTT DoCoMo, IBM, Vodafone, Nokia, Verizon, SBC Communications
and Cisco still figure in the top 25.
TMT companies experienced the
biggest falls in rank: Softbank Corporation, a Japanese company, went down from
No 44 to 447; Yahoo from No 40 to 324. More bloodletting is probably on the
way, for the financials of many TMT companies are precarious. But this sector,
which hardly figured ten years ago, still dominates the list: IT hardware
accounts for $2.7 trillion of market cap, telecommunications services for $2.3
trillion, software and computer services for $1 trillion, and electronic and
electrical equipment for $$900 billion. Thus, these new economy sectors still
account for a third of the market cap of the top 500. Some of the companies are
in financial trouble and will go out. But the sectors will remain important in
the years to come, for they still have a large potential market to exploit.
American companies continue to
dominate the list; of the total market capitalization of $19-odd trillion, US
companies account for $10.9 trillion. Japan trails way behind with market cap
of $1.8 trillion; the number of Japanese companies in the top 500 has fallen
from 77 to 64. Here too, financial weakness may lead to the exit of some next
year. Japanese companies suddenly invaded the list in the 1980s as Japanese
exports boomed and the yen appreciated; today, they are beset by the country’s
economic stagnation, to which no end is in sight. The quality of national
management, whose importance I pointed out earlier in the case of India, has
made a huge difference in the case of Japan as well.
Bigness is not everything; we
will not become a great nation simply by getting a hundred companies into the
top 500. But size matters. Big companies are less likely to be taken over; they
have an edge in competition, and they have resources that slow down their
decline. Life as a big company is easier. Our companies are running scared of
foreign competition. One reason is that they are small; and they have been kept
small by government policies and by the small size of the Indian economy. Our
present government thinks that it has reversed those policies, and that it is
strongly committed to growth. But it is more committed to the small Indian
companies than to making them grow. I do not think the commitment is matched by
an intelligent understanding of what needs to be done.
