Friday, October 17, 2014


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.


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.