On Corporate Governance and Globalization: The Structure of Ownership and the Balance of Trade in th

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On Corporate Governance and Globalization The
Structure of Ownership and the Balance of Trade
in the Indian Corporation

• Sumit K. Majumdar
• University of Texas at Dallas

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The Agenda

• How the study fits in my research agenda
• The issue of consequence
• Contours of the study
• Some theoretical issues
• Some empirical details
• Discussion of results
• Issues for assessing globalization
• Issues for strategy of internationalization
• What further issues need tackling

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Themes of Research Activity

• My research agenda has been organized around the
  evaluation of interactions between
• The firm
• The market
• The state
• My interest has been in addressing three related
  questions
• How institutional factors influence the
  incentives firms face
• How incentives influence the strategies of firms
• How firms strategies influence performance
  outcomes
• Technology diffusion
• Productivity

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Research Trajectories

• Two focus contexts
• Focus on the telecommunications sector in the US
• Focus on Indian industry
• Program has evolved into four distinct streams of
  research
• Communications Sector Strategy and Policy
• Ownership, Property Rights and Productivity
• Strategy and Performance in Indian Industry
• Technology Strategy
• This study falls within the broad paradigm that I
  have followed
• Extends the framework towards an evaluation of
  another outcome
• Globalization

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Issue of Consequence

• The link between governance structures and
  globalization is of historical and practical
  consequence
• The explorers of the world were able to conduct
  their voyages only because of appropriate
  incentives
• The East India Company and its role is evocative!
• What is an appropriate governance structure that
  permits globalization
• For modern day firms what is an appropriate
  structure of ownership that permits global
  activities

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Fit with the Modern Literature

• There is a big literature in economics and
  management
• The issue of how to globalize is a key theme
• Whether via exports or investment overseas
• How to structure an overseas foray receives great
  attention
• Whether as a joint venture or a subsidiary
• In the governance area the question of an
  appropriate structure receives attention
• Contemporary concerns are with institutions and
  incentives within an economy that permit growth
  and development

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What is this Study About

• The big picture
• I evaluate the relationships between ownership
  structures and Indian firms globalization
• I specifically look at globalization as imports
  and exports and therefore also evaluate the
  balance of trade statistic for each firm
• This firm level activity when aggregated provides
  the balance of trade picture for an economy

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Why it Matters for Firms

• Globalization as exporting activity
• Being outwardly oriented
• Engaging with the world at large
• Exploiting bigger markets
• Creating a mercantile footprint
• Globalization as importing activity
• Acquisition of embodied knowledge
• Enhancement of capabilities
• Arbitrage of differential cost structures

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Theoretical Setting

• Why firms export
• Absolute advantage
• Comparative advantage
• Factor endowments
• Demand similarity
• Product Life Cycle
• What about institutional reasons
• Explaining the East Asian Miracle
• Understanding the role of governance and
  incentives
• Taking a closer look at ownership as a
  determinant

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Theoretical Constructs

• What is the link between governance and behavior
• Property rights are key
• Property rights provide the incentives
• Ability to use
• Ability to enjoy
• Ability to re-deploy
• Ability to dispose
• Incentive mechanisms associated with property
  rights lead to enforcement of behavioral
  standards
• But there can be a variety of property rights and
  these can influence globalization

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Preliminary Details of Study

• What is evaluated is the link between ownership
  structure and globalization
• Globalization
• Balance of trade
• Export intensity
• Import intensity
• Ownership structure
• Foreign ownership
• State ownership the public sector
• Corporate ownership institutional owners
• Directors ownership
• Top 50 individuals ownership the key investors
• Public ownership the general public at large

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Some Institutional Concerns

• Institutional feature of control is taken into
  account for each ownership category
• Control is defined according to the Indian
  Companies Act of 1956
• Shareholding of 51 percent or more is associated
  with control
• At 51 percent or more ordinary resolutions can be
  passed
• Control permits the exercise of property rights
  within a specific institutional context

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Context

• Over 1,000 firms listed on the Stock Exchange
• Account for most of Indias market capitalization
• Data for 1988 to 1993
• These straddle the periods before and after the
  1991 reforms
• This helps capture the influence of the reforms
  process as a by-product of the analyses

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Comprehensiveness of Inductive Analysis

• Six ownership categories
• Foreign ownership
• State ownership
• Corporate ownership
• Directors ownership
• Top 50 individuals ownership
• Public ownership
• Two classes of control
• 51 percent or more
• Less than 51 percent
• Three dependent variables
• Balance of trade
• Export intensity
• Import intensity

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Explanatory Variables

• Ownership variables for different categories and
  at different control points
• Controls
• Advertising ratio
• Marketing ratio
• Distribution ratio
• Net fixed assets ratio
• Debt equity ratio
• Free reserves
• Sales growth
• Size

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What do the Herfindahls Show
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A Second Set of Herfindahls
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Assessment of Ownership Structure

• The Herfindahl indices show
• Dispersal of ownership in Indian companies
• The most important category is the public at
  large with over 23 percent of the shares in the
  companies
• The next important category is the corporate
  owners holding less than 51 percent
• These are essentially Indias financial
  institutions

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Estimation

• Standard OLS
• Two stage least squares
• Size is endogenous
• Instruments used
• Business group
• Time
• Age
• Borrowing
• Quantile regression

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Basic Two Stage Least Squares Results
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Quantile Estimation

• Accounts for heterogeneity
• Normal estimation evaluates relationship at the
  mean of the distribution
• This approach generates estimates at different
  quantiles
• The estimation for each quantile is done
  simultaneously

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Quantile Estimates for Export Intensity
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Quantile Estimates for Import Intensity
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Main Empirical Results

• Two main ownership categories influence export
  intensity
• Foreign firms with more than 51 percent
  shareholding
• Firms where Top 50 owners hold more than 51
  percent shareholding
• One main ownership category influences import
  intensity
• Firms with more than 51 percent government
  shareholding

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Some Implications

• Main implications from a governance perspective
• Ability to control is a pre-requisite for being
  internationally pro-active
• Concentration of shareholding leads to greater
  control and therefore greater incentives to enjoy
  the fruits of deployment from various assets
• The importance of blockholders has become
  important for the globalization of the Indian
  economy
• Yet is only a small set of firms taking Indias
  globalization forward

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Property Rights Concerns

• Control is critical if foreign firms are to
  exploit Indias ability to be a global supply
  platform
• Entrepreneurial firms in India also require
  control to become global players
• It is a question of how capabilities and assets
  that are invested are to be exploited
• The economics of asset exploitation revolve
  crucially around the institutional rules
  governing property rights in India

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Theory by Ownership Category

• Different types of owners have different
  motivations
• Foreign firms have capabilities both to give to a
  host country as well as to exploit
• The nature of property rights regimes and control
  are vital
• Entrepreneurial and investor financed firms also
  tend to pay heed to property rights
• State owned firms have tended to abrogate
  property rights with negative consequences
• Corporate sector firms in India are state owned
  and behave like government firms
• Foreign financial institutions are likely to have
  different motivations
• The property rights regimes desired will be
  similar to that desired by other foreign firms in
  India

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Possible Evolution of Ownership Structure

• Three main categories of ownership are likely to
  exist in India in the future
• Foreign ownership
• Entrepreneurial firms the Top 50 individuals
  category
• Mutual funds the Corporate Ownership category
  now
• This is an issue to be examined with longer time
  series data as available
• Why
• Convergence of the Indian economy to global
  regulatory and particularly towards U. S. norms
• Outcomes expected
• More firms become globalized
• Indian economy is integrated into the world
  trading and investment system

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Six Topics in Search of Sponsors

• Evolution of ownership in India
• Development of institutional regimes
• Trajectories of globalization
• Engagement with the world community
• Acquisition of capabilities
• Productivity and performance impacts