Expert Speak India Matters
Published on Oct 23, 2018
The Sharmas versus MNCs

India is a continent of craftspeople and entrepreneurs. There are approximately 50 million registered and unregistered micro, small and medium enterprises in India, accounting for 95% of the industrial units.  In manufacturing, micro and small enterprises employ approximately three quarters of the workforce; the same enterprises in China employ only a quarter of the manufacturing workforce.  The most common enterprise size in the US has 45 workers; in India the most common enterprise has one worker.

Most experts suggest that Indian businesses must scale up if they are to compete internationally and enable India to reach growth rates approaching 10% pa. The vast majority of global trade (80%) is undertaken by large multinational corporates -- bigger is better as the very basic economic doctrine of economies of scale suggests. MNCs are able to seamlessly deploy and organise resources around the world in well planned hyper-efficient internal departments supported by specialised supply chains.

If MNCs are so efficient, then why not grow large organisations bigger and bigger and achieve even more efficiency?  Well the world tried this last century. It was called the Soviet Union, which tried to run its economy with one large organisation – the state.  Adam Smith would remind us that price signalling by the market enables resources to be deployed where profitable. The invisible hand pushes resources where they are most wanted and rewards the creative destruction of the innovative. This beats a large planned organisation, like the state or a dinosaur MNCs, which cannot process data and change processes quickly enough to respond to inherent variability within the system. In a planned system, there is limited creative destruction and thus large surpluses and shortages occur as resources are misallocated or not allocated efficiently.

Whilst many multinational corporates today have a revenue base that is bigger than many small countries, their operations tend to be focused on a single sector. Thus, they avoid the complexities that Soviet planners suffered from when dealing with entire economies.  With the aid of modern sophisticated information technology, MNC’s are able to achieve economies of scale across a massive realm. But their internal planning and resource allocation processes are in a constant battle to keep up with the market – outpace ‘disruption.’

However, as change accelerates, will MNCs continue to dominate or fall like the dinosaurs?  Previously, MNCs had a distinct advantage in their ability to aggregate huge quantities of capital to make large long-term investments.  But the rate of technological change and the sophistication of capital markets to slice and dice risk and disaggregate it into specialist players has made the MNC mammoth capital quality nearly redundant.

Similarly, innovation implementation has revolutionised. For example, 20 years ago who would you bet on to be the ‘go to’ knowledge reference resource for the world; A well-funded global organisation that hired the best brains to compile knowledge references and owned a trusted structured online distribution network to customers. Or – a micro business of open source amateurs on a simple platform that relied on crowds of people to adjudicate personal views of knowledge and owned no distribution channel? We all know Microsoft’s Encarta was absolutely beaten by Wikipedia - that was 20 years ago.

The average life expectancy of an S&P500 company is less than 20 years; in 1980 it was around 35 years; the British East India Corporation survived for 250 years.  As change accelerates, organisations need more rapid creative destruction and bigger firms just can’t cope.  Middle managers are nervous of change and this inherent bias creates an agency cost. Normally this is overcome via a hierarchy system that pushes or pulls change through large organisations. But faster and faster economy wide change favours the nimble/entrepreneur businesses – a network of small businesses that can raise discrete dispersed capital, will beat a hierarchical planned organisation. Given this global trend, perhaps India is sitting on an inherent society wide competitive advantage of natural entrepreneurs and craftspeople.

However, MNCs still hold an inherent advantage, something primal, which Yuval Harrari would describe as humankind’s extraordinary ability to collaborate via the trust in conceptual fictions. Over the ages, millions of men sacrificed their lives for the irrational fiction of a ruler or religion. Humans will trustingly collaborate to the point of death for a conceptual fiction. No other species is capable of such instinctive, mental gymnastics. In the 21century, the most influential fiction is called a brand. Today humans can walk into a strange shop in a foreign land and purchase black sewerage looking bubbly sweet liquid and are willing consume it – because it has that trusted red symbol “Coke” on the can.

In medieval times, Christians used crosses around their necks to achieve instant trust when strangers met. Today humans provide vast quantities of valuable goods to a stranger because digits on a screen explain that millions in fiat money will be paid to them; but the lubricant for this transaction is the fiction of a big brand like General Electric on that screen accompanied by a paise ki dukan like HSBC.

India was doing mathematics centuries before Pythagoras; India recently put a satellite in orbit around mars for under $100m; India has been doing multiculturalism thousands of years before western liberals thought it was progressive; India is a more coordinated federal political system than the EU.  So in these accelerating changing times when networks of nimble craftspeople will beat hierarchies of giant organisations, India’s inherent dispersed societal businesses may be a secret weapon. That said for such an Indian ecosystem to succeed at a global scale, it will need a trusted method to reach from Indian micro specialists directly to global consumers.  Could such a jungle of networks evolve? It would surely rival the ecosystem of the world’s largest jungle in South America.  (p1) (p6) (p5) (Chart1)

Scott D. Anthony, S. Patrick Viguerie, Evan I. Schwartz, John Van Landeghem, “2018 Corporate Longevity Forecast: Creative Destructior is Accelerating”

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Peter Nicholls

Peter Nicholls

Peter is a business executive who thrives at the apex of business government and civil society. Peter excels at leading diverse professionals from diverse cultures ...

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