American multinationals appear to have substantially expanded their presence in India. The Bureau of Economic Affairs of the US Department of Commerce has recently released the results of its benchmark survey for 2009 of the operations of US multinationals, which is conducted once every five years. Those results show that the value added by majority-owned foreign affiliates (MOFAs) of US multinationals located in India had risen from $1,068 million in 1999 to $3,937 million in 2004 and a substantially higher $13,997 million in 2009.
A part of the dramatic increase over the five years ending 2009 was statistical, inasmuch as coverage in the two previous benchmark surveys relating to 1999 and 2004 was limited to the operations of nonbank MNCs. The 2009 survey covered the operations of both bank and nonbank MNCs. However, this was only marginally responsible for the spike in value added by these firms in 2009. Value added by MOFAs of US MNCs engaged in the Finance and Insurance sector (which includes banking) rose by $1,507 million from $30 million to $1,537 million between 2004 and 2009. On the other hand aggregate MOFA value added had risen by $10,060 million. Even if we assume that all of the increase in the Finance and Insurance sector was because of the inclusion of banking, value added by MOFAs had increase at an annual compound rate of 26 per cent between 2004 and 2009 and 28 per cent over the decade ending 2009.
An interesting feature of this expansion is the change in the sectoral distribution of value added in India by US MNCs. Even after adjusting for the overestimation of the relative size of the financial sector in 2009 as a result of the inclusion of banks, we find that the share of manufacturing in total nonbank value added by US MOFAs in India had fallen from 43 per cent in 2004 to 29 per cent in 2009. On the other hand, the share of services (excluding banking) had increased from 53.8 per cent to 71.8 per cent. American multinationals appear to be shifting their attention away from manufacturing towards services. This had been flagged in the past by the exit, for example, of IBM out of the manufacture of computer hardware that it had dominated, and its growing focus on consulting and software.
Within both manufacturing and services too significant changes have occurred. Thus, within manufacturing three sectors seem to have substantially increased their shares in value added. These are Chemicals (from 14.1 to 27.1 per cent), Machinery (from 7.7 to 17.7 per cent) and Computers and electronic products (from 4.7 to 16.6 per cent). In the case of services, the share of value added in the Wholesale trade to value added in all industries declined from 23.6 per cent to 9.7 per cent, whereas that figure rose from 20.6 to 43.5 per cent in the case of Professional, scientific and technical services. More than half of the increment in value added by nonbank MOFAs of US multinationals located in India during the period 2004-09 was on account of Professional, scientific and technical services.
These structural trends speak of two different factors explaining the expansion of US presence in India. On the one hand, US MNCs are entering India to set up production facilities in modern manufacturing, in areas such as Chemicals, Machinery and Computers and electronic products, to cater to the domestic market. In this area, the behaviour of US MNCs seems to be similar in China as well. China had to significantly liberalize its foreign direct investment policies and remove performance requirements for foreign-owned businesses, as part of the agreement for its accession to the World Trade Organization in 2001. In the event, even though China is otherwise a major exporter of manufactured goods, MOFAs of US MNCs produce largely for the Chinese market. The combination of a large sized domestic market and high rates of growth of GDP in China and India, during 2004 to 2009, seems to have encouraged US MNCs to expand their presence in manufacturing in these countries. Many have argued that the overall growth of these countries and their exports of goods and services has adversely impacted the US economy as a whole and US workers in particular. Even if that be true, US MNCs have clearly benefited from their domestic market.
As compared with these developments in manufacturing, in services US MNCs seem to have expanded their presence in Professional, scientific and technical services. This is the area that has received more attention in the US in recent years. These services are largely “produced” for export, indicating that the rapid expansion of US MNCs is either due to firms such as Microsoft or Adobe setting up captive units for generating in India a part of the output of services they produce for world markets or of firms such as Accenture using India as a location for generating services exported to third parties abroad. In both cases the intention is clearly to benefit from the low-cost, English-speaking, skilled labour available in India. Expanding in India allows these firms to face up to competition and increase profits earned in global markets.
Thus, the behaviour of US MNCs suggests that India is both a lucrative market for manufactures and a low-cost hub for the export of services. To focus only on the contribution its cheaper labour force makes to exports of services is to ignore the benefits the country provides as a market for giant corporations from the US.