Financing of large corporations and corporate capital structures in India and in Asian NICs: a comparison

How do the financial characteristics of large Indian corporations compare with those of their counterparts in other NICs? Some important features of the comparative corporate financial structures in developing countries emerge from a simple visual examination of the univariate distributions of a few of the main variables. Broadly speaking, the trends indicate similar shapes of distributions although the scales of the variables are different between countries.

The trends also suggest reasonably well-behaved distributions of corporate characteristics for the Asian corporations. Moreover, these distributions exhibit much the same kinds of regularities as you find in corresponding data for advanced countries.

On the face of it, this is surprising since the economic environment in which developing country corporations operate varies greatly between developing countries themselves, leave alone between the developed and developing countries.

The economic explanation for this phenomenon must lie in the operation of market forces which despite the huge inter-country differences in tax structures, the nature of political regimes, government policies, etc. manage to impose a certain order on the behaviour of these corporate entities.

It has been found that Indian corporations typically retained a marginally greater proportion of their profits than corresponding firms in Korea and Pakistan . However, the average Indian retention ratio during the 1980s was considerably larger than that in Thailand and Malaysia. More significantly, the top Indian and Pakistani corporations financed their long-term growth of net assets from internal sources, i.e, retained profits, to a far greater degree than their counterparts in Korea and Thailand.

Equally important, the Korean and Malaysian corporations financed nearly half of their growth from new equity issues on the stock markets, whilst the corresponding figure for the median Indian corporation, at 16.3 per cent, was very much lower.

Indian companies, however, used relatively more long-term debt to finance their growth than their Korean and Malaysian counterparts. The Thai corporations have the highest debt to net assets ratio, followed by Korea and India. The corresponding ratios in Pakistan and Malaysia were much smaller.

Corporate financing patterns in India and in industrialised countries

We have seen in the last section that there are important differences in corporate financing patterns among the Asian NICs. Nevertheless, it is important to note that these differences are not as pronounced as those between corporations in the NICs and their advanced country counterparts.

Thus, for example, although Indian companies compared with, say, Korean corporations, finance a much smaller proportion of their long-term growth from (a) external sources and (b) new equity on the stock market, these proportions are nevertheless much larger than those typically observed for American and British corporations.

The typical Anglo-Saxon corporation financed almost the whole of its investment from internal sources. The stock market, in fact, made a net negative contribution to the financing of corporate growth (during the period under discussion) in these countries. It was also found that even in non-Anglo-Saxon industrial countries like Germany and Japan, the stock market's contribution to total sources of corporate finance was very small -- barely 2 to 3 per cent.

In comparison with these industrial country figures, Indian companies, as indeed, those of other Asian NlCs, would appear to use both (i) external finance and (ii)equity finance to a far greater degree. The relatively greater use of both (i) and (ii) by developing country corporations is extremely surprising. It is both counter-intuitive and goes against the predictions of economic theory.

In view of the low level of development of the LDC capital markets and their much greater imperfections, one would have expected developing country corporations to rely more on internal finance. A priori, one would also expect them to resort far less to the stock market to raise finance than, for example, firms in industrial countries with well-developed capital markets.

More specifically, the implications of the relevant theoretical models for the developing country stock markets and financing of corporate growth in these countries may be summarized as follows. First, because these countries do not as yet have the accounting standards, or possess in sufficient numbers information-gathering and disseminating private firms or public organizations of the kind found in developed countries, the share prices in these emerging markets are likely to be dominated by ` noise' and speculation.

Second, the fact that not many listed companies in these young markets will have a long enough track record, or sufficient time to establish reputations, will tend to produce market volatility and arbitrary prices.

Third, apart from reducing the efficiency of the pricing signals emanating from the market, such volatility and arbitrary pricing will also discourage firms from seeking a stock market listing or attempting to raise funds by new issues. Other interrelated market imperfections such as asymmetric information which, a priori, will be greater in emerging markets than in the mature ones, will also a same direction. The world clearly does not correspond to the predictions of these theoritical models. As noted earlier, the Indian stock market is the largest in the world in terms of the number of companies listed, just behind the US. There were many more companies listed on Indian stock markets than those of advanced countries such as the UK, Germany or Italy.

Trade & Industrialisation

Edited by Deepak Nayyar

Published by Oxford University Press

Price: Rs 475

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.