Does Direct Investment in Complementary Businesses make Business

Sense to Foreign Companies in an Emerging Economy? Case of

British American Tobacco in India, 1906–2004

Amar K.J.R. Nayak

The objective of this article is to find out if direct investment in complementary businesses is important for
success of a foreign company in the context of an emerging economy like India. The article analyses the case
of British American Tobacco (BAT) with regard to its nature, timing and scope of investment in India from
1906 to 2004 to explain the determinants of its success in India. From a sample of 51 foreign companies that
have been operating in India prior to 1991 and that showed consistency in their financial performance, the
case of BAT was chosen for the study. While the study shows the importance of holistic investment approach
for success of a foreign firm in an emerging economy, it argues that investments in complementary businesses
contributes significantly to the success of direct investment in the context of an emerging economy.

There have been different viewpoints on the
factors that determine success of foreign firms
in the emerging economies context. How-
ever, a lot of emphasis has been attributed to
external factors like regulatory policies of the
host countries, institutional deficiencies and
poor infrastructure for the performance of
foreign firms. While the internal factors or
firm level strategies could actually be more
significant to success of a firm in the above
context, the explanations from this perspec-
tive are a few. The focus of this article is to
examine whether firm level strategy to invest
in complementary businesses is important
for success of a foreign firm in an emerging
economy or a developing country context.
The case of British American Company (BAT)
in India during 1906–2004 has been studied
to examine the above hypothesis.
During the long history of foreign invest-
ments in India, there has been a lot of debate
on the various issues related to FDI in India.
On one hand, it has been argued that free
trade and competition is beneficial to the

Amar K.J.R. Nayak is an Associate Professor, International Business and Strategy at the Xavier Institute of
Management, Bhubaneswar, Orissa, India.
GLOBAL BUSINESS REVIEW, 8:2 (2007): 189–204
SAGE Publications Los Angeles/London/New Delhi/Singapore
DOI: 10.1177/097215090700800201
190
Amar K.J.R. Nayak
whole world in the long run, and India too
will benefit from its inward FDI (Johri 1983;
Kumar 1996; Venkataramani 1990). GATT/
WTO regulations have been based on this
line of argument. Using the above theoretical
framework, foreign companies, foreign gov-
ernments and international bodies have
argued against the closed-door policies of the
Government of India towards international
trade and investment.
On the other hand, it has been argued that
liberalization and opening up of the economy
has had negative impact on India (Kidron
1965; Kumar 2003; Kurien 1966; Nayak 2000,
2002, 2003). Stiglitz (2002) argues that
globalization has not met its promises to the
developing countries. Lall (1999) and Sharma
(2000) argue that the export basket of India
consists of low value and low technology
product and that India cannot remain com-
petitive with increasing liberalization of the
global economy. Nayak (2003, 2005) empir-
ically shows that while FDI in India had a
positive effect on exports, and helped import
substitution during the period 1955–1975,
when India followed restrictive policies on
FDI.
External factors like political patronage,
local dynamics among government and local
companies have been attributed to the per-
formance of foreign firms. Bagchi (1972)
argues that the strong political patronage
helped the British companies to flourish and
grow in India during the early decades of
the twentieth century. Encarnation (1989) dis-
cusses the interplay of forces among local
government, local companies and the foreign
companies from a politico-economic point of
view. Internal factors affecting foreign firms,
Global Business Review, 8:2 (2007): 189–204
like organizational structures and holistic
strategy have also been discussed. Tomlinson
(1989) states that the short-term structures
created by British expatriates and multi-
nationals to generate immediate success
limited their options for future evolution in
India. Nayak (2005, 2006) discusses the strat-
egy of foreign firms for success in the de-
veloping country context.
Recent literature on FDI and firm perform-
ance show the importance of several issues
like timing (Luo 1998; Rivoli and Salorio 1996),
length of operation (Carlsson et al. 2005),
asset specificity of foreign firm (Chen 1999),
distance of investing firm from the host econ-
omy (Ghemawat 2001), mechanism of using
knowledge about foreign market and oper-
ation for increasing commitment in a for-
eign market (Johansson & Associates 1994;
Johansson and Vahlne 1977), positive spillover
from FDI in host economy is a function of
shared ownership of domestic and foreign
ownership (Javorcik 2004). While the above
studies have been based on FDI in both de-
veloped markets and emerging economies,
direct investment strategy of firms in emerg-
ing economies like India have not been probed
much.
In the above context, this article brings in
the perspective of firm level FDI strategy that
has worked in an emerging economy like
India. It focuses on the rare FDI model of BAT,
a model that has helped the company to grow
in size and profitability and benefited the host
country as well. As India becomes an import-
ant host for FDI in today’s era of globaliza-
tion, understanding successful FDI pattern
will be useful to both foreign companies in-
vesting in India and to the Government of

India for designing an appropriate regulatory
policy on FDI, rather than following a com-
pletely open door policy.
The case of BAT was selected from 51 for-
eign companies that have invested in India
prior to 1991. The sampling method con-
sisted of five major steps for selecting cases
from the population of foreign companies in
India. The steps included study of historical
trends of FDI in India, during the period,
1900–2000, selection of sector where FDI has
drawn the maximum FDI, identify individ-
ual companies in the selected sector, sort
individual companies on a three-dimensional
(time, origin and industry) matrix, and select
companies from the matrix that satisfied
three key parameters (entry of company to
India prior to 1991, size of company, and con-
sistency in financial performance). Subse-
quently, hierarchical clustering analyses for
three years, 1990, 1995 and 2000 on the basis
of three financial parameters, namely, Sales,
profit after tax (PAT) and profit before depre-
ciation, interest and tax (PBDIT) was used to
reconfirm the uniqueness of BAT among the
51 companies that qualified for the analysis.
Research Objective: To find the deter-
minants of success1 for BAT in India during
the period, 1906–2004.
Research Hypotheses:
(a) BAT made holistic investment2 across
the various market functions of their
respective industries in India.
(b) Direct investment by BAT in its com-
plementary businesses3 and its related
industries contributed significantly to
its success in India.
Case of British American Tobacco in India, 1906–2004
191
The Nature and Timing of
Foreign Direct Investments
Investments in Local Manufacturing
and Complementary Businesses
From trading, BAT quickly graduated to
manufacturing of cigarettes, setting up a
cigarette factory in Monghyr, Bihar in 1907
through Peninsular Tobacco. In another five
years, it invested in local leaf processing and
leaf growing. Subsequently, it steadily in-
vested in several related areas of the cigarette
business like printing and packaging, duplex
board, tissue paper, aluminium foil, cigarette-
making machine, fibreboard container and
filter rods. By 1970, BAT had invested in all
the complementary businesses of cigarette
in India.
In retrospect, BAT chose to commit very
early in India. Its investments in different
market functions enabled it to manufacture
cigarette at a price affordable to local cus-
tomers. Investing in building awareness of
its products also promoted its success. Invest-
ments in building a distribution network was
yet another area of importance.
In post-independence India, ITC, BAT’s
subsidiary and the associate company, has
been investing consistently in its main and
complementary businesses. The annual
Gross Block as reported in the company bal-
ance sheet has been taken as investment in
main business. Investments in subsidiary
companies and other related businesses have
been taken as investments in complementary
businesses. Investments in government
securities and other trade investments have
been considered to be investment in others
(see Figure 1). It is seen from Figure 1 that
Global Business Review, 8:2 (2007): 189–204
192
Amar K.J.R. Nayak
Figure 1
Investments of BAT/ITC in Different Businesses: 1955–2004
Source: ITC Ltd, (1955–2004), Annual Reports.
the company has steadily invested in its main
business. Investments in the complementary
businesses were mostly undertaken during
the 1960s–1970s. The investments in other
areas have been low and have varied.
In the 1910s, BAT held Peninsular Tobacco,
which manufactured cigarettes in India.
Dominion Tobacco, Imperial Tobacco and
Arcadian Tobacco were sales outlets. Indian
Leaf Tobacco was responsible for distribution
and trade of tobacco leaf. By 1953, BAT had
reorganized its business holdings and added
to its assets shares of its competitors like
Vazir Sultan and All India Tobacco. Carreras,
another British cigarette company, held 3.8 per
cent of BAT’s subsidiary Imperial Tobacco in
India. By 1975, BAT held all its business
interests through ITC Ltd and ILTD. Finally,
by 2002, BAT brought all its businesses in
Global Business Review, 8:2 (2007): 189–204
India under a single entity, Tobacco (Manu-
facturer) India.
Investment in Local Management
Most of ITC’s serving executives consider
that ITC has been an Indian company.4 BAT
gradually reduced the number of expatriates
in its Indian operation. Since it was expensive
to get British managers especially after the
Second World War, increasing Indians in
management served to satisfy the Indian
government. Indian managers in ITC subse-
quently lobbied with the Government of
India for the cigarette and tobacco business
in India.
Abdul Rub Sardar Hussain was the first
to be inducted as covenanted Indian Assist-
ant on 1 September 1934. By 1947, there were

121 Indian managers comprising 44 per cent
of the management. Indian managers were
treated on equal terms with the expatriates
by the middle of the 1960s. The expatriates
received only the additional amount on over-
seas allowance. In 1964, the company insti-
tuted pension for every worker. There were
only seven expatriates in the company by
1972. The last Englishman, Tonny Drayton,
left India in September 1979. As of today,
there are two British personnel, C. R. Green
and J. B. Stevens as BAT’s representatives on
the Board of ITC Ltd.
Further in the direction of indianization
the company changed its name from Imperial
Tobacco Co. of India Ltd to India Tobacco
Limited in 1970; then to I.T.C. Limited in
1974, and to ITC Ltd in 2001. Given the nature
of its business and the worldwide opposition
to tobacco, the company has successfully
managed to create a system by which the local
managers and stakeholders guard the busi-
ness in the Indian context.
Investments in Sourcing,
Marketing and Distribution
The business of leaf tobacco was in India
much before BAT arrived on the scene, but
much of the production and selling was local.
Only a few people used granulated tobacco.
British and American companies like Im-
perial Tobacco, Dominion, Arcadian and
Peninsular Tobacco only traded some of their
brands in India.
BAT worked on creating its supply systems
for procuring leaf tobacco, building aware-
ness of granulated tobacco among the masses
and developing the distribution systems. For
Case of British American Tobacco in India, 1906–2004
193
procurement of raw materials, it set up
tobacco re-drying machines in Shahpur and
Khajauli in 1908 and another in Dal Singsuai
in 1912. A new business unit, Indian Leaf
Tobacco, was set up in 1912 to purchase, dis-
tribute and trade tobacco leaf. This subsid-
iary became Indian Leaf Tobacco Division
(ILTD) and subsequently part of ITC Limited.
This unit has been BAT’s supply arm of leaf
tobacco. ILTD invested a great deal to de-
velop good variety of leaf tobacco in India.
Initially BAT sold its brands through
Dominion Tobacco, registered in London. On
24 August 1910 it set up its selling unit in
India, Imperial Tobacco Co. of India Ltd. To
promote its products Imperial Tobacco gave
away free samples in the range of 50,000–
100,000 cigarettes per district salesman per
month. Lucky dips and cigarette shies were
organized in regular stalls, weekly haats and
occasional melas were also organized to
popularize cigarette smoking. After cigarette
advertising was banned, the company has
been continuing its promotional campaigns
by sponsoring several art, music and sport
activities. The company has also steadily in-
vested in sales and distribution activities. Its
products are now available in more than a
million outlets in India. From selling through
others’ retail outlets it has moved to setting
up its own lifestyle retail outlets and stores
today.
Timing of Investment
In investment, as a multinational enterprise
BAT has uniquely preferred local interest to
its global interest. From its main interest in
tobacco, it has allowed the Indian subsid-
iary/associate ITC to diversity into areas like
Global Business Review, 8:2 (2007): 189–204
194
Amar K.J.R. Nayak

hotels, marine products, exports, agri-business
and retailing. However BAT’s investment in
the value chain of cigarette business has been
consistent, systematic and timely. The timing
of its investments from 1906 to 2004 is shown
in Chart 1.
Integration of Business Goals to
Host Country’s National Goals
Independent India’s concern has been to gen-
erate employment, substitute imports by
local production, increase foreign exchange
reserve through increased exports and ad-
ding private investment in some of the core
industries and social sectors. The Five Year
Plan documents, beginning 1951, reflect these
developmental goals. Many foreign com-
panies decided to wind up operations in
India when the government imposed certain
conditions like local production, investment
in core sectors and export earnings in the
1960s and the 1970s. BAT swam against this
current and invested heavily in India, ingeni-
ously integrating its objectives with India’s
national objectives.

Chart 1
Timings of Investment in various Complementary Businesses

Global Business Review, 8:2 (2007): 189–204


Growing and processing tobacco leaf gen-
erated direct employment among thousands
of farmers and traders in the rural sector. ITC
Ltd set up Triveni Handloom Limited as a
subsidiary unit in 1977, with its head office at
Kanpur. The production centre at Saharanpur
had 35 looms, which was increased to 300
within a year. ITC Ltd also put up two show-
rooms at Badohi and Varanasi. The sales
turnover increased from 0.27 million INR to
1.8 million INR. Almost 1,800 local people
were self-employed in this process, earning
the company additional goodwill of the gov-
ernment and the local people.
BAT also invested in areas for import sub-
stitution and in core sectors like paper, paper-
board and hotels. Haksar (1993), reflecting
on his 34 years of experience in ITC, indicates
that BAT/ITC had a clear plan to align its busi-
ness with the goals of the country. The differ-
ent aspects of this strategy were (a) import
substitution (b) export promotion (c) invest-
ment in core industries (d) investment in the
social sector.
Import Substitution
BAT began in right earnest early on to locally
substitute its imports. In 1945, it was able to
reduce its import component to 20 per cent,
in 1949 by 70 per cent, and in 1957 by 95 per
cent. It invested in local manufacturing from
1907 and went in for local sourcing of tobacco
leaf as early as 1912. It substituted the im-
ports of cigarette paper in the 1950s by invest-
ing in manufacturing paper. Subsequently,
it invested in duplex board and aluminium
foil. By 1963, BAT invested in filter rods and
Case of British American Tobacco in India, 1906–2004
195
it internalized other market functions down-
stream of the value chain like the production
of machinery for packing cigarette by 1960.
Export Promotion
ITC Ltd started off with marine exports in
1971. It earned 7.3 million INR of foreign ex-
change by 1973 and qualified to be recog-
nized as an export house. In the ensuing years,
however, the business incurred losses.5 The
hotel business, targeted at the foreign tourists
in India, was successful in earning foreign
exchange. ITC Ltd chose to invest in the high-
end segment of hotels, building its own
hotels or tying with existing establishments.
The company internalized valuable real
estate properties across the country at cheap
prices by entering into the hotel business. By
1980, the company’s annual export earning
was about 335 million INR and in the next
10 years it increased by about five times. In
the 1990s the value of exports rose to about
10 billion INR.
In 1990, ITC set up the International Busi-
ness Division (IBD) to cater to the export of
agricultural commodities. IBD has focused
on exports of vegetable oils, grains, pulses,
soyameal, rapeseed meal, rice, wheat prod-
ucts, sesame seeds, castor oil, coffee, spices,
black pepper, frozen and cooked shrimps,
and prawns. IBD contributes nearly 60 per
cent of ITC group’s foreign exchange earnings.
Investments in Core Industries:
Paper and Paperboard
The government had been urging private
business houses to invest in paper and
Global Business Review, 8:2 (2007): 189–204
196
Amar K.J.R. Nayak
paperboard manufacture. In 1944, BAT tied
up with Bengal Paper to develop manufac-
ture of cartridge paper. In 1946, it promoted
Tribeni Tissue to manufacture cigarette
paper. In 1981, when ITC wanted to enter the
cement business, the Industrial Development
Bank of India (IDBI)6 suggested investing in
a loss-making paper company, Ashok Paper,
with units in Assam and Bihar. ITC invested
Rs 95 million in Ashok Paper, 25 per cent
of the paper mill’s equity. However, ITC’s
cement and paper projects did not take off
due to delays in the government machinery.
In 1979, ITC promoted Bhadrachalam Paper-
boards Limited, which soon became the mar-
ket leader both in quality and volume of
paperboard business. In 1990, ITC Ltd ac-
quired Tribeni Tissue Limited, which was
managed by the Tribeni Tissue Division. In
November 2002, Bhadrachalam Paper-
boards Limited division was merged with the
Tribeni Tissue Division to form the Paper-
boards and Specialty Papers Division. In 2004,
ITC Ltd acquired the paperboard manufac-
turing facility of BILT Industrial Packaging
Co. Limited (BIPCO), Kovai, near Coimbatore,
Tamil Nadu. In this project, the company
benefited from governmental incentives for
investing in a backward area.
BAT/ITC Ltd has been involved in several
other social and community based develop-
ment projects. BAT has encouraged and sup-
ported art, culture, sports, weaving, farming
and other social development from the early
years. ITC’s recent effort to align its business
goals with the social goals through the innov-
ation of e-Choupal 7 is well-known. Each
e-Choupal costs about USD 3,000 to USD
6,000 to set up and cost about USD 100 to
maintain. One e-Choupal can serve up to 600
Global Business Review, 8:2 (2007): 189–204
farmers from nearly 10 villages within a
radius of 5 km. Today, e-Choupal service has
reached to over 1 million farmers in nearly
11,000 villages. Under the e-Choupal busi-
ness model, the company provides a com-
puter and Internet access in rural areas.
Localization of Ownership
By 1907, BAT had already invested in manu-
facturing and selling of cigarette and local
trading of leaf tobacco through its various
subsidiaries in India. Subsequently, it in-
vested in various downstream and upstream
cigarette and tobacco businesses in India.
BAT created several companies for its various
business functions. The pattern of sharehold-
ing and investments during 1905 to 2002
presented in Charts 1–4 show how BAT con-
trolled several businesses in India. BAT held
Peninsular Tobacco in manufacturing activ-
ity, Dominion Tobacco, Imperial Tobacco and
Arcadian Tobacco in selling and Indian Leaf
Tobacco in tobacco leaf business. Later it
added Printers (India), Exchange Tobacco
and Vazir Sultan to its list of companies.
Until 1953, BAT wholly owned these com-
panies through various organizational ar-
rangements. By 1975, it reorganized all these
and subsidiary units under the control of
ITC. ILTD remained a separate entity of BAT
until 2001, when it was finally merged with
ITC. BAT reduced its shareholding to 60 per
cent in its subsidiary ITC by 1975 but retained
100 per cent equity in ILTD until it was
merged with ITC in 2001.
BAT had been heavily investing in cigarette
and cigarette-related businesses until around
1975. Only in the last three decades has ITC
Ltd tried to enter other sunrise industries like

hotels, exports, marine and agro-based prod-
ucts. However, revenues from cigarette con-
stitute about 80 per cent of its total revenue
even today.
Diluting foreign equity with Indian equity
has been the most difficult experience of for-
eign firms in India. However, while other large
foreign companies like Unilever resisted the
dilution of equity, the managers of BAT were
in favour of dilution.8 BAT agreed to the pro-
posal of the management to dilute because of
its experience in other countries.9 BAT quickly
adopted the proposal of the Government of
India in 1953.
Until 1919, BAT was in total control of its
businesses in India. In 1921, Thomas Bears
and Sons, Bears, and Exchange Tobacco held
nearly 25 per cent of its equity in various
businesses. However, all these companies
were wholly owned by BAT. By 1953, BAT
controlled all its businesses in India through
Figure 2
Change of Ownership 1953–2003
Source: ITC Ltd, (1955–2003), Annual Reports.
Case of British American Tobacco in India, 1906–2004
197
its subsidiaries Raleigh Investment, Tobacco
Manufacturers (India) and Printers India.
The dilution of BAT’s equity with Indian
equity commenced from 1954, going down
to 75 per cent in 1969, 60 per cent in 1974
and 40 per cent in 1976. In 2004, BAT held
only about 32 per cent of the equity in its
Indian operation (see Figure 2).
In recent years, there has been some tussle
on the issue of ownership of BAT in ITC Ltd.
In 1994, J. N. Sapru, former chairman of ITC
Ltd, stated that ITC Ltd does not need BAT.
In 1995, there were several allegations and
counter allegations between K. L. Chugh, the
then chairman of ITC Ltd and BAT. This pub-
lic drama on ownership issue followed a
spate of raids by officials of the Enforcement
Directorate (ED)10 on grounds of ITC violat-
ing the Foreign Exchange Regulation Act,
1973. The enquiries by the ED led to the arrest
of several top executives of ITC, including
Global Business Review, 8:2 (2007): 189–204
198
Amar K.J.R. Nayak
Chugh. By June 1997, BAT and ITC resolved
their differences as BAT licensed ITC to
manufacture and sell some of its prestigious
global brands, including 555, State Express
and Benson and Hedges.
Financial Performance of BAT
In the Indian context, while many foreign
companies have failed to maintain consist-
ency in their growth and profitability in
India, BAT has consistently performed well
in India whether it had 100 per cent owner-
ship in the company or not. Until 1953, BAT
had 100 per cent ownership and with Indian
government’s directive, BAT has steadily in-
cluded local ownership in the company and
its own share of ownership has come down
since 1953. It has performed well in terms of
market share, profit before depreciation in-
terest and tax (PBDIT) and profit after tax
(PAT) (see Figure 3).
Figure 3
Trends in Sales, PBDIT, & PAT
Source: ITC Ltd, (1955–2004), Annual Reports.
Global Business Review, 8:2 (2007): 189–204
Taking all the major players in the various
businesses in which BAT/ITC operates,
namely, cigarette, tobacco, hotels, packaged
food business, ITC has had over 55 per cent
of the total market share in terms of sales
turnover throughout the last 14 years. Des-
pite the increased competition in India since
the Industrial Licensing Policy, 1991, ITC has
increased its market share in cigarettes from
63 per cent in 1990 to over 80 per cent in the
year 2003–04.
Significance of Complementary Investments
Multiple linear regression analyses, taking
sales and PAT as dependent variables, and in-
vestment in main business, complementary
business and other businesses as independ-
ent variables were carried out (see Table 1
for statistical outputs). The model used for
analysing the relationship between the de-
pendent and independent variables has been:

Summary of Statistical Indicators of Multiple Linear Regression Analyses
Dependent Variable of the Case R2
BAT Sales 0.94
PAT 0.99
∗p (significance level) < 0.01.
Y = C + α MB + β CB + γ O
Where Y is the dependent variable (sales,
PAT) and investment in main business (MB),
investment in complementary businesses
(CB) and investment in others (O) are the
independent variables with α, β, γ as their
respective coefficients.
Although the R2 were found to be above
0.8, the t values were significant and since
the high R2 can arise if the independent vari-
ables share a common trend, the issue of
multicollinearity is not significant (Gujarati
2003; Mason, Gunst and Webster 1975;
Montogomery and Peck 1982). The Darwin-
Watson test for sales as dependent variable
was 0.28 implying that there exists some auto-
correlation in the time series data. However,
the Darwin-Watson test for PAT as depend-
ent variables was 2.39 suggesting that the
data in this case, did not suffer much from
autocorrelation.
Test 1:
Dependent Sales
variable:
Independent Investment in main business
variables: (MB), investment in complemen-
tary businesses (CB) and invest-
ment in others (O)
Case of British American Tobacco in India, 1906–2004
199
Table 1
B
R F C MB CB O
0.97 218.28 54675 19.37∗ 38.21∗ –7.80
0.99 2451.50 –1001.29 2.59∗ 2.42∗ 0.43
The coefficient of correlation, (R = 0.97)
shows a strong and positive degree of asso-
ciation between the dependent variable, sales
and independent variables of investments.
The coefficients (B) of independent variables,
namely, main business and complementary
businesses are significant and hence both
these variables are highly reliable. However,
the significance level of coefficient of variable
‘other’ is low and therefore the predictability
of this variable is not strong.
Using all the coefficients of independent
variables, an equation can be constructed to
show how sales were affected by the invest-
ments in main business, complementary
businesses and others in the case of BAT.
Sales = 54675 + 19.4 MB
+ 38.2 CB – 7.85 O (1)
From equation 1, it is observed that invest-
ment in main business and complementary
businesses had positive impact on sales
whereas investment in others had a negative
effect on sales. While one unit increase in
investment on main business increased the
sales by 19.37 units, one unit increase in in-
vestment on complementary businesses
increased the sale by 38.21 units. Investment
on others showed a negative relationship
with sales.
Global Business Review, 8:2 (2007): 189–204
200
Amar K.J.R. Nayak
Test 2:
Dependent PAT
variable:
Independent Investment in main business
variables: (MB), investment in complemen-
tary businesses (CB) and invest-
ment in others (O)
The coefficient of correlation, (R = 0.997)
shows a strong and positive degree of asso-
ciation between the dependent variable, PAT
and the independent variables of investment.
The coefficients (B) of independent variables,
namely, main business and complementary
businesses are significant and hence both
these variables are highly reliable. However,
the significance level of coefficient of vari-
able ‘other’ is low and therefore, this variable
is not so reliable.
Using all the coefficients of independent
variables, an equation can be constructed to
show how PAT was affected by the invest-
ments in main business, complementary
businesses and others in the case of BAT.
PAT = –1001 + 2.59 MB
+ 2.42 CB + 0.43 O (2)
From equation 2, it is observed that invest-
ment in complementary businesses and
investment in main business had similar
degree of impact on profit after tax (PAT) of
the company. While, one unit increase in in-
vestment on main business increased the PAT
by 2.59 units, one unit increase in investment
on complementary businesses increased the
PAT by 2.42 units. One unit increase in in-
vestments on others increased the PAT by
0.43 units.
Global Business Review, 8:2 (2007): 189–204
Summary
Contrary to the FDI pattern of most foreign
companies in India during the last century,
the FDI pattern of British American Tobacco
has been holistic in many ways. BAT invested
in many areas like sales and marketing, local
manufacturing, complementary or support
industry, other social and economic sectors.
It invested heavily in several complemen-
tary business functions of its cigarette busi-
ness. The complementary business functions
included various business functions in its
value chain such as the distribution and mar-
keting network, tobacco leaf, paper for cigar-
ette wrapping, packaging, and machinery for
tobacco rolling. It also invested in several
priority areas of the host government. For in-
stance, it invested in cement, paper, hotel, ex-
port and backward areas in such a way that
its existing business could benefit from its in-
vestment in seemingly unrelated businesses.
It pursued a policy of indianization of its
management since 1930s; a strategic shift in
policy of BAT as compared to many foreign
companies in India. By the year 1979, its sub-
sidiary, I.T.C Limited was completely man-
aged by Indian managers. The most drastic
step in this case has been the change of
ownership of the company. From having
100 per cent ownership, BAT agreed that the
Indian financial institutions and Indian
public own the majority of the equity shares
of its subsidiary in India. Figure 4 shows the
holistic FDI pattern of BAT in India during
1906–2004.
Many of the major investment decisions
of BAT may have been out of the business
situations at different time periods in India
 Case of British American Tobacco in India, 1906–2004
201

Figure 4
Holistic FDI Pattern of British American Tobacco in India, 1906–2004

and the regulatory framework of the country. firm can be successful in a host country like
However, in retrospect, the strategy of BAT India. BAT has been committed to stay in India
in India provides an insight to how a foreign from the very early years of its entry to India.

Global Business Review, 8:2 (2007): 189–204

202
Amar K.J.R. Nayak
It invested heavily across its industry value
chain, astutely aligned its business objectives
with the objectives of the host country and
shared the management and equity with the
host country, India.
Statistical tests also confirm that invest-
ments in the complementary business had
high positive impact on both sales and profit-
ability of the company. Hence, we see that the
NOTES
1. Success of a foreign firm, in this research, is defined
by the consistency of the firm in terms of its sales,
profit generating ability or profit before depre-
ciation, interest and tax (PBDIT) and profit sharing
ability or profit after tax (PAT). PBDIT indicates
the operational efficiency of the company. This
indicator can also be used to compare companies
across industries. PAT indicates the profit generat-
ing ability of the company. This indicator can be
used to compare BAT with other companies within
the cigarette industry.
2. Holistic investment means making investment in
main business, investment in complementary busi-
nesses, investment in areas by which the goals of
both the firm and the host country are achieved,
investment in local management and localizing
equity and localization of management and
ownership.
3. Complementary businesses include all the directly
and indirectly related economic activities in the
value chain of the business that the foreign firm is
engaged in. These economic activities could be in
the downstream or upstream of the vertical value
chain or in some support activities in the horizontal
value chain. For instance, the value chain of a com-
pany selling cars will include car assembling, car
engine manufacturing, car component making,
distribution network, service center network, and
car financing.
Global Business Review, 8:2 (2007): 189–204
strategy of BAT to adopt a holistic investment
pattern with an emphasis on investment in
complementary businesses of its industry
seems to have helped the company to grow
in size and profitability in India. In short, it
establishes the hypothesis that investment in
complementary businesses is important for
business success of foreign companies in an
emerging host economy like India.
4. Most of executives I interacted with seemed to see
ITC as an Indian company. They were surprised
to know how the transition has come about from
BAT to ITC Ltd.
5. In an interview with the author, Mr Ajit N. Haksar,
former Chairman-ITC, mentioned that the com-
pany did not have expertise in sea fishing and
could not monitor the fish catch by its trawlers and
consequently, the trawlers were sold off at huge
losses.
6. Interview by the author with Samir Ghosh, ITC’s
former chairman.
7. Choupal is a Hindi word that means a place where
the villagers gather. Every village usually has a
gathering place, where the male adults of the vil-
lage usually meet to discuss important issues of
the village. This place is also used for common re-
creation in the village. <http://www.digital
dividend. org/pdf/echoupal_case.pdf>
8. Mr T. Thomas, the then Chairman of HLL wanted
to meet Mr Ajit N. Haksar, then Chairman of ITC
to discuss the issue and make a joint representation
to the Government of India. The meeting, however,
did not take place because Mr Haksar strongly
differed with him on the issue. Company sources
revealed this during interviews.
9. Mr Samir Ghosh, who closely worked with Mr Ajit
N. Haksar and who later became Chairman of
ITC reasoned that because of BAT’s experience of
political pressure for national control in several of

the 55 countries where it operated, BAT was
quick to adopt the guideline of the Indian Govern-
ment to dilute its equity in India by including the
local equity.
REFERENCES
Basu, Champaka. 1988. Challenge and Change, The ITC
Story: 1910–1985. Calcutta: Orient Longman.
Carlsson, J., A. Nordegren and F. Sjoholm. 2005. ‘Inter-
national Experience and the Performance of
Scandinavian Firms in China’, International Business
Review, 15: 21–40.
Chen, H. 1999. ‘International Performance of Multi-
nationals: A Hybrid Model’, Journal of World
Business, 34 (2): 157–70.
Encarnation, Dennis. 1989. Dislodging Multinationals,
India’s Strategy in Comparative Perspective. Ithaca:
Cornell University Press.
Ghemawat, P. 2001. ‘Tool Kit: Distance Still Matters—
The Hard Reality of Global Expansion’, Harvard
Business Review, September 2001: 137–47.
Gujarati, Damodar N. 2003. Basic Econometrics, Fourth
Edition, pp. 341–70, New Delhi: Tata McGraw-Hill.
Haksar, Ajit N. 1993. Bite the Bullet, Thirty-four years
with ITC. New Delhi: Viking, Penguin Books.
Indian Investment Center. ‘Foreign Direct Investment
Approved by the Government of India’, 1990–2000,
Government of India, New Delhi.
ITC Limited. Annual Report, 1954–2004. ITC Limited,
Calcutta: A.O.P (India) Pvt. Ltd.
Johanson, J. & Associates.1994. Internationalization,
Relationships and Networks, Stockholm, Uppsala Uni-
versity: Norstedts Tryckeri AB.
Johanson, J. and J.E. Vahlne. 1977. ‘The International-
ization Process of the Firm—A Model of Knowledge
Development and Increasing Foreign Market Com-
mitments’, Journal of International Business Studies,
8(1): 22–32.
Johri, Lalit M. 1983. Business Strategies of Multinational
Corporations in India: Case Study of Drug and Pharma-
ceutical Industry. New Delhi: Vision Books Pvt.
Limited.
Case of British American Tobacco in India, 1906–2004
203
10. Enforcement Directorate is an enforcement body
appointed by the central government for the pur-
poses of foreign exchange regulation.
Jovarcik, B.S. 2004. ‘Does Foreign Direct Investment
Increase the Productivity of Domestic Firms—In
Search of Spillover Through Backward Linkages’,
American Economic Review, 94(3): 605–27.
Kidron, Michael. 1965. Foreign Investments in India.
London: Oxford University Press.
Kobe University. Data Base Select Report. Kobe Univer-
sity, Japan: Research Institute of Economic and
Business
Kumar Krishna. 2003. ‘Has India Inc Failed in Playing
the Leadership Role?’ Vikalpa, 28(3): July–September
2003, pp. 1–14.
Kumar, Nagesh. 1990. Multinational Enterprises in India-
Industrial Distribution, Characteristics, and Perform-
ance. New York: Routledge.
Kumar, Sanjeev. 1996. Foreign Direct Investment in India.
Delhi: B.R. Publishing Corporation.
Kurian, Mathew K. 1966. Impact of Foreign Capital on
Indian Economy. New Delhi: People’s Publishing
House Private Limited.
Lall, Sanjaya. 1999. ‘India’s Manufactured Exports:
Comparative Structure and Prospects’, World Devel-
opment, 27(10): 1769–86. Elsevier Science Limited,
http://www.sciencedirect.com (accessed 11/20/
2003).
Luo, Y. 1998. ‘Timing of Investment and International
Expansion Performance in China’, Journal of Inter-
national Business Studies, 29 (2): 391–408.
Mason, R.L., R.F. Gunst and J.T. Webster. 1975. ‘Regres-
sion Analysis and Problems of Multicollinearity’,
Communications in Statistics, 4(9): 277–92.
Montogomery, Douglas and Elizabeth Peck. 1982.
Introduction to Linear Regression. New York: John
Wiley & Sons.
Nayak, Amar K. J. R. 2002. ‘Disequilibrium of FDI in
Extraction vs Conservation of Natural Resources,
International Conference on New Environmental
Global Business Review, 8:2 (2007): 189–204
204
Amar K.J.R. Nayak
Technologies’, BORDA (Germany) & NISWASS
(India), Bhubaneswar, Nov 28–30.
———. 2002. ‘Patterns of Foreign Direct Investment in
India, 1900s–2000’, Master ’s Thesis, Graduate
School of Business Administration, Kobe Univers-
ity, Japan.
———. 2003. ‘Impact of Trade and Investment Policies
of GATT/WTO on India, 1955–2000’, XXVII Con-
ference of Indian Social Science Congress, IIT
Kharagpur, Dec. 3–7.
———. 2004. ‘Globalization Process in India: A Clash
of Development Objectives of Host with Growth
Objectives of Foreign Companies’, 2nd Inter-
national Conference of Association of International
Business-India Chapter, Loyola College, Chennai,
Jan. 14–16.
———. 2005. ‘FDI Model in Emerging Economies: Case
of Suzuki Motors in India’, The Journal of American
Academy of Business, Cambridge, 6(1).
———. 2006. ‘Determinants of Successful Direct In-
vestment Strategy by Foreign Firms in India: Case
Based Study’, Unpublished PhD Dissertation,
Indian Institute of Technology, Kharagpur.
Global Business Review, 8:2 (2007): 189–204
Nayak, Amar K.J.R., K. Chakravarti and P. Rajib. 2005.
‘Globalization Process in India: A Historical Per-
spective since Independence, 1947’, South Asian
Journal of Management, 12(1).
Rivoli, P. and E. Salorio. 1996. ‘Foreign Direct Invest-
ment and Investment under Uncertainty’, Journal
of International Business Studies, 2nd Quarter, 1996:
335–57.
Sharma, Kishore. 2000. ‘Export Growth in India, Has
FDI Played a Role?’, Discussion Paper, Yale Univer-
sity, Economic Growth Center, http://www.econ.
yale.edu/~egcenter/ (accessed 11/12/2003).
Stiglitz, Joseph E. 2002. Globalization and its Discontents.
London: Allen Lane: The Penguin Press.
Tomlinson, B.R. 1989. ‘British Business in India, 1860–
1970’, in Davenport-Hines, R.P.T. and Geoffrey
Jones (eds), British Business in Asia since 1860, New
York: Cambridge University Press.
Venkataramani, Raja. 1990. Japan enters Indian Industry:
The Maruti-Suzuki Joint Venture. New Delhi: Radiant
Publication.