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 Journal of International Business Studies (2012) 43, 368–395
& 2012 Academy of International Business All rights reserved 0047-2506
Catch-up strategies in the Indian auto
components industry: Domestic firms’
responses to market liberalization
Arun Kumaraswamy1,
Ram Mudambi1,
Haritha Saranga2 and
Arindam Tripathy3
1
Department of Strategic Management,
Fox School of Business, Temple University,
Philadelphia, USA; 2Production and Operations
Management Area, Indian Institute of
Management Bangalore, India; 3Milgard School
of Business, University of Washington-Tacoma,
Tacoma, USA
Correspondence:
R Mudambi, Professor and Perelman
Senior Research Fellow, Temple University,
Fox School of Business, Department of
Strategic Management, 548 Alter Hall,
1801 Liacouras Walk, Philadelphia,
PA 19122, USA.
Tel: þ 1 215 204 2099;
Fax: þ 1 215 204 8029;
Email: ram.mudambi@temple.edu
Received: 4 June 2010
Revised: 13 December 2011
Accepted: 19 December 2011
Online publication date: 8 March 2012
www.jibs.net
Abstract
Market liberalization in emerging-market economies and the entry of multi-
national firms spur significant changes to the industry/institutional environ-
ment faced by domestic firms. Prior studies have described how such changes
tend to be disruptive to the relatively backward domestic firms, and negatively
affect their performance and survival prospects. In this paper, we study how
domestic supplier firms may adapt and continue to perform, as market
liberalization progresses, through catch-up strategies aimed at integrating with
the industry’s global value chain. Drawing on internalization theory and the
literatures on upgrading and catch-up processes, learning and relational
networks, we hypothesize that, for continued performance, domestic supplier
firms need to adapt their strategies from catching up initially through
technology licensing/collaborations and joint ventures with multinational
enterprises (MNEs) to also developing strong customer relationships with
downstream firms (especially MNEs). Further, we propose that successful
catch-up through these two strategies lays the foundation for a strategy of
knowledge creation during the integration of domestic industry with the global
value chain. Our analysis of data from the auto components industry in India
during the period 1992–2002, that is, the decade since liberalization began in
1991, offers support for our hypotheses.
Journal of International Business Studies (2012) 43, 368–395. doi:10.1057/jibs.2012.4
Keywords: upgrading; catch-up; India; internalization theory; liberalization; auto
components industry
INTRODUCTION
With the onset of market liberalization or privatization, domestic
firms in emerging and transition economies confront environ-
mental change that is systemic and “avalanche-like” (Suarez &
Oliva, 2005). Such changes are qualitatively different from
industry-specific changes (such as deregulation) faced by firms in
advanced market economies (Newman, 2000; Peng, 2003). For
instance, there is an economy-wide reshaping of institutional
environments, and the increased entry and participation of
multinational enterprises (MNEs) (McDermott & Corredoira,
2010).
In a highly regulated economy, firm performance is likely to
depend on political capabilities required to manage relationships
with the government and regulatory bodies (Holburn & Vanden
 Catch-up strategies: Indian auto parts
Bergh, 2008; Mahon & Murray, 1981). These
capabilities are likely to be highly context-specific,
and constitute part of what have been specified as
location-bound firm-specific advantages (FSAs)
(Rugman & Verbeke, 2001). As liberalization pro-
ceeds, governments and regulatory bodies slowly
cease to be buffers against market forces, and,
accordingly, there is a shift in emphasis away from
the maintenance of relationships with regulators
and towards efficient operations and business
capabilities.
Domestic firms are forced to operate under new
institutional mechanisms and adopt unfamiliar
forms of governance (Peng & Heath, 1996). The
entering MNEs possess sophisticated technological
and managerial capabilities that domestic incum-
bents lack (Cantwell, 1989). Consequently, dome-
stic firms need to “re-orient” themselves by making
changes to their strategies, structures, technolo-
gies, systems and organizational practices/routines
(Suarez & Oliva, 2005; Tushman & Romanelli,
1985). In addition, the networking capabilities
of domestic firms become key success factors, as
they catalyze valuable technology inflows and up-
grading (McDermott, Corredoira, & Kruse, 2009). In
other words, there is a fundamental change in the
nature of FSAs required to generate competitive
advantage as market liberalization proceeds.
The experiences of domestic firms during mar-
ket liberalization in China, Eastern Europe and
Latin America have been explored in the literature
(e.g., Ghemawat & Kennedy, 1999; McDermott &
Corredoira, 2010; Peng & Heath, 1996; Suarez &
Oliva, 2005; Uhlenbruck, Meyer, & Hitt, 2003).
Many of these studies describe how MNE entrants
gained the upper hand over domestic firms.
Such a dynamic is particularly evident in high-
knowledge industries characterized by complex
products, proprietary and firm-specific techno-
logies and processes, and globally integrated value
chains.
By contrast, in this paper, we ask the question:
How may domestic firms in emerging econo-
mies catch up and perform well with market
liberalization and large-scale entry by MNEs? Our
question is prompted by the extensive literature
on upgrading and catch-up processes in emerging
economies (e.g., Abramovitz, 1986; Amsden, 1989;
McDermott & Corredoira, 2010). The key thesis
behind “catch-up” is that there is greater potential
for rapid increases in productivity, the more
backward the technological and other capabi-
lities embodied in a country’s resource stock
Arun Kumaraswamy et al
369
(Abramovitz, 1986). This notion of catch-up can
also be applied at the firm level (e.g., see Amsden,
1989; McDermott & Corredoira, 2010).
As liberalization begins, most domestic firms
are likely to be technologically and managerially
backward, without much variance in their capabi-
lities and performance. As MNEs with sophisticated
capabilities enter, and upgrading of the overall
economy occurs through foreign direct investment
and attendant spillovers, local firms in emerging
economies can potentially catch up by proactively
investing in upgrading their competencies. The
catch-up process tends to be spearheaded by a few
“leading” (large or small) domestic firms that adapt
their strategies and make appropriate investments
in upgrading their capabilities, diverging away
from laggard firms. As the process continues, a
few leaders begin to approach world standards in
terms of capabilities, and a few laggards remain
anchored in the old ways, but (especially with a
large population, as in a highly fragmented indus-
try) most firms make some progress. As each firm
chooses its optimal level of investment in upgrad-
ing, the overall variance in firm capabilities
increases (see Figure 1).
Indeed, one can visualize the catch-up process
as an umbrella, whose stalk represents the capabi-
lity of the average local firm and whose canopy
represents the variance in capabilities of the popu-
lation of local firms. As the catch-up process
evolves through time, the stalk moves continuously
to the right (increasing average local firm capabi-
lity) and the canopy opens (increasing variance of
local firm capabilities). The culmination of the
catch-up process is convergence, where the stalk
reaches the average capability level in advanced
economies and the canopy closes again (surviving
local firms are all at or close to world standards).
We study such catch-up dynamics and strategies
among domestic firms in the context of the auto
components industry in India during the decade
(1992–2002) after economic liberalization began
in 1991. The automotive industry (which includes
the auto components industry), especially in a libe-
ralizing emerging economy such as India, presents
the ideal context for our study, for several reasons.
First, global auto manufacturers – even Western
firms – have abandoned vertical integration and
have followed Japanese auto manufacturers in
outsourcing components (even entire modules)
and developing close, long-term parallel-sourcing
relationships with a few key suppliers (Cusumano &
Takeishi, 1991; Mudambi & Helper, 1998). Second,
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
370
Frequency of
local firms
Distribution I
Low variance
Status quo ante –
All local firms lag
world standards.
Low capability variance
Figure 1 Catch-up process dynamics.
the technological sophistication and mature nature
of the industry induces significant competition
in any new market, so that cost competitiveness is
essential for survival. Consequently, MNE entrants
may need to develop local supply chains to com-
pete successfully on a cost basis in the new markets
(Humphrey, 2003; Veloso & Kumar, 2002). How-
ever, the complex, integrated nature of the end
product necessitates a costly testing/qualification
process. This prompts MNEs to encourage their
established suppliers (or other transnational sup-
pliers) to follow them into the new markets, instead
of developing domestic firms in the host countries
for the job (Humphrey, 2003; Humphrey & Salerno,
2000). In other words, domestic supplier firms
may face considerable challenges in adapting and
surviving (leave alone performing) with the onset
of market liberalization. This is especially the case
given the strong incentives for MNEs to maintain
control over their respective global supply chains.
Indeed, McDermott and Corredoira (2010: 311)
observe that domestic supplier firms may encoun-
ter an upgrading “glass ceiling”, and even those
that manage to survive may be confined to peri-
pheral roles in the MNE auto manufacturers’ global
supply chain. However, anecdotal and case-based
evidence suggests that many domestic Indian auto
components suppliers survived the entry of MNEs
into the Indian market, and some even integrated
into the global auto industry value chain. This
foregoing discussion specifies the context and
underlines the significance of our current study.
In the Indian auto components industry, we find
that the industry environment evolved through
Journal of International Business Studies
Arun Kumaraswamy et al
Distribution II Distribution III
High variance Low variance
Laggard Leading
firms firms
Increasing
capabilities
Catch up process– Ex post–
Local firms implement Most surviving local firms have
catch up at differing rates. caught up. Low capability
Increasing capability variance variance among survivors
several phases, catalyzed by the periodic policy
refinements made by the Indian government after
market liberalization was initiated in 1991. We
hypothesize that domestic supplier firms need to
adapt their catch-up strategies as their environment
evolves: first, through arm’s length technology
licensing/collaboration or through joint ventures;
then also through integration into the industry’s
global value chain by developing strong customer
relationships with downstream firms; and, finally,
by progressing to knowledge creation through
internal R&D (Mudambi, 2008). Our empirical
analysis of data from the Indian auto components
industry during the period 1992–2002 offers sup-
port for our hypotheses.
The contributions of our study are threefold.
First, our study is among the relatively few (e.g.,
McDermott and Corredoira, 2010) to study the
upgrading and catch-up strategies of domestic
supplier firms in response to market liberalization
in a downstream industry. Typically, in emer-
ging economies, such firms are relatively small,
but account for significant employment. The wide-
spread failure of such firms has the potential to
create considerable disruptions and angst against
MNEs or even the liberalization process itself
(Dunning & Lundan, 2008). Furthermore, in study-
ing institutional evolution and catch-up strategies,
we heed Peng’s (2003) advice to consider the
interactions among domestic firms, MNE entrants
and host governments in shaping one another’s
strategic choices. Second, we provide a window
into the experiences of Indian firms during mar-
ket liberalization. The Indian experience with
 Catch-up strategies: Indian auto parts
liberalization is relatively underexplored in the
management and international business literatures,
and has the potential to offer a distinct point
of comparison with the considerable work that
already exists in the Chinese, Eastern/Central
European and Latin American contexts. Speci-
fically, following Spicer, McDermott, and Kogut
(2000), our study emphasizes the multivalent and
evolutionary nature of the liberalization process,
and the associated evolution of domestic firms’
catch-up strategies over time. Finally, in studying
the Indian auto components industry, we validate
and extend the findings of recent studies (e.g.,
Humphrey, 2003; McDermott & Corredoira, 2010)
on the process of integration of newly liberalized
emerging-market firms into the global value chain
of the auto industry, a key industry and also among
the first to be liberalized in emerging economies.
The remainder of our paper is organized as
follows. First, we offer a description of the Indian
auto industry and its evolution over time. Next,
we theorize on domestic supplier firms’ catch-up
strategies over time, and the performance con-
sequences of such strategies. Then, we discuss our
data, variable measures and statistical models. After
presenting the results of our analysis, we conclude
by discussing key implications and speculating on
the future of the Indian auto components industry.
EVOLUTION OF THE INDIAN AUTO
COMPONENTS INDUSTRY
In the decades after independence in 1947, the
Indian economy was characterized by a pervasive
system of regulation, epitomized by the Industrial
Licensing (Development and Regulation) Act (No. 65
of 1951). In addition to reserving substantial sectors
of the economy for state-owned enterprises, this
policy placed significant restrictions on the expan-
sion of existing private businesses, as well as on
new private start-ups. To obtain permits for under-
taking or expanding business operations, particu-
larly in lucrative sectors of the economy, firms had
to interact extensively with government regulators
and politicians.
The management of relationships with govern-
ment bodies was a location-bound FSA (Rugman &
Verbeke, 2001) that was the most important deter-
minant of firm performance (Majumdar, 1997).
This is evidenced by the fact that even the most
successful domestic firms had relatively small
operations outside India. Opposition to this policy
of regulation was given credence by the persis-
tently dismal performance of state-run enterprises
Arun Kumaraswamy et al
371
(Jalan, 1991). The seeds of change were sown in
the 1980s, beginning with very small “reforms by
stealth” (1980–1984), followed by “reforms with
reluctance” (1984–1991) and finally “reforms by
storm” (economy-wide liberalization from 1991
onwards) (Bhagwati, 1993).
Within the milieu of changes in the overall
economy, three events served as catalysts in the
auto components industry’s recent history and
evolution: auto industry liberalization as part of
wider economic liberalization, beginning in 1991;
a clarification of auto policy in 1997; and a new
auto policy in 2002. Accordingly, we organize our
description into three successive phases of evolu-
tion, beginning with market liberalization in 1991:
1992–1997, 1998–2002 and post-2002. But, first,
we offer a brief window into the pre-liberalization
(i.e., pre-1991) phase of the industry, to provide
additional historical context.
Pre-1991
In the 1950s, the Indian government’s policy of
import substitution and indigenization (of up to
95%) prompted global auto manufacturers such as
Ford and GM to exit India (D’Costa, 1995). The
government classified passenger vehicles as luxury
goods, leading domestic auto manufacturers to
focus on the commercial vehicles market. Further-
more, to promote entrepreneurial growth of the
auto components industry, the government reser-
ved a significant portion of components manufac-
turing for small, privately owned firms termed
small-scale industries. Under this policy, from the
mid-1960s, auto manufacturers were not permitted
to expand their internal components-manufactur-
ing capacity, and instead were required to purchase
a number of components from these small, inde-
pendent components suppliers (Singh, 2004).
In 1959, and later in 1960, incipient bodies
that later became the Automotive Components
Manufacturers Association of India (ACMA) and
the Society of Indian Automobile Manufacturers
(SIAM) were established. These two industry asso-
ciations became key sources of information on
the domestic automotive industry, served as the
liaison with the Indian government and potential
export markets, and initiated industry-level efforts
to promote quality, productivity and research
(Singh, 2004). For its part, the government estab-
lished the Engineering Export Promotion Council
(EEPC) in 1955. Beginning in the 1960s, it also
established public vocational training schools
called Industrial Training Institutes (ITI) around
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
372
the country to ensure a steady supply of skilled
labor. In 1966, the automotive industry and the
government jointly set up the Automotive Research
Association of India (ARAI) to promote applied
research and product development, and also to
offer testing/certification services.
Notwithstanding these efforts to develop the
institutional infrastructure, the Indian auto indus-
try remained closely regulated and protected by
the government and, consequently, small in size.
Absent competitive pressures, domestic auto man-
ufacturers had little incentive to perform conse-
quential research, product development or quality
improvement. They tended to choose components
suppliers based on price, and seldom partnered
with or assisted these suppliers (Okada, 2004).
The small supplier firms, in turn, could not afford
to employ well-trained graduates of the ITIs, and
relied predominantly on less-skilled labor (Okada,
2004). Consequently, the auto components indus-
try became very fragmented, with low production
volumes, predominantly low-skilled labor, low
technological intensity and low quality. Exports
were meager, and directed primarily to developing
countries in Africa and the Middle East.
With time, however, regional clusters anchored
by subsidies from state governments and a critical
mass of labor emerged around key domestic auto-
makers in the West, East and South. A few capable
and relatively large auto component firms, such as
Dunlop, Exide, ICI, the TVS Group and India
Pistons, emerged to constitute the “organized
sector” of the auto components industry (Tewari,
2001). Firms in the “organized sector” sold their
products directly to at least one domestic auto
manufacturer, whereas firms in the “unorganized
sector” were the so-called “small-scale industries”,
primarily supplying inferior-quality components to
the after-market (Saranga, 2009).
The government’s decision in the early 1980s to
permit domestic commercial vehicles manufac-
turers to set up new units, add capacity in auto
and components manufacturing, and enter into
technical/financial collaborations with foreign
auto and components firms (primarily Japanese)
heralded the first tentative steps towards liberal-
izing the auto industry. In 1983, Maruti Udyog
Limited (MUL) was established as a joint venture
between the Indian government and Suzuki Motors
of Japan to manufacture low-priced, small cars for
the growing Indian middle class. However, these
attempts at liberalization were limited, with the
government allowing new entry by private firms
Journal of International Business Studies
Arun Kumaraswamy et al
only in the auto components industry, while
prohibiting such entry in the growing passenger
car segment during the rest of the decade.
During this decade, prompted by the local
content requirement imposed by the government
and also the appreciating yen, MUL and the
Japanese commercial vehicles joint ventures
began to develop local supplier networks by encou-
raging entrepreneurial start-ups, offering technical/
managerial assistance, and promoting joint ven-
tures between their traditional Japanese suppliers
and domestic firms (D’Costa, 1995; Okada, 2004).
This resulted in the auto components industry –
at least, the immediate supply chains of MUL and
the Japanese joint ventures in two-wheelers and
commercial vehicles – adopting lean manufac-
turing and other advanced and modern manage-
ment practices (Tewari, 2001). By 1990–1991,
mirroring the growth of the downstream auto
industry, the auto components industry had
grown to $1.49 billion in revenues (of which the
“organized sector” contributed approximately
$1.15 billion) from just $80 million in 1980–1981
(Singh, 2004). However, export revenues remained
low, at just $125 million.
1992–1997
Significant liberalization of the auto industry
began only in 1991–1992, as part of the wider
liberalization of India’s economy. The industry
was delicensed, and technology licensing/transfer
was encouraged. MNE auto manufacturers were
allowed to enter the Indian auto market and set up
majority-owned or even wholly owned ventures on
a case-by-case basis. Large Indian firms and MNEs
were allowed to take up to a 24% stake in small
domestic components suppliers (Singh, 2004).
Between 1992 and 1997 many MNE auto manufac-
turers, such as Daewoo, Daimler, Ford, Honda, GM,
Peugeot and Toyota, entered the Indian market,
primarily through joint venture assembly opera-
tions with domestic incumbents, and announced
plans to relocate a number of global models into
the Indian auto market (D’Costa, 1995).
Expecting MNE entrants to source all their
components needs from domestic components
suppliers, the Indian government had not allowed
the import of completely knocked down kits (CKDs)
or components by MNE entrants (Humphrey,
Mukherjee, Zilbovicius, & Arbix, 1998, citing
industry sources). In 1995, when it was clear that
MNEs could not begin low-volume operations
without importing CKDs and components, the
 Catch-up strategies: Indian auto parts
Indian government signed Memoranda of Under-
standing (MOU) with individual MNE entrants
allowing them to import CKDs and components;
in return, however, entrants had to make (non-
public) case-by-case commitments on production
volume, local content levels and exports equivalent
to CKD/components imports (Humphrey et al.,
1998). The government also imposed high customs
duties on imported CKDs and components until
MNE entrants fulfilled their commitments. These
high duties made it difficult for MNE entrants to
compete on costs with MUL in the low-priced,
small car segment. Therefore they focused primarily
on the smaller markets for mid-sized and high-
end cars.
TELCO (now Tata Motors) and Mahindra &
Mahindra, two dominant domestic manufacturers
of commercial vehicles, entered the passenger car
segment during the early 1990s with multi-utility
vehicles, and later with small cars. The incumbent
domestic car manufacturers, Premier and HM,
responded by upgrading their technology and
quality, and expanding their offerings in the mid-
sized car segment. All the domestic auto manufac-
turers faced stiff competition from the advanced
models offered by MNE entrants.
These developments prompted significant
changes in the auto components industry. A few
MNE components firms followed MNE auto manu-
facturers into India by establishing wholly owned
subsidiaries. Some others formed joint ventures
with the more capable domestic components
suppliers to produce critical components needed
by MNE auto manufacturers. However, most of
them were content with licensing technologies to
domestic components firms that wanted to upgrade
their technology and productivity. Even relatively
small domestic components firms began hiring
well-educated graduates of the ITIs, instituting
training programs and new work practices, and
relying increasingly on professional managers
(Okada, 2004); the institutional infrastructure that
the government helped establish in the 1950s and
1960s began paying off.
By 1996–1997, auto components industry reve-
nues had increased to nearly $3 billion, with $0.33
billion derived from exports. However, components
exports were targeted primarily at the lower-quality
after-markets, with only a few domestic firms such
as Sundaram Fasteners (a member of the TVS
Group) and Wheels India exporting low volumes to
MNE auto manufacturers or Tier 1 firms (Humphrey
et al., 1998).
Arun Kumaraswamy et al
373
1998–2002
In 1997, the government announced a uniform
policy (in contrast to the case-by-case MOUs signed
in 1995) requiring new entrants to establish
manufacturing (not just assembly) operations in
India. This policy imposed several requirements on
new entrants:
(1) an aggressive schedule of 50% local content
in the first three years, rising to 70% by the fifth
year;
(2) foreign exchange neutrality by requiring entrants
that imported CKDs and semi knocked-down kits
(SKDs) to export an equivalent amount, begin-
ning with the third year;
(3) an investment of at least $50 million to set up
wholly owned subsidiaries (Singh, 2004; Tewari,
2001).
Progressively, the government also imposed emi-
ssion norms equivalent to Euro 1 and Euro 2
emission standards to encourage domestic firms to
upgrade the engine technology in their models.
Several MNE Tier 1 components suppliers entered
the Indian market through wholly owned subsi-
diaries or joint ventures with a few domestic
components firms, and cut back on licensing their
technologies to other firms.1 However, the rela-
tively high investment required for wholly owned
subsidiaries, competition and pricing pressures in a
low-volume market, and the aggressive local con-
tent requirements, meant that MNE auto manufac-
turers and MNE Tier 1 firms had to develop local
sources for a number of components. To ensure that
their global standards were met in the Indian
market, MNEs had to engage in close interactions
and joint efforts with local suppliers to improve
quality and productivity. Domestic auto manufac-
turers also began establishing closer relationships
with their suppliers, in contrast to their earlier arm’s
length and price-based dealings (Okada, 2004).
Beginning in the late 1990s, both MNE and
domestic auto manufacturers began to rationalize
their respective local supply chains and require
their suppliers to locate close to assembly opera-
tions (Humphrey et al., 1998). With time, the
Indian auto components industry became strati-
fied more formally into “tiers”, with Tier 1 being
constituted by MNE components suppliers, their
Indian joint ventures and the more capable domes-
tic components suppliers (Okada, 2004). In addi-
tion, driven by subsidies offered by respective state
governments, three major auto clusters crystallized
around major auto manufacturers in the North
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
374
(Delhi/Gurgaon), West (Pune) and South (Chennai)
of India.
Even though demand, production volumes and
the variety of models had grown – especially after
private banks such as ICICI and HDFC began
financing car purchases in late 1999 – the Indian
auto industry lagged in size behind those in
Korea, China and Brazil (among the emerging
economies). The Indian auto components industry
was commensurately small at $4.5 billion in
2001–2002. As tierization became more formal
and competition increased, many domestic com-
ponents suppliers turned to exports. Accordingly,
revenues from exports increased, but still were low
at just $0.58 billion in 2001–2002.
Post-2002
In 2002, the government announced a new auto
policy to make India a major source of small cars for
the global market, and also an Asian hub for auto
components. Under this policy, the government
further liberalized the auto and auto components
markets by permitting 100% foreign ownership
without attendant local content and minimum
investment requirements. In 2001, it had already
removed the equivalent export obligations to
balance CKD and components imports.
In 2003, in partnership with the industry and
academia, the government set up a Core Group
on Automotive R&D (CAR) to establish priorities
for the future, and approved funding for an
industry proposal to establish two new, advanced
automotive testing/certification facilities and to
upgrade the two existing ones. Beginning in 2004,
the government also began reducing tariffs and
customs duties on key raw materials such as steel,
and, with the 2005 national budget, allowing auto
manufacturers and components firms to take a
weighted deduction of 150% of their R&D
expenses.
These developments prompted many MNE auto
manufacturers and components firms to increase
their ownership/control of joint ventures, or to
set up wholly owned subsidiaries in India. There-
fore a number of joint venture partnerships began
giving way to either 100% MNE or 100% domestic
ownership. In addition, with 100% ownership,
MNEs began to employ an aggressive technology-
driven strategy and to integrate their Indian sub-
sidiaries with their global operations. Furthermore,
absent local content requirements, a few MNE
auto manufacturers such as BMW began relying
on CKDs instead of sourcing components locally.
Journal of International Business Studies
Arun Kumaraswamy et al
For their part, domestic supplier firms also began
to use overseas acquisitions (outward FDI) to obtain
more advanced technologies and faster growth,
instead of relying just on organic growth and
competency development through in-house R&D.
The free trade agreement signed in 2004 with
Thailand presented growth opportunities for Indian
auto components firms, even as it increased the
threat of competition from ASEAN countries.
Furthermore, free trade agreements between other
nations – for instance, the agreement between EU
nations and South Korea – raised the prospect of
MNE firms shifting some production away from
India.
Summary
In sum, the Indian automotive industry appeared
to have evolved in several phases as liberalization
progressed and the government fine-tuned its auto
policy. At the beginning, the main policy objectives
presumably were to attract MNE entry by removing
regulatory constraints, and to alter the incentives of
domestic business groups that were biased against
advanced technologies and innovation by a lack of
competitive pressure (Mahmood & Mitchell, 2004).
During the next phase, the government discou-
raged CKD and components imports by clarifying
its auto policy and requiring new MNE entrants to
commit to local manufacturing and aggressive
indigenization, thereby contributing to the upgrad-
ing and growth of the domestic auto industry. As
growth and consolidation progressed, the govern-
ment liberalized further by removing many require-
ments imposed on MNEs, reducing customs duties
on key inputs, and offering strong incentives for
local R&D. During this third phase, the key policy
objective was to facilitate the integration of domes-
tic industry with global markets, and thereby
sustain its growth and competitiveness.
DOMESTIC FIRMS’ CATCH-UP STRATEGIES
AND PERFORMANCE
We begin by explicitly defining the boundaries
of our theory. Our research context is market
liberalization of a relatively mature industry (by
global standards) in an emerging economy – the
auto/components industry in India during the
1990s – that had been largely isolated from
advanced technologies and global markets for
many decades. Our country of interest, India,
shares characteristics with other emerging econo-
mies, but also offers a relatively unique research
setting. India’s economy has been mixed, that is,
 Catch-up strategies: Indian auto parts
characterized by the coexistence of state-owned
and private firms, since independence in 1947.
Further, the process of market liberalization in
India was relatively gradual, with periodic fine-
tuning by the government based on political,
institutional and market considerations. Such a
gradual process has several common aspects with
the mass privatization efforts in Central/Eastern
European nations (e.g., Ekiert & Hanson, 2003;
Spicer et al., 2000). However, the relative unique-
ness of India as a mixed economy, in our view, can
serve as a point of comparison and contrast with
market liberalization and domestic firms’ catch-up
strategies in countries in Central/Eastern Europe,
Latin America and China.
Our industry of interest – the auto/components
industry – is mature, and capital intensive with
significant scale economies, and produces a com-
plex product whose development is costly and time-
consuming. Auto manufacturers have strong incen-
tives to persist globally with their erstwhile suppli-
ers, and tend to introduce existing or derivative
products instead of developing new products from
scratch for liberalizing markets in emerging econo-
mies (Humphrey, 2003; Humphrey & Salerno,
2000). Many manufacturing industries that produce
complex products also exhibit these characteristics.
Finally, domestic firms whose catch-up strategies
we study were small and backward, catering pre-
dominantly to domestic markets, and by no means
globally competitive when market liberalization
began. Such were the initial conditions for domestic
firms in most emerging economies when economic
liberalization efforts began.
Theory and Hypotheses
For domestic industries and firms in emerging-
market economies, the onset of economic liberali-
zation typically ends many decades of isolation
from advanced technologies and global compe-
tition. For the governments in these economies,
a key objective of liberalization is to attract MNEs to
invest and assist in the upgrading of the country’s
human and technological capabilities (Ivarsson &
Alvstam, 2005). Such upgrading may occur due to
intentional transfers of technical and managerial
competencies by MNEs through formal mechan-
isms such as technology licensing/collaboration
and joint ventures with domestic firms, and know-
ledge transfers to subsidiaries. Alternatively, it may
occur through unintentional spillovers due to labor
mobility, leakage of intellectual property and imi-
tation by domestic firms, or vertical linkages
Arun Kumaraswamy et al
375
(Alcacer & Chung, 2007; Blomström & Kokko,
1998; Cantwell, 1989; Chung, 2001). In addition
to these transfers and spillovers from MNEs,
domestic firms may proactively seek to acquire
and upgrade their competencies to become compe-
titive in an increasingly open market.
In the initial years of the liberalization pro-
cess, the host government is likely to hold few
bargaining chips, and therefore to offer a number
of concessions to entice MNEs to enter (Dunning &
Lundan, 2008). Thus, for MNEs, newly liberali-
zing economies offer opportunities at institutional
entrepreneurship through market entry and the
shaping of still-evolving host-country institutions
in their favor (Cantwell, Dunning, & Lundan,
2010). They afford potentially large new markets
for their products, as well as access to location-
bound or country-specific advantages (CSAs), that
is, complementary assets such as natural resources,
cheaper factors of production or distribution chan-
nels ( Cantwell & Mudambi, 2011; Dunning, 1988)
that they can “bundle” with their own FSAs.
In such a case, the transactions costs incurred by
MNEs in gaining access to complementary CSAs
and integrating these with their own FSAs deter-
mine their entry modes and investment levels in
the new market. Hennart (2009) adds another
dimension to this consideration, arguing that the
transactions costs incurred by domestic firms in
gaining access to and combining MNEs’ FSAs with
their own CSAs are as important as the costs
incurred by the MNE in gaining access to comple-
mentary CSAs. In other words, the most appro-
priate MNE entry mode and organization is one
that maximizes the total rents accruing from the
bundle of FSAs and CSAs (Chen, 2010).
In many manufacturing industries, the FSAs
possessed by the MNE are likely to be in the form
of advanced technologies, products, processes
and organization. Although domestic firms lack
technological competencies when liberalization
begins, they may possess valuable knowledge-
based complementary assets (CSAs), such as market
or distribution-related knowledge and expertise
(e.g., a network of dealerships in the auto industry).
Contracting in the open market for distribution
services or acquiring them outright may be difficult
for MNEs (Hennart, 2000). The preferred mode of
entry for an MNE when both MNE FSAs and local
firms’ CSAs are difficult to transact is an equity
joint venture (Hennart, 2009).2 However, MNEs
may lack the market knowledge to identify poten-
tial partners or targets for partial acquisition.
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
376
Therefore they may have to rely on noisy signals of
domestic firms’ competencies, such as firm size
(Henderson & Cockburn, 1994) or prior perfor-
mance. Entry through equity joint ventures may
also help mitigate the risks due to the uncertain
institutional environment (Meyer, 2001; Peng, 2003).
Mature industries such as the auto industry are
often among the first to be liberalized. These
industries are characterized by standardized com-
ponents and processes, proprietary and OEM-
specific technologies. There is also a growing trend
among firms in many industries to maintain close
relationships with only a small group of suppliers
(Goffin, Lemke, & Szwejczewski, 2006; Mudambi &
Helper, 1998), and to maintain close control over
their globally dispersed supply chains. For the
above reasons, MNEs may find it efficient to persist
with extant suppliers in these new markets, and
opt to import CKDs and components instead of
developing local sources. Or, if customs duties and
tariffs imposed by the host government on imports
are high, they may encourage extant suppliers to
follow them into the host country.
Extant global suppliers do not need access to local
distribution expertise or market knowledge, since
this aspect of the supply chain is handled by
the auto manufacturers. Following the logic of
Hennart’s (2009) model, setting up wholly owned
subsidiaries would be the appropriate option for
them. This option, however, may not be attractive
if slow market growth precludes scale economies,
or if the host government imposes ownership limits
or minimum investment requirements on MNE
entrants. In such cases, these global suppliers may
have to resort to a range of entry modes, such as
equity joint ventures, technology licensing agree-
ments (i.e., sale of technology) or technology
collaborations with domestic firms (e.g., equipment
or designs). For critical components – where con-
trol over intellectual property and operations is
essential – global supplier firms may opt for equity
joint ventures. For relatively standard or simple
components, the time, effort and capital required
to form and sustain equity joint ventures may be
difficult to justify. In such cases, global supplier
firms may prefer arm’s length technology licensing
or collaboration.
For domestic firms, equity joint ventures and
arm’s length technology licensing/collaborations
offer the opportunity to catch up by upgrading
their technological competencies.3 However,
domestic firms (even those engaged in joint ven-
tures with MNEs) may face significant difficulties
Journal of International Business Studies
Arun Kumaraswamy et al
in assimilating and exploiting licensed technolo-
gies, owing to a lack of financial capital, appro-
priate human capital, or appropriate organizational
structures and routines (Van den Bosch, Volberda,
& De Boer, 1999). In addition, they would have to
accumulate buyer-specific know-how, build the
required complementary assets and develop their
absorptive capacities (Cohen & Levinthal, 1990;
Kogut & Zander, 1992; Lane & Lubatkin, 1998).
Such investments, although perhaps critical to
survival in the long term, are likely to have a
negative effect on domestic firms’ contempora-
neous performance. Firms that don’t upgrade –
either because they are incapable of benefiting or
because they cannot afford to do so – do not incur
associated costs, and may survive in the short term
by continuing to service the shrinking market for
cheap, low-quality products. Capable firms that do
upgrade through licensing or joint ventures (and
can benefit) will face short-term costs and a
negative influence on their contemporaneous per-
formance. Thus upgrading through technology
licensing or joint ventures is likely to have a
counterintuitive effect on domestic firms’ contem-
poraneous performance in the early years of market
liberalization. Accordingly, we hypothesize:
Hypothesis 1: During the early years of market
liberalization, upgrading through technology
licensing and technical collaborations (arm’s
length or through joint ventures with MNEs)
becomes the dominant catch-up strategy for
domestic firms. The (short-run) effect of this
strategy on contemporaneous performance of
domestic firms is negative.
With time, the institutional framework to sup-
port open, efficient markets for assets and firms
becomes stronger. Furthermore, as MNEs gain
knowledge of the host-country market and also
develop the competency to effectively bundle
their FSAs with complementary CSAs, their need
for local partners diminishes (Fang & Zou, 2010). As
per Hennart’s (2009) model, MNEs FSAs are still
difficult to transact whereas, now, complementary
CSAs become much easier to transact. In other
words, the preferred mode of organization for
MNEs shifts to wholly owned subsidiaries (unless
proscribed by the host government). Accordingly,
MNEs may seek to acquire domestic firms or buy
out their joint venture partners to secure full
control over operations in the host country
(Boisot & Child, 1999; Cantwell & Mudambi,
 Catch-up strategies: Indian auto parts
2005; Makino & Delios, 1996; Meyer, 2001; Peng,
2000, 2003). Indeed, as has happened in many
liberalized economies, these developments may
hasten the demise of domestic industries, replacing
these over time with a constellation of dominant
MNEs supported by a few domestic firms playing
peripheral roles.
Clearly, the preferences of MNEs and their global
suppliers are not consistent with the host govern-
ment’s objectives. The host government may well
realize that MNE entrants need to be induced to
serve the government’s objectives (Evans, 1979),
through policy changes and initiatives that can
be viewed as “leading the market” (Mahmood &
Rufin, 2005: 340). Specifically, the host government
may (re)impose requirements on MNEs, such as
minimum investment levels, local manufacturing,
aggressive indigenization schedules, and even
limits on ownership, to encourage technology
transfer and assistance to domestic firms. The gov-
ernment may also impose quantitative restrictions
or high customs duties on imported CKDs and
components. These changes make MNEs’ preferred
strategies difficult (or costly) to pursue, and may
induce them to assist more actively in upgrading
the host country’s technology, firms and human
capital in return for continued market access. Given
these restrictions, MNEs may be forced to undertake
vendor development efforts. Vendor development
efforts typically require the MNE to assume the
challenge of transferring tacit and sticky know-
how to the domestic firm, and then ensuring
that the domestic firm also develops the compe-
tencies to assimilate and exploit these technologies
productively.
Such vendor development efforts may enable
domestic firms to better assimilate licensed technol-
ogies and upgrade their manufacturing competen-
cies. However, in a globally integrated marketplace
dominated by MNEs, manufacturing competencies
(although important) do not add as much value
as acquiring marketing knowledge or creating
new knowledge through R&D (Everatt, Tsai, &
Cheng, 1999; Morck & Yeung, 1991; Mudambi,
2008). Therefore it is incumbent on domestic firms
to progress beyond just acquiring manufacturing
competencies.
The ability of domestic firms to progress further
with their catch-up efforts depends on how close
a relationship they are able to forge with down-
stream firms, that is, their customers. Repeated,
frequent interactions facilitate the co-development
of matching organizational structures and processes
Arun Kumaraswamy et al
377
between partnering firms (Lane & Lubatkin, 1998),
and increase the volume and granularity of infor-
mation flows between them (Uzzi, 1996). In turn,
this generates trust and a greater appreciation of
each other’s challenges and strengths, thereby
facilitating the transfer of tacit knowledge and
learning (Dyer & Singh, 1998; Martin & Salomon,
2003). Over time, a virtuous circle emerges wherein
increasingly relation-specific investments enable
partners to recognize additional opportunities
for collaborating and strengthening existing ties
(Gulati & Gargiulo, 1999).
For domestic firms, close ties with their customers
(especially MNEs) enable them to gain deeper
insight into and first-hand experience of custo-
mer needs, and to combine their contextual know-
ledge and upgraded technical competencies to
better service these needs. For instance, they can
implement mechanisms such as concurrent design/
engineering, quality circles and synchronized
operations based on real-time data. Such mecha-
nisms lead to lower costs, higher quality and
potentially higher rates of innovation. Further-
more, domestic firms can benefit from the indirect
ties that their MNE customers have with other
parties (Gulati & Gargiulo, 1999; Uzzi, 1996). For
instance, belonging to a global production and
innovation network may eventually enable dome-
stic firms to access a much larger stream of oppor-
tunities, even though they may be able to capture
only a small share of these rents (Mudambi, 2008).
In this context, Dyer and Nobeoka (2000) describe
in detail the mechanisms that enabled suppliers
in Toyota’s production network to benefit from
strong ties with Toyota and the resultant know-
ledge-sharing with network participants. Partici-
pants in Toyota’s production network shared a
strong network identity that facilitated the emer-
gence of norms for mutually beneficial coordi-
nation, communication and learning. Using this
shared identity as leverage, Toyota created network-
level processes for knowledge-sharing such as a
supplier association, an operations management
consulting division to solve difficult operational
problems, voluntary study groups or learning
teams, and inter-firm employee transfers. Indeed,
McDermott and Corredoira (2010) report that even
a few relational ties with MNE auto manufacturers
enabled domestic components firms in Argentina
to survive.
The time, investment and effort required on the
part of MNEs to develop local supplier partners
are likely to exhibit powerful “lock-out effects”
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
378
(Gulati, Nohria, & Zaheer, 2000: 210). The creation
of strong relationships by MNEs with one (or a set)
of domestic firms might preclude relationships
with other firms, thereby locking late movers out
of vendor development efforts permanently. Such
lock-outs become especially harmful to the domes-
tic firms involved, given the trend in the auto
industry of forging strong ties with just a few
suppliers globally (Mudambi & Helper, 1998).
MNEs may be concerned about the extent of
investment required to develop local suppliers to
acceptable levels of competence (Meyer, Mudambi,
& Narula, 2011). They may also be wary of
opportunism on the part of domestic firms, owing
to the relatively weak intellectual property regimes
in emerging economies (Kogut, 1988). Therefore
domestic firms early on may need to mitigate
these concerns by aggressively investing in learning
and technology assimilation. In addition to cred-
ibly demonstrating that they possess “receiver
competence”, that is, the ability to receive and
utilize the transferred technologies and tacit
knowledge (Mudambi & Navarra, 2004: 389), the
development of customer-specific technological
expertise and co-specialized assets may allay suspi-
cions of potential opportunism (Teece, 1986).
In sum, continued efforts at technology upgra-
ding (i.e., developing technical knowledge) and
the development of strong customer relationships
(i.e., developing marketing knowledge) will both
become critical to performance (Mudambi, 2008).
Accordingly, we hypothesize as follows:
Hypothesis 2: As liberalization proceeds, deve-
loping strong customer relationships and inte-
grating into the industry value chain become part
of the optimal catch-up strategy for domestic
firms. Both catch-up strategies (i.e., technology
licensing/collaborations and customer relation-
ship development) have a positive effect on the
performance of domestic firms.
Based on market growth, adjustments made by
MNEs, and resultant consequences for domestic
industry and firms, the host government may
repeatedly fine-tune the policy regime over time.
As Peng (2003) noted, such dynamics may result in
a more gradual institutional transition to an open-
market economy and offer much-needed time for
domestic industries and firms to adjust. However,
as upgrading of domestic industries and firms
proceeds over time, it becomes increasingly diffi-
cult for host governments to “lead the market”
Journal of International Business Studies
Arun Kumaraswamy et al
with a relatively heavy hand. Indeed, Mahmood
and Rufin (2005) argue that “economic decentra-
lization” is more conducive to innovation, espe-
cially when technology development in the host
country nears the technology frontier. Further-
more, at this stage, the host government’s interest
would be to facilitate the integration of domestic
industries and firms into the global marketplace for
continued growth. Accordingly, there is a strong
incentive for the host government to relax restric-
tions that it had earlier imposed on MNE entrants’
operations.
At this stage, domestic firms may have to upgrade
their competencies further to survive and compete
in the global marketplace. Domestic firms may
have to develop competencies in internal R&D
instead of using technology licensing as a substitute
(Bell & Pavitt, 1993; Kumar & Siddharthan, 1994).
Experimentation and first-hand experience need
to supplement observational learning from their
partners (Uhlenbruck et al., 2003).4 Such internal
R&D increases local absorptive capacities even
further (Cohen & Levinthal, 1990), enabling them
to develop know-why and know-what essential for
new product development and innovation (see
Garud, 1997; Kim, 1998; Kogut & Zander, 1992).
Such a choice by domestic firms would further
spur MNE efforts to gain control over their
ventures, as the institutional environment becomes
capable of supporting open, rule-based market
transactions (Cantwell & Mudambi, 2011; Peng,
2003). This imperative to establish regional beach-
heads and also integrate them more tightly
with their global operations may translate into
attempts to rationalize their local supply chains.
They may become more selective in licensing
their technologies, and retain close relationships
only with a few domestic firms with the capability
to become full partners in product and process
development. Accordingly, we hypothesize:
Hypothesis 3: As liberalization matures, upgrad-
ing internal R&D to create new knowledge
becomes part of the optimal catch-up strategy
for domestic firms, in addition to technology
licensing/collaborations and customer relation-
ship development. All three catch-up strategies
will have a positive effect on the performance of
domestic firms.
Our Theory and Hypotheses in Context
Now, we place our theory and hypotheses in the
context of the Indian auto components industry.
 Catch-up strategies: Indian auto parts
We noted earlier that the Indian government made
two significant policy revisions after liberalization
began in 1991: a clarification of the auto policy
in 1997, and the new auto policy in 2002. At the
beginning, fewer restrictions were placed on foreign
firms as the Indian government tried to entice
MNEs to enter. We call this period (1992–1997)
the transition phase, during which MNEs began
entering the market, the government rectified
“unanticipated” problems with its policy on MNE
entry/operations, and domestic firms began adapt-
ing to open market competition. The formal
clarification of the auto policy in 1997 signaled
the imposition of a more restrictive regime to
induce MNE entrants to help upgrade domestic
firms and industries, in return for market access. We
term this period (1998–2002) the consolidation
phase, during which domestic firms attempted to
build on their upgrading, and MNEs adjusted to the
policy clarifications and began consolidating their
position in the Indian auto market. Finally, with
the new auto policy of 2002, the Indian govern-
ment removed most requirements and restrictions
on MNEs, to facilitate the integration of the Indian
auto industry into the global marketplace. Accord-
ingly, we term this post-2002 period the global
integration phase. In Table 1, we highlight key
events in the evolution of the Indian auto compo-
nents industry. In Figure 2, we represent our
theoretical model in the context of the Indian
auto components industry’s evolution after libe-
ralization began in 1991. Such an evolutionary
and multivalent approach to liberalization is con-
sistent with the findings of studies of the mass
privatization efforts undertaken by Eastern/Central
European countries (Ekiert & Hanson, 2003; Spicer
et al., 2000).
DATA, VARIABLE MEASURES AND MODELS
In our theoretical model, we hypothesize how
the catch-up strategies of domestic firms are likely
to evolve as market liberalization progresses, and
influence their performance. Although our theory
development relates to industry evolution and
catch-up strategies in three successive phases, our
empirical analysis is confined to the first two
phases, that is, the transition phase (1992–1997)
and the consolidation phase (1998–2002). In other
words, our empirical analysis is restricted to the
first two panels of Figure 1, that is, the process
whereby the population of local firms is trans-
formed from Distribution I into Distribution II, and
the catch-up strategies that distinguish between
Arun Kumaraswamy et al
379
and determine the performance of leading and
laggard domestic firms. As the process of catch-up
continues, the distribution of local firms begins
to change again, as laggard firms either exit or
accelerate their investments in technology, result-
ing in a return towards lower variance of capabil-
ities in the local firm population (with a higher
mean). However, data limitations do not allow us to
explicitly examine this phase. Finally, the logical
culmination of catch-up is convergence, whereby
the capabilities of local firms match world stan-
dards (represented by Distribution III in Figure 1);
this endpoint is still in the future for the Indian
auto parts industry.
We abstracted firm-level data for the period
1991–2002 on all Indian auto components firms
listed in the Prowess database. Prowess, a database
maintained by the Center for Monitoring Indian
Economy (CMIE), India, contains detailed firm-
level data on over 10,000 large and medium-sized
Indian firms, comprising all firms traded on India’s
major stock exchanges and also state-owned firms.
We obtained data on technology licensing, tech-
nical collaborations and financial collaborations for
our sample of firms from CapEx, yet another
database maintained by CMIE that tracks collabora-
tions and investment projects in India, beginning
in 1992. Our final sample was an unbalanced panel,
and had 1271 firm-year observations for the 11-year
period between 1992 and 2002. The auto compo-
nents firms in our sample were predominantly
Indian-controlled (93–94%) and accounted for
approximately 66% (in the early years) to 85% (in
the later years) of total annual industry revenues, as
reported by ACMA.
In addition to the above archival data, we
conducted interviews with senior executives in
seven auto components firms, three of them
Tier-1 suppliers and the rest Tier-2 suppliers to auto
manufacturers. These firms ranged in annual
revenues from US$4.9 million to US$275 million,
and in size from 136 employees to over 3000; they
differed in ownership from wholly Indian-owned
to foreign-owned and joint ventures; and they
had a representative customer base among dome-
stic and MNE auto manufacturers. In addition,
to get the customers’ perspective, we interviewed
three auto manufacturers (both MNE and domestic)
operating in India. Our interviewees at these ten
firms were industry veterans, who had spent an
average of 20 years in the auto/components
industries, and occupied senior positions ranging
from Assistant General Manager and Director
Journal of International Business Studies
Journal of International Business Studies
Table 1 Evolution of the Indian automotive industry
Phase Government policy
Prior to 1980 Industrial Licensing Act of 1951
imposes restrictions on the startup
and expansion of private enterprise.
Focus on import substitution and
indigenization (up to 95%).
Passenger cars classified as luxury
goods.
1980s In early 1980s, Indian commercial
vehicles manufacturers permitted
to form technical and financial
collaborations with MNEs, and to
increase capacity in auto/
components production.
Entry into passenger cars
discouraged.
1991 Auto industry delicensed as part of
economy-wide liberalization. MNE
entry allowed with majority or even
100% ownership.
Technology licensing and transfer
from MNEs permitted.
1992–1997 Renegotiation of terms for entry and
operation to ensure that MNE
entrants do not rely exclusively on
CKDs and imported components.
MNE auto/components firms
MNE auto manufacturers such
as Ford and GM exit Indian
market in the 1950s.
Japanese firms enter through joint
ventures with Indian commercial
vehicles and components
manufacturers.
MNE auto manufacturers and
components firms seek to enter,
primarily through joint venture or
wholly owned assembly operations.
MNE entrants set up and begin
operations, primarily through joint
ventures with Indian firms.
In 1995, required to sign MOUs with
government with CKD/components
imports contingent on volume, local
content and export commitments.
High customs duties on imported
CKDs and components until local
content commitments fulfilled.
Since mid-1990s, majority-owned
(51%) ventures and even 100%-
owned ventures allowed in the auto
market on a case-by-case basis.
Predominant focus on mid-sized and
high-end passenger cars market,
unable to compete on cost with MUL
in the compact car market.
Only 24% MNE ownership allowed
in small-scale Indian firms
(i.e., components firms).
Indian auto manufacturers
Since mid-1960s, auto manufacturers
not permitted to expand
components production, and
required to purchase most
components from small-scale firms.
Weak incentives to modernize, absent
competition.
In 1983, Maruti Udyog Ltd (MUL)
formed as joint venture between
Indian government and Suzuki
Motors of Japan.
Limited modernization of the
domestic auto industry due to joint
ventures with Japanese firms.
Indian auto manufacturers form
technology/licensing agreements
with MNEs and begin preparing
for the entry of MNE auto
manufacturers.
Technology and financial
collaborations with MNE auto
manufacturers and MNE components
firms to upgrade their own product
offerings.
Indian commercial vehicle
manufacturers (e.g., TELCO,
Mahindra and Mahindra) enter
passenger car market with multi-
utility vehicles and, later, with small
cars.
Indian passenger car manufacturers
upgrade models, especially in the
mid-sized market.
380
Indian components firms
Fragmented industry, with small firms
with less-skilled labor, low volumes,
low technological intensity, low
productivity and quality
consciousness.
Some relatively large firms emerge to
constitute the “organized sector”.
Catch-up strategies: Indian auto parts
Limited modernization due to MUL’s
vendor development efforts, and also
due to the joint ventures with
Japanese commercial vehicles firms
Technology licensing/transfer and
financial collaboration with MNE
firms spur further modernization
Arun Kumaraswamy et al
Up to 24% stake (by MNEs or
Indian firms) allowed in small-scale
Indian components firms.
Technology licensing/collaboration
and JV with MNE components
firms.
Hiring of skilled workers and
professional managers.
Institution of training programs and
new work practices to improve
productivity.
Components exports increase, but
mostly targeted at the low-end
after-market. A few capable Indian
components firms, however, begin
exporting to MNE auto
manufacturers or Tier 1 components
firms.
 1998–2002 Formalization of case-by-case MOU
terms into a revised auto policy.
Post-2002 New auto policy in 2002 to develop
India as a global hub for small cars
and an Asian hub for auto
components.
Free Trade Agreement (FTA)
signed with Thailand in 2004.
From 2004, customs duties and tariffs
reduced on key raw materials
required by auto industry.
From 2005, a weighted deduction
of 150% of R&D expenses allowed
for auto and components firms.
Journal of International Business Studies
MNE entrants required to set up
domestic manufacturing and increase
local content to minimum 50% by
third year and 70% by fifth year of
first CKD/SKD imports.
MNEs to balance CKD/SKD imports
with equivalent exports from third
year.
At least $50 million MNE investment
required to establish 100% owned
subsidiaries.
MNE auto manufacturers develop
local sources to satisfy local content
requirements, but begin to rationalize
their domestic supply chain.
Major MNE Tier 1 components firms
set up subsidiaries or JVs.
In 2001, MNE entrants allowed to
import CKD/SKD without equivalent
exports.
100% MNE ownership allowed; MNE
auto manufacturers and components
firms increase ownership stakes in JVs.
Local content, export, minimum
investment obligations removed.
More collaborative relationships
with Indian components firms to
improve quality and productivity.
Beginning late 1990s, Indian auto
manufacturers rationalize their
supply chain.
Emission norms and regulations
imposed to conform to Euro 1 and
Euro 2 emission standards
respectively to bring industry up to
global standards.
Core Group on Automotive R&D
(CAR) set up to establish technology
development priorities for the future.
Funding to establish two new,
advanced automotive testing/
certification facilities and to upgrade
the two existing ones.
Indian auto manufacturers begin
investing in R&D and acquiring auto
operations and brands abroad.
Industry becomes more formally
“tierized”.
Technology licensing from MNE
components firms decline as they
begin to set up subsidiaries or JVs
with specific Indian components
firms.
More collaborative relationships with
MNE and Indian auto manufacturers
in improving quality and
Catch-up strategies: Indian auto parts
productivity.
As MNE and Indian auto
manufacturers began rationalizing
their respective supply chains,
pressure on components suppliers
to locate close to assembly plants.
Enhanced focus on exports with
increasing competition in the
domestic market.
FTA with Thailand raises prospects
of competition from ASEAN
countries.
Other FTAs between Asian and
Arun Kumaraswamy et al
European countries raise prospects
of MNEs shifting components
production from India back to
home countries.
Indian components firms begin
investing in R&D and acquiring
components firms abroad.
381
 Catch-up strategies: Indian auto parts
382
Fine-tuning of
policy regime
Evolution of the Industry/Institutional Environment
Transition phase
Technology licensing,
absorptive capacity
development
Catch-up Strategies for Domestic Firms
Figure 2 Model of domestic firms’ catch-up strategies in the Indian auto components industry.
of Quality to President and Managing Director.
Interviews ranged from 1.5 hours to 2 hours each.
We began our interviews with broad, open-ended
questions on the changes that had occurred in the
Indian auto and components industries since
liberalization began in 1991, how these changes
had affected their firms’ behaviors, industry critical
success factors, emerging industry trends, and the
potential consequences of these trends for their
firms. As an interview progressed, we delved deeper
into specific issues, such as the firm’s behavior with
regard to technology licensing, in-house R&D and
the nature of their relationships with upstream/
downstream firms. Our intention was not to
develop theory based on these qualitative data.
Instead, it was to gain a broad perspective on the
industry and to validate our empirical results,
where possible. We use these data only to provide
additional context for our empirical results.
Variable Measures
We measured key variables as follows.
Firm performance (Performance)
Our dependent variable is firm performance. We
measured the performance of domestic auto com-
ponents firms using return on assets (ROA). As our
sample comprised both publicly traded and pri-
vately held firms, we were not able to use return on
equity (ROE) as an alternative measure of firm
performance.
Technology upgrading (TechLicensing)
We measured domestic firms’ investments in tech-
nology upgrading using their reported royalty
expenses over revenues for each year.5
Strength of customer relationships (Tier, FinCollab)
We measured the closeness of domestic firms’ rela-
tionships with their customers using two measures.
Journal of International Business Studies
Arun Kumaraswamy et al
Consolidation phase Global integration phase
Relationship development, Knowledge creation
integration into industry through R&D
value chain
First, we employed the tier system (Tier) commonly
used in the auto industry as a measure of the
strength and quality of relationships between
auto components firms and auto manufacturers.
As per the tier system, a firm that supplies directly
to auto manufacturers (i.e., OEMs) is considered
as belonging to Tier 1, while a firm that supplies to
Tier 1 firms is considered as belonging to Tier 2, and
so on. A number of studies in the auto industry
(e.g., Dyer & Nobeoka, 2000; Mudambi & Helper,
1998) have described the close, beneficial ties
between Tier 1 suppliers and auto manufacturers.
Accordingly, we expect that Tier 1 suppliers will
have stronger and higher-quality relationships with
auto manufacturers than lower-tier suppliers.
Furthermore, as we noted earlier, 93–94% of our
sample comprises Indian-controlled firms, signi-
ficantly mitigating the potentially confounding
effects due to the inclusion of MNE-controlled
Tier 1 firms in such an analysis. As information
on tier was not readily available from public data-
bases such as Prowess, we undertook a detailed
study to categorize our sample of firms by tier.6
We then created a dummy variable with value 1 if
a firm was categorized as Tier 1, and 0 otherwise.
As evident from Tables 3 and 4, over 70% of
the domestic components firms in our sample were
categorized as Tier 1 during both the 1992–1997
and 1998–2002 phases. However, we note the
qualitative difference between Tier 1 firms supply-
ing primarily domestic auto manufacturers during
the early 1992–1997 phase, and Tier 1 firms with
upgraded technologies supplying both MNE and
domestic auto manufacturers after MNE entry
during the later 1998–2002 phase.
Second, we collected data on financial collabora-
tions between MNEs and domestic components
firms from CMIE’s CapEx database. The underlying
logic for this measure is that MNEs are likely
to favor domestic firms in which they have a
 Catch-up strategies: Indian auto parts
financial interest when making decisions on
technology transfer or supplier relationships. We
created a dummy variable, FinCollab, with value 1 if
a domestic firm had financial collaborations
with MNEs during a specific year, and 0 otherwise.
Knowledge creation/provision (R&D)
We measured domestic firms’ capabilities in know-
ledge creation using their respective R&D inten-
sities, that is, R&D expenses over revenues for each
year. We recognize that R&D intensity is an input
measure, and does not necessarily imply effective
knowledge creation. However, the linkage between
such input measures and output measures such
as patents or citation counts is typically strong
(Hagedoorn & Cloodt, 2003).
In addition, based on our reading of the lite-
rature and knowledge of the industry context,
we collected data on the following macroecono-
mic, industry-level and firm-level variables to
control for other influences on domestic firms’
performance:
 GDP growth (GDPgrowth), measured as the per-
centage growth in India’s GDP in each year.
 MNE market share (MNEshare), measured as the
MNE auto manufacturers’ share of the Indian
auto industry in each year. We used this variable
to account for the influence that MNEs had over
the Indian auto industry and, by implication, the
auto components industry.
 Firm size (Size), measured as the natural loga-
rithm of domestic firms’ revenues in each year.
 Firm age (Age), measured as time elapsed since
the domestic firm’s founding.
 Firm market share (Marketshare), measured as the
ratio of domestic firms’ revenues and the indus-
try’s total revenues for each year.
 Firm exports (Exports), measured as the domestic
firm’s revenues from export sales.
 Complexity of domestic firm’s products (Prod-
Complexity), operationalized as a dummy variable
with value 1 if the firm’s products were categor-
ized as highly complex, and 0 otherwise.7 We
included this variable as a control, given
Hoetker’s (2005) finding that firms tended to
choose suppliers for innovative components
based more on familiarity than on their techno-
logical competence.
 Firm location (Location), operationalized as a
dummy variable with value 1 if the domestic firm
was located in one or more of the three auto
clusters in India, and 0 otherwise. Geographic
Arun Kumaraswamy et al
383
location within an industry or regional cluster has
well-documented benefits (Okada & Siddharthan,
2007; Saxenian, 1994). In addition, Dyer (1996)
found that co-location of suppliers and auto
manufacturers facilitated closer coordination and
faster learning, thereby conferring an advantage
on the entire production network.
 Firm ownership (Ownership), operationalized as a
dummy variable with value 1 if a firm was Indian-
controlled, and 0 if it was MNE-controlled. Joint
ventures with MNE firms in which the Indian
partner had majority ownership were considered
to be Indian-controlled.
In Table 2, we present the definitions of all our
variable measures. In Tables 3 and 4, we present
summary statistics and correlations of variables
corresponding to the 1992–1997 phase and 1998–
2002 phase respectively. We acknowledge the large
and statistically significant correlation between the
two control variables, Size and Marketshare. We,
however, decided to include both variables in our
models, because each has different theoretical
implications as controls, Size being clearly a firm-
level control and Marketshare also implicating the
firm’s competitive position vis-à-vis rivals. We
calculated the variance inflation factors for coeffi-
cient estimates in our various models, and found
these to be well within the prescribed cut-off value
of 10.
Models
We estimated separate fixed-effects models for
the transition phase (1992–1997) and for the
consolidation phase (1998–2002) of industry
evolution during market liberalization. We ran
heteroskedasticity-consistent fixed effects esti-
mates, which automatically adjusted for differ-
ences in group-specific variances. We performed
the Hausman test to compare the fixed-effects
specification against the random-effects specifi-
cation in terms of consistency and efficiency.
The results of the test did not support the
random-effects specification.
During the initial years of liberalization, MNEs
entering an unfamiliar market may use variables
such as Performance, Size and R&D of domestic
supplier firms during prior years as signals to iden-
tify potentially valuable partners with whom to
engage in joint venture or licensing arrangements.
To account for such potential endogeneity, we
used a two-stage fixed-effects model specification
to estimate the performance implications of domes-
Journal of International Business Studies
 Catch-up strategies: Indian auto parts Arun Kumaraswamy et al
384

Table 2 Variable definitions and measures

Variable name Variable measure

Dependent variable:
Performancei,t Domestic firm’s performance, as measured by ROA, for firm i in year t

Independent variables:
TechLicensingi,t Ratio of firm i’s royalty expenses to its annual revenues, in year t
FinCollabi,t Dummy variable: 1 if firm i had financial collaboration/venture with MNE in year t; 0 otherwise
Tieri,t Dummy variable: 1 if firm i is a Tier 1 supplier (i.e., sells directly to auto manufacturers); 0 otherwise
R&Di,t Ratio of firm i’s R&D expenses to its annual revenues, in year t

Control variables:
GDPgrowtht India’s GDP growth in year t
MNEsharet MNE market share of Indian auto industry in year t
Sizei,t Natural logarithm of annual revenues for firm i in year t
Agei,t Number of years since incorporation for firm i in year t
Exportsi,t Revenues from exports for firm i in year t
Marketsharei,t Ratio of for firm i’s annual revenues in year t to industry’s cumulative sales revenues in that year
ProdComplexityi,t Dummy variable: 1 if firm i’s product(s) in year t were categorized as being highly critical to the
performance of the end product (viz., autos), and thereby to the auto manufacturers; 0 otherwise
Locationi,t Dummy variable: 1 if firm i in year t is located in more than one more than one of the three major auto
clusters in India; 0 otherwise
Ownershipi,t Dummy variable: 1 if firm i in year t is Indian-controlled; 0 otherwise (i.e., MNE controlled)

tic firms’ catch-up strategies during 1992–1997. In
the first stage, we estimated TechLicensing in the
current period as a function of Performance,
Size and R&D in the prior period. Then, we used
the predicted value of TechLicensing from the
first stage in the following model to estimate
performance of domestic firms during the transi-
tion phase (1992–1997):
Performancei;t
¼ b0 þ b1; j GDPgrowtht þ b2; j MNEsharet
þ b3; j Sizei;t þ b4; j Agei;t þ b5; j Exportsi;t
þ b6; j Marketsharei;t þ b7; j ProdComplexityi;t
þ b8; j Locationi;t þ b9; j Ownershipi;t
þ b10; j PredictedTechLicensingi;t
þ b11; j FinCollabi;t þ b12; j Tieri;t
þ b13; j R&Di;t þ ei;t
Although we explored a number of theoretically
plausible interactions among key variables – for
instance, between TechLicensing and Exports,
between TechLicensing and R&D, between TechLicen-
sing and Marketshare, and between TechLicensing
and FinCollab – none was statistically significant.
With time, the extent to which domestic supplier
firms forge strong relationships with their custo-
mers (i.e., the variable Tier) may be determined
endogenously by technology upgrading during the
prior period (i.e., TechLicensing and R&D during the
period), firm size (i.e., Size), the complexity of the
products they offer (i.e., ProdComplexity) and the
location of these firms close to their customers (i.e.,
Location). Again, to account for potential endo-
geneity, we used the so-called two-stage predictor
substitution (2SPS) approach (Lee, 1979) to esti-
mate the performance model for the consolidation
(1998–2002) phase. In the first stage, we estimated
Tier using an unconditional maximum likelihood
logistic regression model of the above variables,
and then used the corresponding predicted values
of Tier in the performance model:
Performancei;t
¼ b0 þ b1; j GDPgrowtht þ b2; j MNEsharet
þ b3; j Sizei;t þ b4; j Agei;t þ b5; j Exportsi;t
ð1Þ
þ b6; j Marketsharei;t þ b7; j ProdComplexityi;t
þ b8; j Locationi;t þ b9; j Ownershipi;t
þ b10; j TechLicensingi;t þ b11; j FinCollabi;t
þ b12; j PredictedTieri;t þ b13; j R&Di;t þ ei;t ð2Þ
Again, we explored a number of theoretically
plausible interactions among key variables, but
only one interaction (TechLicensing  FinCollab)
was marginally significant at po0.10.

Journal of International Business Studies

 Table 3 Summary statistics and correlations for variables, 1992–1997 phase

Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. Performancei,t 0.08 0.10 1.00

2. TechLicensingi,t 0.01 0.02 0.24* 1.00
3. FinCollabi,t 0.04 0.19 0.06 0.03 1.00
4. Tier i,t 0.73 0.44 0.08* 0.05 0.10* 1.00
5. R&Di,t 0.00 0.01 0.15* 0.07 0.08* 0.10* 1.00
6. GDPgrowtht 6.05 0.41 0.11* 0.01 0.04 0.02 0.00 1.00

Catch-up strategies: Indian auto parts

7. MNEsharet 0.11 0.01 0.02 0.00 0.14* 0.03 0.07 0.45* 1.00
8. Sizei,t 3.17 0.13 0.31* 0.09* 0.13* 0.25* 0.26* 0.07 0.19* 1.00
9. Agei,t 25.76 18.97 0.12* 0.03 0.00 0.05 0.07 0.04 0.01 0.32* 1.00
10. Exportsi,t 0.07 0.13 0.11* 0.12* 0.04 0.03 0.04 0.00 0.00 0.07 0.05 1.00
11. Marketsharei,t 0.01 0.02 0.20* 0.11* 0.01 0.18* 0.24* 0.02 0.07 0.65* 0.22* 0.06 1.00
12. ProdComplexityi,t 0.56 0.50 0.01 0.07 0.02 0.13* 0.01 0.02 0.01 0.05 0.05 0.11* 0.12* 1.00
13. Locationi,t 0.28 0.45 0.08* 0.15* 0.09* 0.14* 0.07 0.02 0.00 0.34* 0.12* 0.17* 0.35* 0.05 1.00
14. Ownershipi,t 0.93 0.25 0.02 0.14* 0.02 0.07 0.04 0.00 0.04 0.11* 0.18* 0.09* 0.15* 0.01 0.03 1.00
N¼593; * if po0.05.

Arun Kumaraswamy et al
Table 4 Summary statistics and correlations for variables, 1998–2002 phase

Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. Performancei,t 0.03 0.13 1.00

2. TechLicensingi,t 0.01 0.03 0.07 1.00
3. FinCollabi,t 0.05 0.22 0.04 0.13* 1.00
4. Tier i,t 0.73 0.45 0.24* 0.03 0.08* 1.00
5. R&Di,t 0.01 0.01 0.08* 0.05 0.04 0.02 1.00
6. GDPgrowtht 5.24 1.33 0.07 0.04 0.06 0.02 0.01 1.00
7. MNEsharet 0.14 0.01 0.02 0.03 0.01 0.02 0.03 0.49* 1.00
Journal of International Business Studies

8. Sizei,t 3.74 1.16 0.34* 0.04 0.15* 0.42* 0.12* 0.05 0.03 1.00
9. Agei,t 25.91 19.29 0.07 0.01 0.09* 0.10* 0.03 0.03 0.05 0.31* 1.00
10. Exportsi,t 0.09 0.16 0.03 0.07 0.02 0.10* 0.03 0.03 0.01 0.01 0.01 1.00
11. Marketsharei,t 0.01 0.01 0.23* 0.04 0.20* 0.23* 0.16* 0.03 0.04 0.68* 0.26* 0.02 1.00
12. ProdComplexityi,t 0.52 0.50 0.01 0.00 0.02 0.16* 0.04 0.01 0.03 0..06 0.12* 0.07 0.07 1.00
13. Locationi,t 0.28 0.45 0.20* 0.00 0.07 0.20* 0.08* 0.01 0.00 0.39* 0.08* 0.09* 0.35* 0.12* 1.00
14. Ownershipi,t 0.94 0.24 0.05 0.16* 0.20* 0.02 0.05 0.02 0.00 0.09* 0.14* 0.05 0.20* 0.04 0.04 1.00
N¼678; * if po0.05.

385
 Catch-up strategies: Indian auto parts Arun Kumaraswamy et al
386

Table 5 Determinants of domestic auto components firms’ performance

Model 1 Model 2a Model 2b

1992–1997 phase 1998–2002 phase 1998–2002 phase

Coefficient t Coefficient t Coefficient t

Intercept 0.08 1.38 0.54** 4.58 0.56** 4.70

GDPgrowtht 0.01** 5.11 0.01** 2.98 0.01** 3.05
MNEsharet 0.82** 2.90 2.18** 3.37 0.65** 3.40
Sizei,t 0.02** 2.76 0.02 1.40 0.02 1.34
Agei,t 0.00 0.82 0.001* 2.34 0.001* 2.33
Exportsi,t 0.09* 2.43 0.05 1.34 0.05 1.35
Marketsharei,t 1.25* 2.07 2.08* 2.29 2.03* 2.23
ProdComplexityi,t 0.02 1.04 0.10* 2.29 0.10* 2.41
Locationi,t 0.07* 2.22 0.11* 2.13 0.11* 2.23
Ownershipi,t 0.01 0.48 0.05 1.49 0.05 1.57
TechLicensingi,t 0.84* 2.22 1.07** 2.69
PredictedTechLicensingi,t 14.63* 2.18
FinCollabi,t 0.02 1.51 0.01 0.49 0.02 0.74
Tieri,t 0.01 0.84
PredictedTieri,t 0.43* 2.07 0.45* 2.18
R&Di,t 0.20 0.41 0.45 1.24 0.47 1.30
TechLicensingi,t  FinCollabi,t 1.20w 1.79
2 Res Log Likelihood 1110.5 1020.9 1025.1
AIC 1106.5 1016.9 1021.1
BIC 1101.1 1010.7 1015.0
Chi-square 169.56** 232.83** 233.03**
N 593 678 678
w
If po0.10; * if po0.05; ** if po0.01.

ANALYSIS RESULTS sources of components. Furthermore, the auto

Table 5 presents the results of our analysis on
the performance consequences of domestic supplier
firms’ catch-up strategies during the two phases
(1992–1997 and 1998–2002). We do not report the
first stages of the respective two-stage models,
because they are not central to our theoretical
arguments; nor do we report models with inter-
action terms whose coefficients were not statisti-
cally significant.8
Determinants of Performance during the
Transition Phase (1992–1997):
Model 1 offers support for our Hypothesis 1, that
domestic firms will catch up through technology
licensing and technical collaborations (both arm’s
length and through joint ventures) as the domi-
nant strategy during the initial years of market
liberalization, and that such a strategy will be
detrimental to their contemporaneous (i.e., short-
term) performance. To MNE entrants unfamiliar
with the newly open Indian market, domestic
firms’ aggressiveness in upgrading their techno-
logical capabilities would serve as a credible signal
of their commitment to become dependable local
industry executives whom we interviewed revealed
that most MNE auto manufacturers insisted that
domestic supplier firms either enter into joint
ventures with their global supply chain partners
(especially for critical components) or license
relevant technologies from them. An executive at
a relatively capable domestic components firm
stated that Indian auto manufacturers were more
willing to trust them with design and development
than MNE entrants that had to undertake a long
and costly qualification process. However, this
executive conceded that technology licensing and
joint ventures were much quicker ways for domes-
tic firms to catch up, especially when new product
development would just involve “reinventing the
wheel” on mature, firm-specific technologies and
components. Indeed, the survival of many auto
manufacturers with wide product portfolios in the
relatively low-volume Indian market required flex-
ible governance structures and technology alliances
between MNE entrants and low-cost domestic
suppliers (D’Costa, 2004).
Not surprisingly, GDP growth and MNE entrants’
auto industry market share (MNEshare) were positively

Journal of International Business Studies

 Catch-up strategies: Indian auto parts
and significantly related to performance. Indeed,
economic growth and MNE entry – associated
with growth of the auto components industry –
no doubt increased the opportunities available
for all domestic firms. In addition, domestic firms’
size (Size) and market share (Marketshare) were
also positively and significantly related to their
performance. Larger domestic firms, and those with
an already established competitive position in
the marketplace, probably possessed the stability
and slack resources to tide them through the
transition phase; moreover, MNE entrants may
have used these characteristics as signals of domes-
tic firms’ stability and capabilities (Ivarsson &
Alvstam, 2005). Firm location (Location) was also
significantly and positively related to performance.
Location of domestic firms in the three auto
clusters gave them some advantage, as MNEs loca-
ted their operations in or near these clusters to
take advantage of the pre-existing infrastructure,
labor pool and subsidies offered by the respective
state governments.
Domestic firms’ revenues from exports, though,
were significantly but negatively related to perfor-
mance. When the liberalization process began,
domestic firms were exporting small quantities of
cheap, low-quality components to less developed
markets such as Africa and the Middle East, and
to the very low-end after-market in a few developed
countries. However, as domestic firms upgraded
their competencies, there was a slow but sure shift
to exports of quality components to MNE auto
manufacturers and global Tier 1 components
firms. This shift, according to industry executives,
required domestic components firms to tackle
serious challenges. For instance, these firms had
no prior exposure to designing quality compo-
nents for different environmental conditions;
nor did they have a good understanding of the
transportation infrastructure, logistics, packaging
and liabilities of exporting to relatively deve-
loped markets. The upfront investments and higher
inventory levels required to service these export
markets increased their costs significantly, making
them uncompetitive in the growing domestic
market. Indeed, several executives opined that
most domestic firms will find it difficult to balance
the demands imposed by exporting with those
imposed by cost considerations in the domestic
market. Only domestic firms with excess capacity
or those that secured opportunities through their
MNE customers or partners seriously considered
export sales.
Arun Kumaraswamy et al
387
Determinants of Performance during the
Consolidation Phase (1998–2002):
Models 2a and 2b offer support for our Hypothesis 2.
First, they support our contention that technology
upgrading through licensing and technical colla-
borations would continue to be a catch-up strategy
for domestic supplier firms, and that it would
influence performance positively during the con-
solidation phase. In addition, our results (across
Models 1, 2a and 2b) demonstrate that the devel-
opment of strong customer relationships and
integration into the industry value chain will
follow-technology upgrading as a catch-up strategy,
and will also become critical for performance
during the consolidation phase.9
Our interviews with industry executives help
explain the positive effect of strong customer
relationships (represented by the well-known
auto industry indicator, Tier 1 supplier status) on
performance, especially after the entry of MNE auto
manufacturers. Executives confirmed that both
domestic and MNE auto manufacturers were well
aware of domestic suppliers’ technology licen-
sing and collaborations, and used these in choosing
their own suppliers. They also described how
close Tier 1 relationships (especially with MNE
auto manufacturers) were instrumental in gaining
preferential access to technologies and “persis-
tent attention and second chances” when they
encountered operational difficulties. One executive
explained how auto manufacturers were ready to
“hold our hands and offer assistance in various
aspects, including technical and process-related
assistance, financial and managerial assistance,
help in materials procurement and tooling, and
even arranging tie-ups with appropriate technology
providers”. Further, domestic Tier 1 firms enjoyed
more opportunities and better scope for the absor-
ption of licensed technologies and best prac-
tices (see McDermott & Corredoira, 2010). For
instance, once domestic Tier 1 firms developed
“well-established process, product, management
and system capabilities”, MNE auto manufacturers
began considering them as partners, involved them
in joint design and development, and gave them
preferred supplier status, even on a global scale.
In addition, executives at several Tier 1 firms
offered instances in which their firms were able to
leverage their erstwhile Tier 1 status with one auto
manufacturer to “get our foot in the door” at other
MNE and domestic auto manufacturers.
Our results are also consistent with those
obtained by other studies of the auto industry. For
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
388
instance, McDermott and Corredoira (2010) found
that relational networks were critical to technology
upgrading in the Argentine auto components
industry. In addition, detailed firm-level studies
on the Indian auto industry have confirmed that
technical collaborations have not only helped
domestic firms to upgrade their technological
capabilities, but have also improved their produc-
tivity and operational efficiency significantly
(D’Costa, 2004; Ivarsson & Alvstam, 2005). There-
after, MNE auto manufacturers began sourcing
components such as sheet metal and fabricated
parts, castings, forgings, some plastic and electrical
components, fasteners and radiator caps from
domestic firms with proven competencies, while
continuing to source safety-critical and/or proprie-
tary components for engines, transmissions, brak-
ing systems, electronics and certain instrument
clusters from their global supply chain partners and
transnational suppliers (Humphrey, 2003; Ivarsson
& Alvstam, 2005). In addition, given the increasing
tendency to maintain close relationships with only
a few suppliers (Goffin et al., 2006; Mudambi &
Helper, 1998), domestic firms with strong Tier 1
customer relationships probably enjoyed assured
long-term demand.
Our other measure of domestic firms’ relation-
ships with their customers (especially MNE auto
manufacturers), FinCollab – that is, financial colla-
boration through minority investments – did not
have a significant effect on domestic firms’ perfor-
mance. One possibility for this result is that MNEs
and their global supply chain partners made pre-
emptive minority investments in domestic compo-
nents firms, treating these as options for the future,
but followed through selectively with efforts to
help or exert control only if domestic firms’ efforts
at catching up were successful. Furthermore, with
global auto components firms setting up operations
in India during the 1998–2002 phase, many of
these options were probably allowed to “expire”.
Indeed, the sheer number of financial collaborations
after liberalization, with their numbers increasing
during the 1998–2002 phase (see note 1), point to
such a strategy on the part of MNEs.
However, the interaction effect between TechLi-
censing and FinCollab on domestic firms’ perfor-
mance was negative and marginally significant
(po0.10). As our interviews suggested, MNEs
tended to exert close control over domestic firms
with which they had entered into both technolo-
gical collaborations (through licensing agreements)
and financial collaborations (through minority
Journal of International Business Studies
Arun Kumaraswamy et al
investments or joint ventures). These domestic
firms would probably have faced the same stringent
technological, productivity and pricing pressures as
subsidiaries or MNE sources, exacting a toll on their
performance. However, in return, these domestic
firms had relatively assured demand for their
products from their “patrons”, compared with their
rivals. Therefore this result may be interpreted as a
risk–return trade-off.
A second interpretation arises from our inter-
views with industry executives. With financial
collaborations, any designs and intellectual prop-
erty developed within the joint venture flowed
back to the MNE partner, compromising the ability
of the domestic partner to get the full performance
benefits. Indeed, in one instance, an executive felt
that his firm would have been better served by a
simple technology licensing agreement instead of a
joint venture with an MNE partner. This executive
also indicated that the wholly Indian-owned com-
ponents firms were likely to exhibit better financial
performance than joint ventures.
Models 2a and 2b also revealed shifts in several
relationships between the transition and consolida-
tion phases. Firm size (Size) ceased to be critical for
performance during the consolidation phase as
MNE entrants gained familiarity with the Indian
market and began relying on more pertinent
criteria to drive their interactions with domestic
suppliers. Instead, firm market share (Marketshare)
became a significant and positive determinant of
performance, indicating potential reputation
effects. Unlike in the transition phase, Location
was negatively associated with domestic firms’
performance during the consolidation phase. This
negative effect of location may occur because the
more capable domestic firms began serving several
auto manufacturers simultaneously (as we uncov-
ered in our interviews with industry executives).
These firms had to locate units close to key auto
manufacturers in multiple clusters (or at least
maintain multiple warehouses with finished goods
inventories), and also had to forge technology/
financial collaborations with each of them. This
need to establish multiple units probably con-
strained the potential for scale economies and
learning/spillovers among the units, in turn result-
ing in lower performance (i.e., ROA).
In addition, the greater was the complexity of
products offered by domestic firms (i.e., ProdCom-
plexity), the lower was their performance during the
consolidation phase. Our interviews suggested that
domestic firms that had graduated to supplying
 Catch-up strategies: Indian auto parts
relatively complex products were subjected to
closer oversight on costs, pricing and quality,
especially by MNE auto manufacturers. These firms
also faced higher warranty costs, and had to
continually upgrade their competencies to keep
pace with the slew of new models introduced in the
competitive but relatively low-volume Indian auto
market (see Helper & Kiehl, 2004, who report the
increasing oversight and new demands imposed by
auto manufacturers on their suppliers).
During this phase, GDP growth exerted a signi-
ficant negative influence on domestic firms’ perfor-
mance. Indeed, with GDP growth and the resultant
growth of the Indian auto market, new entry
and larger-scale operations by MNEs increased
competitive pressures on domestic firms, thereby
negatively influencing their performance. However,
the increasing market share of MNE auto manufac-
turers (MNEshare) was beneficial to domestic com-
ponents firms’ performance, especially as MNE
entrants increased domestic volume and indigeni-
zed aggressively by developing local sources, at least
for standard components.
In sum, Models 1, 2a and 2b offer support for our
Hypotheses 1 and 2.10
Internal R&D and Performance
Internal R&D was not associated with dome-
stic firms’ performance significantly, either in
Model 1 or in Models 2a and 2b. This evidence
may be interpreted as being partly consistent with
Hypothesis 3. In other words, knowledge creation
through internal R&D would be the final step in
catch-up by domestic firms, and therefore will
not materially affect performance during the transi-
tion and consolidation phases. Our results com-
plement findings from the Indian auto industry
during the 1980s that MNE entrants (primarily
Japanese) were reluctant to lose steady revenues
from licensing royalties, and discouraged domestic
partner firms from investing in in-house R&D
(Swaminathan, 1988).
Table 6 Granger causality tests: Domestic auto components firms’ internal R&D and performance
Lags Test of causality from R&D to performance
F statistic F statistic
(1992–1997) (1998–2002)
1 1.97 1.15
2 3.98 2.31
** If po0.01.
Arun Kumaraswamy et al
389
Industry executives noted that a majority of
domestic firms lacked the scale, resources, techno-
logical expertise or managerial competence to
conduct internal R&D, even after 15 years of
catch-up. Their productivity and quality conscious-
ness had increased, and their workforce was more
skilled than before, but many were still too small to
engage in significant R&D. Any efforts at internal
R&D were confined to domestic auto manufac-
turers and a handful of domestic components firms
that had developed significant absorptive capacities
during the 1980s, that is, long before liberalization
began in earnest in 1991. In most other firms,
“internal R&D” referred primarily to “the localiza-
tion of materials and licensed technologies, and
incremental improvement of process”, as observed
by Swaminathan (1988).
However, some domestic components firms (espe-
cially Tier 1 firms) had begun investing in in-house
R&D and building their competencies in developing
components from scratch. Some, such as the TVS
Group and the Kalyani Group, were even buying out
their MNE partners and acquiring valuable intellec-
tual property and product development opportu-
nities with MNE auto manufacturers at the global
level. Even executives at Tier 2 domestic firms
revealed that their firms were slowly trying to move
into assembly of entire subsystems for Tier 1 firms,
instead of just selling them individual components.
Such a move required significant competencies in
both design and production, prompting them to
develop some in-house R&D expertise. Nevertheless,
executives at Tier 1 domestic firms realistically
conceded that their firms will take longer than
global Tier 1 firms to develop new products, and
they had a long way to go in this respect. This
evidence is consistent with patent-based results for
other Asian countries (Mahmood & Singh, 2003).
As an additional step, we performed Granger
causality tests (Granger, 1989) to explore the causal
link between internal R&D and firm performance
during both the transition and consolidation
phases. Results of these tests (Table 6) indicate
Test of causality from performance to R&D
F statistic F statistic
(1992–1997) (1998–2002)
11.66** 23.52**
23.53** 47.39**
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
390
that Performancet1 Granger-causes R&Dt. In other
words, only domestic firms that performed well
invested in R&D. Although these results and
interview data offer support for Hypothesis 3,
further analysis using comprehensive data on the
post-2002 phase is required to fully test this
hypothesis.
CONCLUDING REMARKS
We explored the catch-up strategies of domestic
firms in the Indian auto components industry
during the process of market liberalization, and the
performance implications of these catch-up strate-
gies over time. We found that the optimal catch-up
strategies of domestic firms change as market
liberalization proceeds and the industry’s institu-
tional environment evolves. Catching up through
upgrading of technical competencies is the domi-
nant strategy at the beginning but, as the industry/
institutional environment evolves to allow greater
ownership/control by MNEs and unfettered compe-
tition, the development of strong Tier 1 customer
relationships becomes equally important. Indeed,
both may be necessary steps for domestic firms to
add value through knowledge creation and embed
themselves permanently into the industry’s global
value chains (Mudambi, 2008). In other words,
catch-up by domestic firms is a dynamic process
that mirrors the evolution of the liberalization pro-
cess itself. And, for domestic firms, inability to adapt
successively and within the relatively uncertain
windows afforded by their evolving environment
may spell failure.
A key question, though, is whether domestic
firms in the Indian auto components industry can
avoid the fates of firms in Latin American or the
Central/Eastern European transition economies. In
Brazil, even strong domestic auto components
firms were taken over by MNEs, and the remaining
domestic firms were confined to supplying the after-
market (Humphrey & Salerno, 2000; Humphrey
et al., 1998). In Argentina, too, a majority of
domestic auto components firms exited and survi-
vors were relegated to lower tiers (McDermott &
Corredoira, 2010). Likewise, in Central and East-
ern European transition economies, MNEs became
dominant in the auto industry after privatization
(Van Tulder & Ruigrok, 1998). An exception is
China, where several strong state-owned auto
manufacturers and components groups have emer-
ged, owing to active government promotion,
protection and policymaking (Holweg, Luo, &
Oliver, 2009).
Journal of International Business Studies
Arun Kumaraswamy et al
In India, even before broad-based economic
liberalization began in 1991, India’s centrally plan-
ned economy comprised a large private sector
with several characteristics of a market economy.
Therefore domestic firms – although backward
when compared with MNEs – were more familiar
with market institutions, especially when com-
pared with firms in Eastern European economies.
Furthermore, market liberalization in India occu-
rred far more gradually than in most of these
economies. As Spicer et al. (2000) hypothesized
in the Eastern/Central European contexts, all these
factors may actually have given the more capable
Indian firms the time to develop requisite com-
petencies and make a gradual, productive transi-
tion to a globally integrated marketplace. Indeed,
Indian components firms such as the TVS Group,
the Rane Group and the Kalyani Group have
successfully forged strong Tier 1 relationships with
domestic and MNE auto manufacturers, and
have become integral parts of the auto industry’s
global supply chain.11
Executives whom we interviewed at three auto
manufacturers operating in India were unanimous
in their opinion that Indian Tier 1 firms were very
flexible – that is, they could manufacture compo-
nents for different auto manufacturers and for
different models at very low volumes – when
compared with even MNE suppliers. Although
these executives conceded that improvements had
not yet diffused widely to lower-tier firms, they
pointed to several domestic Tier 2 firms that have
begun to develop design competencies to focus on
growing export markets. In other words, there is
a considerable focus on “catching up” in terms of
developing world-class capabilities and using these
to move to higher value-added activities.
Although modularization, with its potential to
create an upgrading “glass ceiling” for domestic
firms (McDermott & Corredoira, 2010: 311), has
only recently begun in India, we cautiously forecast
that several domestic firms will continue to com-
pete successfully in the Indian and regional auto
components markets alongside MNEs. However,
consolidation of the industry is likely to occur,
as competition increases from China and ASEAN
countries, and auto manufacturers in India further
rationalize their respective supply chains.
Our study has several limitations. First, our
empirical analysis of catch-up strategies is not
complete; that is, our tests of the knowledge
creation phase and Hypothesis 3 (i.e., the process
whereby the population of local firms moves from
 Catch-up strategies: Indian auto parts
Distribution II towards Distribution III in Figure 1)
on the knowledge creation catch-up strategy and
its performance implications were indirect at
best. Second, our study explores the performance
implications of catch-up on only a few variables –
technology upgrading and customer relationships –
and we have used only surrogate measures.
Although this parsimonious set of variables and
our measures capture key catch-up dynamics
during the market liberalization process, a more
comprehensive analysis with more variables (e.g.,
McDermott & Corredoira, 2010; Suarez & Oliva,
2005), and direct measures is warranted.
We conclude by reiterating that the experience of
Indian firms and MNEs during the still-continuing
economic liberalization process has been relati-
vely unexplored in the international management
and strategy literatures. At the most basic level, our
study illustrates the tremendous diversity in catch-
up strategies and paths to global integration
amongst industries in the various emerging-market
economies. We hope that our study will encourage
researchers studying emerging markets to delve
deeper into the Indian liberalization experience.
ACKNOWLEDGEMENTS
We benefited immensely from the critical comments
and suggestions offered by Ishtiaq Mahmood and
three anonymous reviewers. We also acknowledge the
suggestions offered on earlier versions by Mike Peng,
Anshuman Tripathy, and the participants at the 2008
Academy of Management and the 2009 Academy of
International Business annual meetings.
NOTES
1
An analysis of data from the CapEx database
maintained by CMIE, India, shows that the number
of financial collaborations increased by 32% (from
182 to 240) during 1998–2002, when compared with
the 1992–1997 period. By contrast, the number
of technical collaborations decreased by 16% (from
219 to 189).
2
As per Hennart’s (2009) “bundling” model, when
both MNE’s FSAs and the complementary CSAs
possessed by local firms are difficult to transact in
markets, the MNE enters through an equity joint
venture with a local firm. When the MNE’s FSAs are
easy to transact but the complementary CSAs pos-
sessed by local firms are difficult to transact, MNEs
are better off licensing or selling their FSAs to the local
firms. However, when the MNE’s FSAs are difficult to
transact, but the complementary CSAs are easy to
Arun Kumaraswamy et al
391
transact, MNEs are better off choosing a wholly owned
subsidiary as the entry mode.
3
For domestic firms, another potential catch-up
strategy is learning by exporting. Exporting may allow
firms, especially in less developed and technologically
backward economies, to benefit from spillovers
and become more productive and innovative over
time (Aw & Hwang, 1995; Bernard & Jensen, 1999;
Golovko & Valentini, 2011; Salomon & Jin, 2008;
Salomon & Shaver, 2005a). However, only the more
efficient of these firms are likely to export (Clerides,
Lach, & Tybout, 1998). Also, firms tend to export only
after they gain strength in their domestic markets
(Salomon & Shaver, 2005b). Furthermore, firms that
do not possess distinct competencies have been found
not to benefit from exporting (Cassiman & Golovko,
2011). Therefore we expect domestic firms to focus on
exports only after they become productive and
established in the domestic market.
4
Unlike MNEs in developed markets, domestic firms
in most emerging economies undergoing liberaliza-
tion are likely to be small, produce only one product
(or a few products) and cater to limited domestic
demand. Therefore they may not derive scale/scope
benefits from R&D. Competing demands for scarce
financial resources may limit their ability to invest
much in internal R&D. Even if a domestic firm were to
invest in R&D, these efforts could prove risky and
detrimental to performance as competitors quickly
introduce off-the-shelf designs obtained through
technology collaborations (Narayana, Mridul, &
Chandan, 1992). Therefore, in the early years of
liberalization, internal R&D by domestic firms is likely
to be limited to adapting licensed technologies for
local use (Narayanan, 1998). Indeed, only those
firms that have successfully coped with technology
upgrading and changes in the industry environment
are likely to invest in internal R&D (see Van den Bosch
et al., 1999).
5
We recognize the limitation of using royalty
expenses as a surrogate measure of technology
upgrading through licensing and joint ventures. Hence
we drew data on technology collaborations between
domestic firms and MNEs from CMIE’s CapEx data-
base. We created an alternative measure, a dummy
variable TechCollab, that took the value 1 if a domestic
firm had technical collaborations with a relevant MNE,
and 0 otherwise. Using this alternative measure
yielded similar results.
6
We carried out this categorization in two stages.
In the first stage, we collected data on the customer
base of firms in our sample, and categorized firms
that derived 60% or more of their annual revenues
Journal of International Business Studies
 Catch-up strategies: Indian auto parts
392
directly from auto manufacturers as belonging to Tier 1.
We categorized the remaining firms as belonging to
lower tiers. We also requested two industry experts
(individually), each with at least 15 years’ experience
in the Indian auto industry, to categorize our sample
of firms into different tiers, based on their knowledge
of auto manufacturers’ relationships with suppliers. In
the second stage, we compared our categorization
with those of the two experts. When differences arose
in the categorization of a few firms, we sought
the opinion of a third industry expert, and adopted
the majority opinion.
7
As per industry practice, we defined complexity as
a composite ranking on three dimensions: (1) com-
plexity of technology; (2) complexity of production
process; and (3) criticality to performance of end
product. We requested three industry experts to rank
each firm’s primary products on these three dimen-
sions and then aggregate these rankings to determine
whether the firm offered products of high, medium
or low complexity. When differences arose among
the three experts in the case of a few products, we
adopted the majority opinion.
8
Given our hypotheses that TechLicensing would
negatively influence Performance during the 1992–
1997 phase and positively during the 1998–2002 phase,
we tested for a potential curvilinear relationship
between the two variables. The quadratic term (Tech-
Licensing squared) was not statistically significant in
either phase.
9
We emphasize that 93–94% of components firms
in our sample were Indian-controlled, that is, firms
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ABOUT THE AUTHORS
Arun Kumaraswamy is Assistant Professor at
Temple University’s Fox School of Business. He
studies the management of innovation and growth,
strategic adaptation by firms in emerging market
economies such as India, and the performance of
newly public firms. He received his PhD from New
York University. His work has appeared in the
Academy of Management Journal, the Strategic Man-
agement Journal, Organization Science and MIS Quar-
terly, among others.
 Catch-up strategies: Indian auto parts
Ram Mudambi is Professor and Perelman Senior
Research Fellow at the Fox School of Business,
Temple University. His research focuses on the
geography of innovation, particularly in the con-
text of emerging-market economies. He received
his PhD from Cornell University. His work has
appeared in the Journal of Political Economy,
the Strategic Management Journal and the Journal of
Economic Geography, among others.
Haritha Saranga is Associate Professor in the
Production and Operations Management area at
the Indian Institute of Management, Bangalore,
India. Her research interests include produc-
tion and operations management, supply chain
Accepted by Ishtiaq Mahmood, Area Editor, 19 December 2011. This paper has been with the authors for three revisions.
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Arun Kumaraswamy et al
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management, performance measurement, and data
envelopment analysis. She received her PhD from
the University of Exeter. Her work has appeared
in Production and Operations Management, European
Journal of Operational Research and Journal of Opera-
tional Research Society, among others.
Arindam Tripathy is Assistant Professor at the
Milgard School of Business, University of Washing-
ton, Tacoma. His research explores the strategies,
positioning and the performance of firms in diverse
industries. He received his PhD in Management
Science from the University of Texas, Dallas. His
work has appeared in Journal of Business Research
and Auditing: A Journal of Practice and Theory.
Journal of International Business Studies