Impact of cross-border M&A on Indian economy

Cross-border M&A has become pivotal in shaping the economic landscape. The international transactions through cross-border M&A represent a significant catalyst for economic growth, innovation, and development. Further, The integration of a domestic company with a foreign company leads to advanced technologies, expertise, and capital.

This article explains in detail how cross-border M&A transforms India's economic environment by referring to growth in several sectors of acquired/ merged entities that lead to the economic growth of India.

Innovation and Technology Transfer

Cross-border M&A leads to the transfer of technology and expertise from foreign companies to domestic companies when an Indian company either merges with a foreign company or acquires it. This transfer in technology mainly occurs in the manufacturing and technology sector, where foreign firms with advanced technologies merge with Indian entities, which brings advanced technology and best practices that significantly enhance the R & D capabilities of Indian companies.

During Q2 of 2024, the manufacturing sector, driven by strategic acquisitions by foreign companies in auto components and electric vehicles, led to 97 % year-on-year- growth in cross-border deal value. Domestic companies leverage the expertise of foreign companies to innovate and develop new products and services.

Employment Creation

The inflow of FDI through cross-border M&A enhances the domestic production capacity, leading to job creation across various sectors. As foreign companies establish their factories in India or expand their operations in India, the increase in workforce increases, which leads to the growth of per-capita income of the society and leads to an increase in gross domestic product, further increasing the economic condition of the society, in general.

Further, the inflow of FDI leads to skill development initiatives and other training programs where workers gain access to international best practices, advanced technologies, and management techniques, which enhances their skills and development.

Increased Capital Flow

Cross-border M&A boosts the FDI inflows into India. The inflow of capital through M&A transactions is directed towards key sectors that forecast the growth of the Indian economy in general, mainly infrastructure, technology, and healthcare. These investments through infrastructure projects lead to urban development, which is crucial for India's economic growth. India is not only witnessing growth in the Infrastructure sector but is showcasing growth in the technology and healthcare sectors as well, which enhances the overall capital available in the market for economic development.

Diversification of Business

The risks associated with market volatility get reduced when Indian companies diversify their business portfolios. For instance, when a domestic company acquires a foreign company, it reduces its dependence on the Indian market and remains unruffled against domestic economic downturns. Further, cross-border M&A allows domestic companies to diversify their products and services, which increases the growth of their customers. This diversification increases both their revenue streams and strengthens the presence of their brand in multiple markets.

Increased Productivity and Global Competitiveness

Cross-border M&A enhances the productivity and competitiveness of Indian firms in Indian markets, enabling them to compete on a global scale.

Mergers, through the consolidation of resources and optimization of supply chains, result in an increase in profit margins and a lower operational cost for the merged entity, which leads to operational efficiency for the merged entity. Acquisition, on the other hand, enhances the competitive edge for domestic companies when acquiring a foreign company as it improves their access to international markets.

The M&A through cross-border deals also encourages Indian firms to adopt innovative business models and practices that enhance their competitiveness at a domestic level.

Regional Development and Economic Disparities

Cross-border M&A leads to regional infrastructure development in regional and urban sectors. For instance, if a foreign company intending to invest in India establishes a manufacturing company in a rural area, it enhances the creation of jobs and improves economic growth. Further, an increase in investment leads to infrastructural growth as the establishment of new operations leads to infrastructure development in roads, utilities, and communication networks in those areas that lack adequate facilities.

Influence of Policy and Regulatory Framework

The growing trend of cross-border M&A influences the policy and regulatory landscape in India. The need for foreign investment through regulatory norms often simplifies the investment process and reduces regulatory hurdles, which enhances the overall business environment.

The government's digital India initiatives aim to ease the regulatory process as several online platforms for tax compliance, business registration, and other regulatory requirements have minimalized the need for physical paperwork and in-person visits to government offices. Further, the introduction of a single-window clearance system consolidates multiple approvals into one platform, which has significantly reduced the time and effort to launch business operations.

Recent Statistics

The Financial Year (2023- 2024) witnessed a notable increase in cross-border M&A activity in India. The total value of inbound deals reached $ 55 million for Quarter 2 (Q 2), which was a substantial growth from previous years. The influx of foreign capital due to Mergers & Acquisitions (M&A) is pivotal for economic development as it enhances the financial resources available to domestic companies.

The steady growth of M&A activities in India is mainly due to several government initiatives, mainly through 'Make in India' and 'Production Linked Incentive (PLI),' which aim to boost domestic production of goods through FDI in the manufacturing sector.

Conclusion

In conclusion, the ongoing trend of cross-border M&A is pivotal for India's economic landscape, as it enhances innovation, creates jobs, and enhances global competitiveness. The influx of foreign capital through these transactions has enhanced the overall productivity of the skilled workforce. Moreover, the Increased capital inflow in infrastructure, technology, and healthcare has sustained economic growth and urban development.

Overall, cross-border M&A intensifies India's position as a global investment hub which reflects the interplay between global capital flows and domestic economic strategies, paving the way for a robust economy.

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