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Ajay and Amit explore why firm internationalization, not just exports, is the key to India's development journey
Ajay Shah is an economist who has held positions at various government and academic institutions, known for his work on public policy and institutional reform. Amit Varma is a writer, podcaster, and the creator of "The Seen and the Unseen," one of India's most respected long-form conversation shows. Together, they host "Everything is Everything," where they explore big ideas through the lens of first principles, books, history, and lived experience.
India's path to becoming an advanced economy runs through one critical transformation: the emergence of high-productivity firms that compete globally. While conventional thinking focuses on exports as the primary mode of international engagement, this represents just one facet of a more comprehensive process called firm internationalization (I18N).
The conversation explores six interconnected modes of internationalization—importing inputs, exporting goods, accessing foreign capital, hiring foreign workers, using foreign technology, and establishing foreign operations—and why they must work together to drive firm productivity. The discussion traces how these modes create virtuous cycles: firms competing in export markets avoid the toxic political economy of domestic competition, where companies use state power to harm rivals rather than improve productivity. Meanwhile, access to global inputs, capital, and talent at competitive prices becomes essential for competing effectively in international markets.
This framework redefines development economics, shifting focus from poverty programs and redistribution to understanding the conditions that enable sophisticated firms to emerge and scale globally.
Shah, Ajay, and Amit Varma. "Graduating to Globalisation." Episode 48 of Everything is Everything. XKDR Forum, May 24, 2024. Podcast, video, 1:00:25. https://www.xkdr.org/viewpoints/graduating-to-globalisation-episode-48-everything-is-everything
The grand question facing India is whether it can emerge as an advanced economy with high per capita GDP and individual flourishing. Development economics has lost its way by focusing on philanthropy, aid, and redistribution rather than studying the great development success stories of Taiwan, South Korea, Israel, and Chile—countries that transformed from poor to advanced economies after 1945.
From first principles, an advanced economy is simply a country with high productivity. The puzzle is getting workers to produce more per hour, and this happens inside firms. While individual entrepreneurs exist, most GDP is produced within firms—coalitions of capital, managers, governance, technology, and contracts working together to achieve high productivity.
Ajay frames the Indian development journey in stark terms:
"If a quarter of the Indian population was producing at the productivity of first world countries, we are done. That's the Indian developmental journey. And there are many, many very ambitious things contained in that one sentence."
This framing reveals both the challenge and the solution. Only a third of India's working-age population currently works, so the numbers matter enormously. India needs millions of people in high-productivity firms that operate at the global frontier of value-added per worker.
The journey to high-productivity firms is fundamentally a human story about capability and non-coercive relationships. It requires creativity, voluntary contracts, and what Ajay calls "double thank you moments"—transactions where both parties benefit. This system proves immune to racism and prejudice because, as George Stigler taught, capitalists who discriminate against qualified minorities harm themselves.
Successful firms are meritocratic by necessity. They care about getting results, which creates a progressive social character. This stands in contrast to resource-based wealth like Saudi Arabia's oil revenues, which generate high incomes without building human capabilities or sophisticated firms.
Ajay distinguishes between two types of prosperity:
"You get a ton of money, but you actually don't get the knowledge. Actually building those firms is a human story. It's a human story of capability, of non-coercive human relations where people will talk to each other, people will persuade each other, people will enter into contracts with each other."
The human potential clearly exists in India. From schoolchildren creating elaborate firecracker timing systems to Bihar residents stealing entire bridges and rivers, the innovation and organizational capability are evident. The challenge is channeling this energy into productive firms rather than letting it dissipate in regulatory arbitrage or rent-seeking.
Firm internationalization (I18N)—borrowing computer science shorthand for dealing with global complexity—encompasses six interconnected modes. Each represents a way firms can become deeply connected to the global economy, and all contribute to higher productivity.
Imported inputs form the first mode. While local inputs are often cheaper and more convenient, firms choose imported inputs when they offer superior technology, quality, or specialization. Nobody imports materials just to complicate their operations—imported inputs signal access to cutting-edge capabilities.
Exporting goods and services creates the second mode, forcing firms to pass market tests in competitive international markets. Foreign capital, both equity and debt, comprises the third and fourth modes, providing access to cheaper financing than domestic markets typically offer. Foreign employees bring specialized knowledge, skills, and market relationships that domestic hiring cannot match. Foreign technology access ensures firms can compete at global frontiers.
The sixth mode, outbound foreign direct investment, represents a firm's maturation into truly global operations. When Indian companies establish facilities abroad, they demonstrate both capability and ambition to compete anywhere.
Exporting holds special significance not because it generates foreign revenue—that's a crude business-level view—but because it creates healthy competitive dynamics. At the country level, successful exports push exchange rates higher, making imports cheaper and potentially displacing domestic producers. This isn't a problem but a feature: it forces specialization based on comparative advantage.
The deeper value of exporting lies in solving political economy problems. Domestic competition in developing countries often turns toxic, with firms using state power to harm rivals rather than improving their own productivity. Companies lobby for regulations that benefit them while blocking foreign competitors, creating a zero-sum dynamic that enriches the worst actors while degrading state capacity.
Ajay describes this domestic dynamic:
"I will try to get policy changes that will harm you. We will both collaborate on policy changes that will be anti-foreigner. I'll keep the foreigner out. I'll do anti-protectionism. Sorry, I will do protectionism. I will do nationalism."
Exporting eliminates these perverse incentives. There's nothing Infosys can do to lobby the Indian government for better access to German markets. Success requires productivity improvements: better machines, upgraded workforce, cost reductions, and operational excellence. The entire energy of successful exporters flows toward legitimate productivity gains rather than regulatory capture.
Modern production rarely happens within single countries. About 50% of global trade occurs within multinational firms as they optimize production across locations. An engine manufactured in Brazil might travel to Chennai for car assembly before the finished vehicle ships to America.
This reality means successful exporting requires deep integration with multinational corporations. Companies cannot simply say they support exports while opposing multinational operations. The two are inseparable. Indian firms must build global operations while global firms must be welcomed to establish Indian operations—with minimal regulatory friction.
The implications extend beyond trade policy to every aspect of business regulation. Income tax complexity, rules of origin disputes, and enforcement actions that target international operations all undermine India's integration into global value chains. These regulatory burdens don't just harm individual companies; they damage India's attractiveness as a production location within global networks.
Understanding firm economics reveals why international capital access is essential, not optional. Consider steel production: while engineers focus on iron ore, coal, and machinery inputs, the largest cost component is often capital itself. The cost of capital per ton of steel frequently exceeds the cost of raw materials and labor combined.
This means a competitive Indian steel factory must match the capital costs faced by the world's best steel producers in Korea, Japan, or America. Domestic capital markets in developing countries typically cannot provide capital at globally competitive rates, making foreign equity and debt capital crucial inputs.
Ajay draws the parallel explicitly:
"It is as silly to interfere with internationalized capital access as it is silly to interfere with internationalized coal access. We should be loyal to the exporting success of the firm, to the productivity of the firm. The firm must buy the cheapest inputs."
The same logic extends to labor. If building a world-class steel company requires specific expertise, nationality should be irrelevant in hiring decisions. Discrimination against qualified foreign workers is as economically damaging as discrimination against any other qualified group—and for firms competing globally, such discrimination becomes a luxury they cannot afford.
All six modes of internationalization reinforce each other through human relationships and knowledge networks. Foreign workers bring insights about international markets and supplier relationships. Foreign investors and board members facilitate connections for overseas expansion. Export activities create relationships that enable foreign direct investment opportunities.
These connections are deeply human rather than mechanical. As firms build international relationships, they discover opportunities across all modes of internationalization. A foreign employee might know low-cost suppliers in their home country. Foreign shareholders might facilitate expansion into new markets. Export customers might become partners in joint ventures.
The policy implication is that governments cannot pick and choose among modes of internationalization. Attempts to encourage exports while restricting foreign investment or limiting foreign employment create internal contradictions that undermine the entire process.
For policy makers, the lesson is clear: create conditions for firm internationalization by removing barriers rather than providing subsidies. Every production location has cost advantages and disadvantages. Rather than subsidizing firms to overcome India's disadvantages, policy should let firms choose optimal production locations and strategies.
When firms request subsidies for expensive electricity or land, the proper response is to acknowledge these realities without distorting markets. If a business requires cheap electricity but operates in a high electricity-cost environment, it should consider relocating rather than seeking subsidies. This forces efficient specialization while avoiding the distortions that PLI schemes and exchange rate manipulation create.
The more serious policy challenge involves the anti-internationalization bias embedded throughout Indian regulatory agencies. From SEBI to RBI to the Enforcement Directorate, agencies approach foreign engagement with suspicion rather than recognizing it as essential for development. This creates compliance nightmares that deter all but the largest firms from international expansion.
Ajay captures the scale of this problem:
"Many many normal individuals and smaller firms will just say, look, let's be careful. Let's not do things abroad because then we have to deal with this compliance nightmare that these people will come after us."
The contrast with developed countries is stark. Opening a bank account takes minutes in London but creates bureaucratic ordeals for foreigners in India. This asymmetry signals that Indian institutions haven't adapted to the requirements of a globally integrated economy.
For managers and investors, firm internationalization provides both strategic direction and performance metrics. Rather than optimizing for domestic market share or regulatory relationships, successful firms should focus relentlessly on international expansion across all modes.
Internationalization metrics solve principal-agent problems between owners and managers. Export growth, foreign direct investment expansion, international capital market access, foreign employee recruitment, and imported input utilization all indicate management focus on genuine productivity rather than domestic rent-seeking.
From an investment perspective, internationalization provides what Ajay calls "fast and frugal heuristics" for evaluating firm quality. Companies succeeding in competitive international markets—especially in the European Union, UK, or America—have already proven their productivity. Domestic success might reflect regulatory capture, but international success requires operational excellence.
The distinction becomes particularly important in India's technology sector. Software services firms and SaaS companies competing globally operate under completely different constraints than domestic technology firms that have succeeded by navigating India's peculiar regulatory environment. The globally competitive firms face infinite growth opportunities, while domestically focused firms may struggle to expand beyond India's unique institutional landscape.
This framework calls for fundamental changes in development economics research priorities. Instead of focusing on poverty programs and randomized controlled trials of obvious interventions, researchers should study the emergence and scaling of high-productivity firms.
Critical research questions include understanding the political economy of domestic firm competition, measuring the productivity effects of different internationalization modes, and identifying policy barriers to firm internationalization. These questions require sophisticated analysis of firm behavior and institutional environments rather than narrow experimental approaches.
The research agenda should examine both sides of the internationalization story: why some firms successfully internationalize while others remain trapped in domestic rent-seeking, and how different policy environments either facilitate or hinder firm internationalization. This work demands what development economics has largely abandoned—serious engagement with the institutional and political economy factors that determine whether countries can build sophisticated, productive economies.
As Ajay concludes about the research priorities:
"The point of being a researcher is to study important phenomena and make progress on figuring them out and you don't have to be a RCT Nazi in order to figure out these things."
The choice facing development economics is whether to continue studying increasingly trivial questions with fashionable methods, or to return to the fundamental challenge of understanding how countries build productive, prosperous economies.
The complete transcript file is available to download below.
27 Mar 2026
Rahul Ahluwalia and 1 other
03 Jan 2025
Ajay Shah and 1 other
01 Mar 2024
Ajay Shah and 1 other
2024, XKDR | GSTIN: 27AAACX3640C1ZN
by Sane Difference
