The cost of capital: a competitive advantage; a study across India, Japan and the United States with reference to Indian Steel Industry

Abstract

This study examined the role of the cost of capital as a competitive advantage that exists across nations. It examined the propositions that a lower cost of capital could provide a competitive advantage, such variations in the cost of capital did exist in a sustained manner across nations and a firm could lower its cost of capital if it so desired. The study was done with reference with to the steel industry. Which is expected to undergo significant expansion in India The cost of capital can provide a significant competitive advantage in any project that is capital intensive in nature and generates large cash flows. These advantages can manifest themselves in a variety of ways such as increased capital intensity, a sustained price war or can even act as a deterrent to competition. This study did not find any sustained advantages in the cost of capital across three nations examined (the period 1960 to1969 was examined), India, Japan and the United States. At the same time a disturbing trend in the cost of capital especially that of debt was found to be increasing in India. This coupled with the fact that differences did exist in the cost of capital in a global environment by going to external capital markets. This study next examines the needs of the steel sector in terms of the requirement for capital in the next few years. Various estimates indicate that there will be need for between 30,000 to 80,000 crores in the next ten years. The last section of this study then deals with the capital markets from where the capital can be secured. The Euromarket is the one that is closely studied as it can provide capital in almost any currency at the interest rates prevailing in that currency. Systems, procedures, practices, the Indian government point of view are examined along with the instruments available for raising capital in these markets. Given the need for capital the final chapter recommends the use of foreign capital markets, and examines the problems that are likely to emerge and offers tentative solutions to the above.