The Indian Economy Blog

October 24, 2005

Tata, Corporate Social Responsibility and Milton Friedman

Filed under: Business — Yazad Jal @ 7:49 am

Newsweek has a nice little article on the Tata Group.

Tata is a window into the rise of India. While that rise is often traced to free-market reforms that began in the early ’90s, Tata executives emphasize that even now, the company grows despite obstacles thrown up by red tape and special interests. Unlike China’s boom, which was orchestrated by the state, India’s is primarily the story of an enterprising private sector. Often seen in the United States as an outsourcing economy that threatens to siphon off service jobs, India’s wider potential is mirrored in the range of Tata’s ambitions—from luxury hotels and jewelry to a planned $2,000 car.

In recent years, as Tata began listing some of its affiliates on Wall Street, Americans often compared Tata to the model —conglomerate they know best: General Electric. But CEO Ratan Tata, 67, is no Jack Welch. “Certainly not,” he says. Tata executives, many armed with Western M.B.A.s, have all read about Welch, and dismiss many of his American tactics—from mass layoffs to hostile takeovers—as violations of the Tata way. Ratan Tata says his company is not driven to grow “over everybody’s dead bodies.” Some 66 percent of the profits of its investment arm, Tata Sons, go to charity, and executives make clear they have no intention of relinquishing control to Wall Street. At Tata, “corporate social responsibility,” to use the Western buzzword, has real money behind it.

That’s all laudable, but can Tata remain true to its liberal roots as it goes global? Since 2000, Tata has acquired Britain’s Tetley tea, the truck division of South Korea’s Daewoo Motor and Singapore’s NatSteel. Yet it’s also moved into markets where Western multinationals dare not tread, including Bangladesh and Africa, where Tata has assumed the role of a for-profit development agency. However far-flung those markets, they are near in spirit to the social experiment of Jamshedpur (population: 800,000), the steel town Tata carved from the jungle a century ago. It still pays full health and education expenses for all employees, and runs the schools and a 1,000-bed hospital. The city looks frozen in time about 1960, when Tata Steel was still inspired by Soviet planners, yet the mill is one of the newest in the world. Since 1991, Tata has spent $2.5 billion replacing century-old machines and cutting the work force from 78,000 to 45,000 in a downsizing so well managed, steel-union president R.B.B. Singh says, “all the employees… have no regrets at all.”

Tata’s long standing position on corporate social responsibility may be in direct opposition to the main libertarian free-market idea forcefully stated by Milton Friedman in his 1970 article “The Social Responsibility of Business Is to Increase Its Profits.” Maybe not. Reason has opened up a debate on the issue with John Mackey of Whole Foods taking on Milton Friedman and T J Rodgers of Cypress Semiconductor. Reason wants this to be a starting point of a discussion that should be intensely important to all devotees of free minds and free markets. Maybe they should ask Ratan Tata to join in!

25 Comments »

  1. I lived in Jamshedpur (or Tatanagar as the Indian Railways calls it) for two years. There are a lot of stereotypes about the Tatas – some true some not so true. For example, the new age Tata entreprises like TCS, and Teleservices have very little in common with their older ancestors like Steel and Motors.

    In Jamshedpur, the social arm of the Tatas is itself going for-profit, and I hope they succeed !

    http://www.tata.com/tata_steel/media/20040212.htm

    Comment by Gautam — October 24, 2005 @ 9:05 am

  2. From this article, it seems like the ‘Tata Way’ is capitalism with a pinch of socialism. Or vice versa. I think that disqualifies Ratan Tata from joining the discussion on ‘Reason’, as that is targeted at devotees of free minds and free markets. And I’m sure such devotees would not like to hear how Tata sacrifices profit opportunities for better social standing. The middle way never worked.

    Comment by Pranay Manocha — October 25, 2005 @ 7:53 am

  3. “The middle way never worked” for whom, owners, workers or everyone in between? I often like asking people, is profit motive god given or a product of human thinking? If it is a product of human thinking why can’t we question it?

    Comment by mridula — October 26, 2005 @ 2:05 am

  4. Good CSR is good marketing. That’s the only way it should be seen.

    Comment by erwan — October 26, 2005 @ 11:43 am

  5. In America, government is an active participant in social welfare (social security, medicaid, medicare, unemployment benefits etc). So private sector participation is not something essential. In India,social welfare programs don’t reach the intended benefiaries due to widespread corruption. NGOs like Tata often play a much more effective role than the government in this area. Of course, as private organization, Tata can have only limited impact. But for those people who benefit from Tata’s social welfare activities, it’s a huge thing (in the absence of government doing anything).

    Comment by sv — October 26, 2005 @ 12:35 pm

  6. Jack Welch does not run a company whose majority stock holder is a zoroastarian charity. The motives of individual investors are different.

    Another point i’d like to make is that Tata has not invested in fundamental breakthrough R&D in any of its operations. It is piggybacking on others(mostly western) work and then works on organization and delivery and selling it in mostly indian context. If they were to burn a lot of capital on funding R&D, litigation over patents etc their behavior may change. I am not saying one way is better or not, its just that the companies are playing a different game. TCS Electrical and Computer Engineers did not invent any new language, computing platform, signal processing algorithm, new materials for integrated circuits, new methods for IC testing etc. What they did was figure out how to use indian engineers on a large project utilizing established technology(not trailblazing) and focus on management documentaion testing and delivery.
    Similarly Tata Steel or Locomotive did not do any groundbreaking research but use existing methodology and worked on the organization and running of steel plant.

    Comment by Guru Gulab Khatri — October 26, 2005 @ 4:41 pm

  7. Agree with Guru. For instance, I would be surprised to learn that Tata Motors is developing new materials – metals or plastics – so that the $2000 car is not only cheaper, but far better. Naah, thats how the Japanese would work, The Tatas would just remove features, make a flat car with no curves, RTV style, put an iron rod for the gearshift, install a lawn mower engine and sell that as India’s cheapest car.

    CSR is all okay, but where is the Indian Du Pont, the Indian GE, the Indian Ford? Hell, we don’t even have an Indian Google.

    Comment by Pranay Manocha — October 27, 2005 @ 9:57 am

  8. The World Bank Blog has more on this…

    http://psdblog.worldbank.org/psdblog/2005/10/the_social_resp.html

    Comment by Prashant Kothari — October 27, 2005 @ 12:25 pm

  9. The stealth enemies of free markets are people like Ratan Tata and Warren Buffet who have made their billions using the free market system and now want to create a “compassionate public image” by undermining the very marekt system that made them rich.

    The uber-rich like Tata are not impacted by high taxes and socialism because:
    1. They have already made their money for themselves and their succeeding generations
    2. They can work around the system using the best of professional support and legal loopholes

    The ones impacted by these policies are
    1. Aspiring young men trying to make their mark in business
    2. Upper middle class businesses and professionals who are “rich” enough to be impacted by high taxes and regulations but not rich enough to circumvent the system.

    Warren Buffet for example has his billions siphoned off in trusts protected from the taxman and supports higher taxes including a high inheritance tax which will impact many family businesses in the United States when it passes on to the next of kin. There are examples of families that have had to sell of their businesses and farms to pay the inheritance taxes in the United States.

    Comment by Vivek G — October 29, 2005 @ 10:36 pm

  10. I did not like the comment that Mr.Ratan Tata or people like him made huge money due to their fault of creating such a market. TIME had given them an opportunity to do so. If they want to use their money now for public welfare, which Tatas have always been doing, TIME has asked so.
    They considered the demand of the TIME, for which I am personally grateful to them.

    Comment by Sanjeev — November 5, 2005 @ 9:32 am

  11. A company needs to make profits, once the profits are made they can be distributed. if the company muddles along there will be no profits and less charity. follow the gates/ buffett / tata example be profitable AND be sensibly generous..

    in india, its the indian businessman who ONLY wants profits, evades taxes, fools his shareholder and hence will only do token charity

    Comment by Neville — October 2, 2006 @ 3:53 pm

  12. Its easier said than done…….! I have had experience in watching friends of mine in TATAs working with passion as a part of CSR… any emloyee is welcome to contribute to the activity…so what if TATA has made money, you get into business to make money else you get listed as a sick unit
    Being known for trust , quality and honesty, the house still lives upto its image( maybe but for a few who end up spoiling it!)…
    to actuially know how flat / featureless the TATA car is guess we need to just wait and watch! lts pat on the back of somebody who is doing it rather than sitting back and commenting our heart out.

    Comment by mona — December 12, 2006 @ 5:27 pm

  13. the era of salvation through social welfare had reached its end with the start of a “knowledge economy”. while such ideas may have helped and egged the industrial revolution on, they cannot possibly work for huge multinationals where the sole work culture and ethic of professionals(right from the leaves to the root of the tree) is to work and maximize their earning . a resource based policy is essential.
    we talk of globalization and yet i am surprised to see people harbouring sweet myths of social welfare by the corporates of today. individuals, not corporates- do charity. if i find scope of expansion and innovation on MARS, so help me i will leave the planet for the bigger and better deal! who are we kidding here, lets admit that we belong to the shrewd and narcissistic species called MAN.

    Comment by anukriti dixit — January 8, 2007 @ 1:51 pm

  14. so funny….should Tata’s do CSR or not????just because they make profits they are bad….crap. crap. no google from india…so what?? no MIT, stanford in india….what we have is IISC ( Tata institue), TIFR… Accept it— TATAs are the best in CSR. over 100 year of clean corp. govn. Can any corp stand to this claim.

    Comment by Prashanth — January 11, 2007 @ 1:53 am

  15. I think its good marketing and nothing more. The reason, in my opinion, why they have entered in Bangladesh and not in US is because given there business model it is easier for them to be profitable in Bangladesh than in the US. Secondly, if Tata’s feel that the overall productivity of the workforce is more because of there overall policies then I don’t see any contradiction. This might be a good policy to maximize profits.

    Regarding comment about Warren Buffet – He is distributing his personal wealth. I don’t see how it goes against capitalism. And having higher estate tax might not be a totally bad thing.

    Overall a flat tax rate and zero deductions might be the most efficient policy. But in reality its not happening in the US or in India. Tax is the only way to finance gvt expenditure and estate tax might not be bad thing.

    Comment by ik — February 13, 2007 @ 11:42 pm

  16. Does anyone remember the 70s & early 80s? Didn’t Reagan era answer most questions in this regard. And yes there were problems (S&L crisis) but didn’t the U.S. economy take a Quantum Leap since then?

    Comment by Steve — March 8, 2007 @ 12:56 pm

  17. How ‘responsible’ is Tata, really?
    While the Tatas spare no effort to make their CSR well known, here’s a little stuff that may be worth considering.

    Comment by Dhruva — April 20, 2007 @ 7:27 pm

  18. Oops.. sorry i forgot to post it.
    Heres the link: http://www.bhopal.net/tata_rapsheet.html

    Comment by Dhruva — April 20, 2007 @ 7:28 pm

  19. This is a one super duper site

    Comment by no consultation — June 5, 2007 @ 4:49 pm

  20. Read my post at http://cantcme.blogspot.com/2007/06/mr-hyde-of-business.html on how Tata is robbing from the poor (Indian farmers) to pay the rich (European shareholders) … it’s disgusting! Shame on the Tata family.

    Comment by Neeraj — June 21, 2007 @ 8:32 am

  21. Hats of to tata for making revolution in indian automobile industry.it has proved that indians can also produce quality products at cheaper rate’

    Comment by SANDY — August 18, 2008 @ 7:05 pm

  22. for all the cynics here can u please let me know which industrial house has done more for the country?
    which industralists can hold their head as high as the Tata employees?
    for those who call their social efforts marketing please refer to what they did pre-Independence.

    Comment by neville — August 29, 2008 @ 11:50 pm

  23. [...] there is one company which is socially responsible and done a greater good to the Indian population it would definetly be Tata Group. Sure, there are [...]

    Pingback by Now, Mamata is against Tata’s retail entry | Indianomics — August 30, 2008 @ 11:24 pm

  24. Yazed,

    From what you say, (and I note the differing views expressed by fellow commentators on this issue) Tata Motors is a wonderful example of how a socially responsible corporation should seek to conduct itself.

    I hope that the company is able to maintain its core values as it continues to move toward being a global company. If so, it would provide a wonderful example for companies in all countries to follow.

    Comment by Andrew — September 27, 2008 @ 5:19 pm

  25. [...] there is one company which is socially responsible and done a greater good to the Indian population it would definitely be Tata Group. Sure, they are [...]

    Pingback by Now, Mamata is against Tata’s retail entry | India Politics blog |Indian Politico — November 3, 2008 @ 5:14 pm

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