#104 No risk no fun?
At the end of last month, Indian Prime Minister Modi traveled to the United States to lure US companies back to India to invest. According to the Wall Street Journal, just four years ago, the US investment stock in India amounted to approximately $1.9 billion, and now four years later it is only around $800 million. PM Modi tried to assure the likes of Boeing, IBM, GE, Citigroup or PepsiCo that he is cutting through all red tape and making sure that foreign investments are safe in India. The reality, however, tells a different story. The second largest cell phone company in India, Vodafone, has been battling the Indian government in arbitration courts over the imposition of retro-active taxes. Before entering India, Vodafone was promised tax breaks by the government, but after the check cleared, parliament instituted a new law that required Vodafone to pay taxes AND back taxes. Amazon is stuck in limbo, too. When Amazon entered it was fairly certain that as an online platform it would not be subject to retail regulations, but now it seems it will. WalMart, which had announced lofty plans for the Indian market not too long ago, has also put India on the back burner, and only operates wholesale stores there under a joint venture agreement. In most Western countries, the law is the law. In some countries, however, there are no laws or there are sometimes even contradictory laws. And in yet other countries, laws are either changing constantly or they are subject to interpretation. It seems as if some cultures have laws to make their lives easier and more predictable, while other cultures have laws to because … well … why … I mean….! The lesson is that companies need to pay close attention not only to differences in the law, but also to differences in how law is applied and practiced.
November 13, 2014 @ 1:58 pm
I think the difficulties, the US companies face in India are based on the countries cultural differences to some extent. If we compare the US and India in terms of Hofstede’s dimensions of cultural comparison, the huge differences in Power Distance and Individualism are salient.
The US ranks very low in Power Distance, indicating that power is distributed equally and only low hierarchies are common. India on contrary has a very high PD. It is a culture with very high appreciation for hierarchy and a top-down structure in society and organizations. The promises given by the current Prime Minister might be kept while he is in charge. But when someone else becomes Prime Minister, the old ones decisions are suddenly of lesser importance – The new Prime Minister is now higher in hierarchy and if he makes an other decision… The same might be true if the PM gives a promise and the President decides otherwise.
Howsoever: The Americans take this promise at given and demand for it. It can be assumed, that this is one of the main reasons for the problems.
It is also not common to criticize someone above you in hierarchy – as a result the aim of the companies to claim their rights might be seen as very offensive and rude. This contradiction in culture might make it impossible to find a solution.
Another reason, why the companies needs and wishes are disregarded might be the difference in Individualism. The US is a highly individualistic country, where everyone aims for the best possible outcome for oneself. This might be true for the US companies to – The Indians in contrary are not as individualistic. The individuals are expected to act in accordance to the greater good (their country ones) and their actions are also influenced by factors like the families opinion etc.. As a result of this pressure in their home country it might be very hard for ministers to stick to their words. Simply because it is much more important to meet your social networks expectations, instead of some foreigner ones.
I am sure those factors are not the only reasons for the difficulties the companies face – but definitely are they an obstacle for finding a solution. In the next years it will be very hard for India to attract investors from the US, due to the image resulting of this issue.
December 19, 2014 @ 7:53 pm
The problem which comes out in this article is the putatively arbitrary constriction of law on behalf of India.
By western cultural standards this may be true but I dare to say that from an Indian point of view this strategy is justified.
Reasons for those divergences are probably as multiplex as the cultures of those two societies but I have to agree with Dominik Hillbrand in the point that a major thread is the huge difference in power distance between the USA and India.
Next to this he mentioned the differences in the IDV-Index which can also lead to big disagreements with a lot of different impacts.
In addition to that there are enormous differences in the historico-cultural past of the participating countries as well as huge differences in fundamental economic behavior.
But this different past may have led to those differences in PD and IDV in the first place.
From a western point of view the American history starts with conquest from 1492 on, from the same point of view the Indian history starts with getting conquered from 1498 on.
In the 1950ies the US economy boomed like never before while on the other side of the world India got free from more than four hundred years of British colonialism in 1947.
Next to these fundamental differences in history and their impacts regarding to PD and IDV, there are also differences in the economic system as mentioned which also have to be considered when trying to understand the current problem.
The special attribute of the US-economy is the fact that it is modelled more after a free enterprise economy where the state is very low involved in economic regulations.
It stands to reason that an Indian governmental intervention may offend US-investors more than others.
On the other hand it stands to reason that US investors are cautious when they do not know if the law tomorrow is the same like the law today.
From an economic point of view this inevitably leads to distrust in the market and to deduction of investments.
In the last point I have to disagree with Mr. Hillbrand, I do not think that India will have problems with finding investors in the future.
Indians economy is growing by about 8% each year for more than ten years now. Additionally to that the main economic sector in India is not production like in China but it is services.
Leading economic experts assume that this is the sector with the biggest potential for growth in the future.
I do not think that India does not know about that and I would even go one step further and say that India is exactly aware of that and is becoming one of the biggest players in current future
March 18, 2015 @ 3:51 pm
No Risk No Fun?
I would like to address the topic of changing laws and its effect on direct foreign investment in different countries.
For most developing countries capital investment from outside makes a huge difference in terms of economic development and growth rates. But international investors largely depend on stable and reliable general conditions. A reliable justice system sure is one of those general requirements. Others would be the need for infrastructure, human resources, and many others.
One would think that governments would be aware of that fact and act consequently. But there are many examples where domestic policy simply ignored the importance of secure settings for foreign investors.
One of those examples would be Russia. And the Russian government jeopardized a sound economic development that is backed by foreign investment already twice within this still young millennium. Russia experienced the first drawback from an unreliable rule of law, when for domestic political reasons they “rearranged” their whole oil and gas industry. This also lead to legal disputes before international arbitration courts. Not too long ago Russia was sentenced to the highest ever imposed reimbursement payments. It has yet to be seen if they are ever settled. When those “changes” took place in Russia it was a big drawback for international investment into the Russian industry. And as if that lesson was not enough about 10 years later Russia torpedoed its economic development by annexing Crimea and entering into warlike operations with Ukraine. The consequences will harm the Russian economy for years to come.
Another good example for self-destructive unreliability of the legislative process could be Venezuela with its disastrous intervention also into the countries oil industry. I even think that Hungary is a good example for stupid political led distortion of legislative stability. Under its recent government the country started enforcing laws that led to discrimination of foreign investors in different business areas. This concerned the banking sector, agriculture, and recently the retail market. This all led to reduced foreign investment and a decline of the Hungarian economy, which does a lot worse than those of neighbouring countries.
Although I only scratched the surface of those incidents and the stories behind them vary quite widely one thing is clear. Foreign investment and uncertainty don´t get along quite well. And the higher the level of uncertainty the higher the potential premium profit has to be for a company to invest. Therefore governments are well advised, if they try to act reliable and foreseeable, when applying changes within their countries legislation.
March 29, 2015 @ 1:06 pm
When talking about investing in India and the position of the US as biggest foreign investor in India it is obvious that challenge and risk of investing in India is paired with a high chance to succeed but also to fail. What are the economic surroundings in India for investors?
Mr. Hillbrand already analyzed the cultural differences according to Hofstede’s dimensions between the United States and India. India as tourist nation is represented by the slogan “Incredible India”. This slogan which was introduced in 2002 for promoting tourism industry can be used to boldly represent other fragments of Indian society, economy and doing business to foreign investors. [1]
Every day in India can lead to new and unexpected chances for success but also for possible failure. Being prepared for this diverse society and economy needs to be taken seriously. But is it possible to prepare for the unexpected?
Doing business in India is still a challenge. Even though government is interested and eager to reduce the hurdles for foreign investors, the World Bank ranks India on the score of “Ease of doing business” on position 142 out of 189 in comparison with position 7 for the United states and e.g. 90 for China in 2014. When having a closer look into separate topics of this ranking, it is outstanding that India belongs to the 25 % of most complicated nations in regards to themes such as “enforcing contracts”, “dealing with construction permits”, “starting a business” and “paying taxes”. [2]
Mr. Modi travelled to the US to promote investing in India as the foreign investment rates declined by 30 % from 2008 to 2013. But has the situation changed to the better for investors? When consulting the “”Worldwide Governance Indicators” of the World Bank the overall situation for investors in India declined slightly from 2008 to 2013. Franz G. said in his post “Foreign investment and uncertainty don’t get along quite well”. The World Banks Governance Indicators survey for India show that till 2013 the development in the countries’ political, regulatory, government effectiveness, rule of law situation and control of corruption efforts developed negatively. [3] This was and needs to be considered by foreign investors before entering in a new market. I would like to share a minor example on the uncertainty of doing business in India out of my own experience. In 2009 or 2010 the government announced an increase in the General sales tax in the middle of a month with being in effect by the first of the same month.
Next to important factors regarding the stability of a country, after the economic crises in 2008 India struggled to recover. A constant GDP growth rate of about 9 – 9.8 % in the last years before the crises came to a prompt decline down to 3.9 % in 2008. The recovery of up to 10 % in 2010 was followed again by a decline to 5 % in 2013. [4]
So what leads investors despite all these challenges to invest in India? It is the enormous potential of the domestic market; the young and enormously growing middle class which is just at the beginning to use their growing purchasing power [4].
To be successful as foreign investor in India it is important to be prepared for various differences and difficulties. Expecting unexpected changes in business surroundings makes it more likely to be successful in India. On the other hand for the Indian government it will be critical to work on more stability and reliability in the countries governance to regain the trust of foreign investors.
[1] Incredible !ndia Campaign. (n.d.). Retrieved from http://www.incredibleindiacampaign.com/
[2] Ranking of economies – Doing Business – World Bank Group. (n.d.). Retrieved March 29, 2015, from http://www.doingbusiness.org/rankings
[3] Worldwide Governance Indicators. Retrieved March 29, 2015, from http://info.worldbank.org/governance/wgi/index.aspx#doc
[4] Rapoza, K. (2014, November 15). U.S. Leads Top 15 Countries Investing In India. Forbes. Retrieved from http://www.forbes.com/sites/kenrapoza/2014/11/15/u-s-leads-top-15-countries-investing-in-india/2/
April 12, 2015 @ 3:38 pm
1. First of all, Lets present India with a couple of key data:
– Seventh largest country by area (3,287,590 km2)
– Second most populous country (over 1.2 billion people)
– GDP adjusted to PPP in 2014: estimated 7.277 trillion dollars (3rd worldwide)
– GDP adjusted to PPP per capita in 2014: 5,777 dollars (125th worldwide)
– Over 486 million workers (world’s second largest labor force)
– Since 1991 is liberalizing the economy (previously a protectionist economy), since then moving towards capitalism.
– Member of the World Trade organization since 1995
– India’s telecommunication industry, the world’s fastest-growing, added 227 million subscribers during the period 2010–11,[220] and after the first quarter of 2013, India surpassed Japan to become the third largest smartphone market in the world after China and the U.S.
– During the next four decades, Indian GDP is expected to grow at an annualized average of 8%, making it potentially the world’s fastest-growing major economy until 2050 ( [11], Pricewitherhousecooper The world in 2050, bricks and beyond).
– As example, some investors that have place the money in 2014, overcome over 50% profit (check e.g. performance of over 50% in 2014 of the Indian fond investing all variable: LU…).
2. Vodafone problem statement:
In the case of Vodafone, as far as I have understood from several analysis ([1], [2], [3]) is that India requested retroactive taxations payments over a complex financial operation done over an internationally subsidiary (located in the Cayman Islands) to avoid paying taxes. This operation ended up in the Indian court, and after a legal analysis over different international jurisdictions, was sentenced as legal operation by a court in India [2]. Apparently they took advantage of gaps in the legislations ending up being exempted of paying taxes neither in India nor nowhere. Nevertheless the Indian government does not give though arguing that “What is due must be paid, India is no tax heaven” (statement from Arun Jaitley, minister of finance, on April 2015, [2]). Taxes must be always paid also in case of “cross-border transactions involving an Indian company” [1]. Specifically India requests that Vodafone retroactively “pays $2 billion as tax in India on a profit of $10 billion made in 10 years, on an investment of $1 billion” [1].
3) Vodafone Analysis: I will try to see the issue with an eyes bird, with all the different points on the table:
– investor side: they need guarantees, if they invest their money, they want to have the legal safety over a fix legislation (global accepted rules when investing in the markets: known, fixed and accepted in western countries). If investors do not see the application of this rules clear or serious, they would invest the money somewhere else (i.e. take the money out of India). “Retrospective tax laws are usually disliked because they throw taxpayers off their existing equilibrium and push them into the disturbing uncertainty of an unpredicted tax liability and a long drawn out litigation” [1]
– From Indian government:
o they must keep on making attractive the investing in India for foreign capitals. As we just said, investors need fixed accepted rules of the game, and these rules definitely do not include applying laws retrospectively.
o At the same time, India wants to profit from the global world market game, squeezing the last penny for India out of the global mature capitalism world.
o India is since 1995 in the WTO, not as mature as western countries (like e.g. US) in the world market place, where the “rules of the game” are clear. They are still adapting their legislation to match the inefficiencies of the common international market rules.
o From an “ethical” point of view (this is also subjective reflexion from my side): looks quite suspicious to take advantage of gaps in the law to avoid paying taxes with a subsidiary in Caiman islands. Using a complex operation over several international jurisdictions to make it totally opaque (long litigation processes to analyze the legality of the operation) and bottom line tax exempted. What does it mean?
§ Legally may be correct, ethically definitely questionable.
§ Applying the retrospective law from the India point of view is in benefit of the larger and long-term interest of the people in India, where their jurisdiction is and where the goal of the government is).
§ Corporate social responsibility issue: Legal complex operations to avoid paying taxes, although may be legal, should be known by the public opinion and the consumer should decide. Bottom line an “universal law” is needed for the global market concerning the Tax heavens (like Cayman islands) all over the world. (Note: Currently there are around 73 tax heavens countries around the world, which they have a negative impact in the most poor countries as they avoid paying taxes there [9]).
With this overview of the situation, I think India is in the position to push harder this situation, since they can still assure a good ROI for the investors (probably over 1 digit) despite of applying the non-desired the retrospective laws in the global market. Why? Just remind the intro with facts of India: e.g. second most populous country, third largest smartphone market in the world, expected grown of around 8% yearly till 2050. Investors should take these issues into consideration in their risk analysis before making an investment, probably estimate a correction down, but still overall quite profitable. From Vodafone side they will have to fight in an international arbitration courts if they apply the retrospective law, although I personally think it may damage the image of Vodafone if India sells it to the public opinion as a lack of Corporate responsibility: we pay our taxes no matter where we go and I would take it as a universal change needed in every company.
From the invertor point of view , I do not believe it will stop investors from entering India watching the amazing ROI they are having. As example, recall the last bilateral meeting with prime minister of France to foster commerce between both countries ([5], “made in India”, April 2015).
5) Global conclusions and lessons learned:
As overall lesson learned not only applicable to India, but also to other countries, is that “doing business in India, China, and other non-U.S. jurisdictions are complex endeavors, and those who choose to invest in these markets should remain aware of these countries need to generate revenue in light of worldwide economic conditions” [3]. A clear risk analysis must be done (e.g. an expert tax advisor in the case of countries where tax rules may create unexpected consequences). Other examples of similar issues are the constant fights of pharma multinationals also in India with their generics (e.g. [4]), or in recently in Argentina with the government expropriation of Repsol IPF in 2012, still open in 2015 [7].
Investors should evaluate and estimate this risk, and consequently take a decision: do we accept the risk and still make the investment? As the post quite good recognized… no risk no fun.
6) References:
– [1] Financial Chronicle, M Padmakshan, April 05 http://www.deccanchronicle.com/150405/business-latest/article/retrospective-tax-laws-are-surely-needed
– [2] Deepshikha Sikarwar, ET Bureau Apr 7, 2015. 7 2015: http://articles.economictimes.indiatimes.com/2015-04-07/news/60902940_1_tax-haven-tax-demand-tax-terrorism
– [3] The Vodafone Case and Its Effects on Indian Taxation http://www3.cbiz.com/page.asp?pid=9757 Analysis of the Vodafone case:
– [4] Indian government wins legal battle with generics against pharma multinationals, 12.03.2015: (http://www.elboletin.com/internacional/113521/farmaceutica-india-generico-sovaldi-hepatitis.html
– [5] India prime minister Mareda Mori in France Fostering “make in india” 10.april 2015:. http://www.ndtv.com/india-news/full-text-of-pm-narendra-modis-and-french-president-francois-hollandes-joint-statement-753988 Tiene economics part: “address tax base erosion and profit shifting, to promote tax transparency”
– [6] IMF chief Lagarde statement on India as top economy, 16 march 2015: http://timesofindia.indiatimes.com/business/india-business/India-must-seize-chance-to-be-top-economy-IMF-chief-Christine-Lagarde-says/articleshow/46578103.cms
– [7] Chronology of the conflict between Respol and the Government of Argentina: http://www.teinteresa.es/dinero/Cronologia-Repsol-Argentina-expropiacion-YPF_0_1091292737.html
– [8] Wikipedia
– [9] Tax heaven countries https://www.inspiraction.org/justicia-economica/listado-paraisos-fiscales
– [10] the world in 2050: the brics and beyond, pricewaterhouse cooper (http://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-report-january-2013.pdf
April 12, 2015 @ 4:05 pm
1) First of all, Lets present India with a couple of key data:
– Seventh largest country by area (3,287,590 km2)
– Second most populous country (over 1.2 billion people)
– GDP adjusted to PPP in 2014: estimated 7.277 trillion dollars (3rd worldwide)
– GDP adjusted to PPP per capita in 2014: 5,777 dollars (125th worldwide)
– Over 486 million workers (world’s second largest labor force)
– Since 1991 is liberalizing the economy (previously a protectionist economy), since then moving towards capitalism.
– Member of the World Trade organization since 1995
– India’s telecommunication industry, the world’s fastest-growing, added 227 million subscribers during the period 2010–11,[220] and after the first quarter of 2013, India surpassed Japan to become the third largest smartphone market in the world after China and the U.S.
– During the next four decades, Indian GDP is expected to grow at an annualized average of 8%, making it potentially the world’s fastest-growing major economy until 2050 ( [11], Pricewitherhousecooper The world in 2050, bricks and beyond).
– As example, some investors that have place the money in 2014, overcome over 50% profit (check e.g. performance of over 50% in 2014 of the Indian fond investing all variable: LU…).
2) Vodafone problem statement:
In the case of Vodafone, as far as I have understood from several analysis ([1], [2], [3]) is that India requested retroactive taxations payments over a complex financial operation done over an internationally subsidiary (located in the Cayman Islands) to avoid paying taxes. This operation ended up in the Indian court, and after a legal analysis over different international jurisdictions, was sentenced as legal operation by a court in India [2]. Apparently they took advantage of gaps in the legislations ending up being exempted of paying taxes neither in India nor nowhere. Nevertheless the Indian government does not give though arguing that “What is due must be paid, India is no tax heaven” (statement from Arun Jaitley, minister of finance, on April 2015, [2]). Taxes must be always paid also in case of “cross-border transactions involving an Indian company” [1]. Specifically India requests that Vodafone retroactively “pays $2 billion as tax in India on a profit of $10 billion made in 10 years, on an investment of $1 billion” [1].
3) Vodafone Analysis: I will try to see the issue with an eyes bird, with all the different points on the table:
– investor side: they need guarantees, if they invest their money, they want to have the legal safety over a fix legislation (global accepted rules when investing in the markets: known, fixed and accepted in western countries). If investors do not see the application of this rules clear or serious, they would invest the money somewhere else (i.e. take the money out of India). “Retrospective tax laws are usually disliked because they throw taxpayers off their existing equilibrium and push them into the disturbing uncertainty of an unpredicted tax liability and a long drawn out litigation” [1]
– From Indian government:
o they must keep on making attractive the investing in India for foreign capitals. As we just said, investors need fixed accepted rules of the game, and these rules definitely do not include applying laws retrospectively.
o At the same time, India wants to profit from the global world market game, squeezing the last penny for India out of the global mature capitalism world.
o India is since 1995 in the WTO, not as mature as western countries (like e.g. US) in the world market place, where the “rules of the game” are clear. They are still adapting their legislation to match the inefficiencies of the common international market rules.
o From an “ethical” point of view (this is also subjective reflexion from my side): looks quite suspicious to take advantage of gaps in the law to avoid paying taxes with a subsidiary in Caiman islands. Using a complex operation over several international jurisdictions to make it totally opaque (long litigation processes to analyze the legality of the operation) and bottom line tax exempted. What does it mean?
Legally may be correct, ethically definitely questionable.
Applying the retrospective law from the India point of view is in benefit of the larger and long-term interest of the people in India, where their jurisdiction is and where the goal of the government is).
Corporate social responsibility issue: Legal complex operations to avoid paying taxes, although may be legal, should be known by the public opinion and the consumer should decide. Bottom line an “universal law” is needed for the global market concerning the Tax heavens (like Cayman islands) all over the world. (Note: Currently there are around 73 tax heavens countries around the world, which they have a negative impact in the most poor countries as they avoid paying taxes there [9]).
With this overview of the situation, I think India is in the position to push harder this situation, since they can still assure a good ROI for the investors (probably over 1 digit) despite of applying the non-desired the retrospective laws in the global market. Why? Just remind the intro with facts of India: e.g. second most populous country, third largest smartphone market in the world, expected grown of around 8% yearly till 2050. Investors should take these issues into consideration in their risk analysis before making an investment, probably estimate a correction down, but still overall quite profitable. From Vodafone side they will have to fight in an international arbitration courts if they apply the retrospective law, although I personally think it may damage the image of Vodafone if India sells it to the public opinion as a lack of Corporate responsibility: we pay our taxes no matter where we go and I would take it as a universal change needed in every company.
From the invertor point of view , I do not believe it will stop investors from entering India watching the amazing ROI they are having. As example, recall the last bilateral meeting with prime minister of France to foster commerce between both countries ([5], “made in India”, April 2015).
5) Global conclusions and lessons learned:
As overall lesson learned not only applicable to India, but also to other countries, is that “doing business in India, China, and other non-U.S. jurisdictions are complex endeavors, and those who choose to invest in these markets should remain aware of these countries need to generate revenue in light of worldwide economic conditions” [3]. A clear risk analysis must be done (e.g. an expert tax advisor in the case of countries where tax rules may create unexpected consequences). Other examples of similar issues are the constant fights of pharma multinationals also in India with their generics (e.g. [4]), or in recently in Argentina with the government expropriation of Repsol IPF in 2012, still open in 2015 [7].
Investors should evaluate and estimate this risk, and consequently take a decision: do we accept the risk and still make the investment? As the post quite good recognized… no risk no fun.
6) References:
– [1] Financial Chronicle, M Padmakshan, April 05 http://www.deccanchronicle.com/150405/business-latest/article/retrospective-tax-laws-are-surely-needed
– [2] Deepshikha Sikarwar, ET Bureau Apr 7, 2015. 7 2015: http://articles.economictimes.indiatimes.com/2015-04-07/news/60902940_1_tax-haven-tax-demand-tax-terrorism
– [3] The Vodafone Case and Its Effects on Indian Taxation http://www3.cbiz.com/page.asp?pid=9757 Analysis of the Vodafone case:
– [4] Indian government wins legal battle with generics against pharma multinationals, 12.03.2015: (http://www.elboletin.com/internacional/113521/farmaceutica-india-generico-sovaldi-hepatitis.html
– [5] India prime minister Mareda Mori in France Fostering “make in india” 10.april 2015:. http://www.ndtv.com/india-news/full-text-of-pm-narendra-modis-and-french-president-francois-hollandes-joint-statement-753988 Tiene economics part: “address tax base erosion and profit shifting, to promote tax transparency”
– [6] IMF chief Lagarde statement on India as top economy, 16 march 2015: http://timesofindia.indiatimes.com/business/india-business/India-must-seize-chance-to-be-top-economy-IMF-chief-Christine-Lagarde-says/articleshow/46578103.cms
– [7] Chronology of the conflict between Respol and the Government of Argentina: http://www.teinteresa.es/dinero/Cronologia-Repsol-Argentina-expropiacion-YPF_0_1091292737.html
– [8] Wikipedia
– [9] Tax heaven countries https://www.inspiraction.org/justicia-economica/listado-paraisos-fiscales
– [10] the world in 2050: the brics and beyond, pricewaterhouse cooper (http://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-report-january-2013.pdf
September 14, 2017 @ 6:22 am
International Business India, USA
#104 No risk no fun?
India embarked on the journey of liberalization since early 1990 to attract foreign direct investment (FDI). India is one of the fastest growing economies in the world with GDP growth rate of 7.1% for 2016-2017 compared to United States of America 1.6%. India has distinct advantage with huge consumer base being second largest populated country after China.
Like any other emerging market, there are always risks for any foreign companies to invest in India. Legal and political system plays a vital role for attracting FDI. India was ruled by British for more than eighty years and so enjoys a strong British-based legal and accounting system, which helps it to attract more capital from Western countries. India’s long history of private property, democracy and similar law system hopefully prove attractive for potential foreign investors.
Giant companies such as Coca Cola, L’Oreal, Ford and PepsiCo have made large, profitable investments in India, but many others are absent or have withdrawn, including Henkel, Mary Kay and Sara Lee (Govindarajan and Bagla, October 2016).
Vodafone issue with retrospective taxation is very visible but we did not hear this type of case in recent years. This demonstrates India and Prime Minister Modi’s government is making concerted effort to attract multinationals.
In terms of e-commerce, 130 million Indians made an online purchase in 2016 (Govindarajan and Bagla, October 2016). Amazon CEO Jeff Bezos has made India a top priority for growth; he projects that the country will be its second largest market globally by 2025(Govindarajan and Bagla, October 2016). Amazon is the top e-commerce company in India followed by FlipCart and SnapDeal.
While many foreign companies are successful in India, one company that failed miserably is GM. GM India’s performance is a heady cocktail of wrong products, wrong strategy, wrong numbers, and even the wrong people. Quality of GM cars turned out to be very poor at the same time high prices of component parts.
GM’s market share in India has always been in the single digits, but recently Ford has reported rising monthly sales of 36% in India (Govindarajan and Bagla, June 2017).
In 2014, the government increased foreign investment upper limit from 26% to 49% in insurance sector. It also launched Make in India initiative in September 2014 under which FDI policy for 25 sectors was liberalized further.
Recently I visited India and I am surprised to see large number of car brands people are driving. I was able to see all high-end brands like BMW, Mercedes and Audi. This illustrates raising per capita income of people and affordability.
Conclusion
India continues to try to improve its policies regarding FDI attraction and brought many reforms like tax incentives to investors for doing more investment in their country. Political atmosphere is also very stable with Modi’s government potentially winning second term.
Reference:
Bagla, Gunjan and Govindarajan, Vijay (June, 2017) What U.S. CEOs Can Learn from GM’s India Failure https://hbr.org/2017/06/what-u-s-ceos-can-learn-from-gms-india-failure
Bagla, Gunjan and Govindarajan, Vijay (June, 2017) Two Ways to Break into India’s Consumer Market https://hbr.org/2016/10/two-ways-to-break-into-indias-consumer-market
Henisz, Witold J and Zelner, Bennet A (April, 2010) The Hidden Risks in Emerging Markets https://hbr.org/2010/04/the-hidden-risks-in-emerging-markets
https://www.quora.com/Why-is-Vodafone-facing-retrospective-tax-issues-in-India-and-does-this-issue-tarnish-Indias-image-among-MNCs
https://en.wikipedia.org/wiki/Foreign_direct_investment_in_India