Investment Activity of Developing Countries - Essay Example

?International Business Environment Table of Contents Overview 3 (A) Analysis of National Business System and Cultural Conditions 3 National BusinessSystem 3 Cultural Condition 5 (B) Pattern & Trends of Trade between the UK & India 6 Reasons for India’s High Growth Rate in the Retail Sector 7 Certain Barriers to the Retail Sector in the Indian Market In Terms of Trading or Investment 8 (C) Implication of EU for the Firms Proposed Business Links in India 10 (D) The Decision to use Export or Foreign Direct Investment 13 (E) Political Risk 14 References 17 Overview The study that has been stated in this research is concerned with the decision of engaging in the trade or in the investment activity in a developing country. The company taken for the analysis is based in the developed economy of the UK. The decision is to be taken with regards to trade or investment that the company will make in the developing country such as China or India. There are multifarious factors that affect the decision making aspect which will be discussed in the paper. (A) Analysis of National Business System and Cultural Conditions National Business System In this report, the developing nation that has been considered is India that has shown greater potential in the recent years and has been a potential market for many Multinational Corporations (NCAER, 2005). The Indian national business system is a diversified business model that has different aspects of operations. There are urban, rural, metropolitan markets and each of them differs in area with different business system of model. The national business system of India is different from other nations. In India the concept of family is highly valued within the organisations. A significant number of the organisations are owned and managed by the family members. The sense of corporate culture is present in current Indian organisations. But in the UK the business units are fully owned and managed by different personnel i.e. professionals. This factor needs to be taken care of in the process of setting up or investing in Indian market (Communicaid, 2007). The potential growth that has been seen in the Indian market is towards the retail market. There are many foreign players who have invested and are in venture with Indian Retail Company and are able to generate profits from this market. The best suited example is the Wal-Mart of the USA and Bharti Group of India in the retail sector (Bose & Et. Al., 2009). For the business development in the Indian market there are two organisations that operate. The CII (Confederation of Indian Industry) and FICCI (Federation of Indian Chambers of Commerce and Industry) operate for the enhancement of Indian organisations and for foreign investments to be attractive in the Indian market in different sectors (Sinha, 2005). Many of the world’s renowned retailers such as Tesco, Wal-Mart and Carrefour are at present provided significant amount of importance to the Indian retail sector. Carrefour in recent times has entered into the booming retail market of India. With a populace of more than a billion people and escalating middle class, India provides ample promises in the retail sector. But the Indian market is unique with different aspects that make the market challenging for the foreign players (Padmanabhan, 2010). Cultural Condition India has a diverse culture. Business people in India have grown accustomed to the western method of education. The business language that is primarily used in India is English, and the nation also has a similar business and legal framework to that of the UK. In India, boom in the consumer product exports are frequently modern, innovative and lower-priced adapted version of the UK. Any marketing promotion, advertisement or other promotion should be personalised and adopted to take into account the Indian culture (Medicon Valley, 2007). In business organisations of India the participation of women is comparatively lower as compared to the UK. Companies of the UK should focus on this factor before deciding to appoint women employee in Indian market (Medicon Valley, 2007). The hierarchical environment of Indian society considers that the chief or boss is the uppermost or main individual in authority and has huge influencing power. When creating business contacts, the main objective of the UK Company should focus on those individuals who are at the highest place of authority as decision are taken only at this level. In any event, it is common to find that subordinates are unwilling to acknowledge responsibility (Medicon Valley, 2007). In the business risk and innovation towards an organised market, the retail sector in the Indian market has witnessed huge potential and still there are more opportunities in this sector as the market for organised sector is quite less as compared to unorganised sector in this economy (British High Commission New Delhi, 2010). To decide in investing or trading in the Indian retail sector the relationship needs to be properly defined. To trade the UK business needs to build relationships as Indians desire to do business with people they know and can trust. The UK business needs to show credentials, business successes and capabilities and stress that value associates are worthy and reliable as well. (B) Pattern & Trends of Trade between the UK & India There has been evidence between the trade practice of India and the UK. The UK is India’s major business associate in Europe with about 6.4% market share. The India-UK bilateral trade in the initial eight month period in 2007 was up by 13.2% over the equivalent phase of 2006 (India’s Trade Partners, 2010). UK's Trade with India (2008-09) : (In US$ billion) Total 2006-07 2007-08 2008-09* Exports of goods 5.6 7.0 5.6 Imports of goods 4.2 5.0 5.4 Total Trade in Goods 9.8 12.0 11.0 *April, 2008-February,2009 Source: Office of the High Commission of India, London Source: (India’s Trade Partners, 2010). The Indian retail marketplace is the fifth biggest retail that is targeted internationally. The size of the Indian retail industry was $511 billion in the year 2008. At the same time, retail is likely to boost its share in the whole retail market in the upcoming years. Organised retails in India accumulated over in US$ 25.44 billion turnover in the year 2007-08 as against US$ 16.99 billion in 2006-07, which was an enormous increase of around 49.73% (Scribd, 2008). India’s retail market is at its apex point and receives enormous consideration from both international and local retailers. Especially the garment segment has shown potential in the trade between the UK and India (Baden, 2002). Reasons for India’s High Growth Rate in the Retail Sector High Growth Rate: India’s GDP is anticipated to grow more in the upcoming fiscal years. Untapped Growth Potential: Organised retail that accounts for less than 5% of the market is generally accepted to increase at a compounded yearly growth rate (CAGR) of 40% to $107 billion by 2013. India’s large retail sector by 2013 is likely to increase to $833 billion and $1.3 trillion by 2018, at a CAGR of 10 percent (Ferrari, & Dhingra, 2009). Growing Purchasing Power: Consumer expenditure is on an increasing trend. In the last four years the consumer expenditure has developed surprisingly by 75%. This is an attribute to the momentous increase in the disposable incomes of India’s juvenile populace. Certain Barriers to the Retail Sector in the Indian Market In Terms of Trading or Investment The rentals are high and it adds up cost to the company. The retail rentals are high because the location is the important factor in the retail business. The other problem that is faced by the retailers is the inadequate infrastructure. This adds up the problem of logistics and the cost associated with it. There lies a problem in the supply chains. The inefficient supply chain makes the whole process of procurement and delivery more complicated. Even though there is clearance from the Central Government of India, there is probability of interference of the State Local Governments. This increases the legal complications in the operations. There is lack of trained manpower in the retail sector in the Indian market. The market is growing and the personnel are being trained but the cost is high. The important aspect in the retail market in India is the unpredictable consumer behaviour of Indian people. Due to diversified culture and social behaviour, it becomes difficult for the retailers to identify the consumption behaviour pattern (Gupta, 2010). To gain competitive advantage the company needs to identify the consumption pattern behaviour of the Indian consumers. They are different than that of the US and the UK. Below are certain assessments about the behaviour pattern of the Indian consumers that will assist the UK Company in Indian’s retail market for making decision. The Indians do not go for shopping merely to buy. Most of them go for window shopping, for entertainment, passing time and other activities. As such footfalls in the shopping mall are not the appropriate measure on which the investment should be made in India. When the question of shopping comes regarding the household items, the Indian consumers prefer their trusted local vendor than bigger shopping malls or generally a mixture of the both. While investing the company needs to consider this factor. In the Indian market the purchasing decision is largely influenced by the factors such as price, quality and discounts. Few percentage of populace does not go by these entire factors. The retail sector in the Indian market is not capable of attracting best young talents as it does not engage overseas tour for most employees. There is lack of knowledgeable and talented personnel in the Indian retail sector. The option for the UK Company to operate in the Indian market through investment mode in franchise-driven operation would be more profitable in the upcoming years for the following reasons. The local Indian retailers understand the Indian domestic market more than foreign retailers and have less significant restrictions from the government administration and consequently gain more competitive advantage. The cost of operation for the UK based company will be more as viewed from other Multinational Corporations in India due to their various overheads and thus might not meet up the necessary returns on investment. The risk for the UK based company will be reduced through this model of operation in the Indian retail market. Apart for the barriers the companies such as Hugo Boss and Swarovski have established their distribution related office in India and are selling their products to the Indian retailers (Mukherjee & Et. Al., 2005). (C) Implication of EU for the Firms Proposed Business Links in India In the year 2007, the negotiation for free trade agreement (FTA) between EU and India began for the purpose of reaching a comprehensive transaction deal to liberalise trade in services, goods and investment (Trade Craft, 2009). The European parliament has found that the Indian policy is not enthusiastic in the FTA. But still the EU has tried in convincing India to open the market in order to assist the firms of European nations to access lucrative contracts. This increased the scope of the UK government to cater support for domestic firms to trade and invest in Indian market and with India’s FDI policy in retail sector boosts the UK corporations to invest especially in this sector in India. According to the Organisation for Economic Co-operation and Development (OECD), India has been dependent on income from trade taxes that accounted for 24.1% of total tax revenue. But according to the EU the EU-India FTA would reduce the Indian government tariff revenue almost by one third. This will help the UK investors and traders in reducing the financial availability for social spending in the retail sector that includes programs expected to achieve the greater development goals. The EU seeks to advance the penetration of the banking sector in India. There is presence of the UK private banks in Indian market and there has been huge competition among foreign banks. Due to this reason, the banks of the UK are focusing on the profitable sectors. Moreover, in India now the retail sector has been gaining advantage with more profitability. The UK’s firm can get financial assistance from these banks to invest and trade in the Indian retail sector. The EU proposals in the FTA negotiations have intended to encourage the access of essential products through different formatting of sales. This includes the retail selling in the Indian market that will help the UK firm to trade and invest in the retail sector of India. The similar nature in the retail sector across the EU has made the EU to investigate and check the balance in the economy. There has been increase in the size of the super market in the UK. As a result, the EU is encouraging the UK based firms to export and enter in different potential markets such as India in the retail segment (EU, 2007). The increase in the retail market in the UK is dominating small numbers of retailers, which is not favourable for the EU consumers and suppliers. Thus, the EU has been negotiating with the Indian government especially for the trade and investment in the retail sector. In response to this the Indian government has also allowed increase in the FDI (Foreign Direct Investment) percentage. (D) The Decision to use Export or Foreign Direct Investment Previously there was restriction upon the FDI (Foreign Direct Investment) in India especially in the retail sector. Such provisions were approved under the FEMA (Foreign Exchange Management Act) of India. Later in the year 2000, there were revisions on the FDI to boost the economy through the foreign investment. In the case of exports, bulk imports with export/expounded warehouse sales, cash and carry wholesale trading, the FDI policy has permitted 100% FDI. Other imports of goods and services catered at least 75% for the purchase and sales of commodities and services that is among the companies belonging to the similar group. After this announcement the biggest retail company Wal-Mart, has been in venture with Bharti Enterprise Ltd to expand its operations even in the Indian market to capture the potential benefits of FDI policy of India (Sequeira, 2007). Even the UK based company TESCO has been with (Trent) Tata Group in the retail sector in the Indian market to launch its wholesale cash-and-carry business. The company is expected to invest more than $100 millions in the upcoming years (IBEF, n.d.). The UK based retailer Hamleys entered in a venture with Reliance Retail in the Indian market after the FDI approvals to take hold of the toys and games market that is expected to be more than $600 millions. From the above examples of big retailers venturing with the Indian retailers, an entry way for others to invest in the Indian retail sector have been provided to get maximum benefit of the market. According to the study thus far it has been evident that both direct investment and trading are favourable for the UK based company to operate in the Indian market. The provision of the FDI policy of the Indian government has increased the opportunity of the foreign retailers to invest along with trade in a particular business model that will benefit the Indians as well as foreign companies from the Indian retail segment. The investment along with the trading activity of the UK based company is possible if the venture with a renowned, financially strong Indian company in the retail sector generate the maximum benefit from the new drafted policy of the FDI. This will also help in reduction of the risk level as the Indian companies know the consumer behaviour pattern and the parameters of investment in the Indian market. (E) Political Risk In every economy there is political risk as the influential level of politics upon business is huge. In India the political interference that is likely to occur are from the policy that is formulated in FDI and Branding in Retailing with high tariffs and other problems. The Indian Government has not categorically classified the meaning of ‘Single Brand’ anywhere. In this category, the FDI is up to 51% that too is subjected to Foreign Investment Promotion Board (FIPB) consent. There were certain conditions that were drafted by the Government of India related to the Branding in Retail India. The products need to be sold under the same brand internationally; this category would only cover those products that are branded during the manufacturing. Any additional product category that is to be sold under this category would require new approval from the government (Agarwal & Tyagi, 2010). The benefits provided and opportunities offered to the foreign multinational corporation in terms of FDI seem to be restricted with regards to Multi Branding Retailing in India. For this there should be approval from the government and since it’s a lengthier process, there are possibilities in delaying the offers. The government policy maintains FDI in the retail sector, but the government is focused on opening of retail trading for certain categories such as electronics, stationery and others without hurting the interest of the local retailers’ community. The government had increased the level of FDI but the focus is on the development of the local retailer community through different offerings that is not accessible by the foreign corporate (CCI, n.d.). The Government of India is trying to set up and implement a standardised value added tax across states of India. But the structure currently is overwhelmed with differential taxation for different states that results in increasing the costs and complications in establishing an effective distribution network. Inflexible labour law of the Indian Government governs number of hours’ worked and minimum wages to be paid. This limits flexibility of employment and operations of part-time employees. Moreover, multiple clearance are obligatory for the same company for opening new outlets that add up the costs incurred and time taken to expand its presence in the country. There have been various FDI approvals by the Government of India, but there has been less flow of investment and for this reason the government might change its policy which may be favourable or unfavourable. The probability of affect on the investment from foreign might not be certain. The unfavourable result might occur due to strong political and domestic stakeholder interests against liberalisation of retail branding from outside the country or investment from the foreign corporations (Chanda, 2009). For investment and trading, the government interference that might come up is related to the land acquisition problems, restriction by government on zoning and land conversion for commercial purpose, land ceiling legislation, restriction upon trade in certain commodities, products that are strictly reserved for small business and the determination of size of shops and the permissible operating hours governed by the local government authority (Chanda, 2009). Apart from all these challenges, there is huge potential in the retail sector in the Indian market. The potential benefit lies through the franchise agreement, cash-and-carry wholesale trading, strategic licensing agreements and manufacturing and wholly-owned subsidiaries in the Indian market. From the overall analysis it can be comprehended that the option of trade and investment is suitable for the UK based company in India in retail sector. This is evident from the FDI policies of the Indian government in the retail sector. 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