The Potential of Indian Market for Investment - Foreign Direct Investment Theories and Environmental Factors - Coursework Example

Investing into a different nation requires that the investor investigates and examines various issues so that the risk involved reduces. Doing, so will ensure that the investments are safe and will create an environment where the investor is able to gain maximum returns. The likelihood of conducting such an analysis increases when a foreign direct investment is to be made in a country which is totally different from the own country. This difference could arise due to culture, the political atmosphere, and the way the country forms different rules and regulations. Foreign Direct Investment is “the investment made by a country into another and is usually for a long period of time”. (FDI, 2010) In our case the foreign direct investment is made from Australia to India. Foreign direct investment also is of there forms. They are as firstly “inward foreign direct investment, secondly outward foreign direct investment and lastly stock of foreign direct investment”. (FDI, 2010) Based on relevant theories and the manner in which environmental factors have an influence on foreign direct investment have been provided for. The theories which will help to determine the manner in which foreign direct investment is provided for Foreign Direct Investment Theories A look at the various FDI theories will help to determine whether choosing India as a destination for investment is a sound option or not. This will further help in the environmental analysis and will act as a tool to ensure investment is safe. The theories are as follows Capital Market Theory This theory states that “interest rate determines the investment to be made in a foreign country”. (Fletcher & Brown, 2008) India on the overall basis has been consistent and even the growth rate of 8% shows it. When all other countries are looming into recession India has shown growth at a steady pace and the interest rate offered by them matches their growth rate signifying the return the investment will get. This helps to make India a good destination for FDI. Dynamic Macroeconomic FDI Theory This theory states on the fact that “timing of the investment is very important and it depends on the changes the macro economic environment is having”. (Fletcher & Brown, 2008) On this front it is seen that India has changed and with stronger economy and more younger population it is time that investment flows in. Also the manner in which the banking reforms have been made and the potential the country shows while competing with developing countries highlights the importance of investing as it is the proper time to do so. Exchange Rate Theory This theory states that “FDI flows and exchange rate changes should be matched to ensure that the value of the currency doesn’t depreciate”. (Fletcher & Brown, 2008) It is seen as a common fact in India that Australian Dollars has a higher value compared to Indian Rupees. This states the upper hand Australian dollar holds. Also the fcat that it is seen in the past that FDI flows doesn’t depreciated the value of the currency much is a good sign and calls for a step to invest in India. Life Cycle Theory This theory states that “the best time to invest is when the economy is matured so that the risk reduces and return maximizes”. (Fletcher & Brown, 2008) It is a seen phenomenon in the Indian market that is growing and is still to reach its maturity. This presents a good sign as the GDP is growing rapidly which would ensure that the FDI is in the growing phase thereby and moving towards maturity thereby enabling to get a good return. Japanese FDI Theory This theory also supports the growth Indian market is showing. India is in phase III of economic growth where the markets determine the inflow and outflows. Thus, it can act as a vital tool as it will ensure that the market forces determine the flows thereby ensuring that the investment made grows. Thus the theories as applicable to FDI supports the cause of foreign direct investment in India but a look at the environmental factors will further help to investigate and find reasons whether to invest or not in India. A look at the environmental factors will help to identify the manner in which these factors affect foreign direct investment in India from western countries like Australia. Environmental Factors This analysis will help to identify the potential Indian market has for investment. Since, these are factors beyond control so it influences all other companies in similar business similarly. This will thus act as a tool to decide the strategy to enter the Indian market. “Environmental factors affect the entire industry and needs to be considered in decision making because a change in it can bring about major changes in the decision pattern”. (OPPapers, 2010) The factors are Political & Legal Political situation plays a very important role for any industry and more for a developing country. India has a very high influence of “political factors and any changes in decision affect the overall bearing in the sector”. (OPpapers, 2010) The investment policy is “heavily influenced by the political scenario and get affected due to change in policies or unstable government”. (OPpapers, 2010) This calls for an understanding of the scenario. Recently, “the Indian political system has been unstable due to international events like September11 and tension with Pakistan”. (OPpapers, 2010) This has affected the policy changes though still the government has reforms supporting growth. The political situation has also been affected by the recent Gujarat riots. In spite, of such situation the stability of the government at the centre has ensured reforms to allow more investment in all sectors. A research conducted highlights the fact that “foreign direct investment in a company depends heavily on the behaviour and political situation demonstrated by the organisation”. (Blonigen, 2006) This throws light on stability both on the front of the company and the economy. The formation of the government at the centre is a parliamentary form of government who regulates most of the areas. The government has concerned ministry in each sectors which regulated the manner in which the working is carried out. This has ensured that the reforms are directed and helps the government in framing policies. The foreign direct investment has “been supported by the pro investment polices drafted by the government which is stable”. (OPPapers, 2010) The government is also adopting polices to promote investment in new avenues. This has helped to improve the brand of the country as a whole. Another study shows that “political conflict causes changes in the foreign direct investment being made and it refers to intra political conflicts and not inter-nation conflicts”. (Nigh & Hans, 2006) This throws light on the fact that political situation plays a pivotal role in shaping the foreign direct investment a country receives. Thus, it is seen that the policies of the government which is fairly stable at the centre has been focussed towards growth. This helps to minimize the risk for the Australian investor as based on it and the rules drafted to ensure that the foreign investment is safe India seems to be a safe destination for foreign direct investment. The Indian government has rules in place regarding the entry and exit of investors willing to invest in the Indian market. “The government has put a cap on foreign investment in domestic players”. (Justin, 2008) This is ensuring that investors and organisations which comply with those are allowed a stake. This will have a legal effect on Australian investing in India as they will have to abide by the norms. While looking at the political risk, it is seen that the county has a track record where the investment of foreigners have been safe. Since, the government has strong reforms and ensures safety so the political risk has been mitigated. Also using at the Delphi Technique it supports the fact that the political risk has been less. The Delphi technique also supports the same with regard to political risk as enquiring the same experts who are part of the government supports policies which favour investment from abroad. The discriminate analysis also supports the same as based on previous and the manner in which the previous governments have worked it highlights that the polices have been in favour of more investment and this has helped the Indian economy get investment thereby reducing the political risk associated with it. The government has also framed laws regarding “the amount of foreign direct investment a sector can receive so that the domestic industry doesn’t get heavily tilted towards the foreign company”. (Justin, 2009) this ensures that the entity of being an Indian company remains at the same time proves the opportunity to receive foreign investment. Thus it places a cap for an investor from Australia as the investor needs to adhere to it. The Australian Company looking to invest in India can reduce their risk by entering into joint ventures. This will ensure that the company is able to abide by the rules. Also since the action of the Indian government is a friendship one towards foreign investment and India and Australia looking forward to a free trade agreement will help the investor. The Australian investor can also look towards ensuring that they compile with the corporate governance norms which will earn them a good citizenship status and protect them. Also ensuring more employment and mixing of different needs will protect them against the political risks. Legal Factors The Indian system has a common law which will thereby ensure that the funds and investment made from abroad are used in the correct manner. Also the present of anti dumping laws will ensure that the investment made into the domestic industry by foreigners doesn’t get hurt. When looking at the marketing mix from the legal point of view it is seen that the government has law protecting the consumer. There are consumer courts and forums which ensure that the quality doesn’t depreciate. Also different laws regarding the channel for goods which are dangerous and storage for those have been drafted with. In addition to it laws which looks into the quality aspect and different standards like the ISO have been devised which ensure that the marketing mix correct. Also having laws which prohibits advertisement for products which are harmful to the society ensures that the government has laws in all direction which will help to protect the funds invested from the foreigners be used in a wrong manner. The impact of such laws can be reduced by entering into joint ventures as it will ensure that the Australian investor gets passage into different sectors and will ensure that they are able to abide by the laws framed by the Indian government. Economic & Financial Factors The economic situation affects the investment made in a country. The investment avenues in a developing country like India gets affected by “the growth rate and the business cycle as during recession investors pull out money making it difficult to weather the difficult circumstances which arise due to it”. (Justin, 2009) The economic situation has also improved for people as the living standards have risen. “The present GDP (per capita) is calculated at $3100 which is low compared to developed countries but the growth of IT and BPO is giving a push and with younger population on the side the per capita GDP is bound to grow”. (OPpapers, 2010) This is a boost and with the economy reviving has seen a jump in foreign direct investment. When we look at the GNP of India it stands at 4.16 trillion dollars highlighting the growth and economic reforms the country has which calls for foreign investment from abroad. A study also shows that “economic conditions like the growth rate, purchasing power, rules and regulations determine the foreign direct investment a country will receive”. (Gregorio, Lee & Borensztein, 1995) This thus highlights the importance economic conditions have and the manner which determine the amount of investment that will be made in a particular country. The investment also hampered and strategies rendered useless due to barriers of entry into the different sectors. This affected the strategic thinking process and entering into different sectors became difficult. This is an important economic criteria and the government needs to ensure that it doesn’t happen to ensure smooth flow of investment from abroad. With regard to a free trade agreement with Australia it is seen that none such trade agreements exist but a step has been taken in that direction to ensure that an agreement early next year is arrived at which will improve relations and will ensure more investment for both the countries. (Simon, 2010) A feasibility study has been conducted and it supports that having a free trade agreement will lead towards the development of both the countries. The demographics of India include ages of all kind and have a population of 1.2 billion. This highlights the avenue the country has especially considering the fact that the population is younger. The demographic are also willing to spend and are looking for new avenues. Thus, it calls for foreign direct investment in all areas that will ensure a proper return for the investors. Another finding supporting economic growth in foreign direct investment states that “export policies and export a country conducts with the outside world also determines the level of foreign direct investment that country will receive”. (Stanisic, 2008) This is a key and the government needs to draft rules and regulation which at the time of protecting the domestic industry also gives a push to export policies. Another study which also supports the above one states that “having a financial system which is sound and there is transparency in operations ensures that the foreign direct investment the country receives will increase”. (Nasser & Gomez, 2009) The banking and financial reforms are so strong that the chances of any such misgivings are less. This will ensure that the foreign direct investment is safe and the investors can be assured that their investment will be returned and the chances of failure of the financial system are few. Cultural Factors The Indian culture is strongly influenced by culture prevalent is social environment. India being a diverse country this plays a prominent role. “With different people from different backgrounds, religion, income level, and habits affect the way a person stays and brings a change in a social outlook”. (Justin, 2008) The culture when it comes to produce goods is seen that they employ more of labour considering the fact that the country has a huge population. On comparison to Australia where technology is more advanced there seems to be a gap but slowly India is catching up but labour still is prominent and is an advantage as it is cheap. When we look at the economic culture it is seen that the population which is much younger want goods which are latest and matches with the changes accounted in the western countries. This helps to ensure steady demand and since they have a different social culture so there is a difference in the taste and requirement depending upon different areas of the country. When we look at the language it is seen that India has vast languages due to the nature and size of the country. But Hindi is the most prominent of that all especially in smaller towns. With the evolution of newer methods and techniques it is seen that Indians have also adopted towards English which is helping them to develop easy relations with the outside world. In term of culture we see that India has high contest culture where they display the qualities in the group so Australian investors need to match those to ensure that there is no confusion. When we look at the geographical factors we see a difference in the time gap between the two countries. Australia is ahead of India by 5.30 hours. On the communication front we see that having different airlines and the usage of internet has reduced the boundaries between the two countries. The consumption pattern in India has a mix of different culture so adapting to the Australian culture on the consumption pattern is not difficult. A research shows that “people from different countries have different culture as a result of which their pattern of influencing other is also different there by suggesting that culture brings about a change in the way person behaves and this gets moulded by the group he belongs to”. (Ralston, Hallinger, Egri & Naothinsuhk, 2005) Thus, culture affects the manner in which foreign direct investment flows as the investors look forward to a culture which promotes harmony and safety of their funds. At they same time they want to ensure that their funds will be returned back when the investor wishes to do so. The culture is outgoing. The population has a mix of people and they prefer to socialize. This is an opportunity for the all the sector. The culture is such that investments made can grow. This is an avenue for companies to tap and look for alternatives to move. Thus it will give an impetus to foreign investment and more investors will look towards investing. Environmental, Human Resource & Intellectual Property Factors The Indian government has also framed laws for the environment. A cap has been put and steps taken to keep it within limits. This is a step which will win many environmentalists and will also be seen as a safe heaven for foreign investment as it looks towards the well being of the mass. This is slightly different from the laws in Australia where companies are allowed to trade in carbons which is still in a nascent phase in India and will need the requisite time to be fully applicable. Also the laws are looking towards global standards will help the Australian investor to meet the needy changes and thereby create an opportunity where investment is safe and secure. The Australian investor on the human front needs to ensure that they meet the local labour union needs. This can be achieved by joint ventures. Also the fact, that adhering to the local union will help the investor to work in an undisputed manner. The Australian investor needs to ensure that they are able to ensure safety, proper facilities and compensation for the employees. This will help them shape the manner in which things is done thereby enabling them to grow. On the intellectual property front investors needs to ensure that trade marks don’t match to the trade marks already present. Also the investor by ensuring that patents and copyright of their goods and process will help to ensure conformity with the law and will help the investor. Since, the government has laws against dumping and ensuring the local industry doesn’t gets hurt will help and ensure that the investment is safe and secure. Conclusion Thus, the environmental factor and the theories highlight the importance it has. It throws light on the fact that investors need to gauge these factors so that they are able to decide on the investing pattern. This also ensures that the funds are safe at the same time ensure that the investor gets good return on his investment. Thus, analyzing the environmental factor will help the Australian investors to look into various important directions thereby enabling them to gauge the safety of the funds. This will thus help the Australian investor to ensure that the investment avenues in India are safe and the opportunity the country presents for the growth of the funds. 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