Market Feasibility for Investment in India by a Latin American Mobile Firm - Coursework Example

Market Feasibility for Investment in India by a Latin American Mobile Firm Introduction India is one of the few countries that have been able to restore investor confidence even during the toughest of economic times. Since 1990, India has received a steady increase in capital inflows, foreign direct investments and overseas participation, which reflect the extent to which the Indian market has fared well (Edgar, 2012). As a result, foreign companies are viewing the South Asian country as a strategic hub for investments, owing to the government’s investor-friendly policy. India is the second most populous country in the world and has a large surface area. The large population ensures a reliable domestic market for locally produced goods and services. The Indian economy has reached the orbit of high economic growth rate (Sinha, 2004). Unlike 20 years ago, India is widely considered to be an emerging global economic player. As the third largest economy in the world in terms of Purchasing Power Parity, India is a natural preference for foreign direct investments. Foreign Investment in India Foreign investments have played a crucial role in the growth and development of the India’s economy. Investments by foreign firms in various sectors of India’s economy such as telecommunication and energy and infrastructure have enabled the country to achieve an outstanding degree of financial stability. Today, India is one of the world’s largest and fastest growing economies, despite the fact that it has a large population. Moreover, foreign investments have allowed India to focus on development of areas that need economic attention and address the various social issues that challenge the people (Hasan, 2001). Gardner (2000) has noted that since independence, successive governments of India have continually sought to attract foreign direct investments from the world’s major investors such as the United States of America, Britain, France and Germany. Foreign investments in India are allowed through financial collaborations, preferential allotments or private equity, though joint ventures and by way of capital markets. However, foreign investments are not allowed in the areas of arms, nuclear coal, railway or mining industries. To make the local market attractive to potential foreign investors, the government has implemented a number of projects in sensitive areas such as electricity generation and distribution, railway and road development and stabilization of internal economic system. Recently, the Indian national government passed a legislation that allowed foreign direct investments to provide up to 100% of the financing required for certain projects such as construction of tunnels and bridges. Currently, the government allows foreign investments in financial services including the rapidly growing debt card industry. Over the years, the country has had an impressive foreign direct investment growth. In 2007, the country received $34 billion in foreign investments (Edgar, 2012). While this is less than what flowed to her neighbor to the north, China, India continues to replenish its foreign investment attractions. In 2011, foreign direct investments in India reached 2% of the country’s GDP, compared to 0.1% in 1990 (Edgar, 2012). The country has important attractions in the fields of information technology and other areas such as chemicals and pharmaceuticals, auto components, jewelry and apparels (Athreye & Kapur, 2002). There are, however, some few hurdles that India needs to address to become as attractive as other countries as regards foreign direct investment. The poor state of physical infrastructure is the biggest challenge that India faces. Development in India’s infrastructure is so bad that foreign investments are only concentrated to a few specific sectors of the economy. Although some of the issues that plague the country in aspects of highways, ports and telecommunication are being addressed, the slow rate of development and improvement of railway, sanitation and water systems continue to hinder foreign investors. Federal legislations are the most perverse impediment for foreign investment for foreign investment in India. Local authorities are not allowed to conduct any business related to approval and the bureaucratic structure of the central government is a breeding ground for inefficiency and poor service delivery (Béteille, 2001). Despite the promising surge in foreign direct investments, the country’s rigid foreign direct investments are a significant hindrance to the development of the sector. But due to positive economic reforms aimed at regulating the economy, India is positioned as a key front runner in attracting foreign investors. In 2005, the country liberalized its FDI policy to allow for 100% ownership in some ventures. In addition, the country has implemented several industrial reform policies, which have significantly reduced industrial licensing requirements. Moreover, restrictions on expansion by foreign firms have been removed (Trompenaars, 2004). Environmental and Market Analysis of India’s Telecommunication Industry: Opportunities for Foreign Investment The telecommunications industry is one of the fastest growing and most profitable industries in India. The Indian telecom industry had about 600 million connections as at 2010. With over 500 million wireless connections, the Indian telecommunications industry has the second largest wireless network in the world after China (Kakar, 2005). About fifteen million new connections are being added every month. There are huge potential for the growth of telecommunication industry in India. This is because of the country’s huge rural population. It is expected that of the next 250 million people that are expected to go mobile by the year 2015, 10 million will be from rural areas. Although the telecommunication market in India is growing at a very high rate, India has the largest untapped telecommunication market on the global perspective. The bargaining power of suppliers of raw materials is quite low in India. In the telecommunication industry, there are an ample number of substitute suppliers and raw materials are readily available. There are no situations of monopoly in suppliers because suppliers are also competing among themselves or customers. Strengths of India’s Telecommunications Industry India’s telecommunications industry has a huge customer potential. The India’s tele-density stands at 48%. The number of broadband subscribers grew from 0.18 million in 2005 to over 15 million in 2009 (Edgar, 2012). This has gone up since then, considering the high growth rate of the technology industry. The rapid increase in the number of mobile subscribers is a good incentive for foreign investments in the telecommunications industry. In 2005, the government relaxed rules on foreign direct investment. The new rules allowed up to 100% foreign ownership in specified ventures. The liberalization efforts are a good incentive for foreign direct investments. In general, investment in the India’s telecoms industry requires low capital expenditure. Major Weaknesses in India’s Telecommunications Industry India’s poor state of infrastructure in the telecommunications industry is a major hindrance to profitable foreign investment in the industry. India is a late adopter of new telecommunication technologies and unlike the US or China, India is among the last countries to get access to 3G technologies (Edgar, 2012). In addition, the Indian telecommunications market is the most competitive in the world with more than 12 companies offering mobile telephone services. In addition, India’s telecommunications market is highly regulated by the government. The market is difficult to enter because of the huge financial requirement (Joshi, 2001). Opportunities for Foreign Investment in India India’s telecoms market offers unprecedented opportunities telecommunications investors both local and foreign. There are plenty of opportunities for telecommunication service providers, manufacturers of various equipment, infrastructure vendors and related service companies. A number of factors have contributed to the enlarging opportunities for investment in telecom industry. These include: i. An expanding economy with an increasing focus on the service sector. ii. Favorable population mix moving more towards a younger age profile. iii. Rapid urbanization with corresponding increase in family incomes. Because of these favorable factors, foreign investors can look to capitalize on the gains of the India’s telecom boom and diversify the range of operations. Luo, (2004) has noted that an attractive trade and foreign policy and lucrative incentives for foreign investment in various sectors have made India one of the most attractive markets for telecoms service providers and equipment suppliers. Research & Development and Development Programs The past two decades have witnessed India proving its dominance as a technology solution provider. The country is continuously making efforts to develop and make available affordable technology for the people (Julien, 2005). The government and private sector players have invested hefty resources to develop comprehensive security infrastructure for the country’s telecoms network. Research programs have already produced infrastructure that enables interoperability for mobile telephone services. In addition, modern technology inductions are being promoted in the telecoms industry. Pilot projects on current and emerging technologies have been undertaken and more emphasis is being given to technologies that have the potential to improve connectivity in the rural areas. The government encourages R&D in the telecoms sector and this will significantly accelerate narrowing of the current digital divide (Nayak, 2005). Social Factors That May Affect Foreign Investment in India Changes in social trends in India can impact on the business opportunities for foreign firms operating in the country. Much of India’s population has been aging. This has resulted in corresponding increases in the cost of firms that are committed to pension payments for their employees. This also means that firms have to recruit old employees in order to tap into the growing labor pool (Kumar, 2004). In some parts of the country, especially rural areas, literacy rate is very high. This means that some businesses are not welcome in the communities where literacy rates are low. India’s economic factors have been improving continuously. The country has the third largest GDP in terms of PPP ahead of Japan and just behind the US and China. The country has also experienced a continuous growth in per capita income (U.S International Trade Commission 2012). This will increase people’s purchasing power. Political Factors that influence Foreign Investment in India Political factors refer to government policy such as the extent of intervention in the economy. The major political factors that influence investment decisions in India are taxation policy, privatization policy, international trade regulations and deregulation. The government of India has established an efficient tax structure (Ramachandran, 2000). Essentially, India’s taxation system is three tier- union government, state governments and urban and rural local bodies. The power to levy taxes and dues are distributed among the three tiers of the government in accordance with the provisions n the Indian laws. Privatization of several industries such as the banking, insurance and telecoms industry have significantly reduced instances of political intervention in management of businesses. This has led to improved efficiency in service delivery and productivity. The deregulation policy allows foreign companies to freely do business in India so long the businesses are within the law. For a long time, India has enjoyed political stability and this is ideal for foreign investment (Bhandari, Gokaran & Tandon, 2002). Environmental Problems Rapid industrialization and urbanization have had profound effects in India’s business environment. Quality of air is very poor due to heavy industries which emit large quantities of fumes. The country’s sewerage systems are relatively under developed and of the three million premature deaths that occur each year in the world due to air pollution, the highest number occurs in India. As a result, foreign companies are required to observe strict environmental laws (Reifeld, 2001). Implications of Transferring Practices to India by a Latin American Mobile Company Transfer of practices means establishing production or service centers in another location for gainful applications. This can take place through joint ventures and can serve as a tool for strengthening India’s total production systems, providing more competitiveness in the investing firm’s global market position and assisting in closing the gap between the two countries. For a successful entry and continuous growth in the Indian telecommunications market, effective communication with other players in the industry and adaptation to the local culture are important (Ramachandran, 2000). Since 1990s, a growing number of multinationals have been attracted to India and many more have interest to enter the lucrative market. The increasing inflow of foreign direct investments into India is an important indicator of the increasing growth of India as a strategic investment point. Sarangi, (2002) has noted that this is largely due to the increasing understanding of the cross-cultural differences between multinational companies’ home countries and the host country’s business practices. Moreover, the increasing flow of foreign direct investments to India has been accompanied by increasing flow of expatriates. The expatriates are very resourceful in providing essential services and knowledge necessary for developing India’s foreign investment infrastructure (U.S International Trade Commission, 2012). The emergence of globalization requires cross-cultural knowledge and successful management of diversity. While no enough evidence is available on the impact of cross-cultural literacy on the cost of doing business in India, it is fair to assume that having adequate knowledge of cross-cultural issues reduce the cost of doing business in any foreign country. It is thus imperative that the mobile company from Latin America explores and understanding India’s cultural diversity and identity. It is imperative for any multinational company eying the Indian market to understand the country’s unique socio-cultural values and local organizations behavior issues so as to be benefit from transfer of practice to various local units (Kumar, 2001). Recommendation Given the favorable reforms that the government of India has undertaken in respect of its foreign investment policy, it is important that foreign companies transfer their practices to the Asian country, which is also an emerging economic giant. India has a huge population which means guaranteed consumption and hence profitable business. Foreign firms in India’ telecommunication industry can enjoy the benefits of low tax rates and a growing internal market. These are indeed important attractions for investing in India. Ii is, therefore, recommendable that the Latin American mobile firm takes swift measures to establish its presence in the Indian market before it gets saturated. Conclusion India has grown rapidly to become one of the most attractive countries for doing business among the developing nations. The attractive business environment has come about largely because of the country’s political and economic reforms which provide foreign investors with the necessary incentives for doing business in the country. Since 1990, the government has tirelessly worked to implement major economic reforms and this has made it possible for firms located outside India to make direct investments in the Indian market. Due to these favorable reforms, firms from all over the world have taken advantage of the opportunities to invest in various sectors of India’s growing economy. While opportunities for doing businesses in India have led to the success of many multinational corporations, there remain some challenges that may hinder potential investment in certain sectors. In particular, India’s status as a developing country means that it has not attained sufficient development of some essential. For instance, the country’s basic infrastructure is modest; some parts of the country are highly inaccessible. Water and sanitation systems are issues of major concern while the large number of people living in rural areas does not seem to offer incentives for quick expansion in the country’s market place. Despite these challenges, the country’s leadership has undertaken numerous reforms especially in its foreign investment policies. For instance, the government has relaxed rules that put limits on foreign ownership and today, foreign companies can claim 100% stake in specific investments. Regarding the telecommunications industry, the government has taken steps to make the industry attractive and competitive to foreign investors. India’s accommodating culture offers attractive incentives for foreign investments. Moreover, the country’s large population and low cost of living are guarantee for cheap labor force and hence low cost of doing business. In general, the country has all the attraction necessary for foreign investments in various sectors of its economy. References Athreye, S. and Kapur, S 2003, Private Foreign Investment in India, Mimeo, Manchester, UMIST. Béteille A 2001, The Social Character of the Indian Middle Class, in: Ahmad and Reifeld (ed.), Middle Class Values in India and Western Europe, New Delhi , Konrad Adenauer Foundation, Social Science Press. Bhandari, Gokaran and Tandon 2002, Reforms and Foreign Direct Investment in India, DRC Working Paper No. 4, Centre for New and Emerging Markets, London, London Business School. Edgar, T 2012, The Pearson Current Event Digest 2011-2012, New Delhi, Pearson Education India. Gardner, D 2000, India's plans to plug the brain drain. Financial Times, 24, April. p. 17. Hasan, Z 2001, Changing Political Orientation of the Middle Class in India, in: Ahmad and Reifeld (ed.), Middle Class Values in India and Western Europe, Konrad Adenauer Foundation, Social Science Press, New Delhi. High commission of India 2003, India-Singapore: Moving on 2003, Singapore: Sun Media PTE LTD. Joshi, S 2001, Fractured Modernity: Making of a Middle Class in Colonial North India, New Delhi, Oxford University Press. Julien, A 2005, The Applicability of Western Management Practices in LDCs – The Indian Experience of French and German Companies, Paris, Unpublished Diploma Thesis. Kakar, S 2005, The Inner world: A Psychoanalytic Study of Childhood and Society in India, Oxford University Press, Delhi. Kumar, N 2001, Liberalisation and Changing Patterns of Foreign Direct Investment: Has India’s Relative Attractiveness as a Host to FDI Improved? In: Kapila, R. and Kapila, U. (ed.) India’s Economy in the 21st Century, Academic Foundations, Gaziabad. Kumar, R 2004, Brahmanical Idealism, Anarchical Individualism, and the Dynamics of Indian Negotiation Behavior, International Journal of Cross Cultural Management, vol. 4, no. 1, pp. 39-58. Luo, Y 2004, A coopetition perspective of MNC-host government relations. Journal of International Management, vol. 10, no. 4, pp. 431-451. Ministry of External Affairs, Government of India 2002, India 2003-2004: Reliable Business Partners Attractive FDI Destination, Text produced in association with KPMG India. Nayak, A 2005, FDI Model in emerging economies: case of Suzuki Motor Corporation in India, Journal of American Academy of Business, vol. 6, no. 1, pp. 238-246. Ramachandran, R 2000, Understanding the market environment of India. Business Horizons, January-February, pp. 44-52. Reifeld, H 2001, Preface, in: Ahmad and Reifeld (ed.), Middle Class Values in India and Western Europe, Konrad Adenauer Foundation, Social Science Press, New Delhi. Sarangi, D 2002, Infrastructure development: a public-private partnership in India. International Social Science Journal, vol. 54, no. 172, pp. 267-271. Sinha, J 2004, Multinationals in India: Managing the Interface of Cultures, New Delhi, Sage Publications. Trompenaars, F 2004, Riding the Waves of Culture: Understanding Diversity in Global Business, London, The Economic Books. U.S International Trade Commission 2012, Competitive Conditions for Foreign Direct Investment in India, Staff Research Study #30, New Delhi, DIANE Publishing. Read More