Implications of Foreign Direct Investment in India - Dissertation Example

?Introduction Organized retail in India has undergone a change and is expected to become one of the pillars of growth in the Indian economy. At present only three percent of the retail market is in the organized sector (Sreejith & Raj, 2007). The fastest growing sector in retail in India is grocery retailing. The demand for packaged food has grown with rise in disposable income and with both husband and wife working out of home. Modern retail format has entered India and by mid-2011 the share of modern retail had reached ten percent (Dholakia, Dholakia and Chattopadhyay, 2012). According to Sengupta (2008) India’s retail sector is expected to grow to $635bn by 2015. However, grocery retailing India is highly competitive which makes the margins very low. Nevertheless, the country is geographically large and the market potential is high. Organized international retail chains have not been able to enter the Indian market. There are large corporate houses such as Spencer’s, Reliance Fresh and Big Bazar that have been dominating the market. India has been slow in joining the retail revolution that has changed the world retail sector but it is now fast catching up. Inward Foreign Direct Investment (FDI) in India was less than US$ 2 billion prior to reforms in 1991 and it reached US$ 164 billion by the end of 2009 (Dreher, Nunnenkamp and Vadlamannati, 2012). In 2010 the retail market in India was valued at $435 billion and is expected to grow to $535 billion by 2013 (Bhattacharyya, 2012). In 2007, India was ranked the twelfth largest consumer market and is set to become the fifth largest consumer market by 2025, according to a study by McKinsey and Company (cited in Bhattacharyya, 2012). The total business in India is set to grow US$ 1 trillion by 2016-17 (Appendix A). FDI has been booming in India as the economy has opened up to the major world markets. FDI in the retail sector has been restricted to single-brand retailing until recently. The Indian government has recently changed its policy and now permits 51% in multi-brand retailing. All major retailers such as Wal-Mart, Office Depot and Tesco have been eyeing the Indian market. Tesco Plc is a global grocery retailer headquartered in the UK. It is the third largest retailer in the world in terms of revenue. The retailer currently has 5380 stores globally, employs 4, 92,714 people and boasts of a turnover of US $100 billion with a customer base of over 600 million (Mehdudia, 2003). Tesco has been keen to enter the Indian market with FDI in multi-brand retailing since the policies in India have been liberalized. The retail sector includes apparel, accessories, cosmetics and many other sectors. The focus on this study would be grocery retailing. It would be of interest to evaluate the trends in the Indian retail sector, the existing retailers, the power of unorganized retailing in India and the difference that organized retailing could make on the Indian economy. The outcome of this study could have marketing implications for the retailers eyeing to enter the Indian market. This paper could serve to educate them on the values, norms and regulations that govern businesses in India. It could also benefit the academia in terms of retail growth trends in the developing economies. This is because the consumer as well as the retail sector is in transition in most developing economies. Literature Review The Retail Sector in India A study by AT Kearney - Annual Global Retail Development Index (GRDI) for the year 2012 – places India in the fifth position on the basis of retail investment attractiveness (Bhattacharyaa, 2012). The growing Indian market and the retail boom attracted many retailers to enter the Indian market. According to Investment Commission of India, the retail sector in India is expected to grow to $660 billion by 2015 which is three times its current level. FDI in the retail sector can reduce the transaction and transformation costs of business through adoption of an advanced and sophisticated supply chain. This strategy then benefits the end consumers, the farmers or the suppliers. Currently the bulk of the grocery in India is supplied by the small stores or the kiranas, as they are called. Even though modern organized retail has started in India, the modern urban consumer would still split the monthly grocery between the small traditional stores (STS) and the modern retail outlets, with the bulk business going to the traditional stores (Dholakia, Dholakia and Chattopadhyay, 2012). The STS have an advantage as they are conveniently located in every neighbourhood, or in local markets where dry and wet goods stores have the daily necessities on offer. These markets and stores are frequented even by the affluent consumers in India. Dholakia, Dholakia and Chattopadhyay (2012) project into the future how traditional and modern retail sector in India would co-exist. They build a theoretical framework for the traditional-modern retail dynamics of India. They draw upon the general economic and social theories and they integrate theoretical sources and practical insights to develop the framework. This paper would help to understand the retail sector in India. Sreejith and Raj (2007) chart the evolution of the retail market in India from the kirana or the Mom and Pop stores to the entry of organized retail. They also highlight the drivers of growth in the retail sector where consumers have a significant role to play. They emphasize on the benefits of retail boom that the Indian economy would enjoy such as mass employment, infrastructure changes, exports, education, banking, tourism and consumer-oriented culture. On the other hand, the authors point out that 26 percent of the population sill lives below the poverty line and the growth can lead to social tensions. Moreover, the employment that would be created would mostly be for unskilled labour which does not really benefit the country. The entry of retail giants might also adversely impact the local kirana stores. This has been debated upon by many scholars in India and many have raised concerns for the unorganized retail sector. Some fear that competition from big retail companies that have the prerogative to procure from anywhere in the world would pose stiff competition for the small retailers who may also over time, be eliminated from the market place (Chowdhary, 2013). Moreover, as Chowdhary points out, the unorganized retail sector is not a homogenous category. Besides the Indian retail market is quite diverse in culture, scale and structure. While the government is trying to convince that FDI will not harm the local trading practices, vendors fear exit from the scene because the large retail giants would develop direct contact with farmers and producers of essential commodities. Productivity in agriculture in India has declined which might force the foreign retailers to look elsewhere for their supplies. Amidst such debates the GOI continues its efforts not only in attracting foreign retailers but is making this issue a top priority (Ghosh and Chakravarty, 2013). The GOI is even considering abolishing foreign investment caps across all sectors. The global retailers may have to adopt a calibrated approach geographically and investments would have to focus on back-end infrastructure but there is much in store for these retailers that plan to bring in FDI. Supply Chain Management in India Supply chain management is an integral part of the retail sector. Dabas, Sternquist and Mahi (2012) contribute to the supply chain structure in India. This paper points out that India still lags behind in regulatory system which impacts the supply chain. Retailers entering India would have to note that almost one-third of the Indian firms have no supply chain strategy because of the regulatory issues and complex legal structures. India also scores lowest on design, product quality, on-time delivery, and after-sales-service and distribution management. The authors also find gap between supply chain strategies and business objectives in Indian firms. The supply chains in India suffer from poor infra-structure but this is beyond the control of individual firms. The multinational retailers entering the Indian market need to be prepared for the complex regulatory system, and lack of technology implemented in the supply chains. The distribution system is labour-intensive as labour is cheap and available in abundance. Economic exchanges in India are driven by relational norms which might be unknown to western retailers. Trust and mutual goal-fulfilment are important in the Indian supply chains. Employment in the Retail Sector Mukherjee and Goyal examined the employment conditions in organized and unorganized retail as a result of FDI policy in the sector. Retail is labour-intensive and the FDI in this sector is linked with employment. The authors highlight the difference between organized and unorganized retail as far as employment is concerned. The study found that the quality of jobs and future job prospects are better in the organized sector than in the unorganized sector. This is because the organized sector has a corporate set-up and professional management with defined job roles, with fixed holidays and working hours. The unorganized sector does not require high skills and consequently the salaries are low as well. The retail sector has made little impact on the SMEs in the USA and they are unlikely to be impacted in India as well. In fact the SMEs have locational advantage as they would tend to be more business-like under the shadow of the larger retailers (The Economic Times, 2012). Retail modernization in India has registered growth due to economic development, rise in purchasing power, brand proliferation and rising consumerism (Bhattacharyaa, 2012). High economic growth led to higher per capita increases, which in turn, is responsible for the shift in consumption patterns – from necessities to discretionary consumption. As more international brands enter the domestic market consumer awareness and consumption increases. FDI in Retail in India In making ownership decision in FDI in India, the foreign investors can have the bargaining point based on technical, managerial and financial capabilities (Dreher, Nunnenkamp and Vadlamannati, 2012). Country-of-origin (COO) characteristics and host country characteristics are important in ownership decisions in India. In the retail trade the government has relaxed the ownership norms but finding a suitable local partner in India is essential and COO characteristics and Host country characteristics would have a role to play. There are several routes to enter India in the retail sector. Retailers have been using methods such as franchising, particularly in the fast food sector. Pizza Hut and McDonald's are the two giants that have entered India through franchising (Bhattacharyya, 2012). In the apparel and accessories sector also Nike and Lacoste have entered India through franchising. Cash and Carry wholesale trading is another method to enter a country and Metro AG of Germany was the first wholesaler to enter India with 100% FDI (Bhattacharyya, 2012). In this case the retailer does not interact with consumers but its customers comprise of small retailers. Another method to enter a new market is through licensing. Several companies such as Mango, the Spanish apparel brand and SPAR entered into agreements with local Indian companies. They used this method to enter the Indian market. In the apparel and accessories sector other companies such as Nike, Reebok and Adidas entered India setting up wholly-owned subsidiaries in manufacturing. They are treated as Indian companies and hence permitted to do retail in the Indian retail space. These companies entered into agreement with Indian companies, internal companies or existing Indian retailers that have their own outlets. The number of FDI projects in India has increased from 68 in 2010 to 89 in 2011 although in terms of value, inward FDI has reduced in the sector (EYGM, 2012). The consumer products retailers are keen to enter India to capture the growing middle class which is able to afford consumer products. India is poised to become the fifth largest country in terms of consumption by 2025. Consumer products companies are reported to be innovating and adapting to the needs of the Indian consumers. However, profits margins are low due to rising inflation and increase in the cost of packaging and distribution. Complex regulation in the country has been found to be the biggest hurdle. FDI in multi-brand retailing in India comes with a clause which the foreign investors should be prepared for. Fifty-one percent in multi-brand retailing will be allowed and the minimum investment that should be brought into India is US$ 100 million (Uttam and Kumar, 2013). Fifty percent of the investment should be in back-end infrastructure and thirty percent should be invested in procuring products from small-scale manufacturers. Multi-brand retailing would be allowed only in cities with a population of more than ten lakhs. However, several issues have arisen due to the amendment of FDI in retail which now permits multi-brand retailers to have majority stakes. For instance, India being geographically dispersed and comprising of several states, the states has been given the authority to decide if they want such a retailer in their state (The Economic Times, 2012a). Several states such as West Bengal, Gujarat, Uttar Pradesh and Tamil Nadu have decided not to permit FDI in multi brand retailing in their states. Only ten states in India support FDI in multi-brand retailing. The policy also lacks clarity on souring qualifications. Consumer Demographics According to The Hindu (2012) the small kirana shops would not be affected as modern retail would more than double in a very short time. FDI would not be a threat to small retailers. This can be acceptable considering that the country’s population has reached nearly 1.21 billion as per the Census of India 2011 compared to 1.03 billion as per Consensus of 2001 (LaSalle, 2012). The share of urban population has increased from 28% in 2001 to 31% in 2011. Approximately 64 percent of the population in India is in the working age group 15-64 and 35% is between 15-34 years of age. The per capital GDP of the country was INR 46,221 at the end of 2011 which is expected to rise to INR 58,224 by the end of 2015 as forecast by IMF. With such a scenario the retail sector has the potential to be the real growth engine for the country’s economy. The Tier II and Tier III town in India are also setting for the growth that is imminent. With the entry of multi-brand retailers India is expected to gain in terms of quality, infrastructure and prices. Mukherjee, Satija, Goyal, Mantrala and Zou (2012) investigated the brand consciousness of the Indian consumers. Through a survey their brand knowledge, purchase behaviour and perception of foreign brands was examined. The study found that brand purchase in India varies across categories as well as across regions within India. Consumer knowledge and use of foreign brands is low in India currently and the average Indian consumer is price-conscious. They are experimenting with brands and would like more foreign brands to enter India. Branded products are sold through both traditional and modern retail outlets under different retail formats. However, since brand knowledge is poor in India, mode of entry into India should not be associated with brand knowledge. The literature review suggests that the retail sector has high potential for growth. Foreign investors could gain from such investment. However, most of the studies have been conducted before the GOI opened up the economy for multi-brand retailing. Moreover, all the other companies that have entered India in the retail sector are in the fast food restaurant or in apparels and accessories sector. No retailer in grocery in multi-branding format has yet entered India. Thus, before Tesco starts its own multi-brand store further investigation is essential, for instance, the political stability that could influence the FDI policy in the retail sector. Research Aims and Objectives While there are several single brand retailers that have entered India, no multi-brand retailer in grocery has yet entered India. Several discussions and debates ensue on how a multi-brand retailer would be positioned. While some economists cite the benefits of FDI several Indian states have declined from supporting FDI in multi-brand format. FDI can be a catalyst to accelerate and enhance quality production. Competition can enhance productivity and result in reduced costs for the end consumers. It is generally believed that FDI would not harm the interests of the small retailers. However, there is another group of people that are against FDI in retail as it would adversely impact the common man. The existing international retailers in India are from different sectors such as food or apparels. This study focuses on multi-branding in the grocery sector. Thus, with the aim to evaluate the opposing views on the impact of FDI in multi-brand retailing in India, the objectives of the study are: To trace the growth of FDI in retail in India To investigate into the impact on employment in India following FDI in retail To evaluate the infrastructure in India that is necessary for supply and distribution in the retail sector Research Questions 1. Does India offer a stable political environment for multi-brand retailing in India? 2. Is the infrastructure in India suitable for global retailers? 3. What are the growth prospects for retail sector in India? 4. Are the Indian consumers ready to accept foreign brands that may be more expensive than the local brands? 5. Would FDI enhance productivity and distribution efficiency in the retail sector? 6. Which geographical regions within India should be targeted upon initially? 7. What implications does the scenario in India have for global retailers? Research Design It is important to know why the research is being conducted as this helps design the research process. Research explores the basis of knowledge and it is important to ascertain the impact of FDI in multi-brand retailing in India. Multi-brand retailing in India is a fairly new concept and as of now no multi-brand retailer has entered India. To evaluate the impact of FDI research design is essential. Research design pertains to data collection, analysis and presentation of data with the final inference. Data collection can be either qualitative or quantitative in nature. For the purpose of this study qualitative data is considered more appropriate because quantitative data is numerical and this study does not require numbers and figures. This study requires evaluating the impact of FDI in multi-brand retailing in India. Qualitative data can be gathered through primary sources or secondary sources. Gathering primary data through surveys and interviews is not feasible for this study because of time and budget constraints. It would not be possible to access the authorities for information necessary for this study. Since no multi-brand retailer has yet entered India, no primary data can be gathered. Based on past performances and forecast of the impact, analysis can be made of what the retailers should expect to encounter when they enter India. Moreover, there is sufficient amount of secondary data on the retail sector in India, on FDI in the retail sector and the consumer characteristics of Indian consumers. The existing secondary data is considered sufficient to answer the research questions and achieve the study objectives. It is not feasible to gather primary data on issues such as infrastructure and distribution management. These data would have to be obtained from different secondary sources and analysed to develop new insights. Qualitative data thus gathered would help evaluate feelings, thoughts, intentions and behaviour. Several studies have been conducted over a period of time and these would have to be evaluated against the current situation prevalent in India. This would present a realistic picture of the change that has taken place over a period of time. Synthesizing the previous perspectives would enable the researcher to gain new perspectives. Efforts would be made to gather the experience of the single brand retailers that have already entered India. Data Collection and Analysis Data for this study would be based on secondary sources and the secondary sources would include the government statistics, academic journals with focus on journals within the past twelve months. Data would also be gathered through reputed dailies sourced through reputed search engines. These websites would enable the researcher understand from the perspective of the businesses as well as the consumers. Academic journals would be sourced through online databases such as Emerald, EBSCO Host, Taylor & Francis, Science Direct and Sage Publications. The purpose of qualitative data is to gather subjective experience. This is possible through qualitative secondary analysis (QSA) in which analysis is conducted of data that has been collected for some other purpose. QSA helps to corroborate, redefine and validate the original primary analysis. Analysis would be specific and would also entail reflection on the data collected. Efforts would be made to present the data in chronological order which would facilitate analysis. Ethical Considerations Since no primary data is being gathered, ethical concerns are minimal. As far as secondary data is concerned, all the data is publicly available. For all secondary data used for the study, all citations will be provided and all researchers and scholars would be duly acknowledged which would also serve to respect their intellectual property rights. References Bhattacharyaa, R. (2012) The Opportunities and Challenges of FDI in Retail in India. IOSR Journal Of Humanities And Social Science (JHSS), 5 (5), 99-109 Chowdhary, S. (February 2, 2013) FDI in Retail: What it entails? The Hindu. Available from http://www.thehindu.com/opinion/op-ed/fdi-in-retail-what-it-entails/article4372020.ece [Accessed April 16, 2013] Dabas, CS., Sternquist, B. and Mahi, H. (2012) Organized retailing in India: upstream channel structure and management. 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Available from http://articles.economictimes.indiatimes.com/2013-03-14/news/37713635_1_foreign-retailers-back-end-infrastructure-foreign-supermarkets [Accessed April 16, 2013] LaSalle, JL. (November 30, 2012) FDI in multi-brand retail: Is India ready for it now? Moneycontrol.com Available from http://www.moneycontrol.com/news/real-estate/fdimulti- brand-retail-is-india-ready-for-it-now_788962.html [Accessed April 16, 2013] Mehdudia, S. (February 8, 2013) TESCO to open Indian subsidiary for farm output and fruits. The Hindu. Available from http://www.thehindu.com/business/companies/tesco-to- open-indian-subsidiary-for-farm-output-and-fruits/article4393775.ece [Accessed April 16, 2013] Mukherjee, A. and Goyal, TM. (2012) Employment Conditions in Organised and Unorganised Retail: Implications for FDI Policy in India. Journal of Business and Retail Management Research, 6 (2), 26-38 Mukherjee, A., Satija, D., Goyal, TM., Mantrala, MK. and Zou, S. 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Available from http://articles.economictimes.indiatimes.com/2012-10-31/news/34837353_1_clasis-law-single-brand-retail-chains-multi-brand [Accessed April 19, 2013] The Hindu. (September 23, 2012) FDI in retail not a threat to kirana shops: Montek. The Hindu Business Line. Available from http://www.thehindubusinessline.com/government- and-policy/fdi-in-retail-not-a-threat-to-kirana-shops-montek/article3929282.ece [Accessed April 19, 2013] Uttam, P. and Kumar, RS. (2013) The Indian Government and FDI in Retail Sector in India. Advances In Management, 6 (1), 3-8 Appendix A Size of Indian Retail Business Source: Bhattacharyya (2012) Read More