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The Indian market offers various opportunities and challenges to European firms that seek to penetrate it. These challenges or opportunities present themselves differently to companies depending on whether they want to engage in foreign direct investment, or they are going to the offshore destination through India as their business model. India is classified as an emerging economy and has an estimated GDP of 4.761 trillion dollars. It also had FDI inflows of 27.3 billion US dollars in 2012. Its major export partners are UAE, US, China, and Singapore respectively. Its major import partners are China, UAE, Saudi Arabia, US, and Switzerland respectively. As the second most populous country in the world, India has a lot to offer businesses from Europe seeking to expand their markets.
The opportunities that India presents to European companies
The Indian economy was liberalized in the 1990s, and it has continued to open up to foreign company participation. Companies seeking to make foreign direct investments in India are encouraged by a favorable regime of capital investments and trading rules. They can calculate the returns on their investments with certainty based on the fundamental business practices that are allowed in the liberalized environment.
The most attractive sectors for the Indian economy are agriculture, retail, and infrastructure because they are least developed in comparison to similar sectors in advanced economies. These sectors also offer the highest potential in returns on capital invested. Besides, the sectors that support these primary investment areas are also worth considering. Notably, the logistics sector is a worthy candidate for consideration by firms from Europe.
The sectors continue to grow, and they have attracted companies from all over the world. Thus, their growth offers additional opportunities for European firms that would otherwise not survive in a non-supporting environment given that they would be looking for intermediaries in their line of business. The continued participation of foreign companies in these sectors has also led to the development of the overall Indian economy. It is no longer just a recipient of FDI, but it has also become a significant player in the world economy. The country’s companies are expanding as international companies in other parts of the world. The government of India is also making headways at signing bilateral trade agreements with other countries so that Indian firms can have access to foreign markets at preferential rates.
The opportunities aligned to the growth of India come in the form of mergers and acquisition of Indian companies as well as the formation of licensing and trading partnerships with them so that they serve as conduits for introducing and selling European products and technologies to the Indian market and its constituent regions. The location of India makes it an ideal center for offshore business strategies. It can serve the South Asian countries, Australia, Africa, Middle East and the Far East. In fact, during the days when India was a British colony, it served as a major gateway of goods from Europe to Korea and China as well as other Asian countries in the region. It was an important trade route and to date, it has continued to serve the purpose for many European companies (Davies 45-47).
When considering the India market, companies must note that the country has about 600 million young people. They are trendsetters and welcoming to new forms of doing business. They also present a vibrant workforce that is easy to train and equip with latest technologies. India is also a middle-income country which implies that is has a sufficient consumer purchase power for goods targeted at the middle market. It also has a considerable number of wealthy households that are targets of premium and luxury products from Europe and the rest of the world. The demographic advantage of India presents a tremendous opportunity for companies that need a considerable market size to achieve economies of scale.
India is also noted as a cost effective production center in the world. It is attractive to manufacturing and service firms whose primary cost of production is labor. In comparison to the manufacturing costs in Europe, the costs of labor in India make its costs relatively low. The hourly average compensations costs for all employees in Indian manufacturing sector hovered around 1.46 US dollars in 2010 (Sincavage, Haub, and Sharma 3-4).
Meanwhile, in 2011, the hourly compensation for the manufacturing sector in Norway, Switzerland and Belgium as well as Denmark was above 50 US dollars (Bureau of Labor Statistics U.S. Department of Labor 1). Many other European countries have hourly compensation rates for manufacturing that are higher than 20 US dollars. This shows that, even after factoring in the costs of transporting goods from their manufacturing centers, the Indian prospect is still attractive for many European companies.
Indian is also one of the leading knowledge-based economies in the world. It, therefore, provides companies with a large talent pool for skilled job positions and as a result, it has become a major destination for outsourcing in the world. The country has been experiencing a high economic growth rate, meaning that its level of purchasing power throughout the economy has been increasing. Thus, the country is no longer just lucrative for businesses that seek to invest in the location as a hub for serving other markets. Instead, it also allows companies to focus solely on the India market and succeed to break even and go on to stay profitable.
The advancement of technology in India has led to the development of the offshore industry. The technology has allowed India to bypass many boundaries for its offshore industry such as geography. Teams located in India can work closely and in real-time with other teams in Europe towards joint or delegated execution of duties (Mishra and Devarakonda 283).
Challenges that India presents to European Companies
India is a single country, but it does not offer a homogenous market for most commodities. Apart from natural resources opportunities and markets, other industries are faced with the challenge of having different regions and cultural attributes within the collective Indian economy. There are various social classes that affect consumption patterns in India. Besides, there are various regional governments that have different regulations concerning the administration of businesses in their locations.
Often, foreign companies will enter the India market with knowledge of the national rules and regulations for business, and they go on to use these as the basis for estimating their returns on investment. However, they are surprised to find additional bureaucracies at the state government level and the coordination of activities and regulations between the state and national governments.
India is an emerging democracy and its political process is not as developed as that of West European countries. Thus, during election years, there are likely to be populist policies being implemented by governments at the national and state levels that can be costly to businesses that rely on the predictable state of the environment for achieving their business objectives. Some ad-hoc changes in policies can be on levies charged to foreign establishments to allow them to conduct business in India.
The management strategies of Indian companies may differ from those employed by their European counterparts. Thus, companies realize that they have to embrace a mix of European and Indian management principles to be effective. However, the formula for combining these principles is not defined. Many companies have to learn through trial and error. As they do so, they incur significant business costs that can jeopardize their competitiveness in the country. The first are not exempted from the competitive factors in the market such as the existing rivalry and the power of buyers or sellers. Thus, any addition to the challenges of doing business compounds their success risk in the market.
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Customers are another source of challenges to companies seeking to penetrate the Indian market. For example, the Indian culture favors collectivism and has a larger power distance compared with many cultures in West Europe. Thus, marketing strategies have to be different from those in Western Europe for them to be effective. The challenge for companies then is to find the right marketing mix for them to penetrate the market and sustain a significant market share.
Some of the problems affecting the companies from Europe are systematic, and they can be solved by working with experienced and reputable local companies that can help them to navigate the business environment. This is the only alternative to dealing with the red tape associated with setting up enterprises in the country. Having to deal with the national government and then going on to address the bureaucracy at the state level can be costly and frustrating to companies. However, with local guidance on the laws and the expectation of the market, European companies with assistance from their respective embassies and trade commissions in Indian can have a smooth entry into the country. They can also be facilitated with additional guidance for establishing their businesses throughout the country.
Despite the potential avenues for solving the problems that India presents to European companies, these companies must be ready for the daunting task of shifting their policies and preferences to adapt to the cultural expectations of the host nation. A problem with foreign firms is that they will have their compensation policies. They will also bring in their disciplinary and motivation practices that may be in total conflict with Indian practices. For example, due to the collective nature of the Indian culture, individualistic motivation practices such as increasing monetary compensation may only work as worker motivators to some extent before failing. Indian workers will be more loyal to other employees in the same workgroup than to their individual pursuits because they have grown up to value one another in the same social and cultural category (Valliere 126-127).
For companies that are seeking India as an offshore business location, the key challenges will be mainly cultural. In addition to the changes that the company will make regarding time zones, logistics and language, there are inherent cultural changes that a business from Europe must be ready to undergo to succeed in the Indian context. The companies will face shocking revelations of the differing mindset about management hierarchy.
In India, ranks are critical, while for European companies, job performances for individual workers and their contribution to the organization are mostly considered as important. The communication of workers and business partners will also be difficult for foreign firms operating in India. The Indian offshore teams will have to work with their European counterparts, and they will present the cultural challenges. They will also be facing difficult situations of understanding instructions, work schedules, and processes as well as the meaning of goals and visions of their parent European company operations (Jensen 311).
Despite its distinct advantages for offshoring firms and other European companies that are seeking to make foreign direct investments to consider India as their destination, there are challenges that they must be ready to face. This paper has collectively explored the challenges and opportunities that European FDIs and offshore operations will suffer for their operations in India. The paper shows that there are various challenges that specifically affect offshore businesses.
The others affect all the companies similarly. Nevertheless, the extent of harnessing opportunities or facing challenges will depend on the nature of the business and the reliance on local conditions and systems. Companies operating only and a national level and using technology-based solutions will be less affected by challenges compared to those that have to involve locals in their production and marketing activities and have to deal with both national and state regulations.
Bureau of Labor Statistics U.S. Department of Labor. “International Comparisons of Hourly Compensation Costs in Manufacturing.” 2011. Web.
Davies, Paul. What’s This India Business?: Offshoring, Outsourcing, and the Global Services Revolution. New York, NY: Nicholas Brealey, 2004. Print.
Jensen, Peter D. Ørberg. “A Passage To India: A Dual Case Study Of Activities, Processes and Resources In Offshore Outsourcing Of Advanced Services.” Journal of World Business 47.2 (2012): 311 – 326. Print.
Mishra, Sreelekha and Balaganapathi Devarakonda. “Transition From Cultural Diversity To Mutliculturalism: Perspectives From Offshore Industry In India.” AI & Society 30.2 (2014): 283-289. Print.
Sincavage, Jessica R., Carl Haub and O P Sharma. “Labor Costs in India’s Organized Manufacturing Sector.” Monthly Labor Review. 2010: 3-22. Web.
Valliere, Dave. “Culture, Values and Entrepreneurial Motivation In Bhutan.” Journal of Enterprising Communities: People and Places in the Global Economy 8.2 (2014): 126 – 146. Print.