India has experienced a GDP growth that has been nothing but impressive, to the point that many specialists predict that it will become one of the leading economies of the world in the near future (Abramyan, 2009). The country is the second largest democracy, making its market rich enough to handle all sorts of goods and services, ranging from luxury items to low-class items.
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India enjoys an extremely vibrant democracy, which gives it the political stability required to do business. Its market, as confirmed by most entrepreneurs, is quite lucrative, giving it a position at the top of every other Asian country in terms of purchasing power (National University of Singapore, 1995).
Nevertheless, the businesspersons claim that the law enforcement agencies on business are corrupt and have a tendency to drag contract procedures, which deprives the country of the glory that it would otherwise have like an excellent business empire.
The article below is a discussion about several issues that affect the business world in India, giving a focus on how much the political landscape has helped shape the business environment of this country.
The article also shows the kinds of motivations that drive international organizations to do business in India, citing some of the multinationals that have invested as FDI’s in this area. We also get a presentation of the main features of the national innovation systems of the country. Finally, the article suggests some of the needed strategies that will assist someone in taking advantage of the peculiar nature of some of these systems.
Impact of Political and Legal environment on Businesses in India
After independence, the economy of India adopted to the socialist nature of some leaders of the world who were very influential at the time. Such leaders as Nehru imposed laws that would allow the then government to run the key industries in the country, in an effort to safeguard the little that remained from the British colonialists (Sabhlok, 1998).
Such ideas, though convincing, would backtrack the economy of the country, leaving most of the population to leave under poverty. In 1948, the enactment of the Industrial Policy gave the government even more strength, since it now had the power to monopolize the energy industry, the transport industry, the mining of iron and steel, telecommunication and other key industries that build up the economy of a nation (Jain & Trehan, n.d.).
As if that were not enough, the private-sector companies involved in these sectors got only a maximum of 10 years of operation, before handing over the companies to the government. By 1956, while the process of doing the resolutions to the previous Industrial Policy took place, government had 12 major industries to itself (Singla, n.d.).
This left the private sector to handle only the consumer goods. By 1973, the public sector took over general insurance, the life insurance covers, and most of the commercial banks that were available in the country. As the country continued to nationalize most of its industries, it completely took over some of the key national pillars as price control, transportation, utilities, and the use of foreign exchange (Gupta, 1993).
This in turn, led to the substantial growth in terms of administration, mainly caused by the level of education that most of the public sector workers had. The government tried to beat unemployment by hiring unprofessional laborers. This proved to be another futile move, considering the amount of time processing a single form would take when an uneducated civil servant handled this task.
Economic reforms started taking place in 1985, after the abolishment of some of the inhibiting licensing regulations. Previously, no real international investment would take place, because the government would not sanction any kind of competition from outside.
By 1991, these policy changes caused a significant reduction on restrictions of imports, reduction on duties at the ports, liberalization of interest by financial institutions and most importantly the annihilation of some of the restrictive licensing in the industrial sector. By this time, the private sector was able to run some of the sectors like the energy sector, which previously belonged solely to the government (Neera & Priyadarshi, n.d.).
These policy changes paved way for economic escalation, in terms of telecommunication, road construction, oil exploration and even the banking sector. This meant that the business environment would change majorly, in both large scale and small-scale businesses.
Nevertheless there was, in 1995, a backlash on the over-involvement of some international investors, such that some political fronts like the Bharatiya Janata Party ordered the halting of one of the US based project (Gaur, 2004).
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This project’s aim was to provide Bombay with 2015 megawatts of gas-produced electricity. During this time, the importation of good received significant regulation. Foreign investors felt the heat when policies given to local companies to be the major producers of 838 of the items that the country could produce.
Motivations for multinational firms to invest in India
India is one of the fastest growing economies in the world and has, become one of the most popular destinations where multinational companies flock to invest (Madhu, 1999). India can bring the buyer and the seller together regardless of whether trading goes on or not. This is due to several factors:
Climate of the business environment
Since the liberalization of the Indian economy in 1991, the country has come to learn the significance of global players and the positive effect that it has on the local markets.
The government has given up most of control that it had on the business environment, and these reforms have brought about economic freedom and change. In general, the Indian business environment is improving, and its continued realization will attract more foreign investment, which will lead to high-growth rate (Goyal n.d.).
Though India has not had a single party government for the last twenty years, it has had coalition governments that have run the country in a peaceful and democratic way. These governments were able to come up and implement successful economic reforms. As a result, the stable political leadership provided by the two successive coalition governments has given the investors enough confidence to invest in the country (Shriram 1992).
India is a very attractive market in that it has very many willing buyers from diverse cultures, being the world’s second largest population (Miller 2009). Huge populations made up of people from different religions and creeds make it possible for different types of consumer goods to sell. Multinational firms therefore, find a good market for whatever product they deal in.
In the last decade, India has been on the path to infrastructure development (Gaur 2004). Infrastructure is crucial for any nation when it comes to economic development because; these dictate the speed and cost at which the products reach the consumers as well as their condition. Though slow, there are many infrastructure projects going on, and they will transform the country.
An entrepreneurial spirit
India has very stable and powerful businesses ranging from Information technology to energy, auto components, agriculture, and steel. Multinational firms find it easy to operate in India, because there are so many businesses and entrepreneurs who are available to provide forward and backward linkages.
Risks Involved while entering the Indian Market and ways to combat them
The Indian market is large and lucrative and promises good business for a person or company that is ready to follow the culture that exists. One of the first processes that a new company will have to undertake is serious preparation.
One will have to understand that making profits in India does not happen overnight. This was the case for big companies like Apple and Starbuck, which were a bit hesitant on indulging the Indians in business (Majumdar, 2004).
One should also be careful enough not to assume that the culture in India is the same as that of the rest in the Asian countries. India is like a continent, with almost 23 different dialects. This makes it extremely difficult to carry out ones business as freely as one does in places like the United States or most European countries.
Another risk that one can face while starting out a business in India is a lack of patience. First, people of India do not work under schedules that are as tight as they are in the US. They give keen attention to detail and relationship. The interpretation by the foreigners from such actions may be one of lapse or insensitivity to timelines, yet, it is just a prevalent culture in their daily activities.
Companies that do not understand this fact usually find themselves to be undergoing major setbacks as they indulge the Asians in business. There is a lot of patience needed while dealing with this culture.
Another risk involved in a foreign company starting in India is losing on the key talent. Whenever Indians feel as if there is no advocating for their concerns, they more readily lose their morale, hereby causing ineffectiveness in the company, causing major losses in the process.
Some of the measures that one can take if he is ready to start a business in India involve knowing the region to a certain extent. For example, there are sources that will guide one to know that India is the seventh largest country in the region with the second largest population. One should get some statistics that will guide his business venture, for example, There are 500million people aged below 20years (Newman, 2009).
Such information should trigger an executive’s mind as to the product he would release to the market on the first occurrence. One should know how to what extent such challenges as corruption, rigidities in the labor market, regulatory structures and bureaucracy would affect a new business venture in this region. The US Commerce Department also provides excellent guidance as to the best kinds of investments that one can make in this region.
It is also a good idea if one would attend some of the organized trade fairs in this in this region. The key to success is in understanding the elements that constitute the business culture in the region. The ITPO, an organization in India, which is in charge of promoting external trade, is one of those organizations that can assist a first time foreign investor in the region.
In such places, the investor gets to meet potential customers, get proper promotion, advertising and marketing contacts and gets to survey the market all in one trade show. If one wants to venture the industrial sector, it will be important to get in touch with such trade fairs as the Indian Industry Confederation. Forging relations with the Indian investors is also necessary as they have prior experience that is necessary in assisting someone to plunge into the market with ease.
It may also interest a foreign investor to link up with some Professional Associations to keep track of the SMEs that are changing quite occasionally. The laws that govern these SMEs keep shifting forcing the investor, either local or foreign, to keep regular updates on them. With these few pointers, one can obtain a certain level of defense against some of the dangers that one may have to face while entering the Indian market.
Features of the national innovation system in India
The exemplification of India’s innovation systems is in society’s culture and civilization (Shavinina 2003). The features of India’s innovation systems include integrating innovation with all domains of national activity.
It has properly structured science and technology policies and has a strong mechanism that boosts innovation. The system enables productive interaction between public and private institutions while making the most of incentives that protect intellectual property innovators.
To motivate innovation, India has set up National Awards for those who come up with innovations, tax and non-tax financial instruments, as well as financial support to those who are in the development of such innovations. There are many incubation centers and technology parks set up to enhance innovation; in addition, there are programs and institutions set up to develop innovators and entrepreneurs.
The components of the National Innovation System in India include actors, instruments and beneficiaries. The actors comprise of institutions or organizations, which assist in developing and implementing innovation activities that take place within the country. These institutions include government departments, technical universities, independent organizations and industry associations. For the achievement of desired results, the actors have to have close interaction.
The instruments in this case are the policies, guidelines, facilitators and support measures made by the actors. These instruments take into respect external and internal environmental factors.
Some examples of these include the science and technology policy, fiscal innovation incentives, incubation centers and protection of intellectual property rights. The beneficiary in this respect is the society. The implementation of the policies on the national economy, service organizations and industrial units, leaves the whole society to benefit.
Investing in India is likely to promote innovation because, countries like the United States, which is a leader in innovation globally (Alok & Mridula 1999), would be willing to collaborate to promote these innovations.
Wealthy nations take advantage of underutilized resources like natural resources and cheap labor, which are in abundance in the developing nations like India. Innovations are not only about research facilities and expensive laboratories; they can be about modifying the technologies that are there to meet local demands.
The private sector promotes Innovation by bringing more than just financial resources to it. Private companies know market needs and have experience when it comes to introducing products to the market.
The Indian government promotes innovation by creating a good environment of research and development funding (Khan 2004). In addition, transparent governing policies, good governance and competitive policies, which open up markets, Trademarks, patents, copyrights and protection of trade secrets enhance innovation and creativity.
Industries in India likely to attract Foreign direct investment
Foreign Direct investment is the investment made to gain enduring interest in enterprises that operate in economies that are outside that of the depositor. A multinational corporation is the union between a parent enterprise and a foreign affiliate, where the parent enterprise has control over the latter.
Tourism and Hotel include beach resorts and restaurants, as well as any other business undertaking that provides food and accommodation facilities especially to tourists, have 100% FDI (Foreign Direct Investment). The players in this industry include tour and travel operators as well as sports, leisure and entertainment providers. Other industries that have 100% FDI include Exports, imports and cash and carry wholesale trading (Subramanyam 2008).
Business activities that deal with power like electricity generation, its transmission and dissemination not including atomic power plants have 100 percent FDI. In the same category are the drugs and pharmaceutical products, which do not attract necessary licensing.
Other sectors that attract 100% FDI include business process outsourcing, deep-sea fishing, oil exploitation, and real-estate development, industries that require compulsory licensing and other small-scale sector industries.
Private banking which observes guidelines issued by RBI, and the telecommunication sector, where it comes to elementary value added and personal satellite communication draws 49% FDI. For the internet service providers with radio paging, gateways and end-to-end bandwidth get 74% FDI. The insurance sector that gets license from Insurance Regulatory Authority gets 26% FDI.
Fourteen tenders given by the Indian government in January 2010 are likely to attract US$ 157.8 million through the following companies; Asset Reconstruction Company, the Standard Chartered Bank, NDTV Lifestyle, and the Mauritius based India infrastructural Development Fund.
Some theories applied in Foreign Direct Investment, in a multinational corporation, include the theory of Absolute advantage where the country producing the biggest amount of a produce for a specified quantity of resources has an absolute advantage (Salvatore1995).
This relationship results in both the parent company and its affiliate, through specialization to be more productive and operate at a greater advantage. In the theory of Comparative advantage, it shows the benefit of trading even if one country can produce more products on its own.
The multinational corporations apply these theories in India, where they regulate the amount of FDI to a certain percentage in some cases. In other cases, they allow a total investment. The application of both the theories ensures that India gets to produce as much as it can, while at the same time benefiting from countries that produce more than it can
Strategies that Firms must put in place in order to take Advantage of National Innovation System in India
As stated earlier, the Indian National Innovation System banks majorly on the integration of the technical ability of the high numbers of young and professional, middle class, and the resource availability of the country. In essence, the national structure constructed makes it extremely difficult for a new player in the market to uphold some entry strategies in India. Though referred to as a third world country; India’s innovation system exceeds standards of most third world countries. This, nevertheless, does not mean that an investor cannot penetrate in the markets effectively.
One of the best strategies that an investor can adopt is the product adaptation strategy. India’s market for consumer goods is at $400 billion as at 2010, and therefore, promises to be rich for business (Chandra, Rau & Ryans, 2002). In product adaptation, it would require the help of an existing player in the market in order to tap into the population.
Such was the case for Escotel Mobile, which was a partnership between Indian Telcom and the First Pacific from Hong Kong. The greatest advantage to this is that one can reach the vast majority throughout all the states in India and that it is a long-term idea. This strategy can tap into the features of the National Innovation Systems for many years.
It is the same idea that Nokia used while infiltrating the Indian market. Nokia realized that India had the human resource, and the industrial technology needed to adopt the product adaptation strategy. The innovation system that was present allowed fresh making of the brand, taking into consideration the needs that the vast numbers of Indian population had.
This good strategy would allow Nokia to be more competitive than it is today, in the telecommunication industry. In 2005, Nokia’s Indian subsidiary set up an industry that would manufacture its own product in Chennai, capital of Tamil Nadu. The capital came from Nokia’s motherland Finland and amounted to US$ 150 million.
Furthermore, the work force that Nokia needed came from the vast population that India has, thus the manufacturing industry in India did not have so much trouble getting started while doing business. Doing partnership has over time proven as one of the most effective ways of entering the market in India. It is far calmer to do this, and the partnership provides the needed knowledge to tackle the cultural issues affecting business in India.
The market in India is lucrative. The numbers infer that any company or business that has succeeded in establishing itself in India do a lot of business here. Nevertheless, many factors come into play while entering this market, since the country has many different states. These states, as said earlier, have different types of business cultures, and one will need to understand these cultures in order to succeed in doing business.
In return, foreign investors assist the country with the much-needed innovations that will help the local professionals to better their lives, by providing the platform needed in advancing their skills. In the end, both parties benefit from each another, and India becomes a country that has a high economic position in the globe.
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