This report will look at the National Business Systems and cultural conditions in India and will provide a brief assessment of how this will affect the firms. The report then moves on to assess the patterns and trends of trades between the two countries especially in the beverage industrys. The implication of international institutions on the firm, an assessment on the entry mode (FDI or export), advices on the problem of establishing and operating a corporate social responsibility (CSR) in India and finally providing recommendation on whether or not Boost Energy should invest in India.
This report gives us a brief idea about the investment opportunities for 'Boost Energy' which is energy drink manufacturer based in United States doing business in India. The company wishes to launch its products in India as well as export around the world. The Rs 2.5 billion branded energy drinks sector in India is growing at the rate of 60% growth rate of the Rs 70 billion soft drinks market. On the back of an increasing number of modern retail stores, the energy drinks market is expected to reach Rs 11billion by 2010. Although India's business environments is not an easy one to operate, the country's size and economic potential adds up to a profitable market for those who understands the challenges of the system and develop the skills to work within it.
NATIONAL BUSINESS SYSTEM
India has 17.3 percent of the world's population, including a modem, consumption-oriented segment in excess of 200 million. The economy of India is the 12th largest economy in the world by nominal value and the 4th largest by purchasing power parity (world bank). Out of the 200 million population, 40 percent of them are youth. Availability of cheap labour is a motivational factor for our firm since bottling and packaging requires a large work force. One of the other motivational factor is the stable government which has been in power for last 7 years and 3 more years to complete the term. Since 1991, continuing economic liberalisation has moved the economy towards a market-based system. A revival of economic reforms and better economic policies in 2000s accelerated India's economic growth rate. By 2008, India had established herself as the world's second-fastest growing major economy. In this exotic land where threre 17 official languages are recognized, English stands alongside Hindi with an all-India status. Gradual changes have made India more interesting and receptive market. The Indian Government now places higher importance on increasing production in the mixed economy and expanding the role of market forces in resource allocation. New policies have given greater access to imports of technology, machinery, equipment, and intermediate inputs to modernize Indian industry. In the longer run, India faces three additional barriers to economic growth:- lack of infrastructure facilities, bureaucratic obstacles, and environmental degradations. India's economy is already troubled by its inadequate transportation systems and electricity shortage. Similarly, India's complex and entrenched bureaucracy mostly creates a barrier in implementing new economic policies and programs. The United States is India's largest trading partner, accepting 25 percent of India's exports and contributing 10 percent of its imports. Despite occasional political difference between the two countries, the trading relationships have remained essentially immune from the vagaries of international political issues. India have a plenty of natural resources that provide it a competitive advantage in the food processing industry. The semi processed food and beverages food segment is comparatively new and constantly changing. India's cost advantage in manpower can be used to set up large low cost production base for domestic and export markets. If one is to add on significant investment that have come into the country, food processing industry is in a favourable position.
Global Competitiveness Index 2007-2008 (131 countries) 48
Global Competitiveness Index 2006-2007 (122 countries) 42
Sub-index A: Basic Requirements 74
1st Pillar: Institutions 48
2nd Pillar: Infrastructure 67
3rd Pillar: Macroeconomic Stability 108
4th Pillar: Health and Primary Education 101
Sub-index B: Efficiency Enhancers 31
5th Pillar: Higher Education and Training 55
6th Pillar: Goods Market Efficiency 36
7th Pillar: Labour Market Efficiency 96
8th Pillar: Financial Market Sophistication 37
9th Pillar: Technological Readiness 62
10th Pillar: Market Size 3
Sub-index C: Innovation and Sophistication Factors 26
11th Pillar: Business Sophistication 26
12th Pillar: Innovation 28
Source: World Competitiveness Report 2007-08: World Economic Forum
The pillars are by themselves self-explanatory and each pillar is influenced by several factor. The highest rank for India is the market size pillar but which is a “no-brainer” given the size of the population. Macroeconomic stability pillar was ranked so low was because of the government's growing fiscal deficits. The report also highlights the labour market inefficiencies. Another pillar that has been ranked low is the ‘health and primary education' pillar where India has been ranked a very low, 101.
The government has introduced several steps to enhance the growth of food processing and beverages industry. In order to further enhance investment, several policy initiatives have been initiated in the recent past. The initiatives include
• Full repatriation of capital and profits.
• Immediate approvals for foreign investment up to 100 per cent.
• Import duty will be zero for 100 per cent export oriented units. Reduction in customs duty on packing machines.
• Income tax rebate are granted (100 per cent of profits for 5 years and 25 per cent of profits for next 5 year) for upcoming industries.
• Government provides financial aid for establishing common facilities in places such as Agro Food Park.
• Full duty exemptions on all imports for units in Export Processing Zones.
The Special Economic Zone(SEZ) act 2005 was passed by the government to boost confidence among investors about the government's commitment in stability and progress of SEZ's. Incentives And Facilities Offered To The SEZ's are:
• Duty free imports/domestic procurement of goods for developments, operation and maintenance of SEZ.
• Income Tax exemption up to 100% on any exports from SEZ under Section 10AA of the Income Tax Act for first 5 years, 50% for next five years and 50% of ploughed back export profit for next five years.
• SEZ units are given permission to borrow externally up to US $ 500m in a year without any maturity restrictions through authorized banks.
• Exempted from Central sales and service taxes.
International investors are given permission to set up 100 per cent subsidiaries in India. No prior permission from RBI is required. This procedure is also called as "automatic approval route".Investment in public sector units, units in Export Oriented Unit (EOU), Export Processing Zone (EPZ), Special Economic Zone (SEZ) will be eligible for the automatic route. These above mentioned policies are very motivationg for 'Boost Energy' firm since there are no established competitor in India and can use India as an exporting hub making use of the 'SEZ'. India has certain advantages over the rest of the world with regard to technical skills, diligent workforces, cost competitiveness and a huge middle class proficient in English. As Acharya (1998) points out, India with its huge middle class, and as a country which was left virtually unscathed by the recent South-East Asian crisis, gives enormous business opportunities to the worldwide investors
Cultural conditions in India
India's diversity is visible in its people, religion, climate, languages, custom, and traditions which differ from place to place within the country. The culture of India is an combination of diverse sub-cultures spread all around the country. The religions of more than 80.4% of the people follow Hinduism. Islam is practised by 13.4% of all Indians. Sikhism, Jainism and Buddhism are also influential religions. Although field hockey is India's official National sport, cricket is more popular sport in India. The presence of strong sporting culture is very good for firm since energy drinks are widely used in sporting activities.
India has a low ranking in Uncertainty Avoidance (UAI) with 40, compared to the world average of sixty five. India has Power Distance (PDI) using the highest Hofstede Dimension for the culture, with a ranking of 77 with respect to a world average of 56.5. India's Long Term Orientation (LTO) Dimension is 61, with the world average behind at 48. India has Masculinity at 56, with the world average just slightly lower at 51.
Uncertainty Avoidance (UAI) number shows that the culture may be more open to unstructured idea and situations. This Power Distance score for India shows a high degree of inequality of power and wealth within the society. A high LTO score could be indicative of a culture that is perseverant . The higher the country ranks in this Dimension, greater the gap between value of men and women. It may also indicate a more competitive female population, but still less than the male population. Bureaucratic hurdles and a laidback approach to work in the government circle can result in delays in processing, overloads of paperwork and a general lack of confidence in the system. So, immense patience is very much necessary for any business transaction in India. In India, Firms follow the hierarchical system and decision making is mainly from the top to bottom. It could be time consuming, International firms shows respect to this. The lack of infrastructure and inadequate supply chain managements could also act as bottleneck for foreign investments.
Many previous studies have found out that cultural proximity to the home country to be a significant determinant of FDI (Hofstede, 1983; Dunning, 1993). However, some have argued that the preferences and tastes of consumer's in different nations are merging to a global norm (Levitt, 1983), and hence the effects of cultural distance is mostly to dilute progressively. Moreover, firms could be also compelled to ignore the increasing cultural distances of developing countries in favour of their low-wage advantage, and opting them as the 'next best' location, which is true in our case because of more gain from the whole process such as cheap labour, large market size, future hub for exporting products to other developed countries. Special care should be taken regrading the marketing techniques and pricing strategies due to price sensitive market.
(b) Pattern and trends of trade between the two countries ( India and United States of America)
United States exports to India stood at 32.44 b$ and imports stood at 39.89 b$ for the year 2008.Between 1990 and 2000, U.S. investments in India rose from mere $372 million to $2.4 billion — an increase of excess $2 billion over 10 years. Over the next five years, U.S. FDI in India rose by over $6 billion to $8.5 billion. Over the 15 years period, the total value of U.S. FDI in India rose 22-fold. India and the US have signed a group of agreements to give a further boost to the bilateral trade engagement between them, as part of the US Secretary of State, Hillary Clinton's visit to India.
Custom duty came into existence to check the illegal imports and exports of goods. Since 2004, both countries are pursuing a “strategic partnership” based on numerous shared values and improving economic and trade relations. India is in a rapid economic expansion, and many U.S. companies view India as an attractive market and a candidate for foreign investments. The current Indian government sees itself continuing the economic reform started in 1991, aimed at reforming the quasi-socialist economy to a more open, market-oriented economy. Imports into India on food and other strategic sector are charged a duty(Tariff), to give protection to the Indian firms. According to the custom laws, following are the various types of duties which could be charged- Basic Duty, Additional duty, Anti-Dumping. For importing 'Boost Energy' in to India a basic duty is charged at 16%. Indian market have a high level of protectionist policy in the food sector and since almost all the energy drinks available in India are imported, manufacturing and selling of this product in India can give an cost advantage over the competitor and the firm can avoid paying Duty Tax to the government. It can also make use of the various Export Processing Zones to export products easily and economically.
A large amount of empirical literature has analysed the FDI influences local firm in the same industry. The main theories of these studies are knowledge spillover on the basis of demonstration effect and the movement of labour. As local businesses come in contact with existing users, information regarding technological innovation and new management techniques is diffused, the uncertainty is reduced, and imitation levels increase . A second channel of spillovers is the movement of employees. Firms build local human capital through training of local employees, yet these highly skilled individuals may move to locally owned firms or start their own entrepreneurial businesses (Blomstrim and Kokko, 2002). such technological and knowledge spillovers should be avoided by using necessary safety precaution such as data protection systems and making bonds with the managerial level employees. Effectiveness in local product adjustments, globalizing R&D, tailoring talent management, mastering the complexity of global value chains, and managing risks are success factors that have to be considered. Good governance can be a competitive advantage in emerging markets like India where transaction costs are usually high due to Bureaucratic hurdles.
(D) 'Boost Energy' has an option of importing product or FDI to gain access to Indian market. In case of importing products, the firm will have to pay a high tariff of 16%. To be successful in Indian market, pricing of the product plays an important role since most of the customers in India belong to middle class income group. Under such circumstances entering the market using FDI is much better option. Entry through FDI can be done through greenfield entry where the firm starts the project from scratch. Large number of options are available regarding the location of the firm. This mode of entry is suitable for 'Boost Energy' since high level of capital is not required in setting up a beverage plant.
'Boost Energy' should be a Efficiency seeker which is investing to tap into resources and assets in India, not only for local use, but also by the corporation as a whole. Thus, the purpose of the investments is to obtain advantages of common ownerships, or advantages of implementing similar activities and capabilities in different locations (Dunning, 1993). The resources sought out are natural resources, cheap labour, local technological capability, management, marketing experience (Dunning, 1993). 'Boost Energy' is a established firm with certain Firm Specific Advantages in the manufacturing and distribution of energy drinks which can be put in to advantage by FDI through greenfield entry. These advantages allow them to compete successfully against local firms in Indian markets. Through FDI 'Boost Energy' can tap in to the large and fast growing market, cost of key resources such as cheap aluminium for cans, cheap labour, availability of water, encouraging government policies for FDI such as Special Economic Zone(SEZ). Establishing a firm in India can also give a strategic geographical position advantage in world trade. 'Boost Energy' could use India as manufacturing hub for catering the needs of other booming Asian markets.
According to the current investment policy FDI can come into India in two ways. Firstly FDI up to hundred per cent is allowed under the automatic route in all sectors except a small list that require approval of the Government. FDI in sectors under automatic route do not require any prior approval either by the Government or Reserve Bank of India (RBI). The investors are required to notify the Regional office of RBI within thirty days of receipt of inward remittances and required documents are to filed with that office within thirty days of issue of shares to foreign investor. All proposals about foreign investments which needs Government approvals are considered by Foreign Investment Promotion Board (FIPB). As energy drinks come under the 'Automatic route' government approvals are not required.
In the first part of the question, answers regarding to National business system in which factors such as economic, social aspects were looked deep into. By analysing the National Business System, we were able to find that current conditions in India is highly preferable for FDI with encouraging factors such as large market size, cheap labour, government incentives. In the next part cultural analysis was done where most of the factors were encouraging. One of the main motivational factor is continuing bilateral trade relationship with United States, where the base firm is based. It was also found out that the level of protectionist policies adopted by India is very high. Customs duty of 16% is levied on beverages imports in to India. Since our market is price sensitive and large, it is a better option for FDI than imports. In the long run FDI in a developing country is always a good option for Firm due to many factors such as cheap labour and other cost reductions.
Blomstrom, M. and Kokko, A. (2002) FDI and Human Capital: A Research Agenda, OECD, OECD Development Centre: Paris Technical paper no 195.
Acharya (1998). “The Open temple”. Director, Volume Fifty-Two, Number Five, December 1998, 71-71.
Dunning, J. (1993). Multinational Enterprises and the Global Economy. Essex:Addison-Wesley.
G. Hofstede, "The Cultural Relativity of Organizational Practices and Theories," Journal of International Business Studies, 14, 1983.
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