Venturing into new country: India

Venturing into new country: India Introduction
India has always been among the top for any MNC expansion. Being one of the leading economies in the world India has emerged as the winner even in the global meltdown of 2008. This has made the country a safe haven for the potential investors in the last couple of decades after the country opens up for the global world after liberalization in 1991.
Some of the characteristics of the country are as follows: Capital | New Delhi | Form of Government | Democratic/Republic | Population | 1.21 billion | Per Capita Income | $3851 | Inflation rate | 5.96% | GDP growth | 4.5% | External Debt | $345 billion | External Debt to GDP ratio | 67.57 | Trade Balance | -967.2 billion | Language | Official: Hindi, English. Many more recognized | Major cities | Delhi, Mumbai, Chennai, Kolkata | Climate | | Trade Block association | ASEAN, SAARC, | GINI Coefficient | 36.8 | Human Development Index | 0.554 |

Much recent news confirms the fact that India is one of the major destinations for the expansion. Recently Jet-Etihad deal, high growth in FII in the Indian Stock market, green field and brown field investment in the sectors of aviation, multi-retail are some the recent news and changes in the law made in the country making the investment safer and more diverse.
According to E&Y report going forward economic outlook for the country is very encouraging. Global sentiments for the country have improved a lot in the recent past despite of some complications in the economy. Also most of the leading indicators specify the positive outlook for the economy. Earnings by the corporate have increased substantially, unemployment is on the declining phase, regulations favoring the business are some the positive key factors for the prosper growth of the economy. But in terms of controlling black market, the country has been a failure to some extent. There is a big market, secondary in nature that can possess big issues for a new business to setup. An organization has to be very careful while dealing and operating in such an economy.
India is one of fastest growing economy in terms of infrastructure. Some of the early reforms especially in the field of Telecom have made the country one of the best in the telecom sector, India is one of the major providers of IT enabled services. There is an environment of innovation in the country and therefore is an important area to expand the business. But there are some bottlenecks. Spending on infrastructure is way too less for the large mainland like India. They spend less than 4% of GDP on infrastructure. Comparing to China that spend more than 9% of their GDP into the infrastructure, India lags behind. PPP has been encouraged that can be a growth driver for the economy in the coming years.
Government is pretty stable in the country but politically there are many problems owing to the unrest with neighboring countries like Pakistan, China, Sri Lanka, etc. This can be a problematic issue for some business to flourish at times. Considering the amount and level of corruption in the country, expanding into the country can be a big hurdle for multinational organizations. Black money, Bureaucracy, Coalgate, 2G, etc. are some of the recent problems in the economy making the investment a bit riskier. Judiciary system in the country has been very powerful. There have been various levels of courts that decide on the cases. The most important fact is that the judiciary system is independent of the executive department and the legislative branches of the Indian government. Courts have been divided into Supreme Court, High court, District court, etc. But here comes the issue. There have been huge backlogs in the Indian courts. According to chief justice, backlog in the Delhi High court is of the order of 466 years. This delays the process of justice. Corruptions in the system have impeded the system. Simultaneously there are many reforms waiting to get implemented. If implementation can be made proper many problems will be resolved in no time. E-court project is going to start, increase in transparency can be beneficial for the companies.
Considering the size of the country and the diversity it has the human rights can be a bit complicated to some extent. But according to the US Liberty of Congress, even though there are some problems related to human rights in India but there are no need of concern for the American companies to do business in the country. This is unlike many countries like that of South Asia including Pakistan and others. Based on all these factors, Freedom house report gave best rating to India terms of human rights.
There are many companies headquartered in the United States operating in India. Some of them are listed as under: * Caterpillar * Cisco * Colgate Palmolive * Pepsico * Pizza Hut
There are many more companies operating from India generating their largest revenue from this country.
There are many sectors wherein a company can enter into the Indian market. Multi-brand retail and aviation are the recent openings for the world and pretty new and growing in the country. According to the global auto report, five new automobile companies are set to enter Indian market in the next 5 years there by giving a huge boost in the sector. But the competition will also rise in this field. Telecom sector has nearly been saturated. SME’s in the country has been looking for the foreign aid in the pursuit to grow. Also the lifestyle in the country has been constantly changing. Now there are many new food joints including Starbucks entering into the market. This can be one of the most lucrative industries to be into. Some of the many renowned luxurious global brands are entering into the country confirming to the increase in the demand.
The diversity and the demographics in the country help in setting up of the diverse industries with the products diverse in nature.

Financial Factors
Before the liberalization in 1991, India had many restrictions on the various accounts: current as well as capital. Capital controls were very strong till that time. This actually allowed the Reserve Bank of India, the central bank, to make use of the benefits from the various types of monetary policy. But soon after the liberalization the restrictions were taken off from the economy. After this there have been many efforts for the evolution of the currency regime in the country. The exchange rate regime in the country started with the extreme fixed to a middle position as of now. It is yet not fully convertible. Now most of the country experts argue that the middle regime is better for the economies especially emerging economies since it stops the immediate and sudden displacement of the foreign currency. A very large level of maturity in the market is needed to ensure the full float currency and this should be done in a sequential path.
Current is not fully convertible in India. Rupee, official currency for the country, is fully convertible on the current account but coming to the capital account, it is still not fully convertible. But this does not deteriorate the prospective of any multi-national company to keep operating in the scenario given the fact that there is a huge chance of earning a higher profit and return on the investment as compared to many of the South-Asia.
As large amount of foreign currency enter into the market of India, the inflow of capital puts a huge pressure on the domestic currency. This is a complication on the policies specified by the central bank. Thereby, many policy makers intervene by sterilizing the amount of capital inflow into the country affecting the exchange rate to a nominal value. But this kinds of policy in the country has helped maintaining a wide range of differentiation in terms of interest rate, which in turn helped the inflow of the capital to a large extent. This further puts a greater pressure on the currency
But some of the recent research specifies that the Indian rupee has been loosely pegged to the US Dollar. This is evident by the open market operations done by the Reserve bank of India in the past.

Indian Rupee vs US Dollar Month | Date | Forecast
Value | 50%
Correct +/- | 80%
Correct +/- | 0 | Apr 2013 | 54.36 | 0.0 | 0.0 | 1 | May 2013 | 55.1 | 0.4 | 0.9 | 2 | Jun 2013 | 55.9 | 0.5 | 1.2 | 3 | Jul 2013 | 56.6 | 0.7 | 1.5 | 4 | Aug 2013 | 55.9 | 0.8 | 1.7 | 5 | Sep 2013 | 56.1 | 0.9 | 1.9 | 6 | Oct 2013 | 55.6 | 0.9 | 2.1 |

Current Exchange Rates | May 14, 2013 (Close of Day) | Currency | Value | Yen (per USD) | 102.28 | Euro (USD per) | 1.294 | U.K. Pound (USD per) | 1.523 | Swiss Franc (per USD) | 0.966 | Canada Dollar (per USD) | 1.017 | Mexico Peso (per USD) | 12.19 |

Past, present and future projections

India has many stock exchanges including three national stock exchanges. Others are regional stock exchange. Three stock exchanges are: * Bombay Stock Exchange * National Stock Exchange of India * MCX Stock Exchange Limited (MCX-SX)
There are more than 5000 companies listed in the Bombay Stock exchange. This exchange is considered to be the oldest stock exchange in Asia. National Stock exchange is one of the largest in terms of trade volume.
Most of the financial securities are traded in the stock exchanges in the country including equities, derivatives, futures, options, etc.
Also there are many companies that have issued securities in the foreign market in the form of ADR’s and GDR’s. These include Reliance, Tata Motors, etc. United States has been a major economy for the issuance of the Indian bonds. Reliance has once issued bonds of maturity upto 100 years.
Indian IT sector and financial sector is highly integrated with the US market especially in the last decade. This gave rise to the increase in the correlation between the Indian and the US market to as high as 60% in 2010. There is no official data available after that but according to some of the experts this might be up to 70%.
Correlation between the Indian market (Bombay Stock exchange) and the US market in the last decade: Year | Correlation | 2010 | 60% | 2009 | 54% | 2008 | 64% | 2007 | 49% | 2006 | 39% | 2005 | 44% | 2004 | 34% | 2003 | 41% | 2002 | 7% | 2001 | 43% | 2000 | 10% |

But this high correlation has one drawback too. The diversification as needed by the companies operating in the Indian market has decreased in the last 4-5 years and this needs to be factored in before making any investment decisions.
Currently Credit rating for India is BBB- . This means India comes just above the non-investment category. Any downgrade in the rating means the country is not in the investment grade. However the present scenario seems to be in favor of credit rating upgrade. This rating of BBB means that the return on investment is very high but there is a considerable risk when compared to US which has a rating of AAA which is the highest level of rating.
Default rate spread of T-bills is around 5% which is very high. Banking system is very strong in the country. There are many policies that got global recognition that US banks have also started following the 2008 crisis. Raising capital from the banking system can never be a problem given the penetration of the banks in India. But the fixed income market especially bond market is not as evolved as compared to US. This means the company needs to be dependent of banks and other financial institutions for raising money. But as evident there were not many issues while raising money. Also since the stock market is pretty matured, raising capital from the public can never create a hurdle for the company.
Hence there will be many ways by which capital can be raised in India itself. Also if needed be capital can be raised from the domestic market (US) too. But in this case there will be more exchange rate risk as compared to raising capital in India.

Management Factors
There are many ways by which the entry can do done in India: 1. Acquisition 2. Subsidiary 3. Branch 4. Joint venture 5. Franchising
The easiest way to open chains of franchisees in the country. This is going to be the cheapest of the options. The political and others risks are low in this case. But this arrangement means the company should be known in the different countries. Plus franchisee can become competitors in future. Any incorrect agreements or agreements with wrong person can result in havoc for the company
Subsidiary is one better option for the new company to start business in the foreign country. This is also termed as Green Field Investment. This is preferred when the services need to be provided and when the industry is capital intensive. But the risk increases in this case since the capital involves increases making it an expensive option.
Acquisition is better than subsidiary in the sense that the access is made quicker. The lead time of setting up a plant or industry is negligible. It results in greater power in the market and is one of the most used ways to enter into a foreign market.
Joint venture is another way when whole subsidiary or acquisition is no longer an option. There are many sectors where more than 50% stake is not possible in India. In those cases it is better to go for Joint venture with the existing companies. There are many cases for the same in many sectors. This includes sectors like aviation, food joints, and many more.
So in the present scenario it is better to opt for joint venture and look for a strategic partner in the country.
There are many cultural factors that can affect the business in the country. Being very diverse in nature, India can possess huge problems at times. The cultural problems and the impact can be classified into these factors.

Expatriating managers to any new country has been a problem in the United States in the past because of many factors like cultural differences, political factors, family issues, etc. But recently there were many cases where in the managers were happy after going to different countries. The process will definitely not be easy but is possible. Managers can be motivated by giving them the preference and allotting the right manager. After choosing a country, managers can be asked as in who is ready to go. Whosoever is willing to go would be the best choice? In case no one is ready, managers can be picked on the basis of rotation method.
Training is going to be an integrated part for this. It might involve training upto 6-8 months. Sometimes managers demand extra compensation to be repatriated to some other country. That can be taken care of by the company. Also extra benefits can be provided to the managers that can motivate him for the position. These extra benefits can also make other managers realize the gain if they can go to some other country. And considering India being a premium destination for the foreign travellers, it would not be so difficult for the company to get a manager willing to work from this country.

Conclusion
In conclusion there were many factors that have been considered before investing in the global market and start venturing out into a new zone. In terms of revenue, according to the global reports, India has the greatest opportunity of revenue growth in the coming future. According to the survey, more than 57% percent of the companies believe that the growth in revenue in the long term in India is of the order of 25% or more. This is after taking into consideration the conservative approach. Taking optimistic view means the growth rate might shoot upto 35% year on year.
More than 75% of the land is stated to be emerging market and of the global population around 80% live in these countries. Hence it make sense to venture into these countries after proper analysis so as to increase the growth rate of the company. And when it comes to the emerging economies India is no way behind any other economy. This makes this country as a potential country for the new venture.
Asian Development Bank confirms this in a report stating that more than 70% of the total pollution of the country would be in the middle class in the next one and half decade. This substantiates the growth in the demand of the various products in the economy and the companies can take the use of the same.
But everything is not that positive considering the riskiness of the investment in a country with BBB- rating. Insufficient infrastructure, transport facilities add to the problem. Corruption at the highest level makes the operation more difficult.
Abundance of labor creates a positive effect in the minds of the companies. This creates lot of opportunities in the country not only in the field of manufacturing but also in other areas where the demand is set to grow and there is no or little penetration of the companies.
Just like most of the emerging markets in the world India is taking many reforms politically as well as economically that will help the business to grow and to achieve a higher level of privatization, and openness in the culture. This way they will be able to attract more foreign investments and the companies like us can grow in the environment.
In summary, top most sectors to venture into can be classified as: * Technology * Manufacturing * Aviation * Consumer goods
Infrastructure is one area which can also be taken into account while considering the different rules and regulations of the country.

References
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