by: Issues: May / June 2007. Categories: Leadership.

Business opportunities in India may be there for the taking but not knowing the values and cultural norms can doom a western manager’s or entrepreneur’s best efforts. This author has written a valuable primer that will prepare a westerner for doing business in India…and succeeding.

China and India comprise nearly 40 percent of the world’s population and their aggregate output accounts for nearly 25 percent of the global GDP. During the previous decade, China garnered the lion share of the world’s attention. But that may be about to change as India emerges as a major economic power in its own right. Indeed, a vigorous debate is currently under way as to whether or not India will outperform China. Although opinion remains divided, there is now a widespread consensus that India not only has a tremendous potential, but has already begun to realize some of it. The sub-continent is expected to be the world’s fifth largest economy by 2025, and is today the second fastest-growing economy in the world, with growth rates averaging nearly 8 percent during the last three years.

Liberalization has continued unabated since 1991, with India’s economy more than doubling in real terms during this period. That growth is being driven by domestic consumption and the expansion of the information technology industry; both have paid handsome dividends for the country. India’s consumer- goods market is already ranked among the top ten in the world and is expected to reach US$400 billion by 2010, making it the fifth largest in the world. In certain industry segments, such as aviation, the Indian market is already demonstrating tremendous potential, and causing foreign investors to look at India very seriously. Similarly, India now has over 90 million cell phone subscribers and the expectation is that within a few years India will be the second-largest market for cell phones, after China. As the Franklin Fund India manager, Sukumar Rajah notes, “Given its size and expected growth over the next few decades, an India strategy has become a must for companies across the world with global aspirations.” Perhaps this may well be the reason for why AT Kearney’s confidence index ranks India as the second most attractive FDI destination, after China. South Korea’s Posco has recently decided to invest US$12 billion in the state of Orissa for the purposes of mining iron ore and manufacturing steel.

With India’s emergence as an economic superpower and the increasing attraction of the country to foreign investors, many investors are having to devise an India strategy. Some companies, such as General Electric, LG of Korea, have done well, whereas others, such as Sony or Levi’s, had a hard time of it when they entered India. The purpose of this article is to highlight the nature of the Indian business environment and to outline the best ways of coping with these challenges. I begin by describing the evolving economic landscape in India. In a subsequent section, I then outline some of the strategic, political, and cultural challenges that await the foreign investor. I conclude by outlining strategies that may be most appropriate in the Indian context.

India’s evolving economic landscape

The India of today is very different from the country which the British ruled and equally distant from the early post-independence India. Under British rule, the Indian economy stagnated, with economic growth averaging 0.8 percent between 1900 and 1950. With the population growth matching it, the per capita income was stagnant. Following independence, the Indian government embarked on an import-substitution policy that entailed extensive governmental controls on all facets of business activity. As Kumar & Anand have noted, “The underlying rationale for pursuing this policy in the Indian case was a deep sense of pessimism about increasing the country’s exports, a desire to industrialize rapidly, and a romantic attachment to the fundamental tenets of Fabian Socialism…” It is fair to say that this policy combined the worst aspects of capitalism and socialism and significantly hampered India’s ability to grow rapidly between1950 and1980. During this period the Indian economy grew at a rate of 3.5 percent per annum, a rate that many analysts often came to deride as the “Hindu rate of growth.”

The first steps towards reforming the Indian economy took place when Rajiv Gandhi became the Prime Minister. However, the main impetus for reform came in 1991, when the current prime minister, Manmohan Singh, and the then finance minister undertook a series of bold policy initiatives in light of the acute balance of payments crisis that the country was facing. Tariff levels were lowered, industrial licensing was eliminated, foreign investors were granted 51% equity in their ventures in India as a matter of routine, and the exchange rate policy was reformed.

The initiation of economic reforms has without question been widely beneficial. Poverty levels have declined by about a third and the information technology sector has grown at an impressive rate of 30 percent annually for the last five years, with India having captured 75 percent of the IT services export market. The manufacturing sector is once again growing, now at an annual rate of 9.4 percent per annum, and there is an overall shift in the composition of India’s GDP, with services now accounting for 51 percent of a country’s GDP and agriculture constituting only 20.5 percent. The rapid growth of the Indian economy since the economic reforms in 1991 has resulted in a growing middle class. Although it is hard to estimate its exact size, a study by the US Department of Commerce suggests that India has 20 million people with incomes greater than US$13,000, 80 million with incomes in excess of US $3500, and 100 million people whose incomes are higher than US$2800.

India is now also emerging as a major hub in the knowledge-based economy. This is reflected in a number of different indicators. For example, more than 225 of the Fortune 500 companies have established R & D and product design centers in India. The R & D design centers span a wide spectrum of industries. There are well over 70 companies engaged in chip design in India, of which 50 or more are located in Bangalore. General Electric has established the John F. Welch Technology Center in Bangalore. Home to 1800 engineers, the center is responsible for carrying out fundamental research for many of GE’s 13 divisions. Motorola has had facilities in India since 1991 and the R&D facilities in India have helped the company develop a US$40 cellular phone for emerging markets. Microsoft established its third international research center in India in 2005, while Intel has well over 800 engineers developing software for its global product lines. India is also emerging as a major biotechnology outsourcing destination with many multinational firms, such as the likes of Novo Nordisk, Aventis, Novartis, GlaxoSmith Kline, Eli Lilly & Pfizer, considering conducting clinical trials in India.

The rapid rise of India as a technology hub can be attributed to a number of different factors. Goldman Sachs suggests that India’s R & D costs are just one-eighth of levels in western countries. The country’s protection of intellectual property is also improving and it is estimated that 2000 software applications were filed in 2005 with 85 percent of them initiated by multinational firms. India also boasts an abundance of scientific and technological talent, with the country producing the second-highest number of engineering graduates in the world. Concern has been expressed, however, that the quality of these graduates is somewhat uneven, and with the relentless pressure for hiring more of the skilled graduates, a shortage may emerge in the future.

The dynamics of economic reform in India

India is a vibrant, albeit fractious, democracy, in which voter turnout is often greater than that in many industrialized countries. Following India’s independence in 1947, the Congress Party dominated Indian politics for 50 years, but for a brief interruption during the late 70’s. All of that began to change with the rise of the Bharatiya Janata Party, which carved out a position for itself on the basis of “Hindutva ideology,” i.e., an ideology that sought to rediscover the greatness of India. These are the two parties that dominate the national political scene, although each has had to rely on coalition governments. Coalition politics seem to have become the prevailing norm in India, at least for the foreseeable future. The Bharatiya Janata Party was ousted from power in 2004, much to its surprise and that of outside observers. The current government, the United Progressive Alliance, a 24 party alliance, is led by the Congress but relies principally on support from the Communists.

At first glance, the dominance of coalition politics may not augur well for the reform process. But appearances can be deceiving, and India is no exception to this rule. Analysts note that both of the major parties are now committed to the continuation of the economic reforms. As Zainulbhai notes, “The momentum behind reform is irreversible, for it is driven by a collective belief that India must have a strong economy to improve its standard of living, to be taken seriously by the world, and not least, to keep pace with neighbouring China.” This is not to say that the reform process has always proceeded consistently or smoothly. Analysts note that second-generation reforms, such as reform of labour laws, privatization programs, or even for that matter the reduction of the government budget deficit (currently 8-9 percent of GDP), have still to materialize. The reform of labor laws is of particular concern to foreign investors as it has the implication that any company which employs more than 100 workers must seek state approval before making them redundant. Many of the reforms have been stifled by Leftist opposition. As Das notes, “Unfortunately, it stands rigidly against reform and for the status quo, supporting labor laws that benefit 10 percent of the workers at the expense of the other 90 percent…” Nevertheless, one of the striking things about India, as Das notes, is that “Even though the reforms, have been slow, imperfect, and incomplete, they have been consistent and in one direction.” Surely this is a positive aspect and one that is likely to benefit all firms, domestic or foreign.

No discussion of economic reform can be complete without discussing the constraints of the economic infrastructure in the country. India gets a ranking of 54 out of 60 in the IMD 2005 survey. Indian and foreign businesses are often handicapped by lack of adequate and consistent power supply, inadequate port capacity, and/or insufficient number of highways. Lack of power remains one of the biggest constraints on Indian businesses and it has led many companies to set up their own generating capacity. Indian spending on infrastructure has been relatively low but there are indications that it is going to be stepped up. These problems have been magnified by an ineffective bureaucracy that as Das notes creates “…private benefits for those who control it”. Yet, what is most remarkable about India is that notwithstanding these constraints (reform, bureaucracy, infrastructure), the Indian economy has indeed taken off. This is reflective both of the entrepreneurial spirit of the Indians as well as their resilience and creativity.

Strategic, organizational and cultural challenges for the foreign investor

a) Strategic challenges
Strategic adaptability is essential for success everywhere and India is no exception in this regard. The issue of adaptability is a multifaceted one and involves issues such as product adaptation/pricing, and/or organizational adaptation. The experience of many multinationals in the Indian market suggests, that with a few exceptions, they made few adaptations on entry and were over time forced to revisit their strategies.

Consider, for example, the case of product pricing in India. Although the Indian economy is the second-fastest growing economy in the world and may have more billionaires than China, it is still a relatively poor country, with a GNP per capita of about US$480. One of the implications of this is that the Indian market is a price sensitive one and the foreign investor seeking to do business in the country must price the product accordingly.

Consider also the case of Levi’s when it first entered India. The company marketed its product at a hefty price and despite the fact that the brand was much better known than its competitor, Lee, the company initially stumbled. Lee, by contrast, entered into a partnership with Arvind Group and in collaboration with it was able to introduce branded products at an affordable price. Companies in the durable goods sector have also dealt with the problem of affordability by providing financing options for the consumer. They make loans available to the purchaser expeditiously, thus facilitating the sale of their products.

Organizational adaptability deals with three key issues, namely (a) the nature of the top management team; (b) the corporate culture in the local organization; and (c) good coordination between the parent company and the subsidiary. Many multinational firms, with the exception of U.S and U.K firms, often relied on expatriate managers from their own units back home. Many of these companies either did not have access to expatriate Indians and/or did not recognize the importance of having them on their management team. This was a severe handicap as managing in India, as Kumar & Anand note “…requires some exceptional skills including being able to develop relationships and tackle prickly unionized labor, petty bureaucrats, and people in the supply and distribution chains.” The expatriate managers who did succeed in India were, as Kumar & Sethi pointed out, able to “Think Indian!” A good example of a company that has been successful in India without relying heavily on expatriate management in its parent country is the South Korean company LG Electronics. As the managing director of LG Electronics in India notes, “The expatriates are called in only when there is a problem , and they are generally seen as consultants, or advisers to the business. … And even at the corporate level, in India every decision is made by Indian employees.”

Corporate culture plays an important role in determining how an organization responds to the demands of the marketplace. Having the right spirit or ethos helps the company to more effectively execute its strategy. Many multinational firms in India are striving to create a culture which rewards performance. How successful they might be in this respect is likely to be heavily dependent on their ability to be transparent and create a culture which promotes cooperative behavior. Effective teamwork is often difficult in the Indian cultural context, but that does not by any means negate its importance. Given the fact that Indians often have a more positive perception of expatriates, it is conceivable that a skillful expatriate may be able to institutionalize these norms at the time he enters the Indian subsidiary.

Good coordination between the parent company and the local subsidiary is also essential for the effective execution of a firm’s strategy. Effective execution is likely to be facilitated by a shared vision. Often enough, this is not easy, but every effort needs to be made to strive to attain this unity. It would be helpful if the parent company sent the Indian employees to corporate headquarters for training and familiarized them with the company’s culture. ST Microelectronics, an Italian firm, transferred 40 engineers from India to Italy for two years to undergo training, with the objective that these employees would not only become intimately familiar with the company’s technologies but would also be able to better understand the company’s objectives. The top managers in the parent company must also demonstrate their commitment to the Indian market and clearly convey the message that they are in it for the longer term. Jack Welch, the former CEO of General Electric, demonstrated his commitment to the Indian market by his strong backing for GE International Capital Services, one of the biggest business process outsourcing firms in India. GE corporate headquarters was initially reluctant to proceed with this venture but the strong support that Jack Welch gave to it allowed it to become a reality.

b) Political challenges
India is a fractious democracy and with a high degree of nationalistic sentiment the political environment can often become volatile and/or unpredictable for the multinational firm. Foreign investors in infrastructure projects, especially in the power sector, faced considerable difficulty during the mid 90’s. Many of the projects were launched with much fanfare but the end results were disappointing. Although the institutional environment in India may have been a difficult one, the foreign investors did themselves no favors by pursuing agreements that appeared to be one sided in favor of the foreign investor. Often enough contracts were negotiated and/or renegotiated in a never-ending cycle. In fairness, it needs to be pointed out that these were difficult and complex projects whose cost/benefit analysis was far from easy. But that said, it only highlights how sensitive foreign investors need to be, and especially so in the context of projects whose rationale is far from clear.

Firms in other sectors have also run into problems. For example, Coke and Pepsi were accused by a non-governmental organization in India of selling drinks that contained pesticide levels which were much higher than the EU norms. Both of these firms vociferously denied these allegations, and in independent testing, the claim of the non-governmental organization that the pesticide levels exceeded the EU margin by a range of 11-70 was decisively rejected.

How should multinational firms cope with these challenges in a volatile environment? Although each conflict may have its own specific issues that need to be dealt with on its own terms, the fundamental point is that the firm must convince the stakeholders in India that its actions, while undoubtedly benefiting itself, will also benefit India. While many foreign investors often say this routinely, the question is whether their actions are consistent with their rhetoric. A good example of a company that has gone out of its way to garner legitimacy in India is Hindustan Lever, the subsidiary of the Anglo-Dutch Giant, Unilever. The company enjoys an excellent reputation in the country, one it has attained by indigenizing its Indian operations, and helping to promote the socioeconomic objectives of the Indian government and the states in which it operates.

c) Cultural challenges
Indian managers embody both individualistic and collective values. This implies that the Indian manager may behave differently in different situations. As an individualist, the Indian manager can be very aggressive and goal oriented. As a collectivist, the Indian manager may be sensitive to the needs and wishes of the people in his/her group. One of the implications of this cultural orientation is that the western manager may find it difficult to fully comprehend the behavior of his Indian counterpart. It does not necessarily mean, however, that the Indian manager is trying to deliberately deceive his Western counterpart. While this judgment may be tempting, it is a judgment that should not be easily rushed into. The Indian culture is also very hierarchical, which has the implication that decisions are made at the very top and the decision making process may be a slow one. The communication style of the Indians is also indirect, with many Indians reluctant to say no, even when they mean no. Indians also draw a distinction between secular and religious time and are much more sensitive to the latter than to the former. Religious time is time that is associated with the performance of rituals at a specific time and/or undertaking or not undertaking actions based on planetary configurations. The often-cited insensitivity of Indians to secular time can also be a source of frustration for the Western manager who may not be conversant with Indian cultural norms. I have also described the Indian manager as having an idealistic mind set, i.e., a way of thinking characterized by a desire to find the best possible solution to the problem. This can be both beneficial as well as detrimental. On the positive side, the high aspirations of Indians may yield high outcomes, but at the same time high aspirations may prevent the emergence of an agreement.

The Indian cultural values that I have outlined have a wide variety of implications for western managers. They affect Indian communication and leadership styles, motivation patterns, decision making processes, and/or their attitudes towards work. As such, they have wide ranging implications for a multinational firm seeking to do business in India. Outsourcing partnerships, relationships with regulatory authorities, joint venture relationships, and motivating local employees are all likely to be affected by differences in cultural values/norms. A western manager who is not consciously aware of some of the differences that set him apart from his Indian colleagues may find it difficult to cope with some of the cultural challenges that he may be confronted with. On the other hand, consider the case of Scott Bayman, President and CEO of GE India. He came to India against the objections of his wife but has lived in India for around eleven years. Both he and his wife have adapted themselves well to Indian society, with Mrs. Bayman reportedly saying “I’m nowhere ready to leave. We’ve lived here longer than any place. This really is home!”

In this article I have outlined the nature of the economic transformation currently under way in India and the implications that it has for foreign investors. India offers many, many advantages and opportunities to the foreign investor. The consumer sector is on the upswing, India is a key player in the knowledge based economy, and it has the most youthful demographic structure in the world with 70% of India’s population less than 36 years old! Of course, India is still in the process of transition with institutional imperfections affecting the way in which business is done in the country. As the country evolves, many of these imperfections may be left by the wayside, but even in the interim these imperfections may not be a barrier to doing business in India, provided that the western entrepreneur is willing to transform constraints into opportunities.