Introduction with a ranking of 161 on the

Introduction

India,
the world’s 7th largest economy according to GDP (world bank 2016),
is one of the fastest growing economies in the world. It vastly outperformed
the other BRICS economies in terms of growth in 2016 with 7.11% growth in comparison to China
6.7%, South Africa 0.3% and the others shrinking. India also ranked 8th
on the FDI confidence index (Kearney 2017). While India is an attractive area
for FDI there is still a way to go for India to attract and keep foreign
investment. This report will explain and analyze the various factors that
should be considered before foreign direct investment and make recommendations
throughout.

 

Political economy

Political system

India is a parliamentary democracy with a multi-party system, despite
this it is not considered politically stable, with a ranking of 161 on the
stability index. (The global economy, 2017) Political instability can mean that
the country meets one of or a mix of the criteria below;

·        
Considered
likely to have a change in government regime

·        
Higher chances
of civil unrest

·        
Instability in
policies

The reason for this score on the index may be due to the reforms
happening, mostly in fiscal policy, that might be perceived as unstable at this
early stage. The effect of this indicator can be that confidence in the markets
is temperamental affecting share prices and currency exchange rates. Despite
the robust nature of the rupee, this should be considered when deciding which currency,
the business will be trading in and setting its foreign exchange policy. The
graphic below shows the performance and volatility of the Indian rupee against
the GBP since 2013.

 

 

(XE, 2017)

Legal
system

Due to India being a former British territory it uses a common law
system making doing business between the UK, India and other common law
countries significantly easier in comparison to those with other legal systems.
India has some similar laws to the UK such as;

·        
Anti- trust
laws

·        
Employment
laws

·        
Minimum wage
act 1948

·        
Right to information
act 2005

(Government of India, 2017)

While there are some minor differences in laws the judicial procedures
remain mostly the same. It should be considered however that there is little
evidence that rule of law is enforced effectively especially regarding
intellectual property rights- see regulatory environment. (UK Government, 2017)

 

 

 

Economic
system

India is a mixed economy this means that certain areas of the economy
are left to private ownerships and free market mechanisms whilst other sectors are
state owned and have significant government planning. (Hill, 2017) The
public sectors role is to fill the gaps in investment that the private sector
isn’t making and to push initiatives that are in the public interest. This free market leaning economy means
the government cannot apply the same restrictions as they would in a command
economy, instead they try to achieve their objectives of economic welfare by
providing incentives (Hill, 2017) India has a unique economy
in the sense that, unlike some other BRICS economies, it does not rely heavily
on one or two sectors. China and Russia, for example, rely heavily on
manufacturing and oil (World investment report,2017). India’s economy has
numerous strong sectors including manufacturing and services meaning there’s a
variety of sectors for firms to consider investing

 

Foreign direct
investment

Regulatory
environment

Due
to the notoriety of India’s regulatory environment the government has begun
large scale reforms. It has also introduced policies to assist firms while
these changes take place such as:

·        
Make in India

·        
Skill India

·        
Start-up India

There
are also bespoke policies created for specific countries that are looking to
invest on a large scale such as Japan-Plus.

(Export.gov,
2017)

 

Corporate
tax rates in India are above the world average of 22.9% (Deloitte, 2017) and are
higher than those for local firms – shown in the graphic below. While this may
appear that India is hostile to large foreign corporations the rate increases
very little with an increase in profits.

(PWC,
2017)

India
has similar intellectual property systems to the UK such as copyright, patents
and trademarks. It is also signatory to agreements such as The Paris convention
– under this any person from a signatory state can apply for a patent or trade
mark in any other signatory state, and will be given the same status in
another. (UK Government,2017). However, India is not a signatory to The Hague
Agreement, which allows the protection of designs in multiple countries through
a single filing. Not only could this complicate the process of starting
operations in the country, there is also little evidence of strong enforcement
of these laws (UK Government, 2017). The graphic demonstrates that ease of
registering IP outperforms the actual factors of protection such as rule of
law.

 

 

(India
property rights index, 2017)

Local business climate

The
world bank report; Doing business 2018 found that India was one of the top ten
economies for improvement of local business framework. In the same report it
gained a ‘distance to frontier’
score of 56.05/100 in 2017. (Doing business, 2017) The higher the score
indicates an efficient business environment and stronger legal institutions its
predicted score for 2018 is 60.76 showing possible improvement as more fiscal
policies are shaped. The graphic shows the types of indicators used and
predictions for 2018.

One concern when it comes to investment in India is the poor
infrastructure. India rates an average of 55th
regarding transport infrastructure (Global economy, 2017) This could affect
transport of goods should the firm decide to import or export. In response the Indian government has
increased the investment share for infrastructure from 23% to 32% since 2007
(IBEF, 2017). Investment in infrastructure and transport from foreign entities
has been increasingly popular, Japan has invested heavily in infrastructure
projects in the North-east states for example (Chaudhury, D, 2017.).

(Make in India, 2017)

 

Competitiveness

Dunning’s OLI paradigm
says that investment is favourable under certain conditions; Ownership,
Location and Internalization advantages.

Ownership advantages are assets that belong to a firm which can be
applied to production in various locations without a reduction in
effectiveness. They can be things such as;

·        
Managerial
structure

·        
Technology

·        
Patents

·        
Superior
knowledge

(Dunning,
2001).

Considering the importance of investment transport and infrastructure in
India, newer types of technology may be a future ownership advantage for an
investing firm.

 

Location advantages means the utilization of assets or resources tied to
one location that together with the firm’s own assets would be considered valuable.
The most obvious location advantage is natural resources minerals and oil but
in the developing world it can also be less tangible resources such as:

·        
Skilled labour

·        
Cheap labour

·        
Knowledge
spill over

(Wage indicator, 2017)

One location advantage in India could be labour cost as the minimum wage
in India is relatively low as shown in the graphic. This could be used to
create cheaper products in the host country to be sold in the home market –
this is an example of vertical FDI. Horizontal FDI on the other hand would be
duplicating operations in the host country to penetrate the foreign market
(Reinert et al, 2009). A firm should consider the effects of low wages on the
working population when choosing where to invest – see ethics and
sustainability.

Internalization
advantage means that there is a gain to be made by keeping the international
expansion within the firm. The
regulatory environment in India regarding IP protections might indicate that an
Acquisition or Greenfields investment is more suitable than that of licensing
or franchising as it increases control of the company’s assets and thus
profitability. While in this case it appears more prudent to take an
acquisition or Greenfields investment approach that also means taking most of
if not all the risk that comes with building operations from the ground up.

Although it is a
helpful framework Dunnings OLI paradigm isn’t a formal theory backed by
scientific methods and should be treated as an advisory method of determining
the host country (Neary P, 2009)

 

 Openness to regional and international trade

India is signatory to many bilateral trade agreements and trading blocs
some examples are;

·        
South Asian
Association for Regional Cooperation

·        
India-Sri Lanka
free trade agreement

·        
The
commonwealth

(Government of India, 2016)

India was warned in 2016 by the world trade organization about
negotiating exclusively in preferential free trade agreements as some argue
they encourage countries to charge excessive taxes to non-members (Chanya,
2011). There has
since been a major policy shift implemented that means all PFAs will be
converted into comprehensive economic cooperation agreements which are designed
to prevent anti-competitive behaviour in global trading. This could create a
fairer competitive environment for trade in India regardless of where the firm
is based.

 

 

 

 

 

 

 

 

Environment ethics and sustainability

Environment

Like many other Asian
countries, India suffers significant effects of various natural disasters
meaning it has a stake in reducing the effects of climate change. In 2016 India
signed the Paris accords, committing to reduce its emissions by 35% of 2005
levels judging by current policies India is due to outperform these targets (Climate
action tracker, 2017). In 2017 the USA pulled out of these agreements possibly
paving the way for India to become a front runner in the global effort to
tackle climate change. The chart shows the use of Hydropower and renewable
energy sources in 2015.

(Han
Chen 2016)

Ethics

India,
like most developing economics faces several ethical issues;

·        
Labour laws or lack thereof

·        
Inequality

·        
Corruption

Corruption
can be a major concern when investing in developing nations, not only can it
increase cost in form of bribes but also cause uncertainty. Heavy bureaucracy
is believed to be a factor in increased corruption (Berger R, 2014). In 2010
only 12% of foreign companies rated Indian legal framework as ‘good’ and 93%
found procedural delays to be a serious concern (VT, 2012). However, bribery and corporate
fraud risk is down to 5th position on the 2016 risk survey down from
first place in previous years. (Singh et al, 2010) This demonstrates that the
efforts the Indian government is making to counter corruption seem to be having
an effect. It appears that India might be a safer place to invest when it comes
to corporate security however there are still improvements taking place. An
example of a policy used to reduce corruption that has implemented ‘Note
bandi’, a mass discontinuation of the 500 and 1000-rupee notes. The aim of this
was to curb counterfeit currency being used to fund illicit activities such as
bribery.

Sustainability

A major sustainability
issue facing India is an enormous population and subsequently shortages of
necessary resources such as:

·        
Health care

·        
Wealth

·        
Infrastructure

It is often forgotten
that economic growth does not always equal a reduction in poverty. It can
contribute to wealth inequality as some regions will attract more investment
than others. In the U.K for example, the boom of the financial economy and
decline of coal mining meant London and southern areas received significantly
more private and government investment than some Northern areas such as
Yorkshire (IPPR North, 2017). This, in turn, reflects on the general population.
The graphic below that shows the difference of wealth owned by the bottom 10%
and top 10%.

(Credit
Suisse, 2014)

In 2016 UNICEF reported
that demand for water will fall below supply by 2050 if policies aren’t
implemented. One such policy that could affect this is section 135 of ‘The
companies act 2013′ which compels companies with a certain amount of turnover
to allocate 2% of their previous 3 years profits to CSR activities. The graphic
displays data analyzed of CSR expenditure of 7224 Indian companies in 2014-15
(Ministry of corporate affairs, 2016.).

(Ministry
of corporate affairs, 2016.).

 

 

Conclusion

The rupee has performed
well historically and has gained
a further boost this year following the Reserve bank of India’s decision to
keep interest rates unchanged. This has encouraged investment as lower interest
rates are considered off-putting to investors as it lowers expected returns.
Overall major indicators show India to be promising for future investing firms
in terms of profitability. The liberalization of the Indian economy and
business environment hold major benefits for foreign firms seeking a host
country for investments. The end goal appears to be to increase ease of doing
business by decreasing red tape.

 While it might be the case that it is
beneficial to firms’ laws are often in place for a reason and removal could
have negative effects on other members of society. Privatization can create wealth;
however, it can also reduce government ability to intervene when necessary. One
of the possible effects of privatization would be the exploitation of workers
(IER, 2013). Before investing a firm should consider its own ethics, and whether
it wants to be associated with these practices, or if it wants to lead the way
in ethical and sustainable business.