India: Political and Regulatory Systems
Prepared by:
Joel Vilmenay
The success of Staples in India is contingent on favorable political and regulatory policies. The Indian government, however, has developed a reputation of inefficiency, corruption, and poor budgetary management Sullivan (2001). identifies four categories of political risk companies like Staples may encounter upon entering India. The Enron corporation is sited as an example of a multinational corporation that was entangled in the rankling of the Indian government. Opponents of the policies that prompted Enron to make an entry into India propose, among three concerns, the threat that faces the poor in India. Staples’ entry to India is largely dependent on the India government’s development of sound fiscal policies that are designed for consistent long-term foreign investment.
The political and regulatory systems of a target country are very important to the success of any foreign company, including the entry of Staples into India. The more a country is involved in and dependent on the world economy the more risk there is associated with foreign companies like Staples (Sullivan, 2001). Multinational companies targeting foreign countries for entry face many types of political risk. According to Sullivan (2001), “the multinational maybe viewed as a threat to the sovereignty of developing countries if leaders feel that foreign investment and trade reaches a level which makes the local economy dependent on global economic forces and distant market events.”(p. 360). While Staples may not present a threat at this level, the threat of unfavorable political and regulatory policy is possible as Staples seeks to make an entry into India. India’s governance is well known for having endemic problems such as inefficiency, corruption, and poor budgetary management (www.worldbank.org).
Sullivan (2001) sites the example of political risk when he notes the example of the Peruvian government’s take-over of a US-owned oil company in 1985 and their decision not to compensate the owners. Further, he notes the losses incurred by US suppliers when the erstwhile Soviet Union disbanded and failed to pay for government services. In addition, he points to the losses of American assets in Kuwait that were destroyed as a result of the Gulf War. Sullivan (2001) identifies four types of political risk:
· Forced divestment
· Unwelcome regulation
· Interference with operations
· Political Upheaval
In 1991 India abandoned its socialist economic system in favor of a free market systems designed to spur trade for goods and investments. Prior to this change, India maintained a very high barrier to entry for foreign investors like Staples. The free market strategy resulted in foreign direct investments totaling $1-2 billion annually over a three-year period. Encouraged by India’s reforms, the Enron corporation made an entry and investment in the development of Dabhol Power Company, a subsidiary that was entered into a contract with the state government of Maharashtra to build a power plant. After a $300 million investment by Enron, in 1995, due to political rankling the project was cancelled by the state government. Nearly four years later the project was resumed, but was still overshadowed by political instability (Sullivan, 2001).
According to Sullivan (2001), the Indian government development a free market system to generate hard currency to address payments on $90 billion in external debt that existed during that time. Companies, like Staples, were encouraged to establish operations in India because the India government:
· Allowed foreign companies to own up to 100 percent of a business.
· Cut maximum import duties from 300 percent to 50 percent.
· Cut corporate income taxes to the levels of other Asian nations.
· Reduced red tape in the licensing system.
India’s socialist tendencies resurfaced as the $90 billion debt was reduced. It is Sullivan’s (2001) contention that “a policy born of desperation lasts only as long as the desperations lasts.” (p. 371). Even though the then leading Congress Party maintained its support of a free market system, the opposing Hindu nationalist party, which was in control of the state government of Maharashtra began making claims that foreign firms should not be permitted to exploit India.
Sullivan (2001) notes, those who are critical of foreign investment and multinational development present the following arguments:
Capital Market Harm: competition for local loans drive up interest rates and hard currency reserves are drained off to pay for imports.
Technology Harm: often old technology is used, and government spending on infrastructure for foreign investment deflects funds from the poor.
Employment Harm: competition for skilled workers drives up wages, causing local firms problems, and the presences of rich expatriates leads to jealousy.
The issue of poverty is especially acute in India. Notwithstanding the relative achievements of stabilization and reform programs during the 1990s, India's progress in reducing poverty and improving social problems is dependent on the its government’s ability to accelerate economic growth (www.worldbank.org). India's economic growth, estimated at 5.5 percent in 2001/2002, while impressive, still fell short of the government's objective of eight percent. The Indian government continues to be burden with persistent and large fiscal deficits. To Staples benefit however, services: the least regulated sector in the economy, continues to be the strongest performer, while manufacturing, the most regulated sector, is the weakest (www.worldbank.org).
Staples’ successful entry will also be aided by a sound public relations campaign to promote the benefits of the company’s operations in India. To that end, support of Staples will be encouraged by members of the Indian community.
References
Sullivan, J. J. (2001). Exploring international business environments. Boston, MA: Pearson Custom Publishing.
Jalan, A. Saviprasad, H R. How India's reforms will curb foreign investment. International Financial Law Review Dec2002, Vol. 21 Issue 12, p35. Retrieved January 24, 2003 from http://mdusa.lib.umd.edu/proxy/uc/umi
2002 India Country Brief. Retrieved January 23, 2003 from http://lnweb18.worldbank.org/SAR/sa.nsf/Countries/India/4F3233D642E4BB3985256B4A00706AA7?OpenDocument