Anti Competitive Practices in India
Prior to the liberalization of its trade policies in 1991, India employed a socialist economic model that was embodied in their Monopolistic and Restrictive Trade Practices Act of 1969. Since the opening of its markets to foreign trade of goods and investments, India has attracted significant foreign direct investment and has been enabled to improve its fiscal position. Notwithstanding, India continues to enforce anti competitive practices that are driven by anti-dumping rules, tariffs, pricing regulations and entry restrictions. Political risk and corruption are the drivers of much of the anti competitive practices that have been identified. The prospect of Staples’ entry to India suggests a lot of risk. A thorough country analysis must be completed before a recommendation can be made as to the viability of entry to India. In addition, India must employ more friendly competitive and trade practices to ensure and justify long-term foreign investment by Staples.
In the mid 80s imports to the United States increased over 40 percent while exports grew minimally (Anonymous, 2001). The imbalance of import to export activity can foster anti competitive practices such as monopolies and pricing cartels or strategies of protectionism (Sullivan, 2001). Protectionism or anti competitive strategies are barriers established to protect a domestic industry from cheaper competitive goods and services (p. 93). Protectionism in countries such as India and the United States is largely based on the notion that increased importing reduces the demand for low-wage and low-skilled labor. Moreover, it is inferred by anti competitive strategists that domestic industries are unable to grow unless they are permitted an opportunity to earn profits through the minimization of competition from foreign companies and products (p. 92). In the 1950’s the Indian government enforced extensive import restrictions and high tariffs (Gupta & Ray, 1998). India’s protectionist strategy led to the Monopolistic and Restrictive Trade Practices Act of 1969, which sought to save jobs, protect profits and increase government revenue (Anonymous, 2001). The Indian economy, however, began to liberalize and globalize in earnest in 1991 (Khandwalla, 2002). Notwithstanding the efforts that have been made to bolster and foster a rules-based approach to trade, protectionist or anti competitive strategies continue to be employed and are not always favorable to companies like Staples who seek to enter India.
Anti Competitive Practices
When India announced a repeal of its socialist economic system in 1991 and the adoption of free markets for investments and traded goods, foreign direct investment increased by nearly $1-2 billion annually (Sullivan, 2001). Sullivan provides an example (p. 370) of anti competitive practices exhibited by India when Enron Corporation and its partners constructed the subsidiary, Dabhol Power Company and entered into a contract with the state government of Maharashtra to build the power plant near Bombay. After a $300 million investment in the project, Enron had become the largest foreign direct investor in India. Political instability in India threatened the completion of the project and undermined the intention of India’s move to free trade. According to Sullivan (2001), the Indian government moved to reduce foreign investment barriers to generate revenue to offset $90 billion in external debt. Sullivan suggests that the Indian government’s motive (p. 370) to establish free trade was temporary and a means to address their financial crisis. To attract foreign investment the Indian government implemented the following strategies:
· 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 (Sullivan, 2001).
As a result, the Indian stock market yielded over $3 billion in equity investments from 1993-1995 and India began to successfully reduce their debt (p. 371). Open trade competition eliminated India’s monopolistic hold on the airline industry and in Enron’s case, power generation. However, political risk fueled anti competitive tactics and sentiments as the Indian government reduced their debt. Sullivan (2001) notes that while the then ruling Congress Party supported more liberal trade policies, the opposing Hindu nationalist party began to formally opine that foreign firms should be “taught a lesson” not to take advantage of India. According to Vieth (2002) an analysis conducted by a law firm revealed that protectionist activity reached unprecedented levels in 2001, with countries initiating a record 348 anti-dumping investigations. The U.S. and India were the most aggressive users of anti-dumping rules, which prohibit predatory pricing by exporters and provide challenged domestic companies a break from global competition. In addition to anti-dumping measures that target individual countries, India has also used broad tactics such as tariffs, price regulation and entry restrictions (Vieth, 2002). The effects of political risk have caused the positive outcomes of the free trade reforms implemented in 1991 to slow down. Policy errors have resulted in a reduction of growth and have reduced much of the gains in India’s fiscal position. As a result, credit rating agencies have downgraded India's medium-term prospects (Nishimizu, 2002). As of June 2002, India is the World Bank's largest single borrower, with total lending of more than $58 billion from the International Bank for Reconstruction and Development (IBRD) and development credits from the International Development Association (IDA), the World Bank affiliate that provides interest-free loans to economies with low per capita incomes (worldbank.int).
Staples Entry to India
Xerox, a global office supply company disclosed in July of 2002 that graft is part and parcel of the corporate functioning in India, especially in dealings with the government departments (Vishwajeet, 2002). In order for Staples to fully assess the long-term viability of conducting business in India, a thorough country analysis must be completed. The climate today is much more favorable for liberal trade practices compared to the 1950s and 1960s. Notwithstanding, cultural traditions and governmental shifts in trade philosophies suggest some risk to entering India. The successful strategies used by Staples in the analysis of entry to the United Kingdom, Germany, the Netherlands and Portugal must be applied to India.
Anti competitive practices are sometimes employed to protect domestic interests. In 1991, India opened it markets to more liberal trade practices and has realized significant foreign direct investments. Governance suggests that, notwithstanding the increase in foreign investment, protectionism strategies have been used in a retaliatory fashion against foreign firms who compete successfully. Openness to the entry of foreign firms and investors must be regarded as a long-term priority for ongoing reforms in India. India must encourage and enable real competition, increase the service and efficiency standards and improve the quality of their financial infrastructure, transparency and disclosure to earn and keep the trust of foreign investors. The threat of anti competitive tactics resulting from political risk through tariffs, anti-dumping, price regulations, entry restrictions and corruption must be managed to minimize the existing concerns of foreign firms and investors.
Anonymous. (2001, Dec). India: The Competition Bill 2001 International Financial Law Review. Retrieved November 18, 2002 from http://mdusa.lib.umd.edu/proxy/uc/umi
Gupta, B. & Ray, A. (1998, Summer) Real exchange rates and manufactured exports: A study of India's potential exports to the U.S.A. Journal of Asian Economics. 9(2) Retrieved November 20, 2002 from http://mdusa.lib.umd.edu/proxy/uc/umi
Khandwalla, P. N. (2002, Aug). Effective organizational response by corporates to India's liberalization and globalization. Asia Pacific Journal of Management. Retrieved November 17, 2002 from http://mdusa.lib.umd.edu/proxy/uc/umi/pqdweb?Did=000000155679571&Fmt=1&Deli=1&Mtd=1&Idx=1&Sid=4&RQT=309
Nishimizu, Mieko. (2002, Oct) Conference: Adapting India's Financial
Sector to a Globalizing. Retrieved November 23, 2002 from
Raghavan, Prv. (2002, June). India amends Companies Act to line up with more developed economies. Journal of International Taxation. Retrieved November 21, 2002 from http://mdusa.lib.umd.edu/proxy/uc/umi
Sullivan, J. J. (2001). Exploring international business environments. Boston, MA: Pearson Custom Publishing.
Vieth, W. (2002, May 1). Nations Talk Free Trade, but Protectionism
The Los Angeles Times. Retrieved November 22, 2002 from http://mdusa.lib.umd.edu
Vishwajeet, S. (2002, July) In a Jam. Business India. Retrieved November 21, 2002 from http://mdusa.lib.umd.edu/WebZ/html/homeframe.html?sessionid=01-40124-1599320136