Hi Aditi

Can you please help with short answers for the following questions related to the project you helped? I am attaching the project doc for your reference.

Questions

• What were your recommendations for the type of firm and the method of entry into your country?
• What were some specific problems that needed to be addressed?
• Which firms are most likely to be successful?

Expansion into a new market : INDIA EXPANSION INTO A NEW MARKET: INDIA Student Name Name of the University Date 1 Expansion into a new market : INDIA INTRODUCTION For over two decades now, India has been one of the biggest markets for multi-national companies with several top corporate houses trying to enter the emerging economy and tap the potential. India, one of the fastest growing world market, is one of the few economies which survived the 2008 global economic meltdown and showed high resilience on the back of strong and efficient banking system as well as high domestic demand. The country, every now and then, has been on top of MNCs radar and has emerged as one of the safest investment destination, especially after the 1991 liberalization which opened up the Indian economy to the broader world. Before getting on to the current scenario of the Indian markets and the growth potential, it is imperative to see some of the demographics as highlighted below Country Capital Form of Government Population (2015) Per Capita Income (2015) Inflation Rate (2015) GDP Growth Rate (2015) External Debt (2015) External Debt to GDP Ratio (2015) Trade Balance Religion Languages Major Cities Climate Trade Block Association GINI Coefficient (2013) Human Development Index India New Delhi Democratic 1.311 billion $ 6,020 3.78% 7.60% $ 480 billion 23% - $13.3 billion Multiple - Hindu, Islam, Christianity, Sikhism among others Multiple - Major languages are Hindi, English Delhi, Mumbai, Chennai, Kolkata Tropical ASEAN, SAARC, EFTA among others 51 0.624 India has been all over the news recently at a global level, primarily driven by its political development as well as the economic achievement. The second largest national political party came 2 Expansion into a new market : INDIA to power in India in the year 2014 and there has been no looking back since then. All investors, companies, analysts others have been tremendously bullish on the economy since 2014 and the country has been successful in clocking the highest GDP growth rate in the last two years, leaving behind China. There have been sleuths of economic development in the country, of which the most critical is the relaxation in the Foreign Direct Investment regime given by the current government. In the last three years, the country's FDI inflows have seen a phenomenal growth of ~ 50% with changes being brought in by the government across industries. Majority of such investments have taken place in four of the industries, namely - Aviation, Defense, Pharmaceutical and Single Brand Retail. Most of the world leading research houses and universally renowned organizations are pegging India to be the fastest growing economy with a forecasted growth of ~7.5% going forward. The recent political development and sleuths of measures taken has boosted the investor sentiments for the country worldwide. The positive sentiment coupled with new banking reforms, uptick in the corporate earnings and measures by the government to improve the ease of doing business has resulted in the country becoming one of the most favorite investment destinations. Further, the labor laws in India are very employee friendly and the uptick in demand has resulted in the unemployment level falling drastically over the last 5 years. One of the challenges of the Indian economy was the existence of black money resulting in tax evasion which has recently been dealt with very effectively by carrying out a demonetization drive in order to suck up the black money in rotation. Though the recent demonetization is expected to have a minor negative impact on the country's economic growth in the short term, it is perceived to be highly beneficial for the economy in the long run as it will help in increasing the tax base for the government there-by reducing the country's current account deficit and external debt. 3 Expansion into a new market : INDIA In addition to the bullish economic perception as well as ease of doing business, India is also one of the fastest growing market in terms of Infrastructure. The country, led by the early reforms and digitization is one of the world's largest economy in the field of Telecom and IT enabled services. Despite the highly efficient infrastructure in place, the country is seen to spend considerably less on infrastructure development as opposed to the other emerging economies. For instance, India spent only 4% of its GDP on infrastructure development as compared to China which has on an average ~9% of its GDP being spent on infrastructure. The political environment in the country is seen to be pretty stable. The country is the largest democracy in the world and enjoys a stable government. The recent 2014 general elections saw the ruling party getting out of power and the government being formed by the second largest national party which has been highly successful in delivering on its promises of economic growth and inclusion in the last 3 years. Historically, the country has been accused of high corruption across levels which has been tackled very well by the present government which has resulted the country moving down in the global corruption index. Further, though the country do not generally experience any civil unrest, there is some friction with the neighboring country (especially Pakistan) which has erupted every now and then but is seen to be dealt with effectively in the recent past. The rising tension with the neighborhood is seen to be a potential roadblock in consistent economic growth, but the recent support of various global platforms to the country has put India on the top. Further, the legal system in the country is stringent with the country boasting one of the largest independent judiciary system in the world. The country also enjoys laid-down policies to ensure end to end protection of intellectual property. Given the size and diversity of the country, the human right is seen to be a bit complicated to a certain extent. However, the same should not be seen as a road-block for any US multinational 4 Expansion into a new market : INDIA entering into the country as the US Liberty of Congress itself rates India on top in terms of human rights when compared with its other Asian peers. There have been a host of U.S. multinationals which is currently operating in the country and in reality generating a higher revenue than in its own domestic market. Some of the U.S. multinationals which are operating in the Indian market and have been highly successful are given below American Express Cognizant Coca Cola Johnson & Johnson Microsoft Pizza Hut The above list is just a small sample of a long list of U.S. companies successfully operating in the Indian market. The current state of the Indian economy makes it a perfect market for any new entrants across industries. As the economy is highly characterized by growing disposable income, high domestic demand and enormous growth, this market is seen to be among the top of the list for all companies across the world and companies from any industry have a high potential to establish and grow in this market. However, based on the recent economic development and policies which are already implemented, there are four major sectors which had a huge potential even in the short run - Aviation, Defense, Pharmaceutical and Single Brand Retail. These are the four industries where-in the government has already allowed a 100% FDI and is expected to be the biggest beneficiary in the short term. Further, based on the current demographics of the country, a single brand retailer is one of the industry which is highly recommended as the same is entirely driven by the domestic demand and have lower barriers to entry as well as lower capital investment. 5 Expansion into a new market : INDIA In a nutshell, the rich heritage, recent economic and political development as well as bullish sentiments across market participants globally clearly makes India as one of the most favored destinations for foreign investment and despite the recent surge in the foreign direct investment levels, the market is seen to be all geared up for multi-fold increase in the coming times. FINANCIAL FACTORS Post 1991, India entered into a new phase of its exchange rate regime which helped the country in maintaining an adequate level of currency reserves and also helped in reducing the exchange rate volatility. Currently, the country enjoys a floating exchange rate regime where-in the currency value is market determined with the Central Bank (Reserve Bank of India) having the right to intervene by direct purchase and sale in order to maintain balance in the foreign exchange market. As part of the current foreign exchange regime in the country, full convertibility on current account was introduced starting 1994 which allows for the repatriation of export proceeds within 6 months, puts a cap on the amount spent on services availed outside of the home market, dividend balancing in FDI, restriction on repatriation of interest on rupee debt among others. However, full conversion is not allowed on capital accounts, even though this has never been a constraint for foreign direct investments as companies have historically earned a higher return on investment as compared to other Asian peers. For the capital account, all outflows associated with inflows have been completely freed with a preference for FDI and corporates being at the top of the hierarchy for the consideration of liberalization of capital flows. The Indian Rupee has seen to lose some ground vis--vis US Dollar in the recent terms with some analysts/research firms being of the view that the Indian Rupee is loosely pegged to the U.S. Dollar. The INR forecast along-with the actual historical rate is shown below (the rate shown are monthly averages) 6 Expansion into a new market : INDIA From the above line graph, it can be observed that the Indian Rupee has moved into the narrow range over the last 30 months and is expected to remain in the same range going forward. During mid-2016, the INR was seen to depreciate substantially against the dollar when RBI intervened and brought about a balance in the exchange rate which was further helped by interest rate reduction in the Indian economy. Unless any unforeseen events occur, the exchange rate is seen to be in the range of INR 60-64/$ going forward and there is no real exchange rate crisis that the Indian economy faces because the economy is seen to have a strong mechanism in place and substantial reserves to take care of any adverse movements in the market. The Indian economy is seen to have one of the most developed and liquid stock markets among the emerging economies. The Indian stock market is characterized by three major exchanges - Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Multi-Commodity Exchange (MCX) along-with host of other less liquid and less developed regional exchanges. In terms of the trading turnover, the National Stock Exchange has one of the highest trading turnover across the globe (including both cash and derivative instrument). There are ~ 5,000 companies listed on both 7 Expansion into a new market : INDIA NSE and BSE with the NSE index being made up of the top 50 companies (NIFTY) where-as the BSE index made up of top 30 companies (SENSEX). Further, there are many Indian companies which have their ADRs and GDRs being listed across various global stock exchanges (for example, Infosys, Tata Motors, HDFC Bank among others have their ADRs listed on the U.S. stock exchange) The market indices are determined based on the free float mechanism and the Indian stock market (NIFTY 50) is seen to have given an average monthly return of 1.30% over the last 8 years. The below graphical representation shows the evolution of NIFTY 50 on a monthly basis over the said time period During the same period, the U.S. stock market (S&P 500) has yielded an average monthly return of 1.03%. Hence, based on the returns of the last 8 years, the Indian market is seen to have outcast the U.S. stock market in absolute returns term thus confirming the bullish sentiment on the Indian economy. Further, the below table shows the correlation coefficient among the two stock markets for each of the years from 2009 onwards along-with a comparison of the evolution of the two indices in return terms. Year Correlation Coefficient 8 Expansion into a new market : INDIA 2009 2010 2011 2012 2013 2014 2015 2016 88% 15% 53% 50% 60% 94% 6% 81% Though the Indian stock market is seen to have out-weighed the S&P 500 in terms of average monthly return, both the stock markets are seen to be highly correlated (especially in 2014 and 2016) which is something that needs to be factored in while making any investment decision by an U.S. MNC into India as this reduces the benefit of diversification. However, this high correlation can also be attributed to the overall economic improvement across the globe and the correlation is seen to be low in 2015 where-in the U.S. as well as global markets were struggling and Indian markets maintained its uptrend driven by domestic developments. 9 Expansion into a new market : INDIA The country's current credit rating (sovereign rating) is BBB- (stable outlook) as stated by the leading rating agencies (S&P and Fitch) and the same hasn't changed over the last five years. Though this rating is substantially below the U.S. rating of AAA, the Indian economy is long over-due for a re-rating as perceived by many experts globally. India does have sleuths of loan from World Bank but enjoys an exceptional repayment record resulting in no default historically and also enjoys a substantial buffer in terms of its reserves. The default credit risk spread, taking into consideration the 10-year government securities issued by the Indian government and US Fed, is ~ 5.35%. This spread has narrowed over the last five years which can be attributed to the increase in the interest rates in the U.S. on the back of improved economic and employment data and the reduction in the interest rates in India driven by lower inflation and higher growth. The evolution of the 10-year treasury yield for both the countries over the last five years (annual average) is shown below Based on the evolution of the 10-year treasury yield, it can be observed that the Indian market is witnessing a phase of decreasing interest rate which is expected to continue in the future. Further, the Indian economy is characterized by a stringent banking system and is one of the few economies in the world which successfully survived the global financial crisis of 2008. This can be attributed to a 10 Expansion into a new market : INDIA strong banking system where-in the apex bank (Reserve Bank of India) has substantial checks on the Indian banks helping them to absorb any unforeseen shock/financial distress in an effective manner. Further, the policies that are in place in the Indian Banking system is something that has been recognized globally and many developed economies of the world are now seen implementing similar policies in their home market to strengthen their banking system. In a nutshell, the Indian Banking system is one of the most stable financial system and there is no real concern of any financial distress/default in the economy which can also be supported by the low Credit Default Swap prices on India. The low credit default swap spreads for India clearly states that the probability of a default by the economy is not even the remotest of a concern to investors/corporations/governments across the globe. While entering into the Indian market, there are various ways through which the Multinational Corporation can raise money. However, going by the recent economic development, it will be apt to raise the money from the Indian market owing to its decreasing interest rate environment, high growth prospects, high disposable income and a larger investment base. The company planning to enter the Indian market should aim to tap the large investable base in India in order to finance its business. Though there are some pre-requisites for MNCs to raise money in the Indian market, most of these requirements are easily met and the recent FDI boost in the Indian economy also gives host of benefits in terms of tax rebates, lower interest rates, interest free period among others to the new entrants Further, the current regime also allows repatriation of profits by foreign companies. The company can aim to raise the capital both in the form of equity or debt. The Indian equity market has been high on liquidity which would ensure that the equity issuances are fully applied to. However, while raising debt, the companies should bear in mind that the bond market in India is not as developed as other economies and they will have to rely on Bank loans (both bilateral and 11 Expansion into a new market : INDIA syndicated) for debt raising. Hence, keeping all the current regulations and policies in mind as well as the economic scenario, it is advisable for the new entrants to go for most of its capital financing in the Indian market as that will help in also mitigating any adverse interest rate or foreign exchange risk without worrying about profit repatriation. MANAGEMENT FACTORS Foreign investments can be done in a number of ways in India, namely acquisition, wholly owned subsidiary, branch, joint venture, project office or liaison/representative office. Each of the mentioned options of FDI has its own advantages and disadvantages as well as the prescribed procedures and restrictions placed by the Government. Given below is the analysis of the available options: 1. Joint Ventures: Joint venture is considered one of the best strategies to enter a foreign market. It provides a pre-established distribution and marketing set up when entered into with a local partner. Moreover, in India there is restrictions as to not more than 50% stake by the foreign investor in certain sectors, in these cases joint venture with an existing entity is a suitable alternative. 2. Wholly owned subsidiary: Wholly owned subsidiaries can also be established in sectors where the government has permitted 100% FDI. This provides effective control to the foreign investor over its subsidiary. It is suitable for service providers and in a capital intensive industry. However, this option requires a high level of risk and involvement by the investing entity. 3. Branch office: Branch offices can be started by a foreign entity already carrying out manufacturing or trading operations abroad. However, such branch offices are not permitted to manufacture on its own but are required to subcontract to local manufacturers. 12 Expansion into a new market : INDIA 4. Acquisition: Acquisition refers to taking over the already existing company to enter the foreign market. It is one of the most popular options to enter the market as the lead time of setting up is negligible. Therefore, in this scenario the best option to enter the market is via joint venture. The FDI policy requires foreign direct investment through either Automatic Route or through Government Approval. The automatic route covers all the sectors, including services sector, however certain sectors do not permit FDI beyond a ceiling. The proposed investments that are not covered by the automatic route are recommended by the Foreign Investment Promotion Board (FIPB), Ministry of Finance for Government Approval. Moreover, the government prohibits certain sectors from FDI under Government as well as Automatic Route, namely, Retail trading (but permits retail of single brand product), atomic energy, lottery business, gambling and betting, chit fund business, nidhi company, agriculture and plantation activities, housing and real estate business (with few exceptions) and trading in TDRs. Owing to the nature of joint venture, the maximum benefits can be achieved by forming strategic alliance with local partners. Therefore, having a local partner when entering India will not only provide the financial edge but also existing contacts of the Indian partners, aiding in the smooth and speedy setup of operations. Cultural factors play one of the major roles in management of a foreign workforce as it affects the entire co-operation. India being a diverse nation, one can find the following crosscultural issues and the related obstructions in management of workforce: 1. Power Distance: This factor means the existence of inequality among the people of the countries. Inequality creates a difference of status and authority between the managers and subordinates or employees. In the U.S. there is less inequality which means less of 13 Expansion into a new market : INDIA power distance as compared to India where the power distance is high. With smaller inequality the managers in the U.S. are used to participative management whereas in India there is a mix of autocratic and participative management. This cultural difference has a direct impact on the HR activities. 2. Individuals Vs. Group Members: The other factor that may affect the management of the workforce is Individualism. It refers to the preference of the people in any country to act as individuals or as group members. It is seen that people in the U.S. tend to act more as individuals whereas in India, people prefer to act as members of a group. Therefore, as a manager in this country one has to focus on more group-related action and less of individual competition, for better results. 3. Structured Vs. Unstructured: Another factor that affects management of the workforce is the ability of the people to react to changes in the organizations. Like in the U.S., people have flexible culture, i.e., they have the ability to take up unstructured situations making them less rigid. Due to differences in culture, people in other countries may have pre-established rules and guidelines for particular situations, i.e., they are structured to follow and act accordingly. Such countries are rigid to changes and avoid taking risk. The key point is to understand the culture of India and different factors that may affect the workforce management. The activities that are suitable for the U.S. culture may have to be altered to suit the Indian culture to avoid future conflict. In order to ensure effective linkages of the parent company with the foreign operations, expatriate managers should be used. However, from the past records it can be seen that there has been a rise in complaint by the expatriate managers in the U.S. leading to failure of the new ventures. The rate of failure for expatriate managers is around 45%. The concerning factors for the managers sent 14 Expansion into a new market : INDIA overseas are health care, home leave, cultural mismatch, political scenario, accommodation and finding necessary goods and services, repatriation, etc. The needs of the managers is to be understood by making all possible arrangements. The managers must be chosen in a rightful manner by giving them the preference and chance as to who wants to go to the decided country. The willing managers should be chosen and where no one shows interest then managers should be sent on temporary and rotational basis. The cost of relocating managers to a different country usually runs very high as they demand additional compensation to move outside. In the U.S. the cost of expatriating managers is often twice the manager's annual salary. Moreover, to make the offer more lucrative to the managers, the organization should provide extra benefits and perks. This will subside the problems of moving to a new country and highlight the gains that can be achieved by availing the offer. Moreover, India has always been a land of different cultures and traditions making it a premium travel destination for foreigners, adding to one of the many benefits of working in the country. After deciding on the suitable manager for the foreign operations, the major focus comes on training of the manger. It is considered an important part of the entire business plan as training of the manager might require up to 6 to 8 months in the U.S. The training period is less here as the managers are more adaptive and versatile, making it faster and less costly. They already possess both business school education and in-house training programs and have experience of managing a diverse workforce. CONCLUSION AND RECOMMENDATION 15 Expansion into a new market : INDIA Venturing into a new country for expansion is a real crucial decision that any company goes through and it is prudent to carry out an in-depth cost-benefit analysis before making any decision in terms of identifying the new market and regarding all other business processes. One of the key elements that needs to be dealt with while going for international expansion is identification of the right target market. After having analyzed various political, social and economic factors pertaining to India, it can be concluded that India is the fastest growing emerging market in the world and all the recent political and economical developments in the country clearly helps India in standing out as a favorite investment destination. The recent political changes has made the country highly pro-development and the high economic growth rate coupled with favorable demographics has resulted in India emerging as a safe as well as preferred heaven for investors across the globe. All the economists and financial experts are of the view that India is all set to witness the highest growth in the next 10 years and is on the track of becoming the world's largest economy. In addition, a recent survey of largest multi-nationals across the globe suggests that the revenue growth in the country is expected to be 25% going forward in a conservative scenario with an optimistic view predicting a growth of ~ 35% per year. India has the highest percentage of youth population which is seen to drive the next wave of innovation of consumer demand. In addition, the Asian Development Bank forecasts that more than 70% of India's population will be upgraded to middle-class which is expected to drive the growth even at a larger pace. In addition, India is a country with abundance of labor which in turn creates a positive atmosphere for new companies. Though most of the factors are in favor of India, there are few things which still needs to be considered at a deeper level before making an informed investment decision. One such factor is the 16 Expansion into a new market : INDIA current BBB- credit rating of the country despite all the recent developments which raises substantial doubt in the continuity of this growth. In addition, though the recent political shift has helped the country come out of the grasp of corruption, any political shift or inability of the government to continue to curb corruption will negatively impact the country's image and growth potential. In addition, the infrastructure facilities are still sub-standard in the country when compared with other developing nations and needs to be dealt with effectively. In a nutshell, in a scenario where-in there are no unforeseen shifts in the political and economic landscape of India, the country is a highly recommended investment destination for companies looking to expand its operations internationally and it is expected that such an expansion will help the company in increasing its revenues as well as profits multi-fold on the back of high demand and high growth in the country. Though the country offers opportunities for companies across all sectors/industries, the recent regulatory shifts in the Foreign Direct Investment Policy clearly makes the below mentioned four industries to be the largest beneficiary Aviation Defense Single-Brand Retail Pharmaceuticals Hence, venturing into India among one of the above mentioned industries is expected to have a positive impact on the company's growth even in the short term where-as in the long run, the growth story across all industries remains intact and it is really worth contemplating this growing economy for international expansion. REFERENCES Aizenman J, and Glick R. (2008). \"Sterilization, Monetary Policy, and Global Financial Integration\