February 16, 2020
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Getting To The Source

Foreign investors have failed to make a mature risk analysis of India, hence the dismal picture

Getting To The Source

HOW have transnational corporations (TNCs) fared in India under liberalisation? Contrary to leftist critics, who argue that TNCs have steamrolled into our economy and are in the process of wiping out home-grown companies, the performance of most TNCs has actually been quite dismal. Most have had problems just getting started, and have been busy with government permits, MOU deadlines, raising finance and developing reliable suppliers. Foreign hospitality majors like Holiday Inn cannot get land and zoning permits in major cities, manufacturers like DCM Daewoo cannot import enough CKD kits due to bottlenecks at ports, energy companies such as Cogentrix and Enron have no idea what sort of opposition and litigation tomorrow will bring, and foreign insurance companies are mad as hell at having spent millions of dollars in hotel costs without any sign of a clear-cut policy. For those who did overcome these obstacles and managed to start operations like Mercedes cars, Ray-Ban glasses and Nokia cellular phones, initial market projections have proved over-optimistic and they are struggling to figure out whatever became of the huge consumer market that had been promised. Most foreign institutional investors (FIIs) have actually lost money in their equity investments since they arrived. There is now a palpable sense of TNC fatigue and even major conferences, such as Destination India and PowerGen recently, attract poor foreign participation.

So what went wrong? The answer lies in their failure to correctly evaluate and manage political and systemic risks in India: complex procedures, policy flip-flops, bureaucratic nightmares and over zealous social activists. In this they made three basic mistakes.

 Instead of relying on action, events and trends, TNCs have so far put too much faith in what is being said, and by whom. Pronouncements on economic policy, especially by the Prime Minister and Finance Minister, are followed minutely and translated into future expectations. This fixation on personalities and speeches is a costly mistake, and the first cardinal rule of risk evaluation ought to be that words should be taken with a generous pinch of salt. Investors need to focus on past trends, not on lofty statements. The Common Minimum Programme (CMP) of the United Front is a classic example of style over substance.

 TNCs tend to focus only at the Cen-tre, while many, if not most, sources of risk in India are unrelated to national politics. Imagine this: you are a foreign investor in India who is setting up a local beer factory. You have made repeated visits, commissioned market surveys, got all necessary approvals and your factory is under construction. Everything is in place and you are relaxing in your hotel room, enjoying a drink. Think again. Both your venture and you may be in danger of breach of law within weeks. When a new regional party wins the local elections and imposes liquor prohibition in the state.

Or this scenario: you want to set up a joint venture to manufacture furniture-making machinery. You feel confident about a smooth approval process since your project will introduce new technology and generate significant employment, plus your local partner has clout in India. But then a non governmental organisation (NGO) comes along and opposes the project because if may drive the small-scale sector and traditional craftsmen out of business. In the ensuing publicity the government plays it safe and denies you permission.

These are not fictitious scenarios but real cases of recent vintage. They highlight that risk sources include political establishment at the Centre, and also state-level parties, press, NGOs, local business elite and cultural biases. For instance, India has perhaps more newspaper readers than any other country except the US and also a large number of NGOs who are well funded and well networked with sister organisations in the West. It is surprising why TNCs often overlook the role of these institutions in shaping public perception and political debate. Cargill and WR Grace projects, for instance, were undone by local activists and DuPont’s Nylon cord project is now four years behind schedule, as a result of being chased by environmentalists from one state to another. Johnson & Johnson recently announced halt of production of baby milk bottles as a result of pressure from social activists who want to promote the use of mother’s milk in India.

 Most TNCs choose the wrong partner in India. In their rush to enter the market, they often join up with the first big Indian businessman they meet at a conference. This is perhaps the most unexplainable lapse on their part since, if nothing else, India has a huge entrepreneurial base and over 5,000 mid-sized local companies to choose from. These are firms with sales of over $ 3 million and are professionally managed by young, energetic technocrats. This figure is roughly twice that of China, Indonesia and Mexico combined. A wrong partner can be a source of risk. At a minimum, market entry can get delayed due to problems of the partner (Marriott and Shaw Wallace), and at the other extreme a recalcitrant partner can bog down the TNC in court (Coca-Cola and Parle Drinks).

 There is now a steady stream of reports about foreign joint ventures turning sour, and of foreign investors facing problems with the government, local authorities or social activists. Closure of TNC operations, such as of Enron, Cargill and KFC, undoubtedly lower the international rating of India but foreign investors need to learn from them and become more circumspect about their plans. It is time they abandoned their black-or-white perceptions. India isn’t a market which can be ignored, but at the same time it demands more realistic expectations and a more mature risk analysis. 

(The author is a consultant on international business strategy.)

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