Devising a safe and sound Indian market entry strategy is a task which requires foreign investors to consider plenty of factors. A young population with a median age of 26.7 years, combined with a drastic decrease in the number of people living below the poverty line as per NSSO data has led to India’s position as a leading world market. Indeed, consumer spending in India grew from US$ 549 billion to US$ 1060 billion between 2006 and 2011. India’s consumption is expected to rise 7.3 % annually over the next 20 years.
India is also an attractive destination for foreign direct investment thanks to a cheap and skilled labour pool, a democratic Government and investor-friendly policies. However, it is important to understand the market and the regulatory environment thoroughly before setting up shop.
Indian Market Entry Strategy: Setting Up An Office vs. Plunging Headlong
If you are new to the Indian market, starting small is a good idea. To start operations as a foreign company in India, you can set up an office in the country. There are three kinds of offices that you can set up based on your needs.
#1. Liaison Office:
The role of a liaison office is limited to providing and gathering information about the company and its products to potential Indian customers. Such an office can have no commercial activities and must be solely dependent on funds received from the parent foreign company to sustain itself.
#2. Branch Office:
A branch office can conduct the whole range of business activities as carried out by the parent except for manufacturing, though it can sub-contract to an Indian manufacturer.
#3. Project Office:
A project office is a temporary arrangement specific to the delivery of a project contract that can be set up even without the Reserve Bank of India approval in some cases. Once the project is complete, surplus funds can be repatriated to the parent company.
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With time and sufficient understanding of the Indian market, you can always choose to set up shop as an Indian company. There are three ways to do this:
a. Wholly owned subsidiary (WOS):
A foreign company involved in an eligible business activity may register a WOS in India. This is ideal for those businesses that prefer to have full control over their business. While a WOS can be private or public limited, most small and medium businesses set up as a private limited company that is closely held.
b. Joint venture (JV):
The formation of a new company by two or more partners is a JV. This gives immediate access to the established contacts and business of the Indian partners as also entry into sectors where foreign ownership is restricted.
JVs are of two types:
– Unincorporated JVs: These are typically formed in consortiums when executing a large project and the partners are unwilling to incorporate a company.
– Incorporated JVs: These are more common and can be set up as a private limited or a public limited company
c. Limited Liability Partnership (LLP):
The LLP structure is a hybrid of traditional partnership and a private limited company and is a relatively recent development. With fewer compliances compared to a company, the structure offers tax advantages and is investment-friendly.
d. Strategic Alliances:
Forming a strategic alliance with a local player is another route for an international business to establish and eventually build their India footprint.
Think Strategic, Not Short-Term
Whatever the route you decide to follow, it is best to consider long-term advantages rather than short-term benefits. McKinsey data shows that multinational businesses that enter on a standalone basis do better than those that use Indian partners to create JVs.
Most global companies such as Honda which exited the Indian market, have bought out their partners or have gone their separate ways. While it is true that JVs do offer initial comfort in a complex market, without management control and clear path to ownership, global companies may have no option but to exit the market eventually.
Investing In People And Perception For A Holistic Indian Market Entry Strategy
Once you decide to establish your India business, it is important to empower local leaders by giving P&L responsibility and a direct line to the global company CEO. Rewarding good performers among the Indian management by including them among the global top 200 executives as well as promoting them to global positions will result in fast decision-making and sharp execution, especially important in India’s dynamic market.
Foreign businesses must engage with local media, civil society groups, Government and activists proactively to avoid landing in policy-related situations that rapidly spiral out of control similar to the Nestle – Maggi case.
A concrete India market entry strategy is one that considers your long-term priorities. It requires intense and concerted efforts from the top leaders within the company and can pay rich dividends in the long run.
Sources: McKinsey, Coral Research, Coinmen and more
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