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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Getting Voted Off the Island

Several of my recent columns at Asia Times have covered the ongoing turmoil in India regarding whether or not the country will open its retail market to foreign investment (and, thereby, foreign competition).  Whether or not India has the political will and stamina to push through these reforms remains to be seen, but as Fareed Zakaria points out (HT Michael Zakkour), how India responds to this next round of reforms may have a lot to say about whether India will continue to be included in the useful “BRIC” acronym or whether it will get voted off of the proverbial BRIC island.  If India comes up short, as Zakaria puts it, “10 years from now people might still be praising the BRICs, except that the ‘I’ in BRIC might stand for Indonesia, not India.”


India’s stalled reform process would be troubling enough news, but added to this is the unpleasant reality that its domestic economy is stalled.  Export growth from India over the last four quarters has been reduced to purely that from the services sector.  As Derek Thompson of The Atlantic points out in a recent blog post:


Once you get past mid-year export growth, there’s not a lot of good news coming out of India. Inflation is near 10 percent, which is even worse news than it sounds, since Indian families spend as much as 30 percent of their income on inflation-sensitive food. GDP growth is down, industrial production is slowing, and investors are shirking away from Indian assets. All that means the India is inauspiciously reliant on a global economy that is feeling even more vulnerable. Twenty percent of its exports go to the EU, which is on the precipice of … well, who even knows right now. Another 20 percent go to Asian economies, many of which are experiencing their own slowdowns.


As 2011 draws to a close, we are seeing increasing signs that many – if not most – of the BRIC economies are slowing down.  Last week in conversations with a friend who manages a multinational business in Asia, he commented that orders from China have dramatically slowed down over the last several months.  What is going on in China and India may not only be an economic slowdown but also a re-evaluation of what it means to participate in globalization in the ways more developed economies anticipate.  In many ways, India is the canary in the mine relative to questions being asked by the public at large in emerging economies:  they want to be convinced that being open to globalization will do more than create short-term opportunities for them to buy new products; they want to be confident they also stand to benefit long-term from trade with those outside their borders.  This is, in many ways, a similar question being asked in developed economies.  It remains to be seen if 2012 provides clarity for all parties on this matter or further confusion.  In the midst of an American presidential election and a transfer of power in China, I’d bet on the latter.


Big-Box Protests Test India’s FDI Strategy

The last two weeks have seen major strikes and protests in India over the government’s plan to open the domestic retail market to outside competitors like Wal-Mart, Carrefour and Tesco. While a seemingly small move compared to the economic reforms of other emerging economies (China in particular), the strikes and political resistance to the opening of the retail market indicates much about whether India can grow to become as important an investment location for FDI as China has. My column on the question at today’s Asia Times here.


What’s the All the Fuss about Big-Box Retailers Entering India?

For US-India economic ties, the last two weeks have been some of the most interesting in several years.  The Indian cabinet voted last Thursday to allow 100% foreign direct investment (FDI) into what are called “single-retail brand” operations which are cash-and-carry stores that, according to the Wall Street Journal can “only sell to other retailers and businesses”, and 51% FDI into what the government calls “multi-retail brand” stores.  An industry that is currently estimated to be worth $295 billion, Indian retail is highly fragmented yet offers much of the same allure as does China’s retail market since both countries appear to be developing increasingly vibrant middle classes.


Ostensibly, the opposition in India fears that the entrance of large American and European multinational retailers like Wal-Mart, Tesco and Carrefour would drive India’s small neighborhood retail establishments out of business.  A recent study on India’s retail market showed that 97% of the entire Indian retail market is currently run by “unorganized retailers like the traditional family run stores and corner stores.”  This is an important political constituency and one that the reform minded Prime Minister Manmohan Singh understands will need to be placated if his additional economic reforms are to have a chance.  In recognition of these fears, the Cabinet has stipulated that foreign retailers can only make these investments in cities with more than one million people.


Some have been quick to suggest that the political uproar surrounding this seemingly straightforward policy adjustment points towards deeper problems within India relative to how the country embraces globalization.  In fairness to those who hold these opinions, the significant disparity of FDI flowing into China versus India does suggest, among other things, that China has been an easier destination for FDI over the last twenty years.  Estimates of FDI inflows between the two countries show that for the period 2001-2006, China outpaced India by a factor of almost 9, a clear indication about where the world’s investors would rather deploy capital when choosing between China and India.


India’s historical baggage about allowing FDI has a lot to do with having been ruled by the British Empire, and the lasting reputational and cultural damage from the Swadeshi movement in 1947-1948 which encouraged economic independence from outside influence.  In 1973 India’s Foreign Exchange Regulation Act (FERA) led to the ultimate exit of IBM and Coke from the Indian market; however, government actions since then (in particular the 1993 Liberalization policy) have led many to believe that India may soon rival China as a lucrative source of FDI.  Certainly for retailers like Wal-Mart who are becoming more and more successful selling into the emerging market in China, the untapped and highly fragmented consumer retail market in India is very exciting.


Since the 1993 Liberalization policy, FDI into India has increased, with the primary sector that has benefited from this inflow being the services sector, followed by IT.  Successful entrepreneur and political figure Lord Karan Biimoria commented this week that he anticipated this recent move to allow 51% FDI into retail would open the doors for “the private sector to get into the field of infrastructure.”  The hope is that the nascent economic reforms put forward over the last several weeks will pave the way for additional FDI in the areas of infrastructure, higher education and airlines – to name just three of the highest profile areas.


Critics of India’s past policies towards FDI should look not only at what India has done and where it is coming from, but the parallels between its halting embrace of FDI and China’s experience shielding SOEs from its own domestic economic reforms.  While dissimilar in a literal sense, they both have similarities regarding the challenges emerging economies face when entering the globalized world.  As we are still seeing play out in US-Sino economic policy, the role of China’s SOEs remains a sore point for American and European multinationals.  The larger point that unifies what is going on both in China and India is that emerging economies are much closer to political turmoil and economic collapse than developed economies tend to appreciate.  As such, they have to walk the line between embracing the international rule sets that empower and enable globalization than developed economies (who, it should be pointed out, also wrote many of these rules for their benefit).


India remains the next major emerging economy that, as it opens, will begin to draw additional investment and energies from American and European companies.  The challenges in India are going to be different than those in China, in particular because India’s political culture is much more diverse than China’s, because India’s focus is already on high-technology versus manufacturing, and because India’s infrastructure remains woefully lagging compared to China’s.  Regardless, the time is now to begin doing your missionary work in India as this market is likely to present your business with the opportunity to grow when the Chinese economy takes a breather, something that appears to be very much in the cards as 2011 draws to a close.