Table of Contents
This report is intended to give an analysis to the CEO of NEXT Plc on international business in India. India is one of the fastest growing economies today and was named the third largest economy in 2006. The country has experienced growth over the past two decades with annual growth rate of 6% since 2004. India has attracted a lot of international companies as well as small businesses because of the favourable policies created by the government to encourage investment. The government is always giving opportunities to new investors to invest in the country in order to increase employment and improve on the standard of living amongst the people. India creates opportunities for all types of businesses.
The Indian government give grants to manufacturers who establish in areas that are lacking employment and growth in order to encourage evenness in growth. Building a relationship with the Indian government in order to establish in the country has been made easier by the formation of the UK-India round table which is an alliance both governments have formed in order to enhance on their relationship: the UK’s relationship with India goes back hundreds of years, of course – (indeed, it could be said it was the British who actually created the country called India which was not a united country before British administration) – and there are no language barriers because of this, English being the common unifying language.
Despite the strict employee laws and difficulties faced to get a license to invest in the country as a manufacturer, the country still has a lot of advantages that investors will gain both in the short run and long run.
So many companies today are now looking to invest in less developed countries in order to expand or reduce cost of production in order to make more profits. Investing in another country does not just involve cost of production but also understanding the culture and the economy of that country. Differences in the business environment could be a disadvantage to the company or an advantage to the company if they learn and try to understand them
This report will be giving an analysis of an international environment for NEXT Plc. The main aim of carrying out this analysis is to find out if it will be beneficial for NEXT to carry out direct invest in India. In order to give a clear recommendation to the company, this report will start by analysing the business environment of India which includes culture and economic environment. In order to clearly understand the cultural environment, Hofstede’s Cultural Dimension model will be used to analyse how the culture in India is different from that in the UK. Hofstede use five dimensions to describe cultural differences. He used power distance, individualism, masculinity, uncertainty avoidance and long-term orientation. The economic environment will give an overview of the present economic position of India. This section will be talking about the GDP and government policies that have been implemented to encourage investment and growth and for faire employment opportunities.
The report will also give an overview of the relationship between the UK and India by mentioning the UK-India Round Table that was formed in 2000. The report will further give the role of the World Trade Organisation (WTO) in the clothing and textile sector.
A final recommendation will be given on whether NEXT should carry out direct foreign investment in India or export.
Investing in India in not an easy task, especially for a company like NEXT, that is operating in a completely different region and country. The rules and laws on how business activities should be carried out will be different from that of the United Kingdom. One of the greatest challenges companies face in investing in another country in the differences in the business environment. That is the role culture and the economy play in the success of the business. Understanding the culture and how people in a particular environment behave and communicate is as important as know the economic conditions of the country.
The culture of a country is a very important aspect of communication in when doing business. Culture refers to the socially transmitted behaviour, norms and values and believes that govern a particular group of people (Hofstede, 1984). Any UK company moving in to India to start a business should be able to study the cultural differences, especially with employing people. The best and most used model of cultural studies was developed by Geert Hofstede. He developed a model know as Hofstede Cultural Dimensions. Hofstede (1984) described culture as a source of conflict than of synergy and should be well handled in organisations, especially with international companies. In his study, Hofstede (1984) used five dimensions to describe differences in culture between countries and regions. The five dimensions include
- Power Distance Index
- Individualism Vs Collectivism
- Masculinity Vs Femininity
- Uncertainty Avoidance Index
- Long Term Orientation Vs Short Term Orientation
This is when the less powerful people accept that power is not divided equally (Hofstede, 1984). This could be an organisation, country or family. India has one of the highest power distance of 77% compared to 55.6% of the world’s average (Hofstede, 1984). This means India has a high level of inequality in power and wealth in the country. This is arguably not something that has been imposed on people, but what those with lower power distance have come to accept and is part of the norm of the country. This needs to be taken into consideration especially by a company from the UK with a power distance of about 30%. This means the company should expect a greater power distance between management and employees in India than what they are used to in the UK. A high power distance might indicate there is a high difference in compensation and wage. Most of the final decisions in a country like India are made by the boss and maybe without consulting anyone. This does not just happen in families but also in company. The hierarchy is very strong in such societies. While in the UK decision making involves almost everyone that works in an organisation.
Figure 1: Power Distance chart
Source; Hofstede, 1984
Source; Hofstede, 1984
This is the extent or degree to which individuals work in a group or as individuals (Hofstede, 1984). Individuality measures how loose the bond is between individuals where individuals take care of themselves and function individually without the support of other people (Hofstede, 1984). Collectivism measures how individuals work in cohesive groups and families for protection in return for unquestionable. From the figure above, it can be seen that India has a lower rate of individualism than the UK. This means they are likely to work better in a group or as a team than as individuals. This might be because of the benefit they gain working as a team. While in the UK, working as an individual is better than working as a group (Hofstede, 1984). Therefore, setting up a company in India will mean the company will have to assign work in teams or groups. Individuality index for India is about 45% compared to the 85% in the UK (Hofstede, 1984). A country like India with low rates of individualism indicates respect for age and wisdom (Hofstede, 1984). Change in a collectivism country is very slow. The implementation of any strategies to adapt to changes tends to be slower that in a country where individualism is high.
This is the distribution of role between gender in an organisation, family or a country (Hofstede, 1984). This study is based on two aspects: men in the masculine countries are more assertive and competitive and women in feminine countries are more modest and caring (Hofstede, 1984). India has a masculinity rank of 56% compared to 51% of the average world’s rank (Hofstede, 1984). This means there is high competition and that is a distinction between men’s work and women’s work (Hofstede, 1984). This means there are some jobs that cannot be given to women because they are considered to be men’s jobs, and vice-versa. Any company moving in to India has to consider this aspect before establishing themselves in the country.
This is how much the society can tolerate uncertainties and ambiguity, which is the search for truth (Hofstede, 1984). This refers to the extent to which people are comfortable with unstructured situations and how far laws and rules are used to prevent uncertainties to happen (Hofstede, 1984). Cultures that are more uncertainty avoidance try to minimise risks by using rules, laws and other security measures to reduce risks (Hofstede, 1984). India has the lowest ranking in uncertainty avoidance compared to the 65% of the world’s average. India has a higher uncertainty avoidance level than the UK meaning they are more like to have a more formal way of dealing in business, avoiding differences, providing detail plans on how jobs are being done and follow them, clear about expectations and express emotions. This is different from the way UK companies operate. In a low uncertainty avoidance country like the UK, they are more informal with business operations and accept risks. Rules are not restricted in business operations. This is very important to consider, especially if the company plans to have a business partner from India. They should know Indians do not take as much risk as the British and should therefore try to compromise of risk taking procedures. The avoidance of risk may, of course, lead to corruption and a general acceptance of bribe-giving too.
Countries that are long term oriented are more perseverant and look at long term goals than countries that are short-term oriented are more about meeting obligations and protecting one’s ‘face’ (Hofstede, 1984). Saving face is avoiding any shameful act that is not going to make an individual or a company lose its respect to others or to the society. This is very common in less developed countries, as in much of Asia. Indians are more long term oriented than the British. India has a long term orientation of 61% compared to UK’s almost 25%. This means in India, family is more valued, there is strong work ethics and there is high value placed on education (Hofstede, 1984). In this culture, people avoid doing things that will cause others to lose face; they base worth on ethics and loyalty and show respect for tradition (Hofstede, 1984). This is not the case in the United Kingdom where there is equality and people treat others the way they like to be treated, although European countries arguably used to show exactly the same traits as places such as India: those of village-based, religious, hierarchical, pre-industrial societies.
Doing business in India has become an increasingly known decision companies are taking today in order to improve productivity, and, most of all, cut down their cost of production. Many clothing companies are moving to India, in particular.
India has both privately owned companies and those that are controlled by the government, but the government offers the licensing on the private companies, creating a perfect environment for corruption to thrive in. Most of big businesses are controlled by the government, large ‘elite’ families and multinational companies (Raj and Saksena, 2005) The country also has a large number of small scale businesses that compete with large industries. The main aim of the government in India has been to raise the standard of living in the country through quality and social justice (Raj and Saksena, 2005). There has been an increase in investment in the private sector as more investors invest in this sector. The government is carrying out a policy where investors are coming into India to invest in the rural areas where employment opportunities and income levels are low (Raj and Saksena, 2005). The government encourages this by providing incentive to investors investing in certain sectors of the economy and also encourages the development of infrastructures (Raj and Saksena, 2005). Incentives are given to investors investing in agriculture, foreign exchange, industrial development and infrastructure (Raj and Saksena, 2005).
The economy of India has been growing rapidly for the past decade with an increase growth rate of almost 6% between1980 and 2006 (Gurría, 2007). There has been a fall in the poverty line in the country due to the faster growth was led by the government opening its economy to foreign trade and reducing direct tax (Gurría, 2007).
India has been named the third largest economy in the world in 2006 after the United States and China (Gurría, 2007), though one must always be careful of such glib league tables, because over 300 million Indians live in dire poverty: it all depends on criteria used to decide which economy is larger and better. The turnaround in the Indian economy started in the mid 1980s and grew faster in the 1990s when direct taxes where significantly reduced, restrictions on large companies investing in the country was dropped, the financial market was reformed and the equity market was transformed (Gurría, 2007). The government reduced tariffs to 10% in 2007 in order to encourage foreign investment in the manufacturing sector which has been a great impact on the economy (Gurría, 2007). By 2006 the GDP of the country rose to 24% compared to 6% in 1985 because of the inflows of direct foreign investments (Gurría, 2007). The economy has experienced a few changes since its reform. Debt to GDP fell from 82% to 75% between 2004 and 2007; there has been increase in output and there has also been and estimated increase growth rate of 8.5% (Gurría, 2007). The rapid growth in the economy has never led to an imbalance of demand and supply in the economy despite its high GDP (Gurría, 2007).
Figure 3; Growth in GDP in India (%)
Source: Gurría Angel (2007)
The government’s goal to reduce poverty in the country is arguably being gradually achieved today, though sky-high population growth rates means there will always be those in dire poverty. The government’s main aim to rapidly reduce poverty is to achieve and annual growth rate of 10% by restructuring their reforms (Gurría, 2007).
Licensing has become more difficult for manufacturing than the service sector. This means setting up a manufacturing industry in India might be a little more difficult for a clothing company because of the difficulty in getting the license.
The number of workers in the manufacturing sector in India has fallen because of low income. India has some of the strictest employment regulations in the world today. A manufacturing company with more than a hundred workers has to consult the government in case they want to lay off just one worker (Gurría, 2007). This is what a company has to consider before signing a long term contract with employees in India. This might cost the company a lot of money if they decide to they want to lay off a worker. India is, above all else, a labyrinthine bureaucracy.
Figure 4: Employment protection legislation is strict; Regular employment (restrictions on indefinite contracts)
Source: Gurría, 2007
The figure above shows how strict employment laws are in various countries in the world. India comes third in the strictest laws on employment. This arguably makes it difficult for manufacturing companies employing people on long term basis.
The government of India and the United Kingdom have created a strong business link between these two countries based on long-standing historical ties. This link was created in 2000 by the Foreign Secretary Robin Cook and Indian Foreign Minister Jaswant Singh and was called the UK-India Round Table (Ukinindia.fco.gov.uk, 2009). This round table consists of thirty people, with fifteen from the UK and fifteen from India which includes businessmen, writers, politicians academics and journalists (Ukinindia.fco.gov.uk, 2009). This was created to strengthen the relationship between the UK and India. The round table meets annually in India and the UK with the purpose of discussing factors that may affect the relationship between both countries and also to strength any existing relationship (Ukinindia.fco.gov.uk, 2009). Aspects discussed at the round table include; education, visa policies, climate change, the economy and research and technology (Ukinindia.fco.gov.uk, 2009).
This symbiotic relationship formed by both countries will be an advantage for any UK company trying to invest in India. This relationship enables the exchange of ideas and investment opportunities for each country. The presence of half a million Asians of Indian heritage in the UK, mostly middle class and educated, is certainly an advantage to both countries regarding trade.
The World Trade Organisation (WTO) has been one influence on the way companies in India and the UK function and carries out trading. WTO has 148 members and encourages trade between members (Vasan, 2009). In particular, WTO encourages trade between India and other members of the organisation in order to develop the country’s economy. Before the formation of WTO in 1995, the General Agreement on Trade and Tariff (GATT) acted as a body in charge of lower customs duty rates and other trade barriers (Vasan, 2009). GATT came to be in charge of agriculture and textile industries after it moved under WTO. GATT was also in charge of product standards, customs duty rates and other trade barriers in countries (Vasan, 2009). One of the main functions of WTO has been setting standard rules for marketing procedures in the textile and clothing industry, globalise trade, fix international standard for labour wage and working conditions and remove corruption in government policies (Vasan, 2009). Therefore, the clothing industry should not only look for government policies in India that will influence location in the country, but also WTO’s rules regarding the clothing industry and employment policies on wages and working conditions. As a member of the WTO, India is capable of exporting goods to other WTO member states. This means if a company like NEXT opens a manufacturing site in India, they are allowed to export their finished products into the UK and other ‘first world’ countries with large consumer bases.
The textile industry is very strong in India. There is an availability of raw material in the country and a huge and hungry (literally) labour force as well. Labour is cheaper in India than in the United Kingdom because people are so desperate to avoid poverty of proportions unimaginable in the UK. Therefore, NEXT should invest in the country for these reasons. There are two ways through which NEXT can carry out investment in the country. They can either do so directly as a company on their own, or by going into joint venture with another investor of Indian origin: the latter is often preferred by any businesses investing abroad, in order that localisation in put into practice.
Going into a joint venture with another Indian investor could be an advantage for the company as there are so many competitors in the clothing industry today. Another investor would already know the rules, traditions and customs in their home country and what procedures are required; they will also know how to bypass a lot of red tape via the usual endemic corruption and bribes. This will also be an encouragement for the government to make the licensing procedure quicker. A country with a strong culture like that of India prefers to deal with their own from the same country than to deal with an outsider – arguably this is xenophobic, even racist, but that is just the culture of Asia. NEXT Plc can also operate in India as a subsidiary. Being a subsidiary means they will not need a business partner.
Another suggestion for NEXT is to use short term contracts or temporary workers in order to reduce the pressure of the strict employment laws; local partners will know how to get round anything through ‘rewarding’ contacts in the administration.
This report has looked at how NEXT Plc can analyse the business environment in India in order to decide on whether they would like to invest in the country or not. The report first looked at culture as a means of analysing the country’s environment and also comparing it with that in the UK. This was done by using the Hofstede Cultural Dimension Model which described behaviour using power distance, individualism, masculinity, uncertainty avoidance and long term orientation.
The report also looked at the economic environment and government policies that are used to encourage investment in India. This was done by looking at the country’s GDP and annual growth rate and also government policies on taxes and tariffs and their objective to improve the standard of living in the country. An overview on the formation of the UK-India Round Table was also given to show the relationship that exists between the two countries. The report also showed the impact of WTO rules on the textile and clothing industry. Finally, a recommendation was given to suggest that if NEXT carried out direct foreign investment, perhaps with a partner company, it would be a good idea.
The company should invest in the country after looking at the bottom line advantages NEXT will gain by carrying out manufacturing in India.
Source; Hofstede, 1984
- Geert Hofstede (1984). Cultural dimensions in management and planning; Asia Pacific Journal of Management. Vol. 1. Pages 81-99
- Gurría, Angel (2007). Economic Survey of India 2007. New Delhi. Date accessed 16/12/2009 http://www.oecd.org/document/5/0,3343,en_2649_33733_39428741_1_1_1_1,00.html
- Raj, R and Saksena, (2005). Economic Environment of India. Excel Books
- Ukinindia.fco.gov.uk (2009). UK-India Round Table http://ukinindia.fco.gov.uk/en/working-with-india/india-uk-relations/uk–india-round-table
- Vasan, M. (2009). WTO AND ITS IMPACT ON SMALL SCALE INDUSTRIES IN INDIA. Date accessed 17/12/2009 http://www.articlesbase.com/small-business-articles/wto-and-its-impact-on-small-scale-industries-in-india-897767.html