Opportunities and challenges for foreign direct investment in India

India called the land of opportunities is the second fastest growing economies of the world (after China) with a stable GDP and one of the most preferred destinations of foreign investments with very strong infrastructure and cheap labour. India's growth has been steady and is likely to remain around 9 % for the next few years. Agriculture, industry and services being the key sectors of the economy with the shares of 18. 5 %, 26. 4 and 55. 1% respectively.

Further more it is emerging as global manufacturing hub with most of the multinational companies having their plants in almost every part of the country. The huge domestic market and availability of low cost workers with advanced technical skills are a few reasons of increasing foreign direct investment in the past few years. Almost half of the multinationals in the United States have their outsourcing plants in the country due to availability of high skilled workers at a very low cost. There are many opportunities for European companies who wish to start manufacturing in India.

The growth rate of the manufacturing sector truly reflects the country's economic potential, both government and private sector has taken initiatives for developing this sector particularly in the past few years. The sector registered highest growth in March 2007 at 14 % which was almost double as compared to the previous year. The industries which performed well in that year were basically wood, metal, food products, furniture, and cotton textiles. However it is important to build a strategy and study the market in depth before entering as the country is diverse in terms of taste and culture.

Many companies that have their plants in India claim that if the location and timing for entering the market is right then the company has a bright chance for success. It is also important to understand the critical relationship between the risk and reward. According to the survey by Deloitte most of the companies have not been able to tap the potential of emerging markets; global manufacturing giants often miss out on the large mass of customers. So the global multinationals need to learn how to build good relations with the local distributors and how to adapt to local circumstances.

Opportunities in the domestic market – There has been a rapid shift from the low middle class to middle class and even the growing number of upper classes has been a major contributor in the growth of the economy. India has a very strong domestic market and is an attractive destination for global retailers. The retail sector is divided into two – organised and unorganised sectors. Organised retailing is basically done by licensed retailers which include the hyper markets and retail chains.

Unorganised retailers refers to low cost retailing like the convenience stores and small general stores, it constitutes around 98 % of the total trade. Food retail is a very large segment of the market and expanding at a furious rate generating huge amount of employment. Around 4 % of the population alone is in the retail trade business which depicts how important the sector is for the economy, though the country still widely follows the traditional form of retailing in the form of small convenience stores and bazaars.

With 11 outlets for every 1000 people the retail market is highly fragmented, the report by MC Kinsey states that the segment has the potential of becoming $ 300 billion if it continues to open up. Retailing in the country is the easiest business to enter with low capital and infrastructure which is the reason behind the entrance of giants like Walmart. Walmart still functions largely as an American company and global presence is restricted to ten countries out of which only two are Asian – China and South Korea.

It is very conservative in entering global markets unlike General Electric, Coca Cola and Mc Donald's which has most of their revenues from global operations. The Director of International Affairs for Walmart international says "India has been an important market for us and we have sourced almost 1. 2 billion $ worth of merchandise last year and are aiming to increase it by 30 percent every year. She further added that we would like to invest in India's retail sector if this segment of the economy is open for foreign investment".

The CEO says we have been studying the market trends and we realise that it's a price sensitive market and we will develop our strategy accordingly. However the biggest fear is that it would affect the business of small retailers and also it would import large amount Chinese goods which would affect the import balance. The entry of a big retail giant in India is a highly sensitive political issue and several hundreds of shop owners were on the streets of New Delhi to protest. They also fear that these big retailers will force the farmers into selling their goods and later on will acquire their land.

The biggest example of this is the closure of big giant Reliance Fresh in the state of Uttar Pradesh which is one of the largest markets of retail which was done due to some attacks by the local public. The chain was started by Mr Mukesh Ambani the owner of Reliance Industries and it offered many items of daily needs which would hamper the business of small traders on a large extent. A three stage process of setting up a industry in the emerging market – The first stage involves building the base and relations with local people which would help in acquiring the basic necessities of business.

It is better for an MNC to invest huge amount of time and money in acquiring the land. Therefore it is advisable to buy more land than required as getting a piece of land is far more difficult in India as compare to any other emerging market. On the other hand it is also important to hire a good amount of educated people to use the advantage of low cost labour. A company should try bringing together the employees which would help to reduce the rate of attrition which is on a higher side. The second stage is using the technical and design skills which would further create an environment where the employees can further innovate.

Indian workers are well known for innovation and adapting themselves with anything which is new to them. The last stage is working with the highly technical people from some of the top institutions of India such as IIT and IIM's which would further help to build the backbone of the company and use their talent to prosper and grow in a competitive environment. Opportunities in the telecom sector – India telecom market is the fastest growing sector in the world and it is the third largest telecom market with 281. 62 million connections as of January 2008.

The success of Nokia in India which holds 58 % of the market share for mobile phones and its way ahead of its competitors such as Samsung, Motorola and Ericsson is the biggest example of how important the role of foreign investment is in this sector. The FDI inflow from April 2000 to December 2007 has been US 3. 62 billion $ which accounts for around 8 % of the total foreign investment. The country has opted the use of both the GSM and CDMA technologies in the sector. The GSM subscribers are 172. 23 Million as of December 2007 with the growth rate of 11. 87 %.

The Giant Nokia says "India is now its second market overtaking US with over 85 Million people using their phones ". In 2006 the company started its tenth Special Economic Zone in India with an investment of 300 Million $ which would employ more than 10000 people in the unit. It also had an advantage of cheap and talented labour which leads to huge profit margins for the company. But to maintain the market share it was important to meet the growing demands of the market although importing so many units was a challenge considering the country's infrastructure.

Developing countries with much more liberal policies with the capacity of absorbing new technology is ready to face all kind of challenges in the telecom sector. Nokia's distribution and marketing strategies are few of its strongest assets with over 30000 outlets in around 2000 cities. Apart from that the company's advertising strategies which are often aimed at the low end consumer and it also communicated the advantages of buying the phone from an authorized outlet rather than from the grey market. Challenge of limited infrastructure –

India has one of the largest road networks in the world but only a few kilometre of the area is covered with highways as compare to China. These are one of the few reasons why the foreign retail companies are hit with huge transportation costs. Apart from that government only invests around 4 % of the total GDP as compare to China which is 9 %. The port system in the country is also not well utilized with many of the secondary ports facing problems of infrastructure which makes it difficult for the companies to import.

The turnaround time is quite long which leads to delays and also the port system supports only 25 % of the total shipping volume which makes it very difficult for the retailers. A badly organized trucking system and warehouse standards further ad's to the problem of infrastructure. There are huge opportunities in the country but the companies who plan to setup their manufacturing in India should try to build a regional strategy and good relations with the existing retailers. Off shoring in India –

India is the world's favourite outsourcing destination which is generally done in the areas of back office, customer service, financial services and IT. Large multinational companies are setting up their Business Process Outsourcing units in India to save money by using cheap labour and knowledge of IT enabled services found commonly in India. Outsourcing helps the various American companies who have setup their operations in India helps them to reach economies of scale and on the other hand creates a lot of job opportunities for the workforce which would help them to improve their economic status.

India has shown excellence of services that require high level of English, IT services and customer service. The offshore BPO sector is estimated to be US $ 11. 4 billion and over 90 % percent of the jobs have been created in services since the year 2000. The cost of employment per year is around 7500 $ which is 19000 $ in the US. An example of an outsourcing company is Genpact which is a subsidiary of General Electric with provides services like Sales and Marketing, Analytics, Supply Chain, Collections, Customer Service etc.

It employs over 32000 people with revenue of 822 Million $ and operates in almost all the major cities of India that are Gurgaon, Bangalore and Hyderabad. India is uniquely positioned to leverage its costs and advantages to cater the increasing demand of off shoring. However there are several risks involved while outsourcing so the company needs to keep in mind certain factors before locating its business in India. Firstly, there may be some cultural barriers which may cause an issue in the working relationship. Secondly, it's also important to find out about the company and its credentials which would lower the risk.

Some American companies may also end up paying more for real estate or developing the infrastructure, apart from that the rate of attrition is much higher in India as many people keep switching their jobs which would lead to additional cost for the company. They may also lose control over the management due to outsourcing in a different country. Medical Outsourcing as an opportunity – After the BPO's medical outsourcing is the next big thing to look for. It is basically saving the cost of insurance or health care for an employee by outsourcing it to India.

Many organisations in America have started to save a lot of money i. e. almost 90 % of their cost as India is able to provide effective and efficient healthcare services. The doctors in the country feel this concept will boost the economy and the outsourcing sector as it will attract huge investments from abroad. Also if the companies choose to outsource they can increase their profit margins and according to the current drift India's health care industry will be 47 billion $ industry in another three to five years if American companies continue to offshore.