What to Keep in Mind While Entering New Markets – Developing India Entry Strategy

With the rollout of the Union Budget, India now permits 100% FDI in various industrial sectors like pharma, automobile, electronic component, etc., to boost growth opportunities for both the domestic market and foreign investors. This makes it very important to develop the right India Entry Strategy.

As a result, the country, recently, has become one of the largest contributors to the global economy. In fact, in 2020, FDI in India rose to 13% and became one of the few major economies with growth in offshore investment.

This is mainly because the Central Government has remained consistent in improving the business and industrial sector. They have taken several approaches like- tax rectification, trade liberalization, an open approach towards foreign investments, etc. Also, factors like the emerging middle class, developing consumer lifestyle, increase in income, etc., have created favourable opportunities for investors in India.

According to the World Bank Data 2020, India houses 1.39 billion people with a GDP of over USD 3.05 trillion. Being one of the world’s fastest economies, it attracts several interested foreign investors across various industrial sectors. With a favourable India market entry strategy, investors can achieve sustainable growth opportunities and profitable ROI.

Factors That Influence a Foreign Company’s India Entry Strategy

There are several factors that companies need to consider before investing in the global market.

• Infrastructure and Transport

A key factor that affects an investor’s decision is the level of infrastructure and transportation costs. Usually, countries with low-cost labour tend to have substantially higher transportation costs for getting the products or services onto the global market. However, this drawback doesn’t apply to countries with access to shipment via sea like India.

• Size of Economy and Potential of Growth

Investors must set the target to capture the market of a country they plan to invest in. Hence foreign investors must thoroughly review aspects like economic growth, population size, consumer demand, etc., before undertaking an investment in any new emerging market like India.

Consumer behaviour in emerging markets is extremely volatile and can affect the demand and supply chain adversely. Hence, foreign investors should conduct detailed market research with the help of top market entry strategy consulting services. This will enable them to identify the potential of growth down the line and make an informed decision.

• Political Stability

There is an element of risk associated with investing in the global market. Avoid countries with an uncertain political situation, for it is a major disincentive. It is preferable to opt for countries with regulatory policies that encourage investments that help boost economic growth. Moreover, political instability leads to suboptimal short-term macroeconomic policies, creating volatility that reduces FDI inflow.

• Availability of Raw Materials

Another most crucial factor that foreign firms review before investing in any new market is the availability of raw materials. Adequate availability of raw material is crucial as it directly impacts the production cost and facilitates minimizing it.

Foreign investors must therefore consider investing in new markets like India that has competitive advantages in raw materials. India has massive natural resource reserves like cotton, iron ore, bauxite, high solar insolation, etc., which proves highly advantageous for investors in textiles, chemical products, basic metals, etc.

• Exchange Rates

If the host country is weak in exchange rates, it is likely to attract more investors. The reason being multinational asset purchase becomes affordable. However, countries with a volatile exchange rate do not prove to be profitable grounds for investment. Hence, foreign investors must also review the exchange rates before investing in a new market.

Market-Entry Methods

There isn’t just one market entry strategy applicable for the international market. While exporting is the most appropriate method, there are several others applicable depending on a number of factors. These include tariff rates, marketing and transportation cost, level of adaptation of products in the market, etc.

• Exporting

Direct exporting is a traditional form of operating in foreign markets. It is a well-established method due to the lowest amount of risk associated with it. While the method is cost-effective, the investors will need to invest in manufacturing facilities in selected countries. However, countries with a substantial transportation cost are likely to affect the cost of export. Moreover, export requires the involvement of four parties – importer, transport provider, the company, and government of the country products are being exported to.  In India, the import and export system is regulated by the foreign trade act 1992 and the EXIM (India’s Export-Import) policy. Also, it is a prerequisite to register under the regional licensing authority for the export and import of products. Hence, investors need assistance from a reliable consultant in India to understand the exporting investment channel and adequately customize India’s market entry strategy.

• Licensing

Licensing is a relatively sophisticated arrangement that an investor can adopt. It involves transferring the product usage rights to another company. This strategy is applicable if the investor has a relatively large share in the market they are planning to invest in. It requires a smaller investment and offers a high ROI.

• Franchising

Another market entry service for rapid market expansion is franchising. This strategy is typically a North American approach that has now gained traction in other countries. Adopting this procedure works for companies with repeatable business models. There are two caveats applicable to the franchising model:-

1. The business model must be unique or have strong brand goodwill.
2. Create a future competition in a franchise.

• Wholly Owned Subsidiary

Foreign organizations which are looking at entering the Indian market can set up their Indian operations by forming a Wholly Owned Subsidiary in certain sectors, where the Government allows 100% foreign direct investment as per the FDI policy. A wholly owned subsidiary company in India has the maximum flexibility to conduct business in India when compared with either a branch office or a liaison office. A wholly owned subsidiary company has the same standing and is subjected to the same set of regulations which apply to any other Indian organization under the Companies Act.

• Partnering

Partnerships are a necessity for a company entering the foreign market. Usually, this method ranges from sophisticated strategic alliances to simple co-marketing alliances. It is an applicable strategy for markets where the business and social culture is different from local partners and contracts.

• Joint Venture

Establishing a JV company is the favoured form of corporate structure for foreign investors looking at entering India. For any joint venture to be successful in the Indian market, having compatibility between all the parties is imperative. And for the joint venture to continue operating smoothly the associated partners should have the goal and conditions defined clearly as part of the JV agreement. The benefits of joint ventures include leveraging resources, cost-saving, and combining the expertise of both firms.

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Steps Taken by the Government to Promote FDI Inflow

Factors like cost competitiveness, business climate, and skilled labour force availability play a significant role in attracting foreign investments. Moreover, aspects like democracy and free-market policy contribute to attracting global investors. India performs fairly well on these parameters.

Following steps are recent measures taken by the Central Government to promote FDI inflow.

1. 100% FDI is applicable under automatic routes for producing medical equipment.
2. Increase in foreign investment from 26% to 49% in the insurance sector. Similar alterations were made in the pension sector.
3. Infrastructural development under automatic routes is eligible for 100% FDI. In addition, there is relaxation in conditions regarding minimum capitalization, floor area restrictions, transfer of stake, repatriation of foreign investment, and operations and management.
4. The defence sector is eligible for 49% of foreign investments under automatic routes. For advanced or state-of-the-art technology-related production, the government extends it to more than 49%.
5. Manufacturers can sell via wholesale/ retail or through e-commerce without Government approval.
6. Duty-free shops are eligible for 100% FDI under the automatic route.
7. Limited Liability Partnership (LLP) is eligible for 100% FDI.
8. 100% FDI permitted to single-brand retail trading, 49% under Government route and 49% under automatic route.

Need for Consultancy Firms while formulating India Entry Strategy

The foreign investment market in India is growing increasingly competitive. Therefore, to secure a sustainable position in the market, investors will need to conduct proper research. They are required to understand the different measures taken by the government to promote FDI and accordingly frame an India market entry strategy. For this, they require assistance from top consultancy firms in India.

Market entry strategy consulting services like Tecnova conduct research to help global investors enter the Indian market. They offer comprehensive market entry services and assist with strategy formulation and business planning, market exploration, and market-specific implementation strategy, etc. Thus, these consulting firms assist in reducing the risk of investment and effectively capture the Indian market.

By 2025, India is expected to attract USD 120 billion to 160 billion FDI per year. However, investing in new emerging markets like India involves substantial risks due to the extreme volatility. Hence, investors must consider a number of factors to plan their market entry strategy adequately. They should also collaborate with a reliable consultancy firm to identify the profitable investment channels and frame market-specific market entry strategies to achieve sustainability down the line.

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