Political System And Risk

Published Date: 02 Nov 2017

Introduction

Over the years the isolation of countries has declined and globalization on the rise, we have seen companies engaging in huge cross border trade. But before companies invest into a country it considers the influencing factors like business environment, cost, investment opportunity and risk which the country possess this in turn determine the timing, scale, mode of entry and future strategy that would be adopted by the company in that country which would be discussed in this write up .

Choice of Country

With India rapid economic growth that has been forecasted to be the fourth largest by World bank and the IMF in 2020 (Budhwar 2001) influenced our company decision to pick India as a country to invest into .

Though India has draw backs like poor transport system (Banks&Natarajan 1995) this however actually serves has an investment opportunity for our company Easy Motor Bikes which would be introducing innovative fuel efficient two wheelers motorbike into the market to be used as an alternative means of transportation, evidence of demand of our product was seen in (Mosrth 2004) who noted that 70% of the vehicles in India are two wheelers.

Influencing Factors

Political System and Risk

India has been noted to have one of the most stable political system in the world formed by coalition of political parties(Mohan 2006). Despite this they some impediments which treating the stability, this result due to the likelihood that political outcome, events, circumstances in a country and social dispute would have a negative effect on the business environment of a country(Robock 1971). For instance the coalition government has slowed down reforms plans due to private agendas of the different political parties that formed the coalition government (Kripalani 1999), there by hindering economic development in the country because the leaders don't share common goals.

Furthermore, it has however been pointed out by scholars that border dispute as played a major role in interstate war fare (Hensel 2000), taking into cognizance India location which has made it have its share of boarder dispute between it neighbors like Pakistan which it fought three battles with Pakistan between (1947,1965 &1971)(Budhwar 2001) indicating that the tension might arise affecting the economy indirectly , other problem hunting the stability in India is the level of corruption which has spread to all corners of the country including the political part this resulted in India being ranked 94th on corruption(Transparency International 2012).

Lastly the change in government has caused investment risk as investors are not sure of their existence as in the case of Enron who lost it license when there was a change in government(Bartels 2001). the issues discussed above can negatively affect the commercial viability of our investment and the future plans of the business in the country.

Cost Of Investment

The cost of investment is a careful and important decision considered by most investing managers seeking ways to reduce expenses to the bearable minimum. the startup Cost of a company seeking investment can range from cost & ease of setting base, legal fees est. looking at the cost & ease of starting a business which according to doing business data base India is ranked 172 out of 185 economies on starting a business which is determined by the time & cost incurred before a formal registration is completed, which takes approximately 12 procedures, 27 working days and cost 49.8% income capita as seen in the graphical illustration below.

fig 1

Source: Doing Business database

with the above analysis this illustrate that it is a strenuous and expensive procedure starting a business from the scratch in India resulting in investor looking for alternative ways to start up operation.

Infrastructure and Transport Cost

India has seen considerable level of development in it economic sector but has not experienced

such development in it infrastructure causing hindrance in the level of growth and FDI(Gupta and Srayat 1998), (Badale 1998). Despite having one of the largest rail system in the world (Budwar 2001), negative criticism have been raised about it poor infrastructure in areas such as transport network as noted by (Banks&Natarajan 1995, Stoever 1988), the hindrance as made lot of companies have slow growth in turnover and market share, a director of TOOLCO voiced out

saying ''the road and communication needs a lot of funding and a huge task is ahead in developing the sector''( Sebastian et al 2006),. this shows that the infrastructure problem has frustrated there operation. This negative report has influenced the cost of transport and delay in delivery time of companies (Lane 1998), for example The cost of importing a standard 20 feet container into the country in us dollars has fluctuated over the years as seen in {fig 2},it takes 26 days and 11 documents (doing business database)

Source: World Bank, Doing Business project (http://www.doingbusiness.org/).

also exporting as been affected by the problem in this sector with subsequent price fluctuation as experienced by importing according to world bank data base the price of exporting moved up drastically from $ 820 to $1095 between 2007 and 2011 as illustrated in {Fig 3} below

fig 3

Source: World Bank, Doing Business project (http://www.doingbusiness.org/).

the volatile price trends experienced in both import and export cost connote that cost of transportation is on the rise and unstable in India. affecting business as more cost would be expended on distribution of products and loose of customer to competitors who deliver their products faster .

Trade Barriers

Though India as opened it economy to foreign investment in recent years through signing of treaties such as the GATT treaty in 1997 which makes sure companies compete fairly & respect global agreement and investment incentive Act of 1997(Klein & Hirji 2001),to encourage foreign investment. but they are issues which hinder investment such as the infrastructure problem faced by major areas as discussed above, the complexity of the tax structure is another issue as this prevent investors who seek investment according to the president of coco cola who pointed out that the tax law are preventing further foreign direct investment (Klein & Hirji 2001), other barriers that exist are the less friendly export incentives and strenuous custom procedures(Sachdev 2006). all this issues makes investment and trade in the country difficult.

Legal System and Risk

Laws such as the Indian labor law prevents dismissal of worker(Kripalani 1998) and before dismissal can take place approval must be gotten from the employees and government (Kripalani 2000), this can however affect investors waste funds on unproductive workers if it employed the wrong staff due the fact they are new to the business environment, the legal system has also been noted for its bureaucracy, sloppiness and corrupt pratices (Sachdev 2006), this is seen in the data collected from doing business database where it takes approximately 1420 days, cost 39.6% of value your claim and 46 steps to resolve a commercial dispute leading to India being ranked 184 out of 185 on the ease of enforcing contracts see {Fig 4} below.

Fig 4

source: doing business database.

the issue discussed above frustrate litigation if there is a commercial dispute between companies.

Economy And Risk

The Indian economy is emerging into an world giant after the economic reforms and acceptance of World bank and IMF bailout in the 90's,(budwar 2001).reforms such as industrial deregulations, privatization of government enterprise, and reduced government rules on foreign trade and investment has helped in developing the economy rapidly at a rate of 7% annually since 1997(CIA world fact book 2012), this has laid to India being the second largest destination for investors because of it rapid growth( Ernst & Young 2010). Below are some major economic information of India .

Fig 5

Economic information

2012

2011

2010

GDP(Purchasing power parity)

$4.74

$4.492

$4.205

GDP(Official Exchange rate

$1.95

-

-

GDP (Real growth rate)

5.40%

6.80%

10.10%

GDP(Per capita PPP)

$3,900

$3,700

$3,500

Labor force

$498.4m

-

-

un employment rate

9.90%

9.80%

-

Inflation rate

9.2%

8.9%

Export

$309.1b

$305b

-

Import

$500.3b

$490b

-

Reserves of foreign ex and gold

$287.2 b

$297.90b

-

source: cia world fact book 2012 and index mundi

picking some data's from the table such as the GDP(PPP) it is seen that there is a constant increase showing the purchasing power is growing, though there are still signs of some problems in the economy with the growth of inflation from 8.9% in 2011 to 9.2 % which according to (Akinboade et al 2006) suggest that low inflation rate is seen as a sign of economic stability while an high one indicates the inability of the government to balance its budget and deficiency of the central bank to implement monetary policies, and if the rate of inflation continuous to raise it would devalue the currency leading decline in purchasing power there by making cost of production increase .

Timing Of Entry and Scale

Due to the large demand we have seen manufactures such as Hero Honda, Bajaj and TVS motors in the market who already account for 80% of the market share (Kathiravanaa et al 2010) making us late movers, it generally believed that pioneers have outplayed late mover(Kalyanran & Urban 1992) but they can actually be outplayed by indentifying the customer preferences, (Carpenter & Nakamoto 1989) noted this to be the bedrock of competition between both parties. Also through innovation of a product and strategy we can outplay this market leaders as indicated by (Carpenter et al 1997). With the large demand of the product we would be going into the market in a large scale so as to capture some market share .

Mode Of Entry

After consideration of the influencing factors, timing of entry and scale we decided to choose a mode of entry that would help us navigate through the complex business environment and gain some market share, going through the available mode of entries we choose the joint venture(JVs) as the best alternative mode which according to (walker and Johannes 2003) is partnership with an existing company enabling them breach gaps suffered by both parties.

Other advantages gained from this mode is the tax advantage as our company can be treated as a domestic company in India on tax rate even if having 100% stake, the rate also is 38.5% lesser than that of branches which is 48% (Klein & Hirji 2001), likewise by coming together with a local company that understand the environment we can share the investment risk, cost, information and technology to gain market share (Kernghan 1993), this mode also enables us exploit the raw material sources and assume the local identity of our partner(Ahn 1980), making us save cost on sourcing of materials and help in penetrating into the market since we have taking identity of an existing company.

Lastly it helps on legal issues for example (Madaan & Co) pointed out that JV helps in protecting the parent company from  indebtedness in the case of legal dispute, in other words our local JV assume responsibility for it operations. Although some disadvantages exist in mode such as performance problem which makes them fail, according to(Young1994,p. 35) 50% of (JV) fail because of this reason, the conflict of objective and control between partner is another point which (Geringer & Hebert 1989) hinted are the elements for it success or failure but with a well established agreement between both parties this can be adverted .

Future International strategy

In selecting our strategy we considered both external and internal factors. external factors such as the high cost of transportation, strenuous custom procedures as discussed above makes it difficult to service the global market as we might not be able to meet the demand on time and internally and due to the joint venture with an established company we have knowledge about the business environment putting us a strong position, this influenced the decision to select the localization strategy . Though we might actually incur high cost on customization but due to the high demand of the product as indicated earlier by (Mosrth 2004), it enables the company reduce cost through the attainment of economies of scale in the local market, also by using some basic components in production we can draw cost down concurrently capturing scale economies, learning effects and location economies.

Conclusion& Recommendation

With the feasibility study on the Indian business environment it shows that it's a good place for an investor to start up operation, but also they are some investment difficulty that threaten the investment visibility of our company such as the high level of competitors and risk as discussed earlier. But with our recommendation to the board members regarding our mode of entry and future strategy the company should employ it would be able to wade through this difficulties that might threaten the development of the company and enable it outplay the first entrants and gain some market share in industry.