Opening the world’s second most populated country to outside investors has resulted in a rapid inflow of foreign direct investment (FDI); and,
New products manufactured with foreign capital have stimulated consumption among wealthier Indians.
According to the Indian Ministry of Home Affairs’ census Web site, India had a total population in excess of one billion (1,027,015,247) as of the year 2001. Representing a huge untapped market of potential consumers, the Indian subcontinent has been viewed as an attractive investment location for multinational enterprises (MNEs) seeking to expand operations and gain access to new markets and resources. Even in 2001, a year of relative economic decline worldwide, India’s Ministry of Commerce and Industry reported that the nation’s economy managed to grow by a remarkable 5.4%, a figure few countries even came close to achieving. Whether associated with or caused by India’s move toward economic liberalization in the 1990s, such phenomenal growth has been shaped by two principal developments:
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Opening the world’s second most populated country to outside investors has resulted in a rapid inflow of foreign direct investment (FDI); and, |
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New products manufactured with foreign capital have stimulated consumption among wealthier Indians. |
Despite being a relatively poor country, India has a large and growing segment of middle-class and upper-income consumers who are eager and able to buy Western products ranging from automobiles to appliances to soft drinks. Indeed, according to India’s National Council for Applied Economic Research (NCAER), the two segments of the population most desirous of Western goods –namely, the rich and the consuming class- are projected to grow from approximately 56 million families in 2001 to more than 97 million families in 2007.
Concurrently with the explosive growth in the consumer sector, India has taken important steps since 1991 to break down long-standing trade and foreign investment barriers. Under a new liberalized trade policy, the Indian government has implemented vital reforms that include privatization, currency convertibility, the easing of restrictions on foreign ownership, and reductions in customs tariffs and import barriers. Given the explosive growth in the consumer sector and the Indian government’s commitment to easing trade restrictions, it is not difficult to surmise why successful MNEs like Pepsi and Coca-Cola have long coveted India’s burgeoning consumer market.
When Indian Prime Minister Indira Gandhi lost power in 1977, her predominantly pro-Western government was replaced by a regime wary of foreign investors. In line with its populist, pro-nationalist stance, the new government headed by Prime Minister Morarji Desai of the Hindu Bharatiya Janata Party (BJP) proceeded to place restrictions on Coca-Cola, which had operated successfully in India since 1950. Specifically, the Desai regime made three demands to which Coca-Cola had to accede if it wished to continue operating in India:
1) Reduce its equity stake from 100% to 40%.
2) Reveal its secret formula.
3) Place an Indian logo near the company’s trademark.
Not surprisingly, Coca-Cola rejected these demands, preferring instead to grind up its bottles and leave the country.
Regarding the question of whether Coca-Cola should have abandoned the Indian market in light of later events, the answer is a most resounding “Yes!” Although conditions in India favored Coke’s subsequent reentry into India in 1993, the country’s economic climate in 1977 was inimical to the company’s business interests in that:
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Compliance with India’s demand to reveal its recipe would have jeopardized Coca-Cola’s secret “7X” formula, which the company had guarded jealously since its inception. Much of the Coke mystique lies in the secret formula that produces the beverage’s refreshing, distinctive taste; hence, revealing the recipe would have diminished much of the aura surrounding the Coke brand and brought to naught all of the company’s promotional efforts. For Coca-Cola to discard the company’s hard-won positive public image simply to penetrate the Indian market would have been absurd. |
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India’s entangled web of regulations and red tape made it extremely burdensome to conduct operations in the country. Not only did the company have to appease legislators and regulators at the state and national levels, but also there were various ministries that had a say in the approval process. Worse, less than 25% of all foreign investment approvals actually translated into capital inflows, as the A.T. Kearney firm states in its FDI Confidence Audit: India. Such a climate was clearly inhospitable to Coca-Cola’s continuing operations in India. |
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Coca-Cola had not ingratiated itself with Indian officials by reassuring them that the company would contribute to market expansion, economic development and employment in India. Given India’s traditional fear of foreign meddling in the country’s affairs and its distrust of multinational enterprises (MNEs) in particular, Coca-Cola should have stressed the benefits that would accrue to India from the company’s presence. Moreover, by forming strategic alliances with influential Indian business leaders, Coca-Cola could have made it much more difficult for opponents to argue that the company’s presence did not benefit nationals. |
Capitalizing on Coca-Cola’s departure from India, PepsiCo positioned itself to become the premier provider of soft drinks, bottled waters and snacks to India’s teeming masses. Determined not to repeat the missteps that led to Coca-Cola’s departure from the country, PepsiCo entered into lengthy negotiations with the Indian government that eventually resulted in a joint venture agreement in 1988.
Intended to allay India’s main concerns, the agreement included the following key provisions:
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Exports would equal five times the value of imports, and seventy-five percent of concentrates would be exported – this would improve India’s current account balance. |
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Soft drink sales would not exceed 25% of total sales – this would limit production of less nutritional carbonated beverages in favor of healthier alternatives such as natural fruit drinks and bottled water. |
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PepsiCo’s equity stake would not exceed 40% - this would ensure that majority control remained in the hands of Indian nationals, not foreigners. |
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An agro-economic research center would be established – this would promote agricultural research in the country, a declared goal of India’s Department of Agriculture and Cooperation. |
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Products would have an Indian brand name appended – this would “Indianize” Pepsi’s appeal while still maintaining the product’s image as an international drink. |
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Fruit and vegetable processing plants would be established – this would help to bolster India’s notoriously weak agricultural processing industry. |
This agreement was successful precisely because it addressed India’s fears of economic exploitation and stressed the benefits to India of the new relationship. Pepsi was able to assure Indian critics that the venture would contribute to economic and development in India. Both Pepsi and the Indian government reciprocated to meet each other’s needs. In fact, this strategy of mutual satisfaction and reciprocity proved to be the cornerstone of the new agreement, which perhaps was the best Pepsi could have expected under existing conditions.
It is important to note that India’s shift toward globalization is a recent phenomenon that only gained impetus after 1991. Indeed, ever since the country gained independence from Great Britain in 1950, Indian economic policy has been characterized by industrialization through import substitution, protection of domestic producers, and public sector production. Fiercely nationalistic and determined never again to be subjugated by a foreign power, India has rightly taken a negative view of outside
penetration and manipulation of its economy. This attitude has also been compounded by the philosophy of “benevolent socialism” adopted by the state since its founding. Viewing its role as one of supporting Indian industry and handicrafts while limiting foreign economic intervention to a minimum, the Indian government unfortunately spawned a large bureaucracy that spewed forth a multitude of regulations and restrictions including, but not limited to, high tariffs, import limits, excise duties, quotas, licenses, foreign
exchange restrictions, price controls, complex customs procedures, subsidies and preferential treatment to Indian businesses.
Various arguments have been asserted by India in defense of its protectionist, FDI-restrictive policies. The following are the most common:
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Increase employment – India has a negative view of FDI practices that will displace Indian workers in favor of foreign nationals. From the Indian viewpoint, ventures that do not increase employment in India are not in the best interests of the country. |
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Reduce poverty – That India suffers from tremendous poverty is a well-known fact that does not need to be detailed here; nevertheless, it is worthwhile to mention that India looks askance at FDI proposals that are seen to augment poverty instead of reduce it. |
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Strengthen agriculture – Despite being a predominantly agricultural country, India is unable to feed large numbers of its people. Consequently, the country prefers FDI that aims to strengthen the rural economy rather than increase imports of cheap agricultural products. |
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Promote industrialization – India has asserted its right and economic obligation to build up a strong industrial base to wean its economy from volatile agricultural commodity exports and provide jobs for the increasing numbers of people who come to the cities in search of work. |
Proponents of foreign direct investment often argue that the primordial benefit of trade liberalization is an increase in low-cost products that benefit consumers. Although India concedes that such a benefit does exist, it does not consider product cost savings as the paramount criterion for judging the attractiveness of FDI. Instead, Indian policymakers are more likely to be swayed by FDI proposals that emphasize the benefits to India in terms of increased employment, decreased poverty, strengthening of the domestic agricultural economy, and increased industrialization.