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Success of MNCs in India: The investment size factor

Prof. Masanori Kondo, International Christian University

(This is the first part of a series of articles, excerpted from an article contributed by Prof. Kondo, the original Japanese version of which was published in the Weekly Economist of July 15, 2006)

Despite India's rapid economic growth, the amount of investment from Japanese companies remains limited. Many international companies, especially Korean firms, have done so well in the Indian market. What makes them different from unsuccessful Japanese firms?

"Among the BRICs, India will have the highest long-term growth rate"; "India possesses a larger middle class than ASEAN", "Indian people have a very positive image of Japan"; "India can provide an opportunity to hedge risks from relying too much on China", "India possesses an inexpensive but highly skilled labor force".

There is no shortage of quotes from analysts stating the potential and importance of India for Japanese companies. However, quotes like "the current level Indo-Japanese trade and investment is still very far away from tapping that potential" remain prevalent. Any Japanese who visits India will be asked the same question: why Japanese companies have yet to come (to India) despite the huge inflow of Korean investment?

So why doesn't investment from Japan increase? Lack of infrastructure, amount of bureaucratic red tape and high tariffs are seen as the largest problem areas. However, despite these barriers, why have so many Korean firms managed to become so successful? What is the common factor in the success of foreign firms in India?

To find out the answers to these questions, the Japanese Ministry of Economy, Trade, and Industry's research committee on India-Japan business conducted a study. For this study, we visited a number of multinational companies in India. The full report (in Japanese with English abstract) can be accessed at the ministry's home page.

Massive initial investment

The majority of successful foreign firms in India have been highly aggressive by putting forth a large amount of funds into the initial investment. Korea's LG and Samsung have managed to gain a huge share of the Indian market in a very short time by their use of a large scale initial investment. The advantages of a large scale initial investment include not only the quick attainment of brand image, but also the ability to gain an upper hand in negotiations with local government bodies. The recent investments of Mitsubishi Chemicals (an exception among Japanese companies as it chose India before China for investment) and Korea's largest iron manufacturer POSCO show this quite clearly. With a massive proposed investment of around US$12 billion, the local government in Orissa state has become eager to create a model for further investment among large foreign firms and gave extremely favorable conditions to these two corporations.

A firm commitment from the top-level management makes this kind of large scale initial investment possible. In 1983, when Suzuki entered the Indian market, it dominated the market share for a period of time. The decision for this entrance into the market was made possible by Mr. Osamu Suzuki himself, who was willing to shoulder the risk and take personal responsibility for the investment, despite rejection of such proposals by many other companies. GE's Jack Welch's personal liking of India which prompted an aggressive entrance into India, as well as Oracle's Larry Ellison's decision to enter the India market well before the explosion of the IT market in the US, are other examples of top management's commitment to make large scale investments in India.

Examples of failure among foreign firms in India that made large initial investments include Enron (which later became bankrupt) and Daewoo Motors. However, besides these two well known examples, it is actually difficult to find companies that have not found success in India's market after making large scale commitments.

On the other hand, corporations which have made more conservative and lower-scale investments have run into trouble as their products fail to meet the needs which are unique to the Indian market. Even companies which make industry-leading products such as some of the Japanese electronics manufacturers have met with failure by choosing a more modest investment strategy.

When India's Commerce and Industry Minister Kamal Nath visited Japan, his delegation made the statement, "We don't want Japanese companies to wait on their investments until the environment in India becomes absolutely perfect." The minister can be seen to be comparing Korean companies who make the initial investment and work through problems that come up while achieving growth to Japanese firms that hold back on making large commitments to the Indian market while waiting for conditions to improve.

Prof.Kondo, a well known specialist in Indian economics in Japan, is a member of Nihongo Bashi's Academic Advisory Board.