Important Legal Factor in Foreign Investments (India)

The slump experienced by international firms in their traditional markets located in the United States and Europe mandates them to step up their expansion in the emerging markets through foreign investments. In addition, the desire to sustain high organic growth and gain early-mover ground in the developing markets, attracts leading multinationals to the Asian markets characterized by freer spending trends in the rising middle class populations (Egan & Ovanessoff, 2011). The emergence of freer spending amongst occupants in Asian countries including Indonesia, India and Malaysia yields a hopeful drop to the most experienced firms whose growth has stalled in the stagnant trend in the developed markets. Although the emerging markets offer a blend of valuable asset to the international firms desire to overcome the harsh slump in their traditional markets, their ambitions seem suppressed by the volatile and unfavorable foreign direct investment policies.

The Legal Factor in Foreign Investments

The Indian retail sector illustrates a sunrise sector in with potential to triple its current worth to accomplish a $660 billion mark by 2015. The occupation of India as the second most-populous nation after China, it poses immense scales of retail growth alongside the timely urbanization and the increasing consumerism culture. Furthermore, the growth rate of its Gross Domestic Product occupies a similar rank after the China. This yields increasing disposable income amongst its occupants, leaving an equal growth in demand of goods owing to the positive relationship between income and demand (Pandey & Chandra, 2012). The trends illuminate a desirable destination for international retailers attempting to initiate organic growth that has overly stalled in the stagnant markets and developed economies.

The promising edge of the fifth largest retail industry places increased global focus amongst multinational retailers including Amazon, Tesco and Wal-mart. As organized retail segment takes a tremendous shape in the improving productivity and decreasing operating costs, more international firms have proven their desire to gain ground in the growth potential. The aftermath of disrupting the growth of youthful and indigenous firms across the liberalized industries, has placed the Indian authorities to seek legal initiatives to address the prospects of flooding its economy with foreign players (Pandey & Chandra, 2012).

The Indian authorities have continuously brought the retail sector under restrictive policies thus leaving it a varied destination of foreign investment in its sectors. While permissible foreign investments have shifted from the traditional infrastructure, natural resources, offshore services and export-driven manufacturing, the restricted retail sector proves the legal factor an important consideration that suppresses global expansion into the emerging markets. Despite the inflow of foreign investments evidently proving an advantageous platform in developing the Indian economy, the authorities have denied liberalization of the retail sector. The government cites national interest grounds by imposing a ceiling to the foreign investments, thus overlooking improved technology, huge capital inflow and management expertise from the international firms (Chari & Raghavan, 2012).

The international firms attracted to foreign investments emerging markets in the Asian economies by the presence of essential growth factors have failed to pierce the legal barrier imposed through protectionism policies. Despite the presence of young demographic profiles, increased consumer aspirations and expanding middle income earnings and improved demand shifts to global brands contributing to the attractive spiral, foreign players are yet to circumvent the restrictive legal blockades (Gupta, 2012). It implies that getting to the emerging market seems unaccomplished as the denied liberalization yields the entry handle facing most global players in developing economies.

India retailing industry is yet to achieve its flourishing potential owing to the protectionism policy that shields the unorganized sector from the organized and foreign sectors. Equally, the tax structure yields favorable ground to retain a fragmented retailing characterized by small retail operators, as giant corporate retailers incur huge taxes. This translates to increased cost of operating huge retailing outlets. The high fragmentation in the trading sector demanding large intermediaries to strictly operate within their immediate levels facilitate a breeding ground for the unorganized sector characterized by small retail enterprises (Chari & Raghavan, 2012).

The present status of promising industries in the emerging markets depends heavily on the government regulations and approval policies. This demands the international firms to scale an uphill task in their attempts to lobby the host government to liberalize their sectors. For example, the Indian retail industry lacks automatic approval for foreign investments. The restriction imposed to regulate the inflow of foreign investments by the government, prioritizes the growth of domestic companies under competition shields from experienced global players. The retail trade demonstrates the few sectors where entry by foreign firms is hardly allowed freely (Kumar, 2012).

The restriction imposed to start fully owned multi-brand outlets by foreign players leaves the promising sectors as shackles of their potential. The scenario shared across the emerging markets reflects the legal factor a depressant element in the global wave of incessant liberalization. For this reason, Indian retail industry remains aloof from attaining progressive development(Bagaria & Santra, 2014). The dismal situation leaves international firms at bay given the absence of encouraging foreign investments policies.

The history of permitting unrestrained foreign investments inflows in the emerging markets replicates a controversial status inviting legal action. This reflects in the unsuccessful deliberation that faces the global retailer Wal-Mart in its Indian focus (Burkitt, 2013). Where one hand comprising huge domestic and foreign corporate retailers lobby to liberalize the sector, the government steadfast response traces to its legal position. This is similar to the concern shared across other emerging markets of the unrestrained foreign investments adverse impact to the unorganized segments that constitute the employment destination of their huge populations. For this reason, the restrictive element seeks to shield the retailing sector from global retailers often cited as conspiring to exercise monopolistic influence (Chari & Raghavan, 2012). This has the potential to reduce the payment to the suppliers as consumers lose in the high pricing that translates to huge profit repatriations by the retail chains.

The governments of the emerging markets have in the last decade ushered immense economic reforms allowing foreign firms to invest in their countries. The economic strategy to foster their GDP growth stimulates these governments to allow unrestrained entry to their promising sectors. However, a sharp edge exists along their legislatures and regulatory policies evoking cautionary consideration to the foreign firms (Hussain, 2014). In particular, the relaxation of the restrained foreign investments policy in India to allow 51% foreign ownership in multi-brand outlets attracts diverse response from the territorial governance units (Jamaluddin, 2013). This arises as eleven states express approvals of multi-brand retails; six states still retain a reserved policy on foreign investment.

The key element proving the importance of legal influence exhibits in the Indian foreign investments policy. Firstly, the investment in multi-brand category remains protected from international players, therefore initiating investment disputes propagated by foreign government lobbying. For example, Amazon appears to assume hard lobbying by seeking the assistance from the US lawmakers to facilitate its foreign direct investment in India (Mint, 2014).This yields an extremely controversial platform evident from the legal reforms besides the state-to-state variation. In particular, the requirement mandating the foreign retailers to source at least thirty percent of purchased products from small Indian industries creates a hindrance to expand. This emerges from their large volume of products. Despite claims of relaxing the foreign investments policy, setting the investment minimum at $100 million places a beneficial platform to huge international businesses. Likewise, the demand to prioritize back-end infrastructures constituting half of the foreign direct investment yields a financial burden traced from the legal factor (Bagaria & Santra, 2014).

The legal definition of a single-brand alignment, yields conflicting edges where most international firms would hardly comply. Essentially, the demand of branded during manufacture criterion prevents potential multi-brand firms from effectively overcoming the legal regime by relabeling goods offered by third parties as their own products. The alternative check point requiring sold-under a similar brand outside the territory, disadvantages the organizations selling products offered by third parties besides their core brands (Jaiswal, 2014). This highlights the commercial burden imposed by restrictive legal policies that every single international firm faces in their attempt to enter the Indian emerging retailing industry.

The essence of considering the legal factor goes beyond the strategic analysis conducted by the individual international firm to assess elements such as economy, political stability, technology and competition. The legal element derives an overall influence in influencing the global expansion. Here, government approval in accordance with the legal position spelt out in their foreign direct investment policy places all international firms into a unified scrutiny (Maps of India, 2011). The application process for the industrial, commerce and promotion departments accumulating into the entry evaluation illuminates the value attached to the legal element that every firm must embrace.

The form of enterprise ownership that international firms may desire to assume, remains enshrined in the legal provisions. The determination of the enterprise arrangements, includingwholly-owned subsidiaries, joint ventures and franchises exist in the legal ecosystem where foreign investors must seek approval prior to their entry (Reserve Bank of India, 2012). Equally, every firm is subject to the tax implications whose structure remains guided by the legal provisions. Notably, organizations incorporated in India attract a tax rate of 32.45% contrasted to the companies incorporated outside its frontiers incurring a 42% tax rate (Smith, 2012). In the same way, emerging markets impose multi-layered leviesin their indirect tax systems. This creates a need for foreign investors examine the salient features evident from the legal position in instructing the customs duty, imports and export transaction values.

Conclusion

The assessment of the macro environmental factors takes a precedent position during the assessment of the viability of investing in the emerging markets. Besides the economic analysis conducted to determine the gain the international firm derives from its entry into an emerging, the foreign investment initiates in the approval process. This confines the assessment of the legal position as illustrated by the acceptable provisions. Although much deliberate revolves around the economic consideration and its growth potential, the legal factor remains the yardstick of the investment radar. The aforementioned demonstration of the legal position in influencing foreign investments decisions in India reveals the demand to comply with its provisions. Perhaps, its essence becomes evident in deriving the overall course of either restricting or permitting the investment. A prohibitive legal policy is an exhaustive denial of foreign direct irrespective, irrespective of the attraction derived by other macro-element factors.

References

  • Bagaria, N., & Santra, S. (2014). Foreign Direct Investment in Retail Market in India: Some Issues and Challenges. Research Journal of Economics, 2(1).
  • Burkitt, L. (2013, October 5). Wal-Mart Looks to Gain Ground in Asia. Retrieved October 06, 2014, from Wall Steet Journal: http://online.wsj.com/news/articles /SB10001424052702303722604579116923897616240
  • Chari, A., & Raghavan, M. (2012). Foreign Direct Investment in India’s Retail Bazaar: Opportunities and Challenges. The World Economy, 79-90.
  • Egan, H., & Ovanessoff, A. (2011, September 28). Capturing the Growth Opportunity in Emerging Markets. Retrieved October 06, 2014, from http://www.europeanbusinessreview.com/?p=3301
  • Gupta, R. (2012, April-May). FDI in Indian Retail Sector: Analysis of Competition in the Agri-food Sector. 2-53.
  • Hussain, M. M. (2014, April). Foreign Direct Investment in Retail Sector in India: Opportunities and Challenges. International Journal of Finance and Marketing, 4(4), 1-10.
  • Jaiswal, A. (2014). GATS and Retail Services: India Perpsective. Journal of International Law and Trade Policy, 15(1), 12-26.
  • Jamaluddin, N. (2013, April). The evolution of foreign direct investment in multi brand retail: challenges faced by the Indian retail sector. Journal of Business & Retail Management Research, 7(2), 69-82.
  • Kumar, M. (2012). Impact of Foreign Direct Investment on Retail Sector in India. International Research Journal of Management Science and Technology, 5(2), 200-211.
  • Maps of India. (2011, July 05). FDI Restrictions in Indian Sectors. Retrieved October 06, 2014, from http://business.mapsofindia.com/fdi-india/restrictionsn-sectors.html
  • Mint. (2014, April 27). Amazon steps up US lobbying for Indian FDI; Walmart on halt. Retrieved October 06, 2014, from http://www.livemint.com/Industry/fiOG1xUnTOATQS382mwP6K/Amazon-steps-up-US-lobbying-for-Indian-FDI-Walmart-on-halt.html
  • Pandey, S. K., & Chandra, P. (2012). Foreign Direct Investment in Indian Retail Sector: Strategic Issues and Implications. International Journal of Business & Manag, 2(2), 87-93.
  • Reserve Bank of India. (2012). Foreign Direct Investment Flows to India. Retrieved October 06, 2014, from http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513
  • Smith, T. (2012, December). Investing in India: A Guide For Retailers. Retrieved October 06, 2014, from http://www.traverssmith.com/media/1289759/ts_khaitan_investing_in_india_ briefing.pdf

Appendix: Selected Articles

  • Iwata, M. (2014, July 24). Japanese Food Firms Eye Southeast Asian Markets: Plans to Tap Growing Middle Class. Retrieved October 07, 2014, from http://online.wsj.com/articles/japanese-food-firms-eye-southeast-asian-markets-1406259305
  • Rana, P. (2014, July 21). Wal-Mart Invests $103 Million in Indian Wholesale Business. Retrieved October 07, 2014, from http://online.wsj.com/articles/wal-mart-invests-103-million-in-indian-wholesale-business-1405945591
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