Doing Business With India
Content
The Key aspects of doing Business with India – The Challenges of Culture and Quality
Bipin Nambiar IMBA 2000-2002
Promoter Prof. dr. Dirk Buyens
Project submitted in fulfilment of the degree of Masters of Business Administration: General International Management
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Acknowledgements
I wish to acknowledge the assistance provided by staff and faculty of Vlerick Leuven Gent Management School I especially wish to thank Prof. dr. Dirk Buyens for accepting to be my project guide, and helping, and providing support to work around the constraints of time towards the completion of this project I wish to thank my friend Jan Van Meenen for supporting me and help me conduct the Survey and, also, for his suggestions towards improving the quality of this paper I finally wish to thank my wife, Evelien Barroo for her perseverance, support and understanding, all through the MBA, and especially during the final days of the course while working towards completion of this project.
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CONTENTS
1 INTRODUCTION TO THE RESEARCH PAPER ................................................................................... 5 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5 6 IECON- INDO-EUROPEAN CONSULTING AND RESEARCH ...................................................................... 6 AIM OF THE PROJECT .............................................................................................................................. 7 AN INTRODUCTION TO THE INDIAN ECONOMY ....................................................................................... 8 FOREIGN DIRECT INVESTMENTS (FDI) .................................................................................................10 BELGIAN INVESTMENT IN INDIA ...........................................................................................................14 INTRODUCTION .....................................................................................................................................17 THEORETICAL BACKGROUND ................................................................................................................17 THE SAMPLE .........................................................................................................................................19 THE FINDINGS .......................................................................................................................................20 CONCLUSION.........................................................................................................................................25 INTRODUCTION .....................................................................................................................................26 THE INDIAN WORK CULTURE ................................................................................................................26 “THE INDIAN MANAGER” .....................................................................................................................27 THE FOUR DIMENSIONS OF HOFSTEDE .................................................................................................29 OTHER RELEVANT CONCEPTS ..............................................................................................................40 WORK RELATED ISSUES .......................................................................................................................44 COMMON MYTHS ABOUT DOING BUSINESS WITH INDIA .......................................................................47 INTRODUCTION .....................................................................................................................................56 CRITERIA FOR THE KEY INDIAN BUSINESS INDICATORS .......................................................................57 PROCESS FOR ESTABLISHING THE KEY INDIAN BUSINESS INDICATORS ................................................57 MAIN AREA OF BUSINESS PERFORMANCE.............................................................................................58 WEIGHING AND FREQUENCY OF THE KIBIS..........................................................................................62 GRADE DETAILS OF THE KIBI-RATING .................................................................................................64 CONCLUSION.........................................................................................................................................65
METHODOLOGY ......................................................................................................................................17
THE BUSINESS CULTURE IN INDIA....................................................................................................26
VALUATION OF INDIAN COMPANIES ...............................................................................................56
BIBLIOGRAPHY........................................................................................................................................66 APPENDIX...................................................................................................................................................67
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Bipin Nambiar, IMBA 2002
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"On ne voit bien qu'avec le coeur; l'essentiel est invisible aux yeux"
Antoine de St. Exupéry.
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1
Introduction to the Research Paper
The opportunities of doing business in India are tremendous, so are the challenges. The culture within and outside the business environment differs between India and the western world despite the highly conducive business environment that may exist. The brief experience the author has had in working in different countries in the world, and more specifically, in the recent past, in Belgium, has helped in developing an insight into the business practices of both countries - India and Belgium. Being an Indian by origin, and having lived outside India for around seven years, the author also has the luxury to look at India from a different perspective, and sometimes more importantly, from a European context, which helps in having a better understanding of the mindsets of both cultures. Other than the cultural challenges, for which one can be mentally prepared for, the challenge of finding adequate information on the individual businesses are very high too. The transparency that may be initially felt may only be superficial and largely perceived. Understanding the different aspects of an alien culture can be further reinforced by knowing the ‘whys?’ of the individual cultures- namely why a certain culture behaves the way it does. This makes understanding easier and helps the European investor persevere in India – which by itself is an important criterion for success. This project is not an introduction into the Indian economy, even though information and relevant statistics are provided, as any credible report should. The introduction to the Indian economy is a brief one with an underlying focus on the pertinent aspects of foreign investments, and how it compares to competing emerging markets. This report does not attempt to describe all the particular hurdles one may face, but it may help one prepare for them to a certain degree. This report is targeted at those who have already, to a large extent, decided to venture into India and have decided the main target or goal of the venture. It is neither an exploratory guide on doing business in India nor it is a report on why India is a good business destination, but rather it attempts to examine certain key aspects specifically related to cultural aspects of doing business and working with India, and how best to evaluate potential partners in India within the context of their specific culture. This is not a guide that tries to describe all the surprises that you may face, but eventually, 5
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through the direction it provides, helps you prepare for surprises that you may have never imagined. The opportunities offered by emerging markets such as India are tremendous. So are the challenges (if business environment and practices were similar in India as in Europe, there would not be a business case to do business with India in the first place!). The Indian business situation is frequently dichotomous. Where there are opportunities for large cost benefits, there are costs you can be unprepared for; where there is a tremendous intellectual capital, you may be faced with a huge consumer base that is largely illiterate. The underlying traditionalism of your ‘sophisticated’ business partner may often catch you off guard. While the capital markets may be mature, the family ownership and management of the listed companies in these markets may not exactly inspire confidence. India is a land of paradoxes, a nation trying to find its individuality. The goal is not to find uniformity in this diversity, but accept this as a part of business landscape in India, and work within it. This project has, in its last section, attempted to develop a user-friendly, adaptable, and flexible rating system that can be used as a selection tool across any industry or business. Whether making new investments or outsourcing business processes, this serves as a basic tool to help in working through the myriad possibilities and options available in the specific area of business to provide a certain degree of clarity and direction.
1.1
IECON- Indo-European Consulting and Research
Indo-European consulting and Research (IECON) was set up in the year 2000. Since its inception, it has been involved in creating and fostering symbiotic business relations between businesses in Belgium and India. IECON has been involved so far in Partner Selection, Joint Ventures, and most importantly helping companies in Belgium leverage the cost-quality proposition of India. Helping Belgian companies take advantage of the competitiveness of the IT sector in India has also been one of the important aims of the organisation.
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IECON has been involved as a partner in companies such as ValueSource Technologies, who has established operations in India and is one of the fastest growing IT outsourcing firms in Belgium, that outsource to India. The author has been involved in setting up of the company in India and Belgium that has created synergies within Belgian companies and Indian IT talent.
1.2
Aim of the Project
One of the intentions of this project was to create a guide for companies who are interested in investing and doing business in India. IECON will use this research paper as a basis for preparing customised reports for clients and use the rating system developed, as a tool for rating and ranking companies, while providing consultancy for companies who want to invest in, or do business with India.
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Bipin Nambiar, IMBA 2002
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1.3
An Introduction to the Indian Economy
This part of the paper gives an overview of the Indian economy. This does not attempt to be a guide on various investment opportunities in India, but is rather a comparison study of the Indian market vis-à-vis other emerging markets with a focus on economic indicators such as Foreign Direct Investments (FDI). This is not a critical examination as to why India is not reaching its expected and long-awaited potential in attracting foreign investments, but rather an examination of common misconceptions and myths prevailing among the minds of foreign investors to India. India is the seventh largest and the second most populous countries in the world. India is regarded as one of the most exciting and emerging markets of the world. It is one of the few markets in the world that is growing at a consistent rate of 5-6 % annually over the last ten years. The burgeoning middle class estimated at over 150 million with a significant buying power constituting a market larger than many European countries. The disposable income of the group is estimated to be around US $ 30 billion annually1. The new wave of economic freedom passing over the country is bringing sweeping changes in its wake. The Ministry of Economic Affairs in India, in its website, describes the potential as such: India’s skilled managerial and technical manpower available in India match the best in the world. India’s time tested institutions offer foreign investors a transparent environment that guarantees security of their long term investments. These include a free and a vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure.2 While the above description is true to a large extent, India still lags behind emerging markets such as China in attracting valuable FDI (Foreign Direct Investment). A decade ago, India and China had roughly the same Gross Domestic Product per Capita. But at $ 440, India’s current GDP is only about half of China’s and India’s GDP is growing at a rate of only 6 percent a year compared to China’s 10 percent. In the instance of foreign investments: Current flows of FDI into India are worth just 0.5 percent of the GDP. By
1 2
CSIS South Asia Monitor, No. 3, Nov. 1, 1998 Ministry of External Affairs in India website: http://www.meadev.nic.in/economy/menu.htm
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contrast, many developing countries, including Malaysia, Thailand and Poland consistently attract FDI worth more than 3 percent of its GDP3 (Refer Figure 1).
Figure 1
The economic reforms undertaken in India’s highly dynamic and competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its GDP and offers considerable scope for joint ventures and reforms. The open question long in the mind of the analysts is the fact that why India with a large English speaking population, high standards of education among the literate, and a democratic form of government still lags behind other Asian countries who do not have all of these assets. Why has India, despite its 150 million strong middle class population, with a high purchasing power, not translated into a market size which foreign investors expect it to be? According to McKinsey, based on fifteen month long study by the McKinsey Global institute, the key barriers to attracting foreign investments to India have been: • Inequitable regulation: Regulations that restrict competition, especially by the government which doesn’t ensure a level playing field for competition- domestic and foreign • Uneven enforcement of rules: Rules are not equally enforced at all times. Smaller companies get away by taking benefits of the loopholes in the law. Larger and more
3
India-From Emerging to Surging, Amadeo M. Di Lodovico, William W. Lewis, Vincent Palmade, Shirish Sankhe, McKinsey Report, 2002
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visible players cannot get away with such irregularities. Less productive players survive by competing unfairly against the large ones. • • Restrictions on FDI: FDI is prohibited in certain sectors of Indian economy with a view to protect certain home industries such as retail for example. Licensing or quasi licensing: In several sectors of Indian economy operators need a license from the government to compete. 1.4 Foreign Direct Investments (FDI)
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It has also the second largest economy among emerging nations4. India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China. India’s exports as a percentage of its GDP also remain low compared to China (refer Figure 2)5.
Figure 2
4
These indicators are based on purchasing power parity (PPP)
5
Why India lags behind in attracting FDI, Business India, 1999, S Sivakumar
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India has an opportunity to attract FDI of over $15 billion a year over the next five years. The Economist Intelligence Unit, evaluating business environment in 60 countries for the period 2002-2006, has ranked India 41st, ahead of China at 42nd. More importantly, India has moved up five notches from its rank in the earlier period (1997-2001), while China has remained at 42.
Figure 3
Since the liberalisation in 1991 the government has been actively pursuing Foreign Direct Investments into India. Even though there has been a reasonable growth in FDI (refer figure 3), the response of the Foreign Institutional Investors (FIIs) to the opening up of the market cannot be termed as strong. Joint Venture companies are the most preferred form of corporate entities for investment in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India (RBI) in the form FC is required. The 11
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application can be made either by the Indian party or the foreign party. Existing companies having foreign equity holding and desiring to increase it to 74% can also obtain automatic approval if they are in priority areas. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities6. Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZs")7. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated8.
6 7
“The 1995-96 forecast of the Indian economy”, SAPRA News Bulletin, T. Koshy, Sep 1995 From the Website of Ministry if Finance, Government of India 8 From the Website of Ministry if Finance, Government of India.
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Figure 4
Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. Before signing the joint venture agreement, the terms should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. This aspect will be dealt with in more detail in the future chapters. India has entered into tax treaties with a number of countries including, Australia, Belgium, Canada, Denmark, France, Germany, Indonesia, Japan, Korea, Mauritius, Singapore, the United Kingdom and the United States. These treaties endeavour to avoid double taxation and attract know- how and technology. In many treaties the withholding tax on royalties and fees for technical services emanating from India is lower than the general tax rate. A careful planning and corporate structuring can reduce the tax obligations considerably. The following treaties have been successfully used by international investors to reduce their tax obligations in India and in their home countries.
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1.5
Belgian Investment in India
One of the biggest investors in India has been the United States and more recently Mauritius (many US and European investment companies are based in this offshore location for tax reasons). The Belgo-Luxembourg Economic Union (BLEU) is presently the 3rd largest market within the EU for Indian exports. Belgian investment approvals by the Indian government reached a record level of US $ 890 million in, 1998, marking a 16-fold increase over the previous year. Cumulative investment from 1991 to 1998 is about US $ I billion. Today, Belgium is the 9th ranking investor nation in India (2002)9 India and Belgium have traditionally enjoyed warm and cordial ties. The substantive political relationship which is marked by frequent, high level interaction has been underpinned by strong economic content. Political interaction has been at the level of HOG, HOS, Ministerial and Parliament. The visits of His Royal Highness Crown Prince Philippe (1995 and November 1998), then Prime Minister Dehaene (October - November 1997) and the then Foreign Minister Derycke (February 1997) have imparted substance to the bilateral relationship. EAM's visit to Brussels will be the first high level interaction between Indian and Belgian leaders after the assumption of office by the new Liberal-Green coalition led by PM Guy Verhofstadt. In keeping with Belgium's importance as an economic centre in Europe, India has attached importance to fostering commercial relations. Bilateral trade and economic relations are healthy as is evident in the following: Bilateral trade touched US$ 4.2 billion in 1998. Of this trade, diamonds were a major component. India is the 10th largest customer (1.5% share) and 15th largest supplier (0.7% share) of the BLEUs goods and services; About 140 Indo-Belgian agreements (investment and technological), of which more than 60% are with financial equity participation, have been approved by the Government of India. Belgium has expressed its keenness to tap the potential of more diverse economic cooperation with India. The institutional framework for economic, commercial and technological cooperation is wellestablished with the entry into force of the Double Taxation Avoidance Agreement and the
9
Source: Documentation of Belgo-Indian Chamber of Commerce
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Bilateral Investment Promotion Agreement in 1997 and of the Agreement on Economic, Industrial, Scientific and Technological Cooperation in 1990. Indian companies are also beginning to see considerable advantages in making Belgium their base for operations in Europe. The Confederation of Indian Industries (CII) has opened an office in Brussels recently. Indian software companies are also focusing on Brussels to tap the market potential in Belgium and other European countries. There is increasing consciousness of the advantages of having a base in Belgium, a market which still has a high demand for software professionals. Belgium is also among the five largest exporters to India. Bilateral trade touched US$ 4.3 billion in 2000. Of this trade, diamonds were a major component, forming 90 percent of Belgian exports to India. The BLEU is the 3rd largest market within the EU for Indian exports10.
1.5.1
Top 10 exports to Belgium from India11
1. Gems & Jewellery 2. Cotton yarn fab. madeups etc 3. RMG of cotton incl. accessories 4. Manmade yarn fab. madeups 5. Jute yarn 6. RMG of manmade fibres 7. Inorganic/organic/agro chemicals 8. Marine products 9. Machinery & instruments 10. Primary & semi-finished iron & steel
1.5.2
Top 10 imports from Belgium to India12
1. Pearls precious & semiprecious stones 2. Non-electrical machinery
11 12
From the website of the Confederation of Indian Industries, CII, www.ciionline.org From the website of the Confederation of Indian Industries, CII, www.cii.org
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3. Metaliferrous ores & metal scrap 4. Organic chemicals 5. Professional instruments, optical goods 6. Artificial resins, plastic materials 7. Medicinal & pharmaceutical products 8. Iron & steel 9. Non ferrous metals 10. Electronic goods
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2
METHODOLOGY
2.1
Introduction
This chapter deals with the perception of doing business with India by conducting empirical analyses of various factors – including key success factors, policy recommendations and an overview of the encountered experiences in dealing with India. Hereafter we will analyse three empirical issues related to the determinants of doing business with India: • • • What types of key factors are beneficial in order to succeed in doing business with India? What are the main policy recommendations regarding Belgo-Indian trade? What are the main reasons for setting up a joint venture with India?
An analysis of these questions is particularly relevant because of the renewed interest in India and the increasing policy enhancing information channels that are currently being set up in Belgium and Flanders in particular (Export Vlaanderen, BIC-Belgium…). Due to the lack of significant data we opted for an empiric survey administered to companies participating in export-related activities or joint-ventures in India or wishing to do so in the near future.
2.2
Theoretical background
There is not an abundant array of literature available in Flanders or Belgium that approaches the key elements of Belgo-Indian business from a small- or medium-sized enterprise (KMO)perspective. The most comprehensive study so far held in Flanders dates back from 1993 and was made by Donckels, Lambrecht, Bragard and Leboulle of the KU Brussels and the Université de Liège in association with the governmental General Department of then 17
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secretary of developmental cooperation and aid, Dr. R. Moreels, and was not initiated from the BDBH or other national organizations specializing in foreign trade advice or servicing. In order to ensure a non-biased focus of feedback we decided to execute a survey amongst the participants of two seminars “Exportdagen Azië-Oceanië” organized by, and with the permission of, Export Vlaanderen in Kortrijk (June 5, 2002) and Grobbendonk (June 12, 2002). We opted for the selection provided to us by Export Vlaanderen due to inherent knowledge of the international activities they had regarding the participants, and we considered the selection of the sample as representative for the study (mainly Flemish KMO’s).
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2.3
The Sample
The sample interviewed consisted of CEO’s of Flemish KMO’s and/or Trade Export managers of companies that attended the Export Days in either Kortrijk or Grobbendonk. The survey can be found in appendix. Out of the 130 interviews being conducted during these events, 33 respondents had established activities in India via a joint venture or stand-alone.
Table 1
Furthermore, in order to avoid sectoral bias, the sample covered all sectors ranging from textiles to ITC-related businesses. 19
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2.4
The Findings
Key Success Factors on doing business with India
Table 2
During the survey the participants were asked to rank, in order of importance, their recommendations in doing business with India. Their recommendations could be summarized as follows, with the specific comments from the respondents indicated:
2.4.1
Need for a local partner “The best market is the market you control and are able to follow up on. A local partner is invaluable” “You have to establish business in India with a local partner because he knows how to control the market over there” “A lot depends with which representative you start negotiating in India. A local partner knows better than anyone who to contact first.” “You need a local agent as he knows the customs and business culture best”.
2.4.2
Need for adaptation “As soon as you board the plane, you have to forget you’re Belgian.” “You have to understand the local business-customs”.
2.4.3
Pace of approach “Go by it slowly. Especially on the financial level.” “Experiment first, and then start to invest.”
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“Tread the pad of prudence: open up the market slowly, and then penetrate it with small volumes…” 2.4.4 Sound preparation “You have to have a sound internal structure in Belgium. You have to be “ripe” to start doing business with India.” “Go there a lot. At least 4 times a year to talk to the people.”
2.4.5
What are the policy-recommendations you would propose to enhance business with India?
Table 3
A fiscal exemption-policy, financial support measures, a one-stop-shop/single window clearance (“één loket”) and a more supporting role of the Flemish trade representatives were considered necessary. During the interviews the exporters uttered the wish for a more pro-active role of the trade representatives when arriving in India to set up business. The entrepreneurs made clear during the interviews that there is a need for practical information such as insight in the financial health of the would-be local partners (valuation and due diligence), evolutions in local economic policy, and introductions with the proper local authorities…
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2.4.6
Opinions about setting up joint-ventures in India
The main reasons for setting up a joint venture are, according to the interviewees: market entry, limited financial means, political safety-buoy and leverage. During the interviews these arguments were treated more in detail:
Table 4
2.4.6.1
Market Entry
“With a local partner we are more at ease; he makes the entry easier” “Without a joint venture in India you run the risk that you “import” your own cultural pattern into the country. This can lead to major clashes due to the fact that the mentality is different. It is very difficult to “communicate a culture”, hence the need for a local partner. He knows the culture and is able to “feel the people”. “You cannot lead a big company from a distance” “The central question is: how can it happen in India? A local entrepreneur is more capable of answering that question. He knows the local bottlenecks in India and knows how to troubleshoot certain situations which might occur.” “Thanks to a local partner, doors of the local market are opened up more easily”.
2.4.6.2
Limited financial means
“If I would not work with a local partner, I would lose my competitiveness. Now I share an investment in which both my local partner and myself have everything to lose if things don’t work out well” 22
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“My partner finances a part of the company so he bears the risks as well” “If you want to find business over there yourself it takes too long a time to do it on your own” “As a small- or medium-sized company (KMO) we are not able to set up a big entity over there.
2.4.6.3
Political safety-buoy
“You have to work closely with a local Indian entrepreneur otherwise you will have to deal with a tremendous amount of red tape” “A local partner can be a political buffer but be careful he is not related to government officials. You should see situations like these as volatile.”
2.4.6.4
Leverage
“My partner sees the opportunity of the joint venture as a serious improvement of the profitability of his own company and his progress serves as our leverage.”
2.4.7
Growth process of an Indian joint-venture
This finding was also the case for those who were in the process of setting up such a joint venture. Most of the participants consider a previous relationship imperative: “It is imperative to work gradually in India. We started with the delivery of a machine and had little risk. After this initial venture we chose a market segment and are currently setting up a joint venture” “A joint venture is like marrying someone at a distance. It is imperative you get to know each other very well in advance.” “First we had purely commercial contacts with our current partner. This enabled us to get to know him and his company better. He gradually started trusting us and improved his professionalism. In that way we were both sucked, as a figure of speech, in a joint venture-situation.” “Be careful about starting up with loose commercial contacts and then evolving towards a joint venture. In our case the local agent we worked with in the beginning 23
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started to behave unprofessionally when we made him a partner in the new joint venture. We had to part was a couple of months later.”
2.4.8
Rules for setting up a joint venture in India “Don’t go about it easy. It takes quite a long time. It is important you meet regularly with your partner in different circumstances.” “A thorough study is necessary. We did a market survey, examined the financial support measures available, selected a partner, drafted a temporary memorandum of understanding and delimited the financial conditions. It takes a lot of time being that the red tape and the fact that time-management is treated differently over there as it is here.” “Be prepared for the worst. Imagine yourself stranding at a deserted island where the only thing there is a generator. “ “Don’t overreact. Our joint venture stalled because we went in too fast and too European.”
2.4.9
Local employees and collaborators
According to all interviewed entrepreneurs, the joint venture is doomed for failure if no motivated collaborators can be found: “We already examined who of our company could manage the joint venture for a couple of months.” “During the initial negotiations you already have to send down some collaborators to India. That way you can establish their capacity to handle the local culture.” “You need a Belgian person in India otherwise things won’t work. They tell you “yes” but once you turn your back the quality is something that leaves much to be desired for.” “It is recommended that a Belgian person leads the joint venture for a couple of years.” “Without Belgian management it is clearly impossible to run a business. I always tend to send down young people. The fact that they are young I consider a plus because it makes them more flexible and easier to adapt to the local environment.” 24
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2.5
Conclusion
When interviewing entrepreneurs wanting to set up business with India, one should bear in mind that the outcome of the statements are based on the perception of the individual itself. There is, as is always the case with interviews, reduction of actuality. These findings should therefore not be attributed an absolute degree of finality. Remember that these findings are seldom, if ever, static and homogeneous and never good or bad (only adapted to the circumstances). The main inferences of the survey were the following: There was interest in investing in India, though less than China Belgian companies feel that they do not have adequate information on India Many Belgian companies believe in partnering with an Indian partner, but feel that there is no way of knowing or understanding partner capabilities Belgian KMOs (SMEs) still need to obtain information on India and advice on how to understand the information obtained. In the next chapter, which deals with business culture in India, the paper will try and address the issue of culture, and the challenges that go with it, helping a European person prepare for cultural roadblocks if any. Most importantly, the next chapter will also look at the various myths propagated in some measure by enthusiastic officials of the government, and authors, and examine these myths, which have some roots in culture and information, so as to help a prospective investor avoid any misconceptions on India.
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3
3.1
The Business Culture in India
Introduction
Since Hofstede’s study on work culture in the ‘80s, India, after liberalisation, has seen many changes - Especially so in the area of work culture which has undergone major changes in certain spheres and minor changes in other. Despite the passage of time, Hofstede’s studies still hold true in many instances. Modern Indian style of management and corporate behaviour may look western at a first glance, but, on closer inspection, it reveals myriad styles which cannot always be easily understood. The following pages will examine the Indian work culture (if one can be bold enough to attempt to pin-point a certain behaviour as being atypical of an Indian work culture), and more importantly why such a work culture, which is probably unique in its own way, exists, so that work habits and business culture that seem alien at first to an European businessman can be made more comprehensible. The following pages will also examine the work culture, business relations, aspects of negotiation aspects and the ‘do’s’ and ‘don’ts’ of business, frequently comparing them to a European context. The objective of this section is also to help the European, and more specifically the Belgian, company to understand the cultural roadblocks and challenges they may face while setting up operations in India, partnering with an Indian supplier, or while negotiating with an Indian partner.
3.2
The Indian work culture
While India does not have a single uniform work culture, much like the ‘European’ work culture, some of the typical characteristics that are more noticeable can be generalised for the ease of research and understanding. India is as big and as diverse as Europe and it would only be fair to say that the work culture differs slightly from place to place. Key cultural dimensions using Hofstede-Bond and the four criteria used by Hofstede, namely Power Distance, Individualism, Masculinity and Uncertainty Avoidance are used as a basis 26
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
for discussions and comparison with the Belgian (European) Culture. The definitions used here to introduce the concepts are Hofstede’s. This chapter starts by explaining the concept behind the ‘Indian manager’ and also attempts to shed light into two other important concepts, namely the polychronic concept of time and the high-context communication that is regarded as typical to Indian culture, so as to provide a better understanding of India to the foreign reader.
3.3
“The Indian Manager”
For reasons of convenience, an Indian manager often comes under the group ‘Asian Manager’. While India is of course a part of Asia, nothing could be closer to the truth than the perceived closeness and similarity between the typical Indian and the typical Asian Manager. The term ‘Asian manager’ has come to denote the people living in South East Asia and China. India is less close to the South East Asian countries than it is to continental European countries - culturally and behaviourally. ‘Asian manager’ constantly refers to a south East Asian manager – Japanese or Chinese. While frequent comparisons are still made between China and India, and theoreticians try to speak of the emerging markets in the same breath, it is to be said that the Chinese and the Indian work culture, and management styles, are totally different from each other. In particular, the modern Indian manager represents a unique confluence. While his cultural moorings are strong, rooted in an ancient and proud society, his intellectual exposure is almost entirely to Anglo-Saxon management literature in the English language. This is not so much among other Eastern managers. The liberalisation and the surge in the area of Information technology, and the subsequent rise of India as an acknowledged leader in IT outsourcing, helped foster a new breed of International managers who are of Indian origin. Silicon Valley is replete with success stories of Indian Managers. There are many companies listed in the American stock markets which are essentially Indian in origin and still managed by Indian Managers. These companies are now considered more international and global than Indian. While success stories of Indian Managers and professionals are abundant in the US and in the UK, the general impression is 27
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
that Indian Managers in the international scenario still retain their Indian attitudes and beliefs, despite appearing quite western outwardly. Some consider that this paradox, which exists by the very nature of the cultural identity of the Indians, is one of the key success factors. The point to be noted also is that modern management thought in India is strongly influenced by the US. Much of management literature is in English. And it is to these stimuli that the Indian manager is almost wholly exposed. When the British ruled India, most of the organisational strength, or manpower for administration, came from Indians themselves. The adaptability of the Indian administrators to the Anglo-Saxon work culture has been remarkable. The key administrative positions, or the second rung leadership, were almost entirely made up of Indians themselves. These educated Indians; later on, started organising themselves into what became one of the important aspects of the freedom struggle. While imbibing the so called positive aspects of the western style of management, Indians also inadvertently absorbed the negative aspects, such as hierarchy, complete allegiance to authority, and bureaucracy, from the British. The British had initially put these concepts in place to properly manage a potentially hostile population and an alien culture. But the legacy still continues to a large extent in Indian bureaucracy, where the difference between the ruled and the rulers are exceedingly high (large power distance). In the ‘80s, American modern management thoughts started gaining importance and with the liberalisation of the ‘90s, they started gaining prominence. England was basking in its lost glory and for the Indians the new economy to be emulated was definitely the US. The boom of the US economy gave credibility to the management studies and style of the Americans. The increase in management education in India, based on American concepts, and the new breed of managers who had received their higher education in US, helped westernise the Indian companies, sometimes adopting the positive aspects and inadvertently adopting those aspects which did not fit in the Indian cultural milieu. It must be regarded that for all practical purpose, for India, ‘Western Management’ means American or European. Even though both cannot be grouped together, for the ease of definition and comparison, we will try and generalise this aspect in this study.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
The Indian manager thinks in the Western idiom but behaves in the Eastern pattern. It is this duality that is being severely challenged in the corridors of Indian business houses as deregulation and liberalisation continue. Western managers can immediately relate to an Indian manager more than he can to an East Asian manager in the first instance. But when one has a chance to look deeper one understands that lot of the ideas and mentality is still deep rooted in the Indian way of life and thinking. The challenge of managing large organisations spread to the east effectively only after the Second World War. This brought in a cultural overlay on management thinking in the West. The surge of books on Japanese management, and the sensitive writings during the last 30 years of authors like Maslow, Pascal and Senge amplify this point. However, this learning did not require any change in the behaviour of Western managers in their own social contexts. At best, they provided yet another right way for Westerners to operate successfully in Eastern contexts13 So, while for the Western manager there is an Eastern cultural overlay on his management thinking, for the Eastern manager there emerges a Western intellectual tradition as an overlay on his Eastern social context. This gives rise to attitudinal and behavioural patterns that are vastly different, like a rich kaleidoscope of very different colours and patterns. The level of competitiveness of the new breed of Indian Manager has tended, in northern European circles, to have negative connotations and reactions as to being ‘too openly ambitious’ or too ‘pushy’. The competitiveness that is a main feature of Indian life (competitiveness to get good jobs, good education and a good life) permeates into the areas of business. The burning ambition and ‘drive to succeed’ especially when doing business outside India, can be quite unnerving for a European partner. This tendency can be frequently off putting for a European. Understanding the background in these cases helps tremendously in clearing up misconceptions in the minds of individuals from either side. 3.4 The Four Dimensions of Hofstede
While comparing the four dimensions of Hofstede, the countries mentioned here, other than India and Belgium are USA, UK, Germany, Japan and Netherlands. The reasons for limiting the study to these 7 countries are for reasons of clarity and conciseness. Since the target audience of this paper are Belgians, it is obvious why Belgium is one of the countries used for comparison. The reasons for choosing other countries are as follows:
13
“If only India knew what Indians know” , R. Gopalakrishnan, Indian Management
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
USA: Because it is the largest trading partner of India, and also because most of the management thoughts that have come to India are from the United States. UK: Due to the fact that India has a long history of association to this country via colonialism and still continue to maintain strong trading and cultural links with this country. Germany: Because of the fact that Germany is the biggest economy in EU, and is an important trading partner of India. Also because Germany has quite a lot of unique characteristics according to Hofstede’s study. Netherlands: Due to of reasons of proximity to Belgium and the fact that a Belgian reader would be interested in comparing how Netherlands compares to itself and other countries. Some characteristics of the Dutch may also have some semblance to that of Flemish. Japan: Japan is an important trading partner and the one of the biggest economies in the world, and is based in Asia. Japan shares quite a few cultural similarities to India, in certain areas, according to Hofstede. The definitions used to introduce the concepts are Hofstede’s.
3.4.1
Power distance
In a large power distance situation at work, superiors and subordinates consider each other as existentially unequal; the hierarchical system is felt to be based on this existential inequality. The organisations that are in this mode centralise power as much as possible in few hands. Subordinates are expected to be told what to do. There are lot of supervisory personnel, structured into tall hierarchies of people reporting to each other. Salary systems show a wide gap between top and bottom in the organisation.14 In the smaller power distance situation subordinates and superiors consider each other as existentially equal; the hierarchical system is just an inequality of roles, established for convenience; and the roles may be changed. Organisations are fairly decentralised, with flat hierarchical pyramids and limited numbers of supervisory personnel. Salary ranges between top and bottom jobs are relatively smaller.
14
“Cultures Consequences- International Differences in Work related Values”, Geert Hofstede
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
In the power distance index (PDI) study of Hofstede, Belgium and India are not very far scoring 20 and 10/11 respectively-indicating that while power distance is lower in Belgium, it is not so much higher in India.
Table 5
However, while conducting the surveys and while undertaking casual conversations between the members of the Belgian KMOs who have done business in India, one characteristic of the Indian workplace, according to them, is the reverence for the boss. Belgian employers in India try hard to stop Indian employees from calling them ‘Sir’ or ‘Madam’, without much success. In India, the general feeling which the Indian employees give is that they respect authority as they seem to revere their superiors, speak respectfully to them and never argue or raise a point of objection. This, however, can lull a European boss into complacency. Indians express their disregard for authority or disrespect for their bosses in subtle ways that cannot be seen easily. This disregard may manifest itself in poor output, rumour mongering, leaving employment with sudden or no notice, leaving important projects in jeopardy and so on. Indians by and large prefer a democratic set up where a superior consults and confers with them, but do not protest if the superiors do not do so. While interviewing Belgian persons who are assigned to India to head a company or lead teams, this is a constant source of exasperation. If policies and ideas are not criticised, it 31
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
doesn’t necessarily mean that they will be adhered to. This can also reach such an extent that an employee may actually say yes to a job even if he is not capable of doing it, and the try ways to get around it. While this may be viewed as a lack of frankness in certain quarters, it is rather an extreme expression of power distance that exists, wherein one cannot say ‘no’ to authority under any circumstance.
3.4.2
Individualism
Individualism has always been difficult to measure in India. India scores much higher on the individuality index compared to other South Asian cultures and Arab cultures except Japan. However, individualism is lower than most of the Western European countries. Compared to countries like Belgium, India exhibits more collectivistic tendencies. Belgium is ranked 8th in the Individualism index (IDV) of Hofstede compared to 21st rank of India.
Table 6
Belgium combines medium power distances with individualism. In India collectivist tendencies are more in more social circumstances than in the work context. In India individual output is generally considered as good as the group effort and Indians generally prefer working individually more than in group. They like to retain their stamp of individuality in the work they perform. 32
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
But in a lot of work related cases, when compared to the Belgian context, India is highly collectivistic. In collectivist cultures direct ‘no’ is seldom used because saying ‘no’ is considered rude and undesirable and constantly a confrontation. In such a culture, ‘yes’ should not be taken as an approval, but as maintenance of the communication line: ‘yes I heard you’ is the meaning it has in a collectivist culture like Japan². India exhibits similar characteristic like Japan in this regard. (India is ranked almost on the same level as Japan in the Individualism index)15. One of criticisms heard about the Indian work culture from the western managers are the fact that Indians do not have a positive work culture. Many companies based in India have to face the challenge of constant absenteeism for reasons which seem trivial in the eyes of the European (for example a funeral of a distant relative, a marriage of a neighbour’s family member…). These are, according to Hofstede, clear collectivist tendencies. But it is only fair to say that unlike a typical European worker, for example a German worker, an Indian employee will have no problems doing overtimes and working overtime at short notice or working extra hours to complete a project, even though their supervisor or manager had been responsible for the poor planning. An interesting example of collectivism that needs to be highlighted is one of the reactions I had from one of the Managers of an Indian IT company based in Brussels. This manager was deputed from India to Belgium and it had been his first foreign posting. He was surprised by the fact that the Belgians were always taking about weather and similar things which, according to him was ‘banal conversation’. He admitted that while the weather in Belgium was not so great, this was a given fact- known and accepted by everyone. His question was why they would constantly keep talking about it. The reason, according to Hofstede, Belgians talk about weather and involve in platitudes is also the fact that in individualistic societies pauses or silence between meetings are awkward, and they feel a need to fill these gaps with conversation that may be considered trite by an Indian. This is in contrast with a collectivist oriented society like India where even when close families meet, they need not be involved in exchanging conversation but can enjoy each other’s company in silence.
15
Cultures and Organizations, Software of the Mind, Geert Hofstede, 1994
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Extreme collectivistic tendencies are not exhibited by Indian companies compared to Arabian companies, where they prefer dealing with individuals rather than companies. In India, where individual connections matter a lot, business deals are made on the basis of the individual rapport the companies have with clients or suppliers, but it can be continued even if the particular agent or salesman is replaced. If the salesman or agent tries to move the account to the new company he represents, the Indian partner may do so if he is guaranteed better terms and conditions. One aspect of collectivism that is different in Indian culture when compared to Chinese culture is the concept of ‘losing face’. While an Indian employee may take a rebuke or a negative appraisal very personally, he would not ‘lose face’ over it. It is always better to administer disciplinary acts in person and discreetly, but an Indian may not overreact to this as much as an East Asian would. A highly collective culture exhibits low universalism. While working in the area of software development and outsourcing, one of the common apprehensions of the European clients is the fact that the service levels they obtain, they feel, are much lower than what American clients receive. Low universalism means that Indian companies pay more attention to companies or clients that give better business and higher volumes, often at the expense of the smaller partners. For most of the Indian IT companies, projects from European companies cannot match the scale and size of the American companies and moreover the European adherence to slow and steady growth ensures that the project sizes remain small for some time to come and do not ramp in size as fast as American clients do. To avoid this in most cases it is better to chose partners in business who matches you in size or is smaller, and for whom the volumes you provide are important.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Figure 5
3.4.3
Masculinity
According to Hofstede16, societies or cultures can be divided into masculine and feminine. Masculinity in the work place manifests itself through the following characteristics: • • • • • Live in order to work Decisive and assertive managers Stress on equity, competition among colleagues, and performance Resolution on conflicts by fighting them out. Dominant values in a masculine society are material success and progress. Money and things are important. Out of the 53 countries studied by Hofstede, surprisingly both India and Belgium are ranked next to each other. India is ranked in the 20th/21st place, and Belgium is ranked at the 22nd
“ Cultures and Organisations, Intercultural co-operation and its importance for survival, software of the mind”, Geert Hofstede
16
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
place. This means that both countries are not overtly masculine or feminine, even though both clearly show a tendency to more masculinity than femininity.
Table 7
Despite the fact that the author may not be qualified to make this remark, from the brief exposure of about 3-4 years of the Belgian work culture and society (more specifically the Flemish work culture and society), the impression gleaned is that Flemish society is probably more feminine than masculine - closer to the Dutch society which is almost at the end of the femininity scale (51). It is however safe to say that the Flemish society still retains some of the above mentioned characteristics of a masculine society too. In India the society is considered masculine, and men dominate the work place. But the existence of women in the work place has long come to be accepted, with women holding important positions and achieving successes in the so-called male dominated arena. India also has had a woman prime minister who had one of the longest tenure (one of the major complaints against her was the fact that she harboured dictatorial tendencies), and also currently, a woman opposition leader. Authority of women is also easily accepted at work place. Some societies in India are also female dominated. One of the important aspects of the society is material success and progress. This is one of the important aspects of the European and more importantly, the Belgian society too. 36
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Disagreements between the two cultures exist on how to go about it and the way it is done. An Indian may be less subtle about wealth and the pursuit of it, to the discomfort of a European.
Figure 6
3.4.4
Uncertainty avoidance
Uncertainty avoidance is defined as the extent to which the members of the culture feel threatened by uncertain or unknown situations. Uncertainty avoiding cultures shun ambiguous situations. People in such cultures look for a structure in their organisations, institutions, and relationships which makes events clearly interpretable and predictable. It should not be confused with risk avoidance as risk and fear is focused on something specific. According to Hofstede, uncertainty is to risk as anxiety is to fear17. Can two countries that have a highly disparate uncertainty avoidance index (UAI) work together? Can this be a major cause of problem between two partners, if one has a high UAI
17
Cultures and Organizations, Software of the Mind,, Geert Hofstede, 1994
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
and another one low? When comparing Belgium and India, this is one of the Hofstede’s dimensions that are the farthest from each other. India (45) has one of the lowest uncertainty avoidance indexes among 53 countries used for study and Belgium (5/6), one of the highest.
Table 8
Low uncertainty avoidance makes the culture more flexible, more willing to bend or amend the rules on the basis of practicality. Every aspect of life in a high uncertainty avoidance countries are managed by rules and regulations. Europeans often remark that India has many rules but none are followed. They are surprised at the chaos and lack of structure that governs the life of Indians. India has one of the lowest crime rates in the world, and this is probably because of the society’s pressure rather than the rules that govern every aspect of life. At the job front, the job descriptions are not detailed and they do not start and end at specific points. An employee works without a specific structure and his/her job specifications are very loosely formulated. One learns along the way what is expected of him or her and grows with the job. This kind of an environment can make a Belgian employee uneasy as he would not know what is expected of him/her. Even though arguments could be made on the effect a lack of structure may have on productivity of an employee, the counter argument is usually the reasoning that an employee performs best in the environment which takes care of his personal needs (which usually has foundations in the culture background of the employee).
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Hofstede mentions that strong UAI countries score higher on the mistrust side and weak UAI countries score high on the trust side. This is an important aspect when comparing a weak uncertainty avoidance country (India) and a strong uncertainty avoidance country (Belgium) is the fact that in strong UAI countries the tendency is to mistrust strangers or alien cultures immediately until there exist a reason to trust. When doing the survey on the Belgian KMOs one of the interesting inferences was the fear of being ‘cheated’ or ‘short charged’ when doing business with India was very high. This also explains why many Belgian businesses would rather prefer a Belgian person to handle operations in India.
Figure 7
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Figure 8
3.5 3.5.1
Other Relevant Concepts Polychronic concept of Time
Monochronic v/s Polychronic time18: In monochromic cultures, time is experienced and used in a linear way. Time is divided quite naturally into segments; it is scheduled and compartmentalised, making it possible for a person to concentrate on one thing at a time. In a monochronic system, the schedule may take priority above all else and be treated as sacred and unalterable. Monochronic time is perceived as being almost tangible. It is also used as a classification system for ordering life and setting priorities. Because monochronic time concentrates on one thing at a time, people who are governed by it don’t like to be interrupted. Monochronic time seals people from one another and, as a result; intensify some relationships while short-changing others.
18
“Understanding Cultural Differences”, Edward T. Hall and Mildred Reed Hall
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Monochronic time dominates the business in Western Europe and in Belgium. Polychronic time is characterised by the simultaneous occurrence of many things and by a great involvement with people. There is more emphasis on completing human transactions than holding on to schedules. This concept dominates business in Asia, Latin America and also India. Since the Indian’s are at the very high end of the polychronic scale they tend to do many things at a time. Europeans constantly feel that Indians do not prioritise their time. In their eyes Indian’s are doing many unproductive things at the same time. They also have the impression that Indian’s do not keep time and appointments and that they have a loose concept of time. The time an Indian spends to network, talk to other people, communicating incessantly to colleagues and co-workers is an inherent trait in Indians, and is considered very important. This can be quite exasperating for a westerner if this happens in the middle of a meeting or an important discussion. This is usually a subconscious phenomenon and a westerner may see it as a lack of respect or unnecessary intrusion. Indian’s have an elaborate family and friends network which take precedence over anything else and it is vital for Indians to maintain the relationship and retain the status quo of such relationships. One of our partner companies visited a supplier site in India, a software development company they had a brief relationship with. One of the most noticeable aspects of the working culture was the fact the developers would chat with each other quite frequently. One of the project managers remarked that he preferred that his team sit next to the entrance of the office. When questioned why, he remarked that the Indian developers had a tendency to talk to each and every one of the other team members en route to the toilets. This constant social interaction was unnecessary in the eyes of the Belgian Project Manager. It was also suggested that if the suppliers would put an end to this unnecessary talking, then productivity would increase and delivery of products would be more timely. Martin M. Kristensen, in the book “Doing Business with India” on the subject of Business culture remarks thus – “one annoying aspect is the frequent interruptions during meetings. Managers or officials take messages and phone calls, sign piles of documents and receive
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
impromptu visitors. It is important, albeit difficult, to understand that this is not intentional rude behaviour, but rather a way to manifest the manager’s importance in the organisation”.19 By and large educated Indians doing business with Europeans keep time and are usually punctual. This is in most cases reserved for westerners only as Indians have realised from their experience that westerners have a fetish for punctuality. But if one has to deal with government officials or so, then it is likely to expect that meetings will not proceed on the scheduled time. Moreover, even if the Indians are punctual, a Belgian manager remarked, they spend more time to come to the point and delay the meeting talking matters that are unrelated to business. Matters unrelated to business are often matters that lead to creating trust. This point will be further examined in the coming pages.
3.5.2
High context Behaviour
Countries can be divided into low-context and high-context. In low-context countries, Information is highly focused, compartmentalised, and controlled, and, therefore, not apt to flow freely. In high-context cultures information flows freely as people are spatially involved with others due to higher inter-personal contact20. A high-context communication is one in which little has to be said or written because most of the information is either in the physical environment or within a person, while very little is in the coded explicit part of the message. This type of communication is frequent in collectivistic cultures. A low context communication is one in which the mass of information is vested in the explicit code, which is typical for individualistic cultures. Lots of things which in collectivistic cultures are selfevident must be said explicitly in individualistic cultures21. Western Europe and Belgium are low-context countries, while countries like India are high context countries.
19
20 21
“Doing Business with India”, Roderick Millar, M.S. Chandramouli, PriceWaterhouseCoopers, 1999
“Understanding Cultural Differences”, Edward T. Hall and Mildred Reed Hall
“ Cultures and Organisations, Intercultural co-operation and its importance for survival, software of the mind”, Geert Hofstede
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Most of the information within an organisation is known to the employees in an organisation, even though the information itself may not be very relevant. One of the major information sources is the grapevine in business. It is impossible to avoid this as most colleagues at work place share a close relationship outside work also and meet and interact in similar social circles. When a European receives information from an Indian partner or manager it is usually in sporadic bursts and not coherent to the European mind. The so called ‘dumbing down’ of information, an American invention, which tries to make information understandable by everyone, is not much ascribed to by the Indians. They expect the European manager to be aware of the present situation at any given time and will not provide lot of background and preamble while providing the information itself. From the Indian perspective, Europeans are well versed in their own area of specialisation, but not very knowledgeable in matters outside. While this may be a misconception, it creates communication barriers between the two in certain cases. What is sometimes ‘stating the obvious’ for the Indian manager may be ‘reiterating the facts’ to avoid ambiguity for the western manager. One of the common complaints of Belgian businesses that have units in India is the absence of adequate data and performance indicators. Indians rely on their instincts and this cause frustration to the Europeans who need to have adequate data to base their day to day decision making on. Data, when available, are quite comprehensive and wordy. One of the common reactions from Belgians about Indian businessmen is the fact that they speak with a ‘forked tongue’. In a manner of speaking that they do not mean what they say. They are verbose and take time coming to the point. This is especially the case when the information that has to be transmitted is not a positive one. Indirectness and meandering speech is not a deliberate attempt to mislead in most cases as perceived by a foreigner. It is a cultural aspect. To obtain direct answers it may be well to do to ask very direct questions which leave no scope for anything other than a black or white reaction.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
3.6 Work Related Issues This chapter deals with issues directly related to work and day to day aspect of doing business with India. The things to keep in mind while doing business with India, so as to maximise benefits and reduce tensions and ambiguity are mentioned here. This is listed in order of its importance. This is based on the survey of individuals who do business with India and from other interviews carried out among Indians and Belgians involved in cross national trade between the two countries. 3.6.1 Timing and Delivery Delivery problems were one of the most frequently mentioned problems once a working relationship has started. This problem exists in large numbers even in the Information Technology sector, where India is regarded as very competitive. As mentioned earlier in the report, one of the major reasons, attributed to the cultural aspect, is the concept of time (polychronic v/s monochronic). But successful companies are the ones that have worked around this problem. One of the survey respondents mentioned that they give a date that is earlier than the actual date so that eventually the delivery is made when needed. This approach, even though successful, is not a long term solution. One of the ways we learned to make the delivery on time is a combination of setting up an earlier date plus working together and explaining the criticality of timely delivery to those involved, together with a carrot and stick system, basing the future of relationship by using delivery as a strong performance indicator for extending contracts.
3.6.2 Personal Rapport This is probably one the most important aspect of doing business with India. Indians value human relationships above everything. If a supervisor/manager or a partner/client has a personal rapport with his/her Indian partner or employee, then the benefits of the relationships are manifold. Take time to know your Indian partner. You may be frequently invited for personal functions and parties. It is best to accept the offer. Initially Europeans may be surprised at such invitations, as it takes a lot of time for a relationship to evolve to this level in Europe. Even though Indians are as friendly as Americans in the first instance, they tend to be less superficial about the relationships. In business, they will not hesitate to go the extra mile for you if they have a good rapport for you and if they have the impression that you value their friendship and company. 44
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
3.6.3 Contracts and Legal aspects While business guides frequently mention the importance of having strict contracts and written down deals, more often than not, if a deal doesn’t go well, especially for KMOs, it is time consuming to get a recourse from the courts. While India has a judiciary that has high moral and ethical standards, fighting a legal battle is a time consuming process. While it is very good to have a written contract (written with the help of an Indian lawyer), it is even better to get into business relationships with credible, trustworthy and proven partners. It is well worth the effort to spend time to whet out possible partners before entering into business relationships. Two very important aspects of doing business with India, is to have an Indian accountant and a lawyer providing you fiduciary and legal help. The rules and regulations in India are constantly evolving and changing and it is difficult for a foreign company to keep abreast of it at all times.
3.6.4 Management in India: Belgian or Indian? One of the most common questions asked by companies who set up operations in India is whether they need to have a Belgian management handling operations in India or an Indian management. While many successful companies have Indian management handling day to day operations, some of them swear on the importance of having Belgian management. Having a Belgian manager, based on the views of some respondents, ensures peace of mind, and also, all information – financial and otherwise, is sent in the right way. One of the frequent problems noticed with a uniquely Belgian management in India is the human resources issue. The manpower in India is very capricious. It is difficult to retain them, especially in sectors such as Information Technology and other high skill areas. It is impossible, in most cases, for Belgian managers (being from a different culture) to gauge the subtle changes and understand the nuances that are not evident in the first instance. These small ripples in the organisation cannot be ignored, as they have a tendency to get bigger. Human resources policies or the way of dealing with Belgian and Indian employees are totally different, mainly because the motivational and hygiene factors (according to Frederick Herzberg) are different. 45
Bipin Nambiar, IMBA 2002
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The best possible compromise to maximise benefits and ensure higher comfort levels may be to have a competent human resource manager handling the Indian staff who reports to the Belgian manager, who serves as a link between operations in India and the head office in Belgium.
3.6.5 Meetings One often hears disconcerting remarks of Belgian managers who go for a meeting in India with an agenda and realise that everything is discussed except the agenda. Meetings in India are usually a time consuming process and the attendees while brain storming ideas are quite vociferous in their suggestions, which a Belgian person may perceive as a conflict situation. Indians generally love to argue and debate and bounce of ideas to one another, unlike the nonconfrontational attitude of Belgians. The best way to deal with this, especially if you are deliberating the meeting, is to ensure that the agenda is adhered to, but also foresee time and create opportunity to have an environment of open discussion. It is important to ensure structure to such meetings so as to optimise the time utilisation, but also important is for the meeting to serve as a forum to hear the viewpoints of the attendees. One to one meetings are more efficient for decision making as it is very difficult in a lot of cases to ensure consensus. India being a culture with a higher power distance, it is acceptable for the employees that the management make the eventual decision. In other words do not look at meetings as a forum for decision making.
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3.7
Common Myths about doing Business with India
Many overseas companies -- large and small -- have made successful entries into the market since India began its liberalization process in 1991. Yet, some have also attempted and failed. There is no doubt that the potential is vast. India's total market is 950 million and the middle class is huge and growing. Both the central and state governments are aggressively seeking foreign investment -- adding incentive on incentive to encourage overseas companies to set up shop. On the surface in fact, India looks like an investment dream come true. But, in reality, the challenges are equally vast. Those that will succeed in tapping the country’s great potential will do so through careful research and a well-designed plan. India, among the European investors, is believed to be a good investment market despite typical problems such as political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. Success in India, for foreign companies, largely depends on the correct estimation of the country’s potential, proper ground work and spending time and resource to extensively research into the market before undertaking any kind of venture. India, sometimes, is not always what it is perceived to be. Few of the common myths that foreign investors can have in India are mentioned here and elucidated.
3.7.1
Myth No.1: “Amazing market sizes”
Don't get carried away by rosy estimates of the market's size22 . A middle class that equals the population of Western Europe or USA is indeed a non-ignorable market. But many entrants get carried away by the potential market sizes. This common error is made even by large multinational companies used to entering emerging markets. Even companies like Coca Cola estimated that with market sizes this big, a small percentage of the market itself is huge numbers in itself. Having gone ahead with this belief, Coke is still to make Profits in India 10 years after entering the market. Not only have they realised that soft drink consumption among Indians is largely an urban phenomenon, and even then consumption habits, and thus consumption levels are very different from the average American consumer.
22
Manjeet Kripalani, BusinessWeek, Bombay
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Recently, many analysts, after 10 years of liberalisation admit that the government’s projection of a 250 million strong middle class was probably a bit too optimistic. Recent estimates based on a survey on consumer patterns indicate a middle class, with reasonable purchasing ability, to be around 100 million23. Even within this 100 million, the purchasing power of the population is far below the European and American middle class. When companies go to India to attract workers in the field of Information Technology, they are frequently astounded by the projections of the number of Programmers graduating each year from engineering colleges each year. While the numbers are indeed more than Europe or US, it may still not be easy to find the right profiles, and it is also hard to attract and retain the staff with the right skill and experience.
3.7.2
Myth No. 2 “Liberalisation makes things easy”
When the Indian market became liberalised, companies venturing into India expected the veritable red carpet to be rolled out for them. But the case was, and is still is not so, to a large extent. The bureaucracy in India used to years of working under a system of licensing have not completely adapted to the changing needs of the market. An entrenched system cannot be done away in an instant. This means complicated and time consuming procedures for getting permissions and setting up businesses. Liberalisation is an idea proscribed by all political parties in India, but basic elements of rules and regulations are constantly changing and evolving. Any new investor must learn to accept this inconsistency as the ‘teething problems’ of an evolving market. “Single window clearance” a commonly used expression to attract investment to a certain sector is not always what it is made out to be. Taxation laws that benefit local industries create a non-level playing field. For example the dream of tapping many millions of consumers lured the auto makers such as Ford, General Motors, Daewoo, Mercedes, Fiat, and Peugeot who all teamed up with domestic carmakers. But exceedingly high duties on imported components made them less competitive in the market compared to car makers such as Suzuki which benefited from a tie up with the Government of India to produce cars. India
Based on survey of consumer patterns conducted by the National Council on Applied Economic Research, New Delhi
23
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has stalled the signing of treaties like WTO, which it believes to be unfair and there is a certain negative reaction among certain groups in India about the arrival of multinational corporations and their affect on the cottage industries in India. These reactions have been by far sporadic and largely non-violent. 3.7.3 Myth No. 3: “Bribery is rampant”
The story of the now infamous Enron Corporation who was asked to leave India on charges of ‘irregular’ payments to the government for building its power plants and for obtaining contracts from the government is now famous. Recently, Xerox Corporation of US created headlines in India when it was revealed that they had fictitious accounts which were used to park the money to be paid as bribes. In a preliminary inspection by the Income Tax department of the Government of India around four hundred thousand euros of unaccounted cash was found24. Bribery and payment of ‘baksheesh’ is not an imperative to doing business in India. While some things may be speeded up by paying bribes, more often than not, it is a recipe for disaster especially in a situation where governments in the states and centre change with frequent regularity and the new governments start investigating the permissions granted by the previous ones. In this game of political one-upmanship the eventual loser is the company or individual that has been involved in any unsavoury dealings.
Figure 9
24
“Xerox had 85 fictitious accounts: Income Tax”, Press Trust of India, Sunday August 11, 2002
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3.7.4
Myth No. 4: “Consistent low costs”
India is commonly perceived as a low cost market and destination. But sometimes costs in certain sectors of businesses can be as high as in developing countries. This perception of India as ‘low cost’ destination has frequently upset many business plans. India is of course competitively priced for intellectual capital and labour costs and so on, but property prices and such, especially in large Indian cities, can give foreign investors quite a shock, India has one of the highest property costs (when compared to the GDP per capita) among the developed and developing countries (refer graph). Prices of Luxury items are usually priced at a premium even when compared to prices in Europe. Hotel rooms at high class hotels in most cases costs more than in Europe, especially in cities like Bombay and New Delhi. In the field of software this may also largely be the case. Companies that go to India to set up software development centres are surprised that the cost of renting and buying locations are high (especially rent advances that are usually in the range of 10-12 times the rent of a month, and only refundable, without accruing any interest, at the end of the term). If one tries to stay away from major cities to save on rents, then one has to grapple with absence of skilled knowledge workers, who are usually concentrated in the cities. Costs of skilled knowledge workers, who have had opportunities to visit and work in the west on short or long tenures, are also increasing due to high demand.
Figure 10
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3.7.5
Myth No. 5:“International culture”
India is culturally close to Europe in many ways, but distant as well. While a typical Indian Manager may be western in his/her working style, his/her ideas and thoughts may still be within his / her own cultural context. This aspect has been dealt with in elaboration in the previous section of this chapter
3.7.6
Myth No. 6: “One size fits all”
Global products have to be localised to a large extent to be palatable to the tastes of the Indian consumer. While ideas like fashion may have global connotations, products based on lifestyles of the people may have to be altered to fit the tastes of the local populace. McDonalds for example does not use beef in their hamburgers in India as majority of the people in India do not eat beef. Moreover, there are burgers in the menu altered to the taste of the Indian palate. Companies like Kellogg’s have realised that it is not easy to penetrate the market with standard products that are successful in US. Kellogg dreamed of 250 million cereal-eating Indians. So in September, 1994, with a $65 million investment, it launched Corn Flakes. The flakes did well initially, helping to double the market for breakfast cereals. But sales soon plummeted because a 500-gram box of Kellogg's product cost 33% more than its nearest competitor. And in a country where breakfast is usually a bowl of hot vegetables, cold cereal is a novelty--a one-time purchase. ''It was just clumsy cultural homework,'' says Titoo Ahluwalia, chairman of market researcher ORG-MARG in Bombay25.
3.7.7
Myth No. 7: “No competition”
The biggest surprise reaction from the newcomers in the market is stiff competition from the existing local players well entrenched in the market place. These local players have years of loyalty from the consumers which the new multinationals find hard to break. Furthermore, the presence of global players in the market makes the existing local ones to be more aggressive in the market place. In the field of engineering and technology there are many local players that make competing products that may initially not show up in the radar screen of research companies.
25
Study based on ORG-MARG Research Organisation, Bombay, India
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The local players have invested years in creating their networks and contacts that is difficult for foreign players to break into. In a price sensitive market place the local players also can compete on prices which the foreign players can hardly match. . Fords and GMs, for example, sell for $22,000 in a country where the average per capita purchasing power is $1,666. They were forced to hit the premium end because they couldn't compete with existing players’ quality and low cost26. General Electric Company (GE) is one of the companies that acknowledged the market strength of the existing players when it came to India. The U.S. conglomerate came to India in 1991, when Indian law had just started letting foreign investors set up wholly owned subsidiaries rather than have to find local joint-venture partners. Still, GE chose Indian appliance maker Godrej, the market leader in its sector, and sent a special team from the U.S. to determine Godrej's capability and market dominance. Then, GE hired local managers and made them meet U.S. standards. GE played it safe and now is firmly established in the industrial landscape of the country. The tie-up benefited both companies. Godrej got GE's technology to upgrade its appliances; GE got Godrej's good reputation and distribution system. Godrej-GE now claims a 40% market share in consumer appliances, and GE uses India as a low-cost manufacturing base for such exports as light bulbs and X-ray equipment
3.7.8
Myth No.8: “Uniform Markets”
India is a culturally complex nation. Different states have different consumption patterns and customs27. Foreign investors frequently underestimate the diversity of Indian society. India has 17 official languages and an ethnic diversity as wide as that from Britain to the Middle East - not to mention 25 states, dozens of castes, and six major religions. Yet on trips to scope out investments in India, foreign executives often visit only Bombay or New Delhi and meet well-educated, urbane, Westernized Indians. ''It's easy to be deceived by that picture,'' says a Western insurance executive who has studied the country's consumption habits, cultural
26 27
Hormazd Sorabjee, Editor, “Auto India” Rama Bijapurkar, Marketing Consultant, Indian Institute of Management.
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biases, and medical systems for a year and is still not sure he understands them. ''You go back thinking, 'Wow, what a great market.' But that's just 0.5% of the market. It's a thin veneer”28. The challenges and costs of catering to markets which have a great diversity in language is something that western European companies are used to. But the challenges in India are probably more than what is faced in the home markets, especially also, because of the ethnic diversity within India.
3.7.9
Myth No. 9: “Dependable Research Data from International sources”
International rating companies still try come to grips with the challenges of managing and obtaining correct and adequate data. The research done on Indian companies are not always adequate and the benchmarks and standards of research used in the west may not adequately work in India. Combined with the fact that transparency levels in companies and the financial markets are lower, it makes it doubly difficult to ascertain the true value of companies for western investor. The Security and Exchanges Board of India (SEBI), tries to clean up the financial markets and set up strict regulations, but once in a while a scandal breaks out in the financial markets that takes away investor trust in the market. Most of the major companies or conglomerates are family owned, but despite the fact that they are professionally managed, it may be quite a challenge to understand the intricacies of working and the accounting patterns of these companies. Most of the data available from Rating organisations such as Moody’s or CRISIL are usually restricted to large companies, while small and medium sized companies (SMEs), are very frequently a more fitting partner for foreign firms. The final section of this paper addresses issues in rating and how best to adapt rating systems that are objective, and gives tangible inferences - a system that is dependable and can be personalized to the needs of the individual investor, while keeping in mind the context of Indian business.
3.7.10 Myth No. 10: “Sophistication level of potential partners” It requires a lot of research into the capabilities of the Indian partner before one can have a clear insight on the potential. This passage taken from the book “Doing Business with India29”
28
“Investing in India”, Manjeet Kriplani, Businessweek International Edition, 1997
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Bipin Nambiar, IMBA 2002
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describes the insight of Martin M. Kristensen, Resident representative, The Industrial Fund for Development countries. “What one observes is that appearances can be deceptive. A ‘dhoti’-clad business man from the Deep South of India may not always make a credible impression on you at the first meeting. But take some time to know him. While outwardly very traditional (in western opinion that is!), he would match you in his shrewdness, business acumen and enterprise-related decisions. On the other hand a businessman dressed in western attire in corporate situations, whom you would consider more like a westerner, could be as deeply rooted in the inner ethos of India’s culture and spirit”. One often tends to fall into this trap of misconceptions and frequently enters into a relation with a partner they can relate to rather than a more competent one.
3.7.11 Myth No. 11: “Parity in productivity” Productivity levels of workers in most areas are lower than in the west. Many business plans, when adjusted to productivity levels, may not seem so attractive anymore. There is always a looming possibility that in the not too distant future, India’s low labour cost advantages with other countries may be whittled away by high power generation costs, interest rates and regulatory hurdles. World Bank, working with the Confederation of Indian Industries, conducted a large scale survey of 1100 firms; specific sub sectors were studied to review productivity. Investment climates are conducted for 10 states from best to poor. They noted that while Indian productivity is low, its wages are low as well, so it is cost competitive with other countries. There is, however, large productivity dispersion across firms. The study said a key research question is why are firms which have large labour cost advantages not taking over more of their sector or doing better to export. It was found that weak firms are hard to close, it is hard to lay off redundant workers in India or start new firms, there are high interest rates and capital costs, many medium size firms run on their own power generators which is highly inefficient and are a large capital expense, India had poor transportation infrastructure, and there were issues of bureaucracy and corruption30.
“Doing Business with India”, Roderick Millar and M.S. Chandramouli, in association with PriceWaterhouseCoopers. 30 “Investment Climate, Growth, and Poverty Reduction: A Methodology of Survey-Based
29
Diagnostics in Developing Countries”- David Dollar, World Bank Study 54
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All these aspects affect productivity. As mentioned in the study the low costs offset low productivity temporarily, but investors have to be ready to face this challenge. Indian expatriates all over the world are known for their productivity, but not so when they are based in India. This means that the environmental factors are as important as the individual with respect to productivity Companies involved in setting up operations in India or working together with Indian partners have to be ready to face the prospect of being involved in work that could be deemed as ‘nonproductive’. These are however not avoidable. The successful ones are those who leverage this correctly and are prepared for this aspect of operation so that the resources allocated to manage non-productive work can be well contained and measured.
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4
4.1
Valuation of Indian companies
Introduction
There is no such thing as a comprehensive model to design business-fulfilment potential of would be Indian business partners. It is proposed to develop a conceptual tool to determine whether an Indian company has a feasible chance to become a profitable business-partner in the long term. Furthermore, the tool also may help to discover hidden bottlenecks of would-be business partners or help identify “blind spots” in Western business thinking. The tool proposed is based on the development of Key Indian Business Indicators (KIBI). Although these may be considered necessary to determine the “quality” of an Indo-European relationship, they are not to be considered a sufficient step towards creating an optimal fusionbusiness culture. To ultimately improve a cross-cultural business interaction, the Key Indian Business Indicators have to become tightly woven into all management processes from day one. Examples of what this could mean are: • • KIBIs may become the basis for more consistent monitoring and reviewing performance throughout the duration of the business venture; KIBI-performance should be tied to business relationship-evaluation and more specifically to the introduction of price-related negotiations in terms of KIBIperformance.
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4.2
Criteria for the Key Indian Business Indicators
The Key Indian Business Indicators should correspond to a number of criteria:
Table 9
4.3
Process for establishing the Key Indian Business Indicators
Establishing the KIBIs should be linked not only to the nature of the business but also to the strategic goals which form the base of the Euro-Indian business collaboration, the sector and the politico-economic context of the region involved. The KIBIs should be established primarily by the European partner although it would be advisable to elaborate the determination of the KIBIs together with the Indian partner or local accounting and legal firms. The level and intensity of interaction between the parties involved, the relationship dynamics, should be the basis for the continuous updating and 57
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differentiation of the KIBIs at least on regular intervals. The process of determining KIBIs is determined as follows:
Table 10
4.4
Main area of Business Performance
Defining the main areas of business performance is mainly an iterative process as all areas will, in one way or another, be interconnected. The summing up of the main areas of due diligence implies a sense of direction but should, in no way, be considered as complete or accomplished. A change in a company’s business mission doesn’t necessarily result in a change of focus on a number of areas but a change of a company’s definition of product/market scope can be a source of KIBI-innovation when it is quite different from previous assessments. KIBIs should also be determined in function of the sector of both parties involved. It may be clear that establishing coherent KIBIs for a pharmaceutical joint-venture in India will be totally different than from setting up a joint-venture regarding ICT The main areas of business performance capability of a prospective Indian partner company have been defined as elements that make up the combination of both high quality servicedelivery and cost-optimization. These elements have been summed up and their periodic availability indicated: • • Accounting and Financial maturity (yearly) Commercial Policy (quarterly) 58
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• • • • • • •
R&D (yearly) Performance measurement (monthly) Human Resources (yearly) Management (monthly) International Experience (quarterly) Optimizing personnel/utility costs (monthly) Optimizing other costs (monthly)
4.4.1 Accounting and Financial maturity Clearly the most obvious parameter in determining potential Indian partner-companies lays in the financial solidity of the company. This financial solidity can be determined both in terms of organizational set-up (overall organization of accounting, treasury and audit), the presence of an institutionalized analytical reporting-discipline and the analysis of financial statements, credit usage and financial planning. As performance indicator regarding the maturity we opted for the analysis of primarily the tax returns as these statements are mandatory and all Indian companies have to disclose a complete overview of the financial indicators in their yearly tax returns. Additionally, although far from complete sometimes, an analysis of the balance sheet, profit & loss-statement and financial planning are an added source of information. It is however emphasized that a comparative analysis of these data with the data mentioned in the tax returns remains necessary as well as a quality-check which implicates a local accounting firm.
4.4.2 Commercial Policy The analysis of the inherent commercial policy is the second indicator we consider important enough for analysis both in terms of overall organisation, market-characteristics, products and services and distribution channels. A wide range of product or service lines can reflect a sub-optimal product mix that reduces productivity. The number of customers and suppliers, their profitability and historical evolution as well as an overview of the 3-year sales forecast can be considered crucial in establishing the commercial effectiveness and growth potential of the company. 59
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4.4.3 Research and Development In establishing commercial and business dealings with India, mainly in the bio-technological, ICT-related fields and the pharmaceutical sector, the amount of Business Expenses related as a percentage of turnover serves as a good “innovativeness-coefficient”. India is known for its large number of patent applications every year. Imperative is the study of the yearly evolution of these investments. 4.4.4 Performance measurement Performance management and the attribution of objectives per member of the staff are considered an important factor in achieving the company-set targets of commercial and financial growth. Only one parameter should be considered in determining the company’s performance namely the timely finishing of the performance evaluation cycle in all departments as it indicates the discipline regarding the realization of company-imposed objectives.
4.4.5 Human Resources Productivity and skill-level of personnel remains a caveat when dealing with Indian companies due to the low productivity levels of India compared to other Asian countries. This factor captures any possible labour productivity penalties due to lower frontline trainability potentially caused by lower educational levels, different educational focus (discipline/skills), low frontline worker motivation, lack of incentives/possibility for top management to implement changes. The stability of the production-process is therefore to be considered crucial in selecting business-partners and the effectiveness of management in that field can be put in the right perspective by considering the number of production days lost due to strikes and social conflict. 4.4.6 Management Although it is difficult to evaluate the skill of local management and frequent prior contacts with local management are necessary in order to determine the level of professionalism, the skill-level and international experience may be considered important. It has been deliberately omitted to consider qualitative evaluation of management material as a KIBI due to the inherent psychological nature of the indicator hence making it difficult to install a generic benchmark. 60
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One interesting aspect of evaluating management in India is the degree of relatedness to local policy or decision makers in view of the fact that these ties can facilitate considerably business-making. One would, however, like to warn European entrepreneurs not to take into consideration such assets due to the volatile nature of these relationships especially in India.
4.4.7 Exposure to international business In view of the previously discussed cultural differences between India and the West, prior experience of local management to Western and American corporate culture is to be considered primordial both in terms of exposure and deadline- and production management. Dealing with potential Indian partners is facilitated considerably by previous international business dealings of the Indian partner to be. 4.4.8 Costs Due to inherent cost-advantage capabilities of Indian manufacturing, the last indicator to be considered when evaluating Indian companies is the production- and financial performance versus the yearly budgets. It enables the Western entrepreneur to evaluate the cost-control of the potential Indian partnership.
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4.5
Weighing and Frequency of the KIBIs
KIBIs without a performance scale or weight-assignment towards a general evaluation is to be considered useless. Although performance scales are to be drawn up taking into account the diversity of sectors, it is considered rather clear that the applicability of each KIBI can be determined universally.
Table 11
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4.5.1
Weightage of KIBI Dimensions
Figure 11
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4.6
Grade details of the KIBI-rating
Grading of the KIBIs are indicated on a ordinal scale ranging from A to D
Table 12
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4.7
Conclusion
One of the underlying objectives, while conducting the survey, and writing of this report, has been to explore the possibilities, or the added value, a company or an organisation of individuals that provides rating on Indian companies in the context of culture, and with knowledge of the business environment thereof, could have. During the course of this research it has been made clear that there still exists a desire in Belgian entrepreneurs to invest in India provided there is an organisation or an agency that helps them make the whole process easier, and also ensures the availability of credible and fitting partners. A fear of an alien culture is largely based on the fear of the unknown. Once a clear insight is given into a particular culture that fear naturally subsides to a large extent. This reports attempt to do exactly that. India itself offers a plethora of opportunities. But like any new opportunity that exists, challenges come hand in hand. The key aspect to creating a successful relationship is perseverance, proper due diligence and scrutiny. It is upto the investor or the business to see what factors are important in their particular relationship, and adapt and customise a rating system such as KIBI for their use. Most of the aspects of culture, which can make an investment prospect daunting, are mentioned here. But an open mind and a strong resolve to temporarily conform, helps you resolve these challenges. Eventually, irrespective of culture, any business activity that focuses on a win-win situation and focuses on creating a symbiotic relationship between the partners are generally prone to succeed.
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5
Bibliography
1. Cultures and Organizations, Software of the Mind, Geert Hofstede, 1994 2. Understanding Cultural Differences, Edward T. Hall and Mildred Reed Hall, 1990 3. Doing Business with India, Roderick Millar, M.S. Chandramouli, PriceWaterhouseCoopers, 1999 4. Organisational Behaviour, Kreitner, Kinicki, Buelens 5. Managing Across Borders, Christopher A. Bartlett, Sumantra Ghosal 6. Belgo-Indian Chamber of Commerce Newsletter, Jan 2002 7. McKinsey Report India-From Emerging to Surging, Amadeo M. Di Lodovico, William W. Lewis,Vincent Palmade, Shirish Sankhe, McKinsey, 2002 8. Cultures Consequences- International Differences in Work related Values, Geert Hofstede
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6
Appendix
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How to use the Survey : In view of the draft of a research project of the Vlerick Leuven Gent Management School aimed at examining the possibilities of Belgian companies doing business with emerging countries, we would like to request your feedback regarding this issue. We are very interested to learn your points of view regarding the subject. Please leave no questions blank. Thank you for participating.
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Question Is your company the mother holding of companies in Belgium or in other countries ? What sector is your company active in : Primary sector Food, beverages Textiles, wearing clothes Publishing, printing IT Chemicals, rubber and metals Machinery and equipment Gas, water, electricity Construction Wholesale and retail Others (please specify) Please indicate the amount of the latest turnover in euros. Does the mother company have subsidiaries or maintain commercial links in emerging markets ? If yes, please specify the countries : China Philippines India Indonesia Japan Korea Malaysia Singapore Taiwan Thailand Vietnam Other
Answer
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Please indicate the nature of the strategic decision to maintain links with these countries : Productivity Cost Innovation and R&D Efficiency Other (please specify) How will the commercial or legal cooperation of the company with these countries evolve ? Increase Decrease Maintain stable Please indicate the nature of satisfaction with these operations : Very satisfied (please specify) Satisfied Not satisfied (please specify) How did the company decide on setting up operations with these countries : In-house research External research (consultancy,…) Seminar Other (please specify) Do you consider that there is currently sufficient information available regarding these countries ? If no, please specify what type of information currently lacks : Potential of Enterprises Financial information Investment information Marketing and Sales information R&D and Innovation information Product and Process information Legal information Other (please specify)
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Would you be willing to pay for similar information ? Please specify. Yes No What organizations do you turn to in order to receive information regarding these countries ? Governmental organizations (embassies, consulates, Export Vlaanderen…) Information providers Consultants Local agents Press, media, internet,… Chambers of Commerce Other In what format would you like to receive specific information regarding business- and investment-opportunities with these countries In an extensive report on demand Continuously via mail or the internet Via a newsletter Other (please specify) What information would you deem necessary : Competitive Intelligence Investment opportunities Financial health Market-research Business development opportunities Strategy and management-capabilities Other (please specify) Please feel free to add your remarks
Bipin Nambiar IMBA 2000-2002
Promoter Prof. dr. Dirk Buyens
Project submitted in fulfilment of the degree of Masters of Business Administration: General International Management
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Acknowledgements
I wish to acknowledge the assistance provided by staff and faculty of Vlerick Leuven Gent Management School I especially wish to thank Prof. dr. Dirk Buyens for accepting to be my project guide, and helping, and providing support to work around the constraints of time towards the completion of this project I wish to thank my friend Jan Van Meenen for supporting me and help me conduct the Survey and, also, for his suggestions towards improving the quality of this paper I finally wish to thank my wife, Evelien Barroo for her perseverance, support and understanding, all through the MBA, and especially during the final days of the course while working towards completion of this project.
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CONTENTS
1 INTRODUCTION TO THE RESEARCH PAPER ................................................................................... 5 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5 6 IECON- INDO-EUROPEAN CONSULTING AND RESEARCH ...................................................................... 6 AIM OF THE PROJECT .............................................................................................................................. 7 AN INTRODUCTION TO THE INDIAN ECONOMY ....................................................................................... 8 FOREIGN DIRECT INVESTMENTS (FDI) .................................................................................................10 BELGIAN INVESTMENT IN INDIA ...........................................................................................................14 INTRODUCTION .....................................................................................................................................17 THEORETICAL BACKGROUND ................................................................................................................17 THE SAMPLE .........................................................................................................................................19 THE FINDINGS .......................................................................................................................................20 CONCLUSION.........................................................................................................................................25 INTRODUCTION .....................................................................................................................................26 THE INDIAN WORK CULTURE ................................................................................................................26 “THE INDIAN MANAGER” .....................................................................................................................27 THE FOUR DIMENSIONS OF HOFSTEDE .................................................................................................29 OTHER RELEVANT CONCEPTS ..............................................................................................................40 WORK RELATED ISSUES .......................................................................................................................44 COMMON MYTHS ABOUT DOING BUSINESS WITH INDIA .......................................................................47 INTRODUCTION .....................................................................................................................................56 CRITERIA FOR THE KEY INDIAN BUSINESS INDICATORS .......................................................................57 PROCESS FOR ESTABLISHING THE KEY INDIAN BUSINESS INDICATORS ................................................57 MAIN AREA OF BUSINESS PERFORMANCE.............................................................................................58 WEIGHING AND FREQUENCY OF THE KIBIS..........................................................................................62 GRADE DETAILS OF THE KIBI-RATING .................................................................................................64 CONCLUSION.........................................................................................................................................65
METHODOLOGY ......................................................................................................................................17
THE BUSINESS CULTURE IN INDIA....................................................................................................26
VALUATION OF INDIAN COMPANIES ...............................................................................................56
BIBLIOGRAPHY........................................................................................................................................66 APPENDIX...................................................................................................................................................67
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
"On ne voit bien qu'avec le coeur; l'essentiel est invisible aux yeux"
Antoine de St. Exupéry.
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Bipin Nambiar, IMBA 2002
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1
Introduction to the Research Paper
The opportunities of doing business in India are tremendous, so are the challenges. The culture within and outside the business environment differs between India and the western world despite the highly conducive business environment that may exist. The brief experience the author has had in working in different countries in the world, and more specifically, in the recent past, in Belgium, has helped in developing an insight into the business practices of both countries - India and Belgium. Being an Indian by origin, and having lived outside India for around seven years, the author also has the luxury to look at India from a different perspective, and sometimes more importantly, from a European context, which helps in having a better understanding of the mindsets of both cultures. Other than the cultural challenges, for which one can be mentally prepared for, the challenge of finding adequate information on the individual businesses are very high too. The transparency that may be initially felt may only be superficial and largely perceived. Understanding the different aspects of an alien culture can be further reinforced by knowing the ‘whys?’ of the individual cultures- namely why a certain culture behaves the way it does. This makes understanding easier and helps the European investor persevere in India – which by itself is an important criterion for success. This project is not an introduction into the Indian economy, even though information and relevant statistics are provided, as any credible report should. The introduction to the Indian economy is a brief one with an underlying focus on the pertinent aspects of foreign investments, and how it compares to competing emerging markets. This report does not attempt to describe all the particular hurdles one may face, but it may help one prepare for them to a certain degree. This report is targeted at those who have already, to a large extent, decided to venture into India and have decided the main target or goal of the venture. It is neither an exploratory guide on doing business in India nor it is a report on why India is a good business destination, but rather it attempts to examine certain key aspects specifically related to cultural aspects of doing business and working with India, and how best to evaluate potential partners in India within the context of their specific culture. This is not a guide that tries to describe all the surprises that you may face, but eventually, 5
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
through the direction it provides, helps you prepare for surprises that you may have never imagined. The opportunities offered by emerging markets such as India are tremendous. So are the challenges (if business environment and practices were similar in India as in Europe, there would not be a business case to do business with India in the first place!). The Indian business situation is frequently dichotomous. Where there are opportunities for large cost benefits, there are costs you can be unprepared for; where there is a tremendous intellectual capital, you may be faced with a huge consumer base that is largely illiterate. The underlying traditionalism of your ‘sophisticated’ business partner may often catch you off guard. While the capital markets may be mature, the family ownership and management of the listed companies in these markets may not exactly inspire confidence. India is a land of paradoxes, a nation trying to find its individuality. The goal is not to find uniformity in this diversity, but accept this as a part of business landscape in India, and work within it. This project has, in its last section, attempted to develop a user-friendly, adaptable, and flexible rating system that can be used as a selection tool across any industry or business. Whether making new investments or outsourcing business processes, this serves as a basic tool to help in working through the myriad possibilities and options available in the specific area of business to provide a certain degree of clarity and direction.
1.1
IECON- Indo-European Consulting and Research
Indo-European consulting and Research (IECON) was set up in the year 2000. Since its inception, it has been involved in creating and fostering symbiotic business relations between businesses in Belgium and India. IECON has been involved so far in Partner Selection, Joint Ventures, and most importantly helping companies in Belgium leverage the cost-quality proposition of India. Helping Belgian companies take advantage of the competitiveness of the IT sector in India has also been one of the important aims of the organisation.
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Bipin Nambiar, IMBA 2002
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IECON has been involved as a partner in companies such as ValueSource Technologies, who has established operations in India and is one of the fastest growing IT outsourcing firms in Belgium, that outsource to India. The author has been involved in setting up of the company in India and Belgium that has created synergies within Belgian companies and Indian IT talent.
1.2
Aim of the Project
One of the intentions of this project was to create a guide for companies who are interested in investing and doing business in India. IECON will use this research paper as a basis for preparing customised reports for clients and use the rating system developed, as a tool for rating and ranking companies, while providing consultancy for companies who want to invest in, or do business with India.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
1.3
An Introduction to the Indian Economy
This part of the paper gives an overview of the Indian economy. This does not attempt to be a guide on various investment opportunities in India, but is rather a comparison study of the Indian market vis-à-vis other emerging markets with a focus on economic indicators such as Foreign Direct Investments (FDI). This is not a critical examination as to why India is not reaching its expected and long-awaited potential in attracting foreign investments, but rather an examination of common misconceptions and myths prevailing among the minds of foreign investors to India. India is the seventh largest and the second most populous countries in the world. India is regarded as one of the most exciting and emerging markets of the world. It is one of the few markets in the world that is growing at a consistent rate of 5-6 % annually over the last ten years. The burgeoning middle class estimated at over 150 million with a significant buying power constituting a market larger than many European countries. The disposable income of the group is estimated to be around US $ 30 billion annually1. The new wave of economic freedom passing over the country is bringing sweeping changes in its wake. The Ministry of Economic Affairs in India, in its website, describes the potential as such: India’s skilled managerial and technical manpower available in India match the best in the world. India’s time tested institutions offer foreign investors a transparent environment that guarantees security of their long term investments. These include a free and a vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure.2 While the above description is true to a large extent, India still lags behind emerging markets such as China in attracting valuable FDI (Foreign Direct Investment). A decade ago, India and China had roughly the same Gross Domestic Product per Capita. But at $ 440, India’s current GDP is only about half of China’s and India’s GDP is growing at a rate of only 6 percent a year compared to China’s 10 percent. In the instance of foreign investments: Current flows of FDI into India are worth just 0.5 percent of the GDP. By
1 2
CSIS South Asia Monitor, No. 3, Nov. 1, 1998 Ministry of External Affairs in India website: http://www.meadev.nic.in/economy/menu.htm
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Bipin Nambiar, IMBA 2002
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contrast, many developing countries, including Malaysia, Thailand and Poland consistently attract FDI worth more than 3 percent of its GDP3 (Refer Figure 1).
Figure 1
The economic reforms undertaken in India’s highly dynamic and competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its GDP and offers considerable scope for joint ventures and reforms. The open question long in the mind of the analysts is the fact that why India with a large English speaking population, high standards of education among the literate, and a democratic form of government still lags behind other Asian countries who do not have all of these assets. Why has India, despite its 150 million strong middle class population, with a high purchasing power, not translated into a market size which foreign investors expect it to be? According to McKinsey, based on fifteen month long study by the McKinsey Global institute, the key barriers to attracting foreign investments to India have been: • Inequitable regulation: Regulations that restrict competition, especially by the government which doesn’t ensure a level playing field for competition- domestic and foreign • Uneven enforcement of rules: Rules are not equally enforced at all times. Smaller companies get away by taking benefits of the loopholes in the law. Larger and more
3
India-From Emerging to Surging, Amadeo M. Di Lodovico, William W. Lewis, Vincent Palmade, Shirish Sankhe, McKinsey Report, 2002
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
visible players cannot get away with such irregularities. Less productive players survive by competing unfairly against the large ones. • • Restrictions on FDI: FDI is prohibited in certain sectors of Indian economy with a view to protect certain home industries such as retail for example. Licensing or quasi licensing: In several sectors of Indian economy operators need a license from the government to compete. 1.4 Foreign Direct Investments (FDI)
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It has also the second largest economy among emerging nations4. India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China. India’s exports as a percentage of its GDP also remain low compared to China (refer Figure 2)5.
Figure 2
4
These indicators are based on purchasing power parity (PPP)
5
Why India lags behind in attracting FDI, Business India, 1999, S Sivakumar
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India has an opportunity to attract FDI of over $15 billion a year over the next five years. The Economist Intelligence Unit, evaluating business environment in 60 countries for the period 2002-2006, has ranked India 41st, ahead of China at 42nd. More importantly, India has moved up five notches from its rank in the earlier period (1997-2001), while China has remained at 42.
Figure 3
Since the liberalisation in 1991 the government has been actively pursuing Foreign Direct Investments into India. Even though there has been a reasonable growth in FDI (refer figure 3), the response of the Foreign Institutional Investors (FIIs) to the opening up of the market cannot be termed as strong. Joint Venture companies are the most preferred form of corporate entities for investment in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India (RBI) in the form FC is required. The 11
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
application can be made either by the Indian party or the foreign party. Existing companies having foreign equity holding and desiring to increase it to 74% can also obtain automatic approval if they are in priority areas. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities6. Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZs")7. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated8.
6 7
“The 1995-96 forecast of the Indian economy”, SAPRA News Bulletin, T. Koshy, Sep 1995 From the Website of Ministry if Finance, Government of India 8 From the Website of Ministry if Finance, Government of India.
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Figure 4
Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. Before signing the joint venture agreement, the terms should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. This aspect will be dealt with in more detail in the future chapters. India has entered into tax treaties with a number of countries including, Australia, Belgium, Canada, Denmark, France, Germany, Indonesia, Japan, Korea, Mauritius, Singapore, the United Kingdom and the United States. These treaties endeavour to avoid double taxation and attract know- how and technology. In many treaties the withholding tax on royalties and fees for technical services emanating from India is lower than the general tax rate. A careful planning and corporate structuring can reduce the tax obligations considerably. The following treaties have been successfully used by international investors to reduce their tax obligations in India and in their home countries.
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Bipin Nambiar, IMBA 2002
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1.5
Belgian Investment in India
One of the biggest investors in India has been the United States and more recently Mauritius (many US and European investment companies are based in this offshore location for tax reasons). The Belgo-Luxembourg Economic Union (BLEU) is presently the 3rd largest market within the EU for Indian exports. Belgian investment approvals by the Indian government reached a record level of US $ 890 million in, 1998, marking a 16-fold increase over the previous year. Cumulative investment from 1991 to 1998 is about US $ I billion. Today, Belgium is the 9th ranking investor nation in India (2002)9 India and Belgium have traditionally enjoyed warm and cordial ties. The substantive political relationship which is marked by frequent, high level interaction has been underpinned by strong economic content. Political interaction has been at the level of HOG, HOS, Ministerial and Parliament. The visits of His Royal Highness Crown Prince Philippe (1995 and November 1998), then Prime Minister Dehaene (October - November 1997) and the then Foreign Minister Derycke (February 1997) have imparted substance to the bilateral relationship. EAM's visit to Brussels will be the first high level interaction between Indian and Belgian leaders after the assumption of office by the new Liberal-Green coalition led by PM Guy Verhofstadt. In keeping with Belgium's importance as an economic centre in Europe, India has attached importance to fostering commercial relations. Bilateral trade and economic relations are healthy as is evident in the following: Bilateral trade touched US$ 4.2 billion in 1998. Of this trade, diamonds were a major component. India is the 10th largest customer (1.5% share) and 15th largest supplier (0.7% share) of the BLEUs goods and services; About 140 Indo-Belgian agreements (investment and technological), of which more than 60% are with financial equity participation, have been approved by the Government of India. Belgium has expressed its keenness to tap the potential of more diverse economic cooperation with India. The institutional framework for economic, commercial and technological cooperation is wellestablished with the entry into force of the Double Taxation Avoidance Agreement and the
9
Source: Documentation of Belgo-Indian Chamber of Commerce
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Bilateral Investment Promotion Agreement in 1997 and of the Agreement on Economic, Industrial, Scientific and Technological Cooperation in 1990. Indian companies are also beginning to see considerable advantages in making Belgium their base for operations in Europe. The Confederation of Indian Industries (CII) has opened an office in Brussels recently. Indian software companies are also focusing on Brussels to tap the market potential in Belgium and other European countries. There is increasing consciousness of the advantages of having a base in Belgium, a market which still has a high demand for software professionals. Belgium is also among the five largest exporters to India. Bilateral trade touched US$ 4.3 billion in 2000. Of this trade, diamonds were a major component, forming 90 percent of Belgian exports to India. The BLEU is the 3rd largest market within the EU for Indian exports10.
1.5.1
Top 10 exports to Belgium from India11
1. Gems & Jewellery 2. Cotton yarn fab. madeups etc 3. RMG of cotton incl. accessories 4. Manmade yarn fab. madeups 5. Jute yarn 6. RMG of manmade fibres 7. Inorganic/organic/agro chemicals 8. Marine products 9. Machinery & instruments 10. Primary & semi-finished iron & steel
1.5.2
Top 10 imports from Belgium to India12
1. Pearls precious & semiprecious stones 2. Non-electrical machinery
11 12
From the website of the Confederation of Indian Industries, CII, www.ciionline.org From the website of the Confederation of Indian Industries, CII, www.cii.org
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3. Metaliferrous ores & metal scrap 4. Organic chemicals 5. Professional instruments, optical goods 6. Artificial resins, plastic materials 7. Medicinal & pharmaceutical products 8. Iron & steel 9. Non ferrous metals 10. Electronic goods
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2
METHODOLOGY
2.1
Introduction
This chapter deals with the perception of doing business with India by conducting empirical analyses of various factors – including key success factors, policy recommendations and an overview of the encountered experiences in dealing with India. Hereafter we will analyse three empirical issues related to the determinants of doing business with India: • • • What types of key factors are beneficial in order to succeed in doing business with India? What are the main policy recommendations regarding Belgo-Indian trade? What are the main reasons for setting up a joint venture with India?
An analysis of these questions is particularly relevant because of the renewed interest in India and the increasing policy enhancing information channels that are currently being set up in Belgium and Flanders in particular (Export Vlaanderen, BIC-Belgium…). Due to the lack of significant data we opted for an empiric survey administered to companies participating in export-related activities or joint-ventures in India or wishing to do so in the near future.
2.2
Theoretical background
There is not an abundant array of literature available in Flanders or Belgium that approaches the key elements of Belgo-Indian business from a small- or medium-sized enterprise (KMO)perspective. The most comprehensive study so far held in Flanders dates back from 1993 and was made by Donckels, Lambrecht, Bragard and Leboulle of the KU Brussels and the Université de Liège in association with the governmental General Department of then 17
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secretary of developmental cooperation and aid, Dr. R. Moreels, and was not initiated from the BDBH or other national organizations specializing in foreign trade advice or servicing. In order to ensure a non-biased focus of feedback we decided to execute a survey amongst the participants of two seminars “Exportdagen Azië-Oceanië” organized by, and with the permission of, Export Vlaanderen in Kortrijk (June 5, 2002) and Grobbendonk (June 12, 2002). We opted for the selection provided to us by Export Vlaanderen due to inherent knowledge of the international activities they had regarding the participants, and we considered the selection of the sample as representative for the study (mainly Flemish KMO’s).
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2.3
The Sample
The sample interviewed consisted of CEO’s of Flemish KMO’s and/or Trade Export managers of companies that attended the Export Days in either Kortrijk or Grobbendonk. The survey can be found in appendix. Out of the 130 interviews being conducted during these events, 33 respondents had established activities in India via a joint venture or stand-alone.
Table 1
Furthermore, in order to avoid sectoral bias, the sample covered all sectors ranging from textiles to ITC-related businesses. 19
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2.4
The Findings
Key Success Factors on doing business with India
Table 2
During the survey the participants were asked to rank, in order of importance, their recommendations in doing business with India. Their recommendations could be summarized as follows, with the specific comments from the respondents indicated:
2.4.1
Need for a local partner “The best market is the market you control and are able to follow up on. A local partner is invaluable” “You have to establish business in India with a local partner because he knows how to control the market over there” “A lot depends with which representative you start negotiating in India. A local partner knows better than anyone who to contact first.” “You need a local agent as he knows the customs and business culture best”.
2.4.2
Need for adaptation “As soon as you board the plane, you have to forget you’re Belgian.” “You have to understand the local business-customs”.
2.4.3
Pace of approach “Go by it slowly. Especially on the financial level.” “Experiment first, and then start to invest.”
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“Tread the pad of prudence: open up the market slowly, and then penetrate it with small volumes…” 2.4.4 Sound preparation “You have to have a sound internal structure in Belgium. You have to be “ripe” to start doing business with India.” “Go there a lot. At least 4 times a year to talk to the people.”
2.4.5
What are the policy-recommendations you would propose to enhance business with India?
Table 3
A fiscal exemption-policy, financial support measures, a one-stop-shop/single window clearance (“één loket”) and a more supporting role of the Flemish trade representatives were considered necessary. During the interviews the exporters uttered the wish for a more pro-active role of the trade representatives when arriving in India to set up business. The entrepreneurs made clear during the interviews that there is a need for practical information such as insight in the financial health of the would-be local partners (valuation and due diligence), evolutions in local economic policy, and introductions with the proper local authorities…
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2.4.6
Opinions about setting up joint-ventures in India
The main reasons for setting up a joint venture are, according to the interviewees: market entry, limited financial means, political safety-buoy and leverage. During the interviews these arguments were treated more in detail:
Table 4
2.4.6.1
Market Entry
“With a local partner we are more at ease; he makes the entry easier” “Without a joint venture in India you run the risk that you “import” your own cultural pattern into the country. This can lead to major clashes due to the fact that the mentality is different. It is very difficult to “communicate a culture”, hence the need for a local partner. He knows the culture and is able to “feel the people”. “You cannot lead a big company from a distance” “The central question is: how can it happen in India? A local entrepreneur is more capable of answering that question. He knows the local bottlenecks in India and knows how to troubleshoot certain situations which might occur.” “Thanks to a local partner, doors of the local market are opened up more easily”.
2.4.6.2
Limited financial means
“If I would not work with a local partner, I would lose my competitiveness. Now I share an investment in which both my local partner and myself have everything to lose if things don’t work out well” 22
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“My partner finances a part of the company so he bears the risks as well” “If you want to find business over there yourself it takes too long a time to do it on your own” “As a small- or medium-sized company (KMO) we are not able to set up a big entity over there.
2.4.6.3
Political safety-buoy
“You have to work closely with a local Indian entrepreneur otherwise you will have to deal with a tremendous amount of red tape” “A local partner can be a political buffer but be careful he is not related to government officials. You should see situations like these as volatile.”
2.4.6.4
Leverage
“My partner sees the opportunity of the joint venture as a serious improvement of the profitability of his own company and his progress serves as our leverage.”
2.4.7
Growth process of an Indian joint-venture
This finding was also the case for those who were in the process of setting up such a joint venture. Most of the participants consider a previous relationship imperative: “It is imperative to work gradually in India. We started with the delivery of a machine and had little risk. After this initial venture we chose a market segment and are currently setting up a joint venture” “A joint venture is like marrying someone at a distance. It is imperative you get to know each other very well in advance.” “First we had purely commercial contacts with our current partner. This enabled us to get to know him and his company better. He gradually started trusting us and improved his professionalism. In that way we were both sucked, as a figure of speech, in a joint venture-situation.” “Be careful about starting up with loose commercial contacts and then evolving towards a joint venture. In our case the local agent we worked with in the beginning 23
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started to behave unprofessionally when we made him a partner in the new joint venture. We had to part was a couple of months later.”
2.4.8
Rules for setting up a joint venture in India “Don’t go about it easy. It takes quite a long time. It is important you meet regularly with your partner in different circumstances.” “A thorough study is necessary. We did a market survey, examined the financial support measures available, selected a partner, drafted a temporary memorandum of understanding and delimited the financial conditions. It takes a lot of time being that the red tape and the fact that time-management is treated differently over there as it is here.” “Be prepared for the worst. Imagine yourself stranding at a deserted island where the only thing there is a generator. “ “Don’t overreact. Our joint venture stalled because we went in too fast and too European.”
2.4.9
Local employees and collaborators
According to all interviewed entrepreneurs, the joint venture is doomed for failure if no motivated collaborators can be found: “We already examined who of our company could manage the joint venture for a couple of months.” “During the initial negotiations you already have to send down some collaborators to India. That way you can establish their capacity to handle the local culture.” “You need a Belgian person in India otherwise things won’t work. They tell you “yes” but once you turn your back the quality is something that leaves much to be desired for.” “It is recommended that a Belgian person leads the joint venture for a couple of years.” “Without Belgian management it is clearly impossible to run a business. I always tend to send down young people. The fact that they are young I consider a plus because it makes them more flexible and easier to adapt to the local environment.” 24
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2.5
Conclusion
When interviewing entrepreneurs wanting to set up business with India, one should bear in mind that the outcome of the statements are based on the perception of the individual itself. There is, as is always the case with interviews, reduction of actuality. These findings should therefore not be attributed an absolute degree of finality. Remember that these findings are seldom, if ever, static and homogeneous and never good or bad (only adapted to the circumstances). The main inferences of the survey were the following: There was interest in investing in India, though less than China Belgian companies feel that they do not have adequate information on India Many Belgian companies believe in partnering with an Indian partner, but feel that there is no way of knowing or understanding partner capabilities Belgian KMOs (SMEs) still need to obtain information on India and advice on how to understand the information obtained. In the next chapter, which deals with business culture in India, the paper will try and address the issue of culture, and the challenges that go with it, helping a European person prepare for cultural roadblocks if any. Most importantly, the next chapter will also look at the various myths propagated in some measure by enthusiastic officials of the government, and authors, and examine these myths, which have some roots in culture and information, so as to help a prospective investor avoid any misconceptions on India.
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3
3.1
The Business Culture in India
Introduction
Since Hofstede’s study on work culture in the ‘80s, India, after liberalisation, has seen many changes - Especially so in the area of work culture which has undergone major changes in certain spheres and minor changes in other. Despite the passage of time, Hofstede’s studies still hold true in many instances. Modern Indian style of management and corporate behaviour may look western at a first glance, but, on closer inspection, it reveals myriad styles which cannot always be easily understood. The following pages will examine the Indian work culture (if one can be bold enough to attempt to pin-point a certain behaviour as being atypical of an Indian work culture), and more importantly why such a work culture, which is probably unique in its own way, exists, so that work habits and business culture that seem alien at first to an European businessman can be made more comprehensible. The following pages will also examine the work culture, business relations, aspects of negotiation aspects and the ‘do’s’ and ‘don’ts’ of business, frequently comparing them to a European context. The objective of this section is also to help the European, and more specifically the Belgian, company to understand the cultural roadblocks and challenges they may face while setting up operations in India, partnering with an Indian supplier, or while negotiating with an Indian partner.
3.2
The Indian work culture
While India does not have a single uniform work culture, much like the ‘European’ work culture, some of the typical characteristics that are more noticeable can be generalised for the ease of research and understanding. India is as big and as diverse as Europe and it would only be fair to say that the work culture differs slightly from place to place. Key cultural dimensions using Hofstede-Bond and the four criteria used by Hofstede, namely Power Distance, Individualism, Masculinity and Uncertainty Avoidance are used as a basis 26
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
for discussions and comparison with the Belgian (European) Culture. The definitions used here to introduce the concepts are Hofstede’s. This chapter starts by explaining the concept behind the ‘Indian manager’ and also attempts to shed light into two other important concepts, namely the polychronic concept of time and the high-context communication that is regarded as typical to Indian culture, so as to provide a better understanding of India to the foreign reader.
3.3
“The Indian Manager”
For reasons of convenience, an Indian manager often comes under the group ‘Asian Manager’. While India is of course a part of Asia, nothing could be closer to the truth than the perceived closeness and similarity between the typical Indian and the typical Asian Manager. The term ‘Asian manager’ has come to denote the people living in South East Asia and China. India is less close to the South East Asian countries than it is to continental European countries - culturally and behaviourally. ‘Asian manager’ constantly refers to a south East Asian manager – Japanese or Chinese. While frequent comparisons are still made between China and India, and theoreticians try to speak of the emerging markets in the same breath, it is to be said that the Chinese and the Indian work culture, and management styles, are totally different from each other. In particular, the modern Indian manager represents a unique confluence. While his cultural moorings are strong, rooted in an ancient and proud society, his intellectual exposure is almost entirely to Anglo-Saxon management literature in the English language. This is not so much among other Eastern managers. The liberalisation and the surge in the area of Information technology, and the subsequent rise of India as an acknowledged leader in IT outsourcing, helped foster a new breed of International managers who are of Indian origin. Silicon Valley is replete with success stories of Indian Managers. There are many companies listed in the American stock markets which are essentially Indian in origin and still managed by Indian Managers. These companies are now considered more international and global than Indian. While success stories of Indian Managers and professionals are abundant in the US and in the UK, the general impression is 27
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
that Indian Managers in the international scenario still retain their Indian attitudes and beliefs, despite appearing quite western outwardly. Some consider that this paradox, which exists by the very nature of the cultural identity of the Indians, is one of the key success factors. The point to be noted also is that modern management thought in India is strongly influenced by the US. Much of management literature is in English. And it is to these stimuli that the Indian manager is almost wholly exposed. When the British ruled India, most of the organisational strength, or manpower for administration, came from Indians themselves. The adaptability of the Indian administrators to the Anglo-Saxon work culture has been remarkable. The key administrative positions, or the second rung leadership, were almost entirely made up of Indians themselves. These educated Indians; later on, started organising themselves into what became one of the important aspects of the freedom struggle. While imbibing the so called positive aspects of the western style of management, Indians also inadvertently absorbed the negative aspects, such as hierarchy, complete allegiance to authority, and bureaucracy, from the British. The British had initially put these concepts in place to properly manage a potentially hostile population and an alien culture. But the legacy still continues to a large extent in Indian bureaucracy, where the difference between the ruled and the rulers are exceedingly high (large power distance). In the ‘80s, American modern management thoughts started gaining importance and with the liberalisation of the ‘90s, they started gaining prominence. England was basking in its lost glory and for the Indians the new economy to be emulated was definitely the US. The boom of the US economy gave credibility to the management studies and style of the Americans. The increase in management education in India, based on American concepts, and the new breed of managers who had received their higher education in US, helped westernise the Indian companies, sometimes adopting the positive aspects and inadvertently adopting those aspects which did not fit in the Indian cultural milieu. It must be regarded that for all practical purpose, for India, ‘Western Management’ means American or European. Even though both cannot be grouped together, for the ease of definition and comparison, we will try and generalise this aspect in this study.
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Bipin Nambiar, IMBA 2002
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The Indian manager thinks in the Western idiom but behaves in the Eastern pattern. It is this duality that is being severely challenged in the corridors of Indian business houses as deregulation and liberalisation continue. Western managers can immediately relate to an Indian manager more than he can to an East Asian manager in the first instance. But when one has a chance to look deeper one understands that lot of the ideas and mentality is still deep rooted in the Indian way of life and thinking. The challenge of managing large organisations spread to the east effectively only after the Second World War. This brought in a cultural overlay on management thinking in the West. The surge of books on Japanese management, and the sensitive writings during the last 30 years of authors like Maslow, Pascal and Senge amplify this point. However, this learning did not require any change in the behaviour of Western managers in their own social contexts. At best, they provided yet another right way for Westerners to operate successfully in Eastern contexts13 So, while for the Western manager there is an Eastern cultural overlay on his management thinking, for the Eastern manager there emerges a Western intellectual tradition as an overlay on his Eastern social context. This gives rise to attitudinal and behavioural patterns that are vastly different, like a rich kaleidoscope of very different colours and patterns. The level of competitiveness of the new breed of Indian Manager has tended, in northern European circles, to have negative connotations and reactions as to being ‘too openly ambitious’ or too ‘pushy’. The competitiveness that is a main feature of Indian life (competitiveness to get good jobs, good education and a good life) permeates into the areas of business. The burning ambition and ‘drive to succeed’ especially when doing business outside India, can be quite unnerving for a European partner. This tendency can be frequently off putting for a European. Understanding the background in these cases helps tremendously in clearing up misconceptions in the minds of individuals from either side. 3.4 The Four Dimensions of Hofstede
While comparing the four dimensions of Hofstede, the countries mentioned here, other than India and Belgium are USA, UK, Germany, Japan and Netherlands. The reasons for limiting the study to these 7 countries are for reasons of clarity and conciseness. Since the target audience of this paper are Belgians, it is obvious why Belgium is one of the countries used for comparison. The reasons for choosing other countries are as follows:
13
“If only India knew what Indians know” , R. Gopalakrishnan, Indian Management
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
USA: Because it is the largest trading partner of India, and also because most of the management thoughts that have come to India are from the United States. UK: Due to the fact that India has a long history of association to this country via colonialism and still continue to maintain strong trading and cultural links with this country. Germany: Because of the fact that Germany is the biggest economy in EU, and is an important trading partner of India. Also because Germany has quite a lot of unique characteristics according to Hofstede’s study. Netherlands: Due to of reasons of proximity to Belgium and the fact that a Belgian reader would be interested in comparing how Netherlands compares to itself and other countries. Some characteristics of the Dutch may also have some semblance to that of Flemish. Japan: Japan is an important trading partner and the one of the biggest economies in the world, and is based in Asia. Japan shares quite a few cultural similarities to India, in certain areas, according to Hofstede. The definitions used to introduce the concepts are Hofstede’s.
3.4.1
Power distance
In a large power distance situation at work, superiors and subordinates consider each other as existentially unequal; the hierarchical system is felt to be based on this existential inequality. The organisations that are in this mode centralise power as much as possible in few hands. Subordinates are expected to be told what to do. There are lot of supervisory personnel, structured into tall hierarchies of people reporting to each other. Salary systems show a wide gap between top and bottom in the organisation.14 In the smaller power distance situation subordinates and superiors consider each other as existentially equal; the hierarchical system is just an inequality of roles, established for convenience; and the roles may be changed. Organisations are fairly decentralised, with flat hierarchical pyramids and limited numbers of supervisory personnel. Salary ranges between top and bottom jobs are relatively smaller.
14
“Cultures Consequences- International Differences in Work related Values”, Geert Hofstede
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
In the power distance index (PDI) study of Hofstede, Belgium and India are not very far scoring 20 and 10/11 respectively-indicating that while power distance is lower in Belgium, it is not so much higher in India.
Table 5
However, while conducting the surveys and while undertaking casual conversations between the members of the Belgian KMOs who have done business in India, one characteristic of the Indian workplace, according to them, is the reverence for the boss. Belgian employers in India try hard to stop Indian employees from calling them ‘Sir’ or ‘Madam’, without much success. In India, the general feeling which the Indian employees give is that they respect authority as they seem to revere their superiors, speak respectfully to them and never argue or raise a point of objection. This, however, can lull a European boss into complacency. Indians express their disregard for authority or disrespect for their bosses in subtle ways that cannot be seen easily. This disregard may manifest itself in poor output, rumour mongering, leaving employment with sudden or no notice, leaving important projects in jeopardy and so on. Indians by and large prefer a democratic set up where a superior consults and confers with them, but do not protest if the superiors do not do so. While interviewing Belgian persons who are assigned to India to head a company or lead teams, this is a constant source of exasperation. If policies and ideas are not criticised, it 31
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
doesn’t necessarily mean that they will be adhered to. This can also reach such an extent that an employee may actually say yes to a job even if he is not capable of doing it, and the try ways to get around it. While this may be viewed as a lack of frankness in certain quarters, it is rather an extreme expression of power distance that exists, wherein one cannot say ‘no’ to authority under any circumstance.
3.4.2
Individualism
Individualism has always been difficult to measure in India. India scores much higher on the individuality index compared to other South Asian cultures and Arab cultures except Japan. However, individualism is lower than most of the Western European countries. Compared to countries like Belgium, India exhibits more collectivistic tendencies. Belgium is ranked 8th in the Individualism index (IDV) of Hofstede compared to 21st rank of India.
Table 6
Belgium combines medium power distances with individualism. In India collectivist tendencies are more in more social circumstances than in the work context. In India individual output is generally considered as good as the group effort and Indians generally prefer working individually more than in group. They like to retain their stamp of individuality in the work they perform. 32
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
But in a lot of work related cases, when compared to the Belgian context, India is highly collectivistic. In collectivist cultures direct ‘no’ is seldom used because saying ‘no’ is considered rude and undesirable and constantly a confrontation. In such a culture, ‘yes’ should not be taken as an approval, but as maintenance of the communication line: ‘yes I heard you’ is the meaning it has in a collectivist culture like Japan². India exhibits similar characteristic like Japan in this regard. (India is ranked almost on the same level as Japan in the Individualism index)15. One of criticisms heard about the Indian work culture from the western managers are the fact that Indians do not have a positive work culture. Many companies based in India have to face the challenge of constant absenteeism for reasons which seem trivial in the eyes of the European (for example a funeral of a distant relative, a marriage of a neighbour’s family member…). These are, according to Hofstede, clear collectivist tendencies. But it is only fair to say that unlike a typical European worker, for example a German worker, an Indian employee will have no problems doing overtimes and working overtime at short notice or working extra hours to complete a project, even though their supervisor or manager had been responsible for the poor planning. An interesting example of collectivism that needs to be highlighted is one of the reactions I had from one of the Managers of an Indian IT company based in Brussels. This manager was deputed from India to Belgium and it had been his first foreign posting. He was surprised by the fact that the Belgians were always taking about weather and similar things which, according to him was ‘banal conversation’. He admitted that while the weather in Belgium was not so great, this was a given fact- known and accepted by everyone. His question was why they would constantly keep talking about it. The reason, according to Hofstede, Belgians talk about weather and involve in platitudes is also the fact that in individualistic societies pauses or silence between meetings are awkward, and they feel a need to fill these gaps with conversation that may be considered trite by an Indian. This is in contrast with a collectivist oriented society like India where even when close families meet, they need not be involved in exchanging conversation but can enjoy each other’s company in silence.
15
Cultures and Organizations, Software of the Mind, Geert Hofstede, 1994
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Extreme collectivistic tendencies are not exhibited by Indian companies compared to Arabian companies, where they prefer dealing with individuals rather than companies. In India, where individual connections matter a lot, business deals are made on the basis of the individual rapport the companies have with clients or suppliers, but it can be continued even if the particular agent or salesman is replaced. If the salesman or agent tries to move the account to the new company he represents, the Indian partner may do so if he is guaranteed better terms and conditions. One aspect of collectivism that is different in Indian culture when compared to Chinese culture is the concept of ‘losing face’. While an Indian employee may take a rebuke or a negative appraisal very personally, he would not ‘lose face’ over it. It is always better to administer disciplinary acts in person and discreetly, but an Indian may not overreact to this as much as an East Asian would. A highly collective culture exhibits low universalism. While working in the area of software development and outsourcing, one of the common apprehensions of the European clients is the fact that the service levels they obtain, they feel, are much lower than what American clients receive. Low universalism means that Indian companies pay more attention to companies or clients that give better business and higher volumes, often at the expense of the smaller partners. For most of the Indian IT companies, projects from European companies cannot match the scale and size of the American companies and moreover the European adherence to slow and steady growth ensures that the project sizes remain small for some time to come and do not ramp in size as fast as American clients do. To avoid this in most cases it is better to chose partners in business who matches you in size or is smaller, and for whom the volumes you provide are important.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Figure 5
3.4.3
Masculinity
According to Hofstede16, societies or cultures can be divided into masculine and feminine. Masculinity in the work place manifests itself through the following characteristics: • • • • • Live in order to work Decisive and assertive managers Stress on equity, competition among colleagues, and performance Resolution on conflicts by fighting them out. Dominant values in a masculine society are material success and progress. Money and things are important. Out of the 53 countries studied by Hofstede, surprisingly both India and Belgium are ranked next to each other. India is ranked in the 20th/21st place, and Belgium is ranked at the 22nd
“ Cultures and Organisations, Intercultural co-operation and its importance for survival, software of the mind”, Geert Hofstede
16
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Bipin Nambiar, IMBA 2002
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place. This means that both countries are not overtly masculine or feminine, even though both clearly show a tendency to more masculinity than femininity.
Table 7
Despite the fact that the author may not be qualified to make this remark, from the brief exposure of about 3-4 years of the Belgian work culture and society (more specifically the Flemish work culture and society), the impression gleaned is that Flemish society is probably more feminine than masculine - closer to the Dutch society which is almost at the end of the femininity scale (51). It is however safe to say that the Flemish society still retains some of the above mentioned characteristics of a masculine society too. In India the society is considered masculine, and men dominate the work place. But the existence of women in the work place has long come to be accepted, with women holding important positions and achieving successes in the so-called male dominated arena. India also has had a woman prime minister who had one of the longest tenure (one of the major complaints against her was the fact that she harboured dictatorial tendencies), and also currently, a woman opposition leader. Authority of women is also easily accepted at work place. Some societies in India are also female dominated. One of the important aspects of the society is material success and progress. This is one of the important aspects of the European and more importantly, the Belgian society too. 36
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Disagreements between the two cultures exist on how to go about it and the way it is done. An Indian may be less subtle about wealth and the pursuit of it, to the discomfort of a European.
Figure 6
3.4.4
Uncertainty avoidance
Uncertainty avoidance is defined as the extent to which the members of the culture feel threatened by uncertain or unknown situations. Uncertainty avoiding cultures shun ambiguous situations. People in such cultures look for a structure in their organisations, institutions, and relationships which makes events clearly interpretable and predictable. It should not be confused with risk avoidance as risk and fear is focused on something specific. According to Hofstede, uncertainty is to risk as anxiety is to fear17. Can two countries that have a highly disparate uncertainty avoidance index (UAI) work together? Can this be a major cause of problem between two partners, if one has a high UAI
17
Cultures and Organizations, Software of the Mind,, Geert Hofstede, 1994
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
and another one low? When comparing Belgium and India, this is one of the Hofstede’s dimensions that are the farthest from each other. India (45) has one of the lowest uncertainty avoidance indexes among 53 countries used for study and Belgium (5/6), one of the highest.
Table 8
Low uncertainty avoidance makes the culture more flexible, more willing to bend or amend the rules on the basis of practicality. Every aspect of life in a high uncertainty avoidance countries are managed by rules and regulations. Europeans often remark that India has many rules but none are followed. They are surprised at the chaos and lack of structure that governs the life of Indians. India has one of the lowest crime rates in the world, and this is probably because of the society’s pressure rather than the rules that govern every aspect of life. At the job front, the job descriptions are not detailed and they do not start and end at specific points. An employee works without a specific structure and his/her job specifications are very loosely formulated. One learns along the way what is expected of him or her and grows with the job. This kind of an environment can make a Belgian employee uneasy as he would not know what is expected of him/her. Even though arguments could be made on the effect a lack of structure may have on productivity of an employee, the counter argument is usually the reasoning that an employee performs best in the environment which takes care of his personal needs (which usually has foundations in the culture background of the employee).
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Hofstede mentions that strong UAI countries score higher on the mistrust side and weak UAI countries score high on the trust side. This is an important aspect when comparing a weak uncertainty avoidance country (India) and a strong uncertainty avoidance country (Belgium) is the fact that in strong UAI countries the tendency is to mistrust strangers or alien cultures immediately until there exist a reason to trust. When doing the survey on the Belgian KMOs one of the interesting inferences was the fear of being ‘cheated’ or ‘short charged’ when doing business with India was very high. This also explains why many Belgian businesses would rather prefer a Belgian person to handle operations in India.
Figure 7
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Figure 8
3.5 3.5.1
Other Relevant Concepts Polychronic concept of Time
Monochronic v/s Polychronic time18: In monochromic cultures, time is experienced and used in a linear way. Time is divided quite naturally into segments; it is scheduled and compartmentalised, making it possible for a person to concentrate on one thing at a time. In a monochronic system, the schedule may take priority above all else and be treated as sacred and unalterable. Monochronic time is perceived as being almost tangible. It is also used as a classification system for ordering life and setting priorities. Because monochronic time concentrates on one thing at a time, people who are governed by it don’t like to be interrupted. Monochronic time seals people from one another and, as a result; intensify some relationships while short-changing others.
18
“Understanding Cultural Differences”, Edward T. Hall and Mildred Reed Hall
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
Monochronic time dominates the business in Western Europe and in Belgium. Polychronic time is characterised by the simultaneous occurrence of many things and by a great involvement with people. There is more emphasis on completing human transactions than holding on to schedules. This concept dominates business in Asia, Latin America and also India. Since the Indian’s are at the very high end of the polychronic scale they tend to do many things at a time. Europeans constantly feel that Indians do not prioritise their time. In their eyes Indian’s are doing many unproductive things at the same time. They also have the impression that Indian’s do not keep time and appointments and that they have a loose concept of time. The time an Indian spends to network, talk to other people, communicating incessantly to colleagues and co-workers is an inherent trait in Indians, and is considered very important. This can be quite exasperating for a westerner if this happens in the middle of a meeting or an important discussion. This is usually a subconscious phenomenon and a westerner may see it as a lack of respect or unnecessary intrusion. Indian’s have an elaborate family and friends network which take precedence over anything else and it is vital for Indians to maintain the relationship and retain the status quo of such relationships. One of our partner companies visited a supplier site in India, a software development company they had a brief relationship with. One of the most noticeable aspects of the working culture was the fact the developers would chat with each other quite frequently. One of the project managers remarked that he preferred that his team sit next to the entrance of the office. When questioned why, he remarked that the Indian developers had a tendency to talk to each and every one of the other team members en route to the toilets. This constant social interaction was unnecessary in the eyes of the Belgian Project Manager. It was also suggested that if the suppliers would put an end to this unnecessary talking, then productivity would increase and delivery of products would be more timely. Martin M. Kristensen, in the book “Doing Business with India” on the subject of Business culture remarks thus – “one annoying aspect is the frequent interruptions during meetings. Managers or officials take messages and phone calls, sign piles of documents and receive
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
impromptu visitors. It is important, albeit difficult, to understand that this is not intentional rude behaviour, but rather a way to manifest the manager’s importance in the organisation”.19 By and large educated Indians doing business with Europeans keep time and are usually punctual. This is in most cases reserved for westerners only as Indians have realised from their experience that westerners have a fetish for punctuality. But if one has to deal with government officials or so, then it is likely to expect that meetings will not proceed on the scheduled time. Moreover, even if the Indians are punctual, a Belgian manager remarked, they spend more time to come to the point and delay the meeting talking matters that are unrelated to business. Matters unrelated to business are often matters that lead to creating trust. This point will be further examined in the coming pages.
3.5.2
High context Behaviour
Countries can be divided into low-context and high-context. In low-context countries, Information is highly focused, compartmentalised, and controlled, and, therefore, not apt to flow freely. In high-context cultures information flows freely as people are spatially involved with others due to higher inter-personal contact20. A high-context communication is one in which little has to be said or written because most of the information is either in the physical environment or within a person, while very little is in the coded explicit part of the message. This type of communication is frequent in collectivistic cultures. A low context communication is one in which the mass of information is vested in the explicit code, which is typical for individualistic cultures. Lots of things which in collectivistic cultures are selfevident must be said explicitly in individualistic cultures21. Western Europe and Belgium are low-context countries, while countries like India are high context countries.
19
20 21
“Doing Business with India”, Roderick Millar, M.S. Chandramouli, PriceWaterhouseCoopers, 1999
“Understanding Cultural Differences”, Edward T. Hall and Mildred Reed Hall
“ Cultures and Organisations, Intercultural co-operation and its importance for survival, software of the mind”, Geert Hofstede
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Bipin Nambiar, IMBA 2002
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Most of the information within an organisation is known to the employees in an organisation, even though the information itself may not be very relevant. One of the major information sources is the grapevine in business. It is impossible to avoid this as most colleagues at work place share a close relationship outside work also and meet and interact in similar social circles. When a European receives information from an Indian partner or manager it is usually in sporadic bursts and not coherent to the European mind. The so called ‘dumbing down’ of information, an American invention, which tries to make information understandable by everyone, is not much ascribed to by the Indians. They expect the European manager to be aware of the present situation at any given time and will not provide lot of background and preamble while providing the information itself. From the Indian perspective, Europeans are well versed in their own area of specialisation, but not very knowledgeable in matters outside. While this may be a misconception, it creates communication barriers between the two in certain cases. What is sometimes ‘stating the obvious’ for the Indian manager may be ‘reiterating the facts’ to avoid ambiguity for the western manager. One of the common complaints of Belgian businesses that have units in India is the absence of adequate data and performance indicators. Indians rely on their instincts and this cause frustration to the Europeans who need to have adequate data to base their day to day decision making on. Data, when available, are quite comprehensive and wordy. One of the common reactions from Belgians about Indian businessmen is the fact that they speak with a ‘forked tongue’. In a manner of speaking that they do not mean what they say. They are verbose and take time coming to the point. This is especially the case when the information that has to be transmitted is not a positive one. Indirectness and meandering speech is not a deliberate attempt to mislead in most cases as perceived by a foreigner. It is a cultural aspect. To obtain direct answers it may be well to do to ask very direct questions which leave no scope for anything other than a black or white reaction.
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Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
3.6 Work Related Issues This chapter deals with issues directly related to work and day to day aspect of doing business with India. The things to keep in mind while doing business with India, so as to maximise benefits and reduce tensions and ambiguity are mentioned here. This is listed in order of its importance. This is based on the survey of individuals who do business with India and from other interviews carried out among Indians and Belgians involved in cross national trade between the two countries. 3.6.1 Timing and Delivery Delivery problems were one of the most frequently mentioned problems once a working relationship has started. This problem exists in large numbers even in the Information Technology sector, where India is regarded as very competitive. As mentioned earlier in the report, one of the major reasons, attributed to the cultural aspect, is the concept of time (polychronic v/s monochronic). But successful companies are the ones that have worked around this problem. One of the survey respondents mentioned that they give a date that is earlier than the actual date so that eventually the delivery is made when needed. This approach, even though successful, is not a long term solution. One of the ways we learned to make the delivery on time is a combination of setting up an earlier date plus working together and explaining the criticality of timely delivery to those involved, together with a carrot and stick system, basing the future of relationship by using delivery as a strong performance indicator for extending contracts.
3.6.2 Personal Rapport This is probably one the most important aspect of doing business with India. Indians value human relationships above everything. If a supervisor/manager or a partner/client has a personal rapport with his/her Indian partner or employee, then the benefits of the relationships are manifold. Take time to know your Indian partner. You may be frequently invited for personal functions and parties. It is best to accept the offer. Initially Europeans may be surprised at such invitations, as it takes a lot of time for a relationship to evolve to this level in Europe. Even though Indians are as friendly as Americans in the first instance, they tend to be less superficial about the relationships. In business, they will not hesitate to go the extra mile for you if they have a good rapport for you and if they have the impression that you value their friendship and company. 44
Bipin Nambiar, IMBA 2002
The Key aspects of doing Business with India – The Challenges of Culture and Quality ____________________________________________________________________________________________________
3.6.3 Contracts and Legal aspects While business guides frequently mention the importance of having strict contracts and written down deals, more often than not, if a deal doesn’t go well, especially for KMOs, it is time consuming to get a recourse from the courts. While India has a judiciary that has high moral and ethical standards, fighting a legal battle is a time consuming process. While it is very good to have a written contract (written with the help of an Indian lawyer), it is even better to get into business relationships with credible, trustworthy and proven partners. It is well worth the effort to spend time to whet out possible partners before entering into business relationships. Two very important aspects of doing business with India, is to have an Indian accountant and a lawyer providing you fiduciary and legal help. The rules and regulations in India are constantly evolving and changing and it is difficult for a foreign company to keep abreast of it at all times.
3.6.4 Management in India: Belgian or Indian? One of the most common questions asked by companies who set up operations in India is whether they need to have a Belgian management handling operations in India or an Indian management. While many successful companies have Indian management handling day to day operations, some of them swear on the importance of having Belgian management. Having a Belgian manager, based on the views of some respondents, ensures peace of mind, and also, all information – financial and otherwise, is sent in the right way. One of the frequent problems noticed with a uniquely Belgian management in India is the human resources issue. The manpower in India is very capricious. It is difficult to retain them, especially in sectors such as Information Technology and other high skill areas. It is impossible, in most cases, for Belgian managers (being from a different culture) to gauge the subtle changes and understand the nuances that are not evident in the first instance. These small ripples in the organisation cannot be ignored, as they have a tendency to get bigger. Human resources policies or the way of dealing with Belgian and Indian employees are totally different, mainly because the motivational and hygiene factors (according to Frederick Herzberg) are different. 45
Bipin Nambiar, IMBA 2002
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The best possible compromise to maximise benefits and ensure higher comfort levels may be to have a competent human resource manager handling the Indian staff who reports to the Belgian manager, who serves as a link between operations in India and the head office in Belgium.
3.6.5 Meetings One often hears disconcerting remarks of Belgian managers who go for a meeting in India with an agenda and realise that everything is discussed except the agenda. Meetings in India are usually a time consuming process and the attendees while brain storming ideas are quite vociferous in their suggestions, which a Belgian person may perceive as a conflict situation. Indians generally love to argue and debate and bounce of ideas to one another, unlike the nonconfrontational attitude of Belgians. The best way to deal with this, especially if you are deliberating the meeting, is to ensure that the agenda is adhered to, but also foresee time and create opportunity to have an environment of open discussion. It is important to ensure structure to such meetings so as to optimise the time utilisation, but also important is for the meeting to serve as a forum to hear the viewpoints of the attendees. One to one meetings are more efficient for decision making as it is very difficult in a lot of cases to ensure consensus. India being a culture with a higher power distance, it is acceptable for the employees that the management make the eventual decision. In other words do not look at meetings as a forum for decision making.
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3.7
Common Myths about doing Business with India
Many overseas companies -- large and small -- have made successful entries into the market since India began its liberalization process in 1991. Yet, some have also attempted and failed. There is no doubt that the potential is vast. India's total market is 950 million and the middle class is huge and growing. Both the central and state governments are aggressively seeking foreign investment -- adding incentive on incentive to encourage overseas companies to set up shop. On the surface in fact, India looks like an investment dream come true. But, in reality, the challenges are equally vast. Those that will succeed in tapping the country’s great potential will do so through careful research and a well-designed plan. India, among the European investors, is believed to be a good investment market despite typical problems such as political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. Success in India, for foreign companies, largely depends on the correct estimation of the country’s potential, proper ground work and spending time and resource to extensively research into the market before undertaking any kind of venture. India, sometimes, is not always what it is perceived to be. Few of the common myths that foreign investors can have in India are mentioned here and elucidated.
3.7.1
Myth No.1: “Amazing market sizes”
Don't get carried away by rosy estimates of the market's size22 . A middle class that equals the population of Western Europe or USA is indeed a non-ignorable market. But many entrants get carried away by the potential market sizes. This common error is made even by large multinational companies used to entering emerging markets. Even companies like Coca Cola estimated that with market sizes this big, a small percentage of the market itself is huge numbers in itself. Having gone ahead with this belief, Coke is still to make Profits in India 10 years after entering the market. Not only have they realised that soft drink consumption among Indians is largely an urban phenomenon, and even then consumption habits, and thus consumption levels are very different from the average American consumer.
22
Manjeet Kripalani, BusinessWeek, Bombay
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Recently, many analysts, after 10 years of liberalisation admit that the government’s projection of a 250 million strong middle class was probably a bit too optimistic. Recent estimates based on a survey on consumer patterns indicate a middle class, with reasonable purchasing ability, to be around 100 million23. Even within this 100 million, the purchasing power of the population is far below the European and American middle class. When companies go to India to attract workers in the field of Information Technology, they are frequently astounded by the projections of the number of Programmers graduating each year from engineering colleges each year. While the numbers are indeed more than Europe or US, it may still not be easy to find the right profiles, and it is also hard to attract and retain the staff with the right skill and experience.
3.7.2
Myth No. 2 “Liberalisation makes things easy”
When the Indian market became liberalised, companies venturing into India expected the veritable red carpet to be rolled out for them. But the case was, and is still is not so, to a large extent. The bureaucracy in India used to years of working under a system of licensing have not completely adapted to the changing needs of the market. An entrenched system cannot be done away in an instant. This means complicated and time consuming procedures for getting permissions and setting up businesses. Liberalisation is an idea proscribed by all political parties in India, but basic elements of rules and regulations are constantly changing and evolving. Any new investor must learn to accept this inconsistency as the ‘teething problems’ of an evolving market. “Single window clearance” a commonly used expression to attract investment to a certain sector is not always what it is made out to be. Taxation laws that benefit local industries create a non-level playing field. For example the dream of tapping many millions of consumers lured the auto makers such as Ford, General Motors, Daewoo, Mercedes, Fiat, and Peugeot who all teamed up with domestic carmakers. But exceedingly high duties on imported components made them less competitive in the market compared to car makers such as Suzuki which benefited from a tie up with the Government of India to produce cars. India
Based on survey of consumer patterns conducted by the National Council on Applied Economic Research, New Delhi
23
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has stalled the signing of treaties like WTO, which it believes to be unfair and there is a certain negative reaction among certain groups in India about the arrival of multinational corporations and their affect on the cottage industries in India. These reactions have been by far sporadic and largely non-violent. 3.7.3 Myth No. 3: “Bribery is rampant”
The story of the now infamous Enron Corporation who was asked to leave India on charges of ‘irregular’ payments to the government for building its power plants and for obtaining contracts from the government is now famous. Recently, Xerox Corporation of US created headlines in India when it was revealed that they had fictitious accounts which were used to park the money to be paid as bribes. In a preliminary inspection by the Income Tax department of the Government of India around four hundred thousand euros of unaccounted cash was found24. Bribery and payment of ‘baksheesh’ is not an imperative to doing business in India. While some things may be speeded up by paying bribes, more often than not, it is a recipe for disaster especially in a situation where governments in the states and centre change with frequent regularity and the new governments start investigating the permissions granted by the previous ones. In this game of political one-upmanship the eventual loser is the company or individual that has been involved in any unsavoury dealings.
Figure 9
24
“Xerox had 85 fictitious accounts: Income Tax”, Press Trust of India, Sunday August 11, 2002
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3.7.4
Myth No. 4: “Consistent low costs”
India is commonly perceived as a low cost market and destination. But sometimes costs in certain sectors of businesses can be as high as in developing countries. This perception of India as ‘low cost’ destination has frequently upset many business plans. India is of course competitively priced for intellectual capital and labour costs and so on, but property prices and such, especially in large Indian cities, can give foreign investors quite a shock, India has one of the highest property costs (when compared to the GDP per capita) among the developed and developing countries (refer graph). Prices of Luxury items are usually priced at a premium even when compared to prices in Europe. Hotel rooms at high class hotels in most cases costs more than in Europe, especially in cities like Bombay and New Delhi. In the field of software this may also largely be the case. Companies that go to India to set up software development centres are surprised that the cost of renting and buying locations are high (especially rent advances that are usually in the range of 10-12 times the rent of a month, and only refundable, without accruing any interest, at the end of the term). If one tries to stay away from major cities to save on rents, then one has to grapple with absence of skilled knowledge workers, who are usually concentrated in the cities. Costs of skilled knowledge workers, who have had opportunities to visit and work in the west on short or long tenures, are also increasing due to high demand.
Figure 10
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3.7.5
Myth No. 5:“International culture”
India is culturally close to Europe in many ways, but distant as well. While a typical Indian Manager may be western in his/her working style, his/her ideas and thoughts may still be within his / her own cultural context. This aspect has been dealt with in elaboration in the previous section of this chapter
3.7.6
Myth No. 6: “One size fits all”
Global products have to be localised to a large extent to be palatable to the tastes of the Indian consumer. While ideas like fashion may have global connotations, products based on lifestyles of the people may have to be altered to fit the tastes of the local populace. McDonalds for example does not use beef in their hamburgers in India as majority of the people in India do not eat beef. Moreover, there are burgers in the menu altered to the taste of the Indian palate. Companies like Kellogg’s have realised that it is not easy to penetrate the market with standard products that are successful in US. Kellogg dreamed of 250 million cereal-eating Indians. So in September, 1994, with a $65 million investment, it launched Corn Flakes. The flakes did well initially, helping to double the market for breakfast cereals. But sales soon plummeted because a 500-gram box of Kellogg's product cost 33% more than its nearest competitor. And in a country where breakfast is usually a bowl of hot vegetables, cold cereal is a novelty--a one-time purchase. ''It was just clumsy cultural homework,'' says Titoo Ahluwalia, chairman of market researcher ORG-MARG in Bombay25.
3.7.7
Myth No. 7: “No competition”
The biggest surprise reaction from the newcomers in the market is stiff competition from the existing local players well entrenched in the market place. These local players have years of loyalty from the consumers which the new multinationals find hard to break. Furthermore, the presence of global players in the market makes the existing local ones to be more aggressive in the market place. In the field of engineering and technology there are many local players that make competing products that may initially not show up in the radar screen of research companies.
25
Study based on ORG-MARG Research Organisation, Bombay, India
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The local players have invested years in creating their networks and contacts that is difficult for foreign players to break into. In a price sensitive market place the local players also can compete on prices which the foreign players can hardly match. . Fords and GMs, for example, sell for $22,000 in a country where the average per capita purchasing power is $1,666. They were forced to hit the premium end because they couldn't compete with existing players’ quality and low cost26. General Electric Company (GE) is one of the companies that acknowledged the market strength of the existing players when it came to India. The U.S. conglomerate came to India in 1991, when Indian law had just started letting foreign investors set up wholly owned subsidiaries rather than have to find local joint-venture partners. Still, GE chose Indian appliance maker Godrej, the market leader in its sector, and sent a special team from the U.S. to determine Godrej's capability and market dominance. Then, GE hired local managers and made them meet U.S. standards. GE played it safe and now is firmly established in the industrial landscape of the country. The tie-up benefited both companies. Godrej got GE's technology to upgrade its appliances; GE got Godrej's good reputation and distribution system. Godrej-GE now claims a 40% market share in consumer appliances, and GE uses India as a low-cost manufacturing base for such exports as light bulbs and X-ray equipment
3.7.8
Myth No.8: “Uniform Markets”
India is a culturally complex nation. Different states have different consumption patterns and customs27. Foreign investors frequently underestimate the diversity of Indian society. India has 17 official languages and an ethnic diversity as wide as that from Britain to the Middle East - not to mention 25 states, dozens of castes, and six major religions. Yet on trips to scope out investments in India, foreign executives often visit only Bombay or New Delhi and meet well-educated, urbane, Westernized Indians. ''It's easy to be deceived by that picture,'' says a Western insurance executive who has studied the country's consumption habits, cultural
26 27
Hormazd Sorabjee, Editor, “Auto India” Rama Bijapurkar, Marketing Consultant, Indian Institute of Management.
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biases, and medical systems for a year and is still not sure he understands them. ''You go back thinking, 'Wow, what a great market.' But that's just 0.5% of the market. It's a thin veneer”28. The challenges and costs of catering to markets which have a great diversity in language is something that western European companies are used to. But the challenges in India are probably more than what is faced in the home markets, especially also, because of the ethnic diversity within India.
3.7.9
Myth No. 9: “Dependable Research Data from International sources”
International rating companies still try come to grips with the challenges of managing and obtaining correct and adequate data. The research done on Indian companies are not always adequate and the benchmarks and standards of research used in the west may not adequately work in India. Combined with the fact that transparency levels in companies and the financial markets are lower, it makes it doubly difficult to ascertain the true value of companies for western investor. The Security and Exchanges Board of India (SEBI), tries to clean up the financial markets and set up strict regulations, but once in a while a scandal breaks out in the financial markets that takes away investor trust in the market. Most of the major companies or conglomerates are family owned, but despite the fact that they are professionally managed, it may be quite a challenge to understand the intricacies of working and the accounting patterns of these companies. Most of the data available from Rating organisations such as Moody’s or CRISIL are usually restricted to large companies, while small and medium sized companies (SMEs), are very frequently a more fitting partner for foreign firms. The final section of this paper addresses issues in rating and how best to adapt rating systems that are objective, and gives tangible inferences - a system that is dependable and can be personalized to the needs of the individual investor, while keeping in mind the context of Indian business.
3.7.10 Myth No. 10: “Sophistication level of potential partners” It requires a lot of research into the capabilities of the Indian partner before one can have a clear insight on the potential. This passage taken from the book “Doing Business with India29”
28
“Investing in India”, Manjeet Kriplani, Businessweek International Edition, 1997
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describes the insight of Martin M. Kristensen, Resident representative, The Industrial Fund for Development countries. “What one observes is that appearances can be deceptive. A ‘dhoti’-clad business man from the Deep South of India may not always make a credible impression on you at the first meeting. But take some time to know him. While outwardly very traditional (in western opinion that is!), he would match you in his shrewdness, business acumen and enterprise-related decisions. On the other hand a businessman dressed in western attire in corporate situations, whom you would consider more like a westerner, could be as deeply rooted in the inner ethos of India’s culture and spirit”. One often tends to fall into this trap of misconceptions and frequently enters into a relation with a partner they can relate to rather than a more competent one.
3.7.11 Myth No. 11: “Parity in productivity” Productivity levels of workers in most areas are lower than in the west. Many business plans, when adjusted to productivity levels, may not seem so attractive anymore. There is always a looming possibility that in the not too distant future, India’s low labour cost advantages with other countries may be whittled away by high power generation costs, interest rates and regulatory hurdles. World Bank, working with the Confederation of Indian Industries, conducted a large scale survey of 1100 firms; specific sub sectors were studied to review productivity. Investment climates are conducted for 10 states from best to poor. They noted that while Indian productivity is low, its wages are low as well, so it is cost competitive with other countries. There is, however, large productivity dispersion across firms. The study said a key research question is why are firms which have large labour cost advantages not taking over more of their sector or doing better to export. It was found that weak firms are hard to close, it is hard to lay off redundant workers in India or start new firms, there are high interest rates and capital costs, many medium size firms run on their own power generators which is highly inefficient and are a large capital expense, India had poor transportation infrastructure, and there were issues of bureaucracy and corruption30.
“Doing Business with India”, Roderick Millar and M.S. Chandramouli, in association with PriceWaterhouseCoopers. 30 “Investment Climate, Growth, and Poverty Reduction: A Methodology of Survey-Based
29
Diagnostics in Developing Countries”- David Dollar, World Bank Study 54
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All these aspects affect productivity. As mentioned in the study the low costs offset low productivity temporarily, but investors have to be ready to face this challenge. Indian expatriates all over the world are known for their productivity, but not so when they are based in India. This means that the environmental factors are as important as the individual with respect to productivity Companies involved in setting up operations in India or working together with Indian partners have to be ready to face the prospect of being involved in work that could be deemed as ‘nonproductive’. These are however not avoidable. The successful ones are those who leverage this correctly and are prepared for this aspect of operation so that the resources allocated to manage non-productive work can be well contained and measured.
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4
4.1
Valuation of Indian companies
Introduction
There is no such thing as a comprehensive model to design business-fulfilment potential of would be Indian business partners. It is proposed to develop a conceptual tool to determine whether an Indian company has a feasible chance to become a profitable business-partner in the long term. Furthermore, the tool also may help to discover hidden bottlenecks of would-be business partners or help identify “blind spots” in Western business thinking. The tool proposed is based on the development of Key Indian Business Indicators (KIBI). Although these may be considered necessary to determine the “quality” of an Indo-European relationship, they are not to be considered a sufficient step towards creating an optimal fusionbusiness culture. To ultimately improve a cross-cultural business interaction, the Key Indian Business Indicators have to become tightly woven into all management processes from day one. Examples of what this could mean are: • • KIBIs may become the basis for more consistent monitoring and reviewing performance throughout the duration of the business venture; KIBI-performance should be tied to business relationship-evaluation and more specifically to the introduction of price-related negotiations in terms of KIBIperformance.
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4.2
Criteria for the Key Indian Business Indicators
The Key Indian Business Indicators should correspond to a number of criteria:
Table 9
4.3
Process for establishing the Key Indian Business Indicators
Establishing the KIBIs should be linked not only to the nature of the business but also to the strategic goals which form the base of the Euro-Indian business collaboration, the sector and the politico-economic context of the region involved. The KIBIs should be established primarily by the European partner although it would be advisable to elaborate the determination of the KIBIs together with the Indian partner or local accounting and legal firms. The level and intensity of interaction between the parties involved, the relationship dynamics, should be the basis for the continuous updating and 57
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differentiation of the KIBIs at least on regular intervals. The process of determining KIBIs is determined as follows:
Table 10
4.4
Main area of Business Performance
Defining the main areas of business performance is mainly an iterative process as all areas will, in one way or another, be interconnected. The summing up of the main areas of due diligence implies a sense of direction but should, in no way, be considered as complete or accomplished. A change in a company’s business mission doesn’t necessarily result in a change of focus on a number of areas but a change of a company’s definition of product/market scope can be a source of KIBI-innovation when it is quite different from previous assessments. KIBIs should also be determined in function of the sector of both parties involved. It may be clear that establishing coherent KIBIs for a pharmaceutical joint-venture in India will be totally different than from setting up a joint-venture regarding ICT The main areas of business performance capability of a prospective Indian partner company have been defined as elements that make up the combination of both high quality servicedelivery and cost-optimization. These elements have been summed up and their periodic availability indicated: • • Accounting and Financial maturity (yearly) Commercial Policy (quarterly) 58
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• • • • • • •
R&D (yearly) Performance measurement (monthly) Human Resources (yearly) Management (monthly) International Experience (quarterly) Optimizing personnel/utility costs (monthly) Optimizing other costs (monthly)
4.4.1 Accounting and Financial maturity Clearly the most obvious parameter in determining potential Indian partner-companies lays in the financial solidity of the company. This financial solidity can be determined both in terms of organizational set-up (overall organization of accounting, treasury and audit), the presence of an institutionalized analytical reporting-discipline and the analysis of financial statements, credit usage and financial planning. As performance indicator regarding the maturity we opted for the analysis of primarily the tax returns as these statements are mandatory and all Indian companies have to disclose a complete overview of the financial indicators in their yearly tax returns. Additionally, although far from complete sometimes, an analysis of the balance sheet, profit & loss-statement and financial planning are an added source of information. It is however emphasized that a comparative analysis of these data with the data mentioned in the tax returns remains necessary as well as a quality-check which implicates a local accounting firm.
4.4.2 Commercial Policy The analysis of the inherent commercial policy is the second indicator we consider important enough for analysis both in terms of overall organisation, market-characteristics, products and services and distribution channels. A wide range of product or service lines can reflect a sub-optimal product mix that reduces productivity. The number of customers and suppliers, their profitability and historical evolution as well as an overview of the 3-year sales forecast can be considered crucial in establishing the commercial effectiveness and growth potential of the company. 59
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4.4.3 Research and Development In establishing commercial and business dealings with India, mainly in the bio-technological, ICT-related fields and the pharmaceutical sector, the amount of Business Expenses related as a percentage of turnover serves as a good “innovativeness-coefficient”. India is known for its large number of patent applications every year. Imperative is the study of the yearly evolution of these investments. 4.4.4 Performance measurement Performance management and the attribution of objectives per member of the staff are considered an important factor in achieving the company-set targets of commercial and financial growth. Only one parameter should be considered in determining the company’s performance namely the timely finishing of the performance evaluation cycle in all departments as it indicates the discipline regarding the realization of company-imposed objectives.
4.4.5 Human Resources Productivity and skill-level of personnel remains a caveat when dealing with Indian companies due to the low productivity levels of India compared to other Asian countries. This factor captures any possible labour productivity penalties due to lower frontline trainability potentially caused by lower educational levels, different educational focus (discipline/skills), low frontline worker motivation, lack of incentives/possibility for top management to implement changes. The stability of the production-process is therefore to be considered crucial in selecting business-partners and the effectiveness of management in that field can be put in the right perspective by considering the number of production days lost due to strikes and social conflict. 4.4.6 Management Although it is difficult to evaluate the skill of local management and frequent prior contacts with local management are necessary in order to determine the level of professionalism, the skill-level and international experience may be considered important. It has been deliberately omitted to consider qualitative evaluation of management material as a KIBI due to the inherent psychological nature of the indicator hence making it difficult to install a generic benchmark. 60
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One interesting aspect of evaluating management in India is the degree of relatedness to local policy or decision makers in view of the fact that these ties can facilitate considerably business-making. One would, however, like to warn European entrepreneurs not to take into consideration such assets due to the volatile nature of these relationships especially in India.
4.4.7 Exposure to international business In view of the previously discussed cultural differences between India and the West, prior experience of local management to Western and American corporate culture is to be considered primordial both in terms of exposure and deadline- and production management. Dealing with potential Indian partners is facilitated considerably by previous international business dealings of the Indian partner to be. 4.4.8 Costs Due to inherent cost-advantage capabilities of Indian manufacturing, the last indicator to be considered when evaluating Indian companies is the production- and financial performance versus the yearly budgets. It enables the Western entrepreneur to evaluate the cost-control of the potential Indian partnership.
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4.5
Weighing and Frequency of the KIBIs
KIBIs without a performance scale or weight-assignment towards a general evaluation is to be considered useless. Although performance scales are to be drawn up taking into account the diversity of sectors, it is considered rather clear that the applicability of each KIBI can be determined universally.
Table 11
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4.5.1
Weightage of KIBI Dimensions
Figure 11
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4.6
Grade details of the KIBI-rating
Grading of the KIBIs are indicated on a ordinal scale ranging from A to D
Table 12
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4.7
Conclusion
One of the underlying objectives, while conducting the survey, and writing of this report, has been to explore the possibilities, or the added value, a company or an organisation of individuals that provides rating on Indian companies in the context of culture, and with knowledge of the business environment thereof, could have. During the course of this research it has been made clear that there still exists a desire in Belgian entrepreneurs to invest in India provided there is an organisation or an agency that helps them make the whole process easier, and also ensures the availability of credible and fitting partners. A fear of an alien culture is largely based on the fear of the unknown. Once a clear insight is given into a particular culture that fear naturally subsides to a large extent. This reports attempt to do exactly that. India itself offers a plethora of opportunities. But like any new opportunity that exists, challenges come hand in hand. The key aspect to creating a successful relationship is perseverance, proper due diligence and scrutiny. It is upto the investor or the business to see what factors are important in their particular relationship, and adapt and customise a rating system such as KIBI for their use. Most of the aspects of culture, which can make an investment prospect daunting, are mentioned here. But an open mind and a strong resolve to temporarily conform, helps you resolve these challenges. Eventually, irrespective of culture, any business activity that focuses on a win-win situation and focuses on creating a symbiotic relationship between the partners are generally prone to succeed.
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5
Bibliography
1. Cultures and Organizations, Software of the Mind, Geert Hofstede, 1994 2. Understanding Cultural Differences, Edward T. Hall and Mildred Reed Hall, 1990 3. Doing Business with India, Roderick Millar, M.S. Chandramouli, PriceWaterhouseCoopers, 1999 4. Organisational Behaviour, Kreitner, Kinicki, Buelens 5. Managing Across Borders, Christopher A. Bartlett, Sumantra Ghosal 6. Belgo-Indian Chamber of Commerce Newsletter, Jan 2002 7. McKinsey Report India-From Emerging to Surging, Amadeo M. Di Lodovico, William W. Lewis,Vincent Palmade, Shirish Sankhe, McKinsey, 2002 8. Cultures Consequences- International Differences in Work related Values, Geert Hofstede
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6
Appendix
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How to use the Survey : In view of the draft of a research project of the Vlerick Leuven Gent Management School aimed at examining the possibilities of Belgian companies doing business with emerging countries, we would like to request your feedback regarding this issue. We are very interested to learn your points of view regarding the subject. Please leave no questions blank. Thank you for participating.
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Question Is your company the mother holding of companies in Belgium or in other countries ? What sector is your company active in : Primary sector Food, beverages Textiles, wearing clothes Publishing, printing IT Chemicals, rubber and metals Machinery and equipment Gas, water, electricity Construction Wholesale and retail Others (please specify) Please indicate the amount of the latest turnover in euros. Does the mother company have subsidiaries or maintain commercial links in emerging markets ? If yes, please specify the countries : China Philippines India Indonesia Japan Korea Malaysia Singapore Taiwan Thailand Vietnam Other
Answer
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Please indicate the nature of the strategic decision to maintain links with these countries : Productivity Cost Innovation and R&D Efficiency Other (please specify) How will the commercial or legal cooperation of the company with these countries evolve ? Increase Decrease Maintain stable Please indicate the nature of satisfaction with these operations : Very satisfied (please specify) Satisfied Not satisfied (please specify) How did the company decide on setting up operations with these countries : In-house research External research (consultancy,…) Seminar Other (please specify) Do you consider that there is currently sufficient information available regarding these countries ? If no, please specify what type of information currently lacks : Potential of Enterprises Financial information Investment information Marketing and Sales information R&D and Innovation information Product and Process information Legal information Other (please specify)
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Would you be willing to pay for similar information ? Please specify. Yes No What organizations do you turn to in order to receive information regarding these countries ? Governmental organizations (embassies, consulates, Export Vlaanderen…) Information providers Consultants Local agents Press, media, internet,… Chambers of Commerce Other In what format would you like to receive specific information regarding business- and investment-opportunities with these countries In an extensive report on demand Continuously via mail or the internet Via a newsletter Other (please specify) What information would you deem necessary : Competitive Intelligence Investment opportunities Financial health Market-research Business development opportunities Strategy and management-capabilities Other (please specify) Please feel free to add your remarks
