The world’s emerging nations offer numerous investment opportunities for companies that want to go beyond their borders and continue to grow. Nevertheless, not all these nations offer the same legal security and stability, or a familiar work culture that facilitates commercial relationships. In an interview with Universia-Knowledge at Wharton, Jyoti Gupta, professor of finance at the ESCP-EAP business school in Europe and former dean of the Asian Institute of Technology, analyzes India’s business ties with Spain and Latin America, focusing on the legislative efforts India has made to provide a maximum level of security for foreign investors.
Universia-Knowledge at Wharton: What are the biggest risks that a foreign company faces when it decides to get started in India?
Jyoti Gupta: The risks involved in getting established in India are not different from those that come from any adventure in globalization. The truth is that India has a well-established democracy that is widely respected by the population. Its legal system is stable, independent and based on English common law, and it functions in a normal way. As a result, we’re not wrong in saying that India provides an extraordinary opportunity for Spanish investors.
Nevertheless, in responding to your question, it makes sense for me to emphasize that there are some challenges businesses need to confront, as they do in other countries. One of these is the bureaucratic obstacles, where there are occasional cases of corruption – which are severely prosecuted. Of course, you have to add that there are cultural differences – less so than with China. And finally, as in every business, there is the importance of selecting partners. When it comes to that issue, my advice is to visit the Indian Chamber of Commerce, which has listings of possible partners, and to consult such institutions as the Foreign Investment Promotion Board and the Foreign Investment Implementation Authority (FIIA), which help foreign investors.
UKnowledge at Wharton: What obstacles need to be overcome in order get started in the country?
J.G.: The legal requirements are not complicated. India is very aware that foreign investment is one of the most important engines of the country’s economic growth. India permits foreign direct investment in every sector, including services. One of the most common entrance routes is the so-called ‘automatic route,’ which only requires notification after entering, rather than authorization by the government beforehand.
The second route, of course, is through direct approval by the government. In such cases, investors have to resort to the FIIA. Beyond legal issues, another thing that is a major obstacle is the lack of infrastructure, which provides a handicap for business development. On the other hand, this is an incredible business opportunity for Spain since it has a significant number of large construction firms that are looking for interesting projects outside their borders.
UKnowledge at Wharton: What are some of the examples of Spanish companies that are doing business in India?
J.G.: There is an enormous list of Spanish companies that have set up businesses in India. One of the most famous is the Inditex textile company (which owns the Zara chain.) It has moved into India at a gradual but steady pace because Spanish fashion brands are very highly regarded in India, and there is significant market potential now that the middle class is growing at a considerable rate. In addition to the textile sector, Spanish companies in the agribusiness sector (Agroalimen) and the pharmaceutical sector (Farmaprojects) have already entered the country.
The largest Spanish investors in India are Cobra (engineering), the Duro Felguera Group (turnkey operations), Coinma (office furniture) and Agroalimen. Other Spanish companies that have a presence in India include Acciona (construction), Albertis (infrastructure), Aldeasa (duty free airport shops), Banco Sadabell, BBVA (bank), Cintra (toll road operator), Mondragón (a corporate cooperative in the Basque Country), Corte Ingles (retailing), Garrigues (law firm), Pascual Group (food), Keraben (ceramics), Mango (textiles), Mapfre Group (insurance), Taurus (home appliances) and Union Fenosa (electric power).
UKnowledge at Wharton: What are the key attractions of India for Spanish companies?
J.G.: India has grown at a steady rate of 10% a year, so it offers great opportunities for both domestic and foreign investors. You have to remember that it is the world’s fourth-largest economy and the tenth-largest industrial country, and it has a middle class of 300 million people. At this time, its economy is growing at the second-fastest rate…. Because of these factors, it is easy to imagine that investments will also earn a significant rate of return.
Recently, several very important initiatives have been carried out that are designed to attract foreign companies. These include industrial deregulation, simplification of investment procedures, promulgation of competitiveness laws, deregulation of trade policy, a total commitment for guaranteeing intellectual property rights, reform of the financial sector, the deregulation of foreign exchange regulations and, above all, very generous rules that help boost the spirit of investors.
UKnowledge at Wharton: How easy is it for a foreign-owned company to take control of an Indian corporation?
J.G.: It is quite easy. India is one of the countries that have the freest policies for foreign direct investment (FDI), as well as for the transfer of foreign technology. In most sectors, up to 100% of FDI is permitted under the so-called ‘automatic route’ we mentioned earlier. Of course, there are sectors where there are restrictions against taking over 100%. For example, investors in the defense and military sector; the insurance sector, and retailing are permitted to own a maximum of 49% of their [Indian] companies. When it comes to infrastructure and telecommunications, the maximum rate [of foreign ownership] is 51%.
UKnowledge at Wharton: Is there some sort of legal protection for a foreign company that decides to partner with an Indian company?
J.G.: Legally, foreign firms have all the necessary legal guarantees. In that sense, we can guarantee that courts are trustworthy and well-established, just as in Spain. Everyone in business can have access to the courts in India. Their rights are defended with all the guarantees. The only caveat is that trials can wind up taking a long time… You have to remember that companies like Coface and Cesce, whose task is to minimize business risks – also provide their services in India.
Finally, while it is not directly related to legal protection, I believe it is interesting to emphasize the enormous power exercised in India by the mass media, which are always open to playing a defensive role and to making accusations when necessary.
UKnowledge at Wharton: What image do Indian companies have of Spanish companies?
J.G.: They have a very positive view. There have never been any political problems between India and Spain. In addition, India feels culturally close to Spain, through its art, literature and architecture. Many Indian students go to Spain, and they like Spanish fashions, as I explained earlier. As a result, Indian entrepreneurs show no reluctance to accept the arrival of Spanish companies or reach commercial agreements with them.
UKnowledge at Wharton: How do Spanish executives think about the way companies function in India?
J.G.: Generally speaking, I believe they have a positive view, especially after those companies are already here [in India] although Spanish executives clearly are apprehensive about the enormous lack of infrastructure that exists in India for developing their businesses. They also can’t count on having a sufficient number of qualified personnel.
UKnowledge at Wharton: Could you provide some practical advice for Spanish executives who want to do business in India?
J.G.: The best advice I can give Spanish executives is to keep an open mind when they decide to move into India. Unlike countries such as China and Japan, doing business in India is not “ceremonial.” The formalities that prevail at a business meeting in China, where people distribute business cards according to a specific system of rules, do not exist in India. The fundamental factor is the close, informal character of meetings. For example, it is not common to wear neck ties. The Indo-European culture is very well entrenched so the differences are minimal. Nevertheless, doing business in India requires you have a flexible concept of time, and not to reveal any sense of urgency.
Finally, it should be stressed that the success of any agreement between India and Spain is not based on a formal legal document but on personal relationships that reflect a friendship and confidence that all parties believe in. For that reason, it is very common for a deal to be closed, not in a restaurant, but in the home of the Indian executive, and in the presence of his wife and children. You should not be surprised to receive an invitation to have dinner with his family in a private home. On the contrary, this is a sign of being on the right road to closing a commercial agreement. You have to accept such an invitation immediately, and show your appreciation.
UKnowledge at Wharton: Culturally speaking, what are the main differences and similarities between India and Spain? In what ways is it possible to have a greater number of misunderstandings that might make commercial relationships more difficult?
J.G.: As I explained earlier, one difference is the way doing business involves informality and closeness. In Spain, executives will close a commercial agreement over lunch at a good restaurant but never in their own home and with their children. Personal relationships are something left on the sidelines; in India, they are the key. When it comes to similarities, we are much closer culturally than we believe, especially if we compare ourselves with a Communist country like China.
In India, as anywhere else, respecting the culture of the country is a complicated thing, and it can lead to frictions. India is an enormously free and open country. Clearly, it has many traditions, but its peoples are not so traditional. The communications, media and business worlds have no reluctance to openly criticize politics, religion or other aspects of the country. They are also not offended if a Spanish executive openly exposes his fears or those aspects that he likes least about India. Criticism is viewed as something particularly normal and common in a democratic society.
UKnowledge at Wharton: When will India arrive in Spain?
J.G.: Currently, we have some examples of Indian companies that have moved into Spain, especially in the energy sector and the software industry. However, these investments are very marginal, despite the sound political and cultural understanding that exists between the two countries. At the moment, the largest Indian investment in Spain has to do with solar energy. XL Telecom & Energy plans to invest a total of $250 million in a solar plant in the south of Spain. They forecast they will generate 28 megavolts during the first year and increase output to 200 megavolts within a few years.
UKnowledge at Wharton: Can you comment on the relationship between Indian companies and Latin American companies?
J.G.: The relationship is good. We have no political problems with these countries, so we are targeting them for investments. India already has a presence in Brazil and Mexico. Like India, Brazil is an emerging country and we have a lot of business interests there. However, trade relations are still not very strong.
UKnowledge at Wharton: Looking at the future, do you believe that it will be the Indian companies that make acquisitions in Latin America, or the Latin Americans who move into India?
J.G.: The case of ArcelorMittal (the world’s largest steelmaker) provides a good example of how Indian companies can wind up surprising us. India is especially interested in buying Latin American companies because of their potential in Spanish-speaking markets. Our interests are focused, above all, on the service sector, heavy industry (steel), pharmaceuticals (generic drugs), and software companies. The future will surely provide us with major surprises from India.
