7 Factors Affecting India Entry Strategy Of Foreign Investors

foreign direct investment

The Union Government of India permits 100 percent foreign direct investment in one brand of retail thereby providing an impetus to the domestic market as well as to the foreign retailers. Today, the country is one of the largest contributors to the economy of the world and the efforts of the government to support improvement in the business sector has always been prominent.

Doing business in India offers plenty of opportunities to global companies. However, the market of this country is large and complex, so it cannot be viewed as one market but a cluster of interconnected regional markets where the investment and the legislative climate changes from one state to another. The guide below looks into some of the favorable strategies for doing business in India.

Understanding the entry options

The foreign investors and companies looking forward to entering the country or those who are already operating their business entity in India need to comply with the regulatory and the legal environment. For the beginners planning to enter this country for setting up new companies, it is essential to plan an appropriate strategy for entry.

The plan for entry varies according to the sector, nature of the business, the cost, scale of operations, and the commercial objectives. Accordingly, foreign investors can begin a branch or liaison office, company, and a limited liability partnership or LLP in this country. While the LLP’s are governed by the Limited Liability Partnership Act, the Indian companies are managed by the new law or the Companies Act of 2013.

Several of the Indian government policies work in favor of setting up business in India and enhances the ease of doing business in this country.

Taxation issues

In India, the income tax is controlled by central legislation or the Income Tax Act of 1961 and the indirect taxes such as the customs and excise duty and the GST or the Goods and Services Tax are governed by the state and central laws.

Although the corporate tax rate is a bit on the higher side right now, the government has planned to reduce it progressively to minimal levels over the next four years.

Apart from this, the country follows the transfer pricing rules that apply to the related party transactions.

Measuring the risks against the opportunities

The companies are recommended to assess the risks against the opportunities state wise and analyze the prominent indicators of the size of the market, the cluster of industries, growth, and stability.

While the metrics of the industry clusters measure the size of the potential customer pool for the B2B and the B2C companies, the market stability metrics evaluate the social stability and the institutional business.

Foreign companies keen to do business in this country must follow this step to determine the market potential based on size, industry clusters, and growth and also evaluate the risks associated with the market.

Overall, this step allows the companies to assess the actual potential of a state.

Determining the operating environment

Companies should also try to find out the operating environment of each state by analyzing the indicators associated with talent, finance, infrastructure, business, and tax environment. They can get the necessary data on the government portal of each state.

The operating environment and the business vary significantly across the states and the companies setting up LLC in India can choose the state with a strong operating environment or one that has a well-developed infrastructure as it can lower the cost of the multinationals planning to do business in this country.

Analyzing the results

After assessing the risks against the opportunities and the operating environment of the states and depicting them on a graph, it becomes clear and easy to analyze those states that offer the highest return based on the investment and provides a better India entry strategy to the companies. There is no doubt that the companies must choose those states that offer the highest return on the investment.

Settling the disputes

India follows a single system of court and common law for governing the state and the central laws. With three distinct tiers such as the High Court and the apex court, the lower district courts, and the Supreme Court, the companies need to find out how to settle the disputes.

Although the court litigation process in India is usually subject to delays, the commercial disputes may be treated through alternative dispute resolution.

However, the choice can have commercial, legal, and financial consequences.

Therefore, investors should weigh these factors properly while resolving disputes. Consulting with a legal firm in India is the best option before choosing the mode to put an end to the disputes.

Choosing the states

The multinational companies must align their strategy according to the outcome and group the states in order of priority. Ideally, the first group of states must provide the highest opportunities and have a strong operating environment.

Many of the MNC’s have their presence in these states. Conducting internal reviews and examining the areas based on geographical extension helps in figuring out the areas of operational inefficiencies.

The second category of states offer moderate opportunity and have the good regulatory environment. Finally, the third category of states have the weak regulatory environment and provide moderate opportunities.

India can be a rewarding and difficult market for the multinationals, but the companies with a structured approach to prioritize the states and navigate the complexities of the market effectively can make the best decisions based on quantitative insights.

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