Investing in India: Strategies for Tackling Bureaucratic Hurdles

Sanjiv Kumar and Leena Thacker-Kumar

A lthough free- market reforms have spurred

foreign investment in India, I,ureaucratic hurdles continue to shackle foreign investors and impede the flow of investment. From July 1991~when the free- market reform policy started-to December 1994, al1nost 19,000 foreign investment pro- posals worth $130 hil- lion w:ere filed with the government. But only a few of these investment

commitments have actually heen implemented, while others languish at various pre-implementa- tion stages.

Foreign companies generally have reacted positively, even excitedly, to the prospect of in- vesting in India. Approximately 422 American firms have set up operations in India, ranging from such well-knoc\,n multinational corporations (MNCs) as Mcl)onald’s, Coca-Cola. Motorola. AT&T, and IRM to small companies such as Liebert Corporation and I3ryAir. According to a recent Ernst & Young sur\‘ey, LJ.S.-based MNCs cite India as one of their top priorities for foreign investment. 13ut bureaucratic interference still continues to bog them do\vn. As reported in Abdoolcarim (1994). an Ecmr~mist survey of 16 major foreign corporations and joint ventures located in India indicated that inept and interfer- ing bureaucracy has been the biggest obstacle for foreign investors. The lal~yrinth of bureaucratic ol>stacles cause’s project overruns and costly de- lays for businesses. “American executives,“ re- ports Burns (1995), “are finding that the Indian I3ureaucracy. though gradually releasing its tight

grip on the economy, wields wide powers, con- pounding inefficiencies from decades of social- ism.”

So what can foreign investors do. if anything, to successfully negotiate the murky waters of Indian bureaucracy and still reap the benefits of investing in India? In this article, we attempt to provide insights on how foreign companies can leverage their decisions to alleviate bureaucratic woes and improve their chance of business suc- cess. Though some level of bureaucratic ob- stacles invariably will be encountered, an active effort to “deal with bureaucracy” will minimize the frustration and costs associated with bureau- cratic hurdles. This would mean proceeding with planning and implementation decisions with one eye keenly focused on how each decision will affect the firm’s ability to handle the red tape. For example, decisions about where to locate, who should 1~ the Indian partner (most foreign in- vestment in India is in the form of joint ventures). which managers to select and appoint as parent representatives. and the nature of expatriate train- ing and support can all serve as potential tools in overcoming lmreaucratic impediments.

BUREAUCRATIC HURDLES

B efore delving into the strategic decisions of doing business with lnclia, 3n up-front understancling of the nature of bureau-

cratic challenges will allow foreign investors to leverage their decision-making process more effectively. We begin, therefore, with 3 portrait of the tmreaucratic. hurdles likely to IX encountered.

Levels of Bureaucracy: Central versus State

The Indian federation, or union. is organized into 25 states and seven centrally administered union territories. Although the systems of government at the central and state levels closel)~ resemble each

other, the Indian constitution provides three lists for demarcating areas of jurisdiction: the union list, the state list, and the concurrent list. The union list includes items on which the central government has exclusive authority to make and enforce laws, such as foreign affairs, customs duties, and taxation of income. Likewise, the state list contains areas (law enforcement, land policies) over which the state has exclusive au- thority to make and enforce laws. Both the cen- tral and individual state governl~ents have con- trol over items on the concurrent list, such as labor welfare and price controls.

Understanding whether a particular approval or license is within the jurisdiction of the union, state, or concurrent list will allow a foreign inves- tor to target its efforts toward the appropriate government level(s). It is important to note that bureaucratic processes (getting licenses and ap- provals) related to items on the union list are fairly streamlined. However, the lower rungs of the government (state and municipal) are still struggling to streamline their processes. The need to reform bureaucratic processes has not perme- ated uniformly across all states and down to lower government levels. “At the lower levels, there is no sense of urgency, no sense that the world is not going to wait for you,” said the president of AT&T India (Abdoolcarim 1994). As such, although negotiating bureaucracy at the central level may not be difficult, the going can be very arduous at the state level.

Take, for instance, the experience of the American agro-business company, the Cargill Corporation. It took Cargill just 30 days to receive the go-ahead from the central government for a wholly owned, $15 million salt-processing ven- ture, which was expected to boost much-needed foreign reserves of India by exporting one million tons of salt. Despite these obvious advantages, however, Cargill could not obtain the land needed to set up the venture. The government of the northwestern state of Gujarat turned down the company’s initial choice of land on the coast. Its second choice-also on Gujarat land, hut un- der federal jurisdiction-was disputed by the organized Small Scale Salt Manufacturers of Gujarat. In the end, Cargill had to pull out of the salt venture. And this experience occurred in a state that has been a leader in drawing foreign investment.

State-Level Bureaucracy: Not All States Are Equal

What are some of the bureaucratic problems faced at the state level? Some of the key obstacles are:

l power connections; l environmental clearances; l labor laws;

l approvals for other requirements, such as land and water; and

l implementation of regulatory compliance. Obtaining a power connection is within

the domain of the state authorities. Depending on the state in which the unit is being set up, obtain- ing a power connection can take from six to 18 months. In some states, this may involve seeking approvals from nine different agencies and filling out 40 different forms. Even if a firm were to try to establish its own power generator, it would still require approvals by state government au- thorities. In addition, if excess power were gener- ated, it could not be sold to adjoining plants.

Environmental clearances, regardless of the nature of the unit being set up, are required by most states and may entail filling multiple forms. Though some states, such as Punjab, have actively reduced the clearance requirements only for hazardous industries (dubbed the “red cat- egory”), others still require clearances for all units, regardless of industry.

Labor law in India is a morass. Labor laws are on the concurrent list; this means that while both central and state governments get to formu- late policies, it is the state that implements them. Currently, as many as 51 different acts define labor, wages, and units. Though there is a need for uniform labor laws for all states, no action has yet been taken by the central government.

Other requirements, such as land, water, and natural resources, are under the jurisdiction of the state and may pose challenges for the for- eign investor. For example, in some states, com- panies have to deal with nine different agencies and go through 29 steps to get approval for land acquisition. For water connection, a company may have to deal with 11 different agencies and fill out 21 forms.

Implementation of regulatory compli- ance, much of which is on the concurrent list. is not well coordinated al the state level. For ex- ample, if a company has to comply with six dif- ferent laws enacted by the central government but implemented by the state, as many as six different inspectors may come to check compli- ance. Additionally, the firm may have to maintain six different books to exhibit compliance with each of the six different acts for each of the six inspectors. Naturally, this redundancy imposes additional costs on the firm. Although some states are trying to create a better system of con- solidating redundancies, these procedures will take time to implement. Until then, foreign inves- tors have to learn to comply with these many superfluous requirement-s.

The problem of working at the state level is further compounded when foreign investors have to seek approval from the very top state official even for a small decision. Although states are

Investing in inch Strategies for Tackling Hu~eeaucratic Hurdles 11

trying to decentralize decision making, their at- tempts have had little impact, having fallen victim to an ingrained culture in which lower-level offi- cials are afraid to make decisions.

So a foreign investor has to be ready to deal with various agencies, forms, and obstacles at the state level. Although understanding the nature of such bureaucracy is a necessary first step, there are decisions that can help foreign investors deal with it. Based on our experience, a company can use its decisions about location, joint venture partners, selection of managerial personnel, and expatriate training and support to minimize costs of t?ureaucratic interference and improve busi- ness success.

LOCATION DECISIONS

N ot all of India’s states have the same number or type of bureaucratic hurdles. Some are more investor-friendly than

others. The choice of the right state in which to locate is critical for a foreign investor. Table 1

Table 1 India: Top Ten States in Attracting Foreign Investments: August 1991 to July 1994

Table 2 India: Top Ten States in the Development of Infi-astructure

outlines the top ten states in terms of attracting foreign investment.

How does a company choose the right state for its location? We suggest that a firm should examine a combination of three factors in its choice: (a) infrastructure, (11) political leadership, and (c) incentives.

Infrastructure

This is probably the most vulnerable spot when it comes to a state trying to attract foreign invest- ment. For example, even a state like Tami Nadu, which has one of the best infrastructures in India. faces substantial power shortages every day (a deficit of two million kwh/day). Table 2 lists the top ten states in terms of infrastructure develop- ment.

Most states are unable to undertake infra- structure development projects because they face severe budgetary constraints. This problem has been compounded because many states have bargained away their current source of income- the sales t:lx-as potential incentive to attract foreign investment. So the crucial question for the foreign investor is: Does the state have the requisite infrastructure to support its goals? The biggest infrastructure constraint a foreign investor should consider is power. Other important con- siderations are roads, bridges, airports, and tele- communications.

Political Leadership

With states becoming more competitive in drdw- ing foreign investment, the political leadership of a state plays a critical role in helping iron out bureaucratic hurdles. In evaluating leadership, foreign investors should focus less on the politi- cal affiliation of the ruling party in the state and tnore on the leaders’ attitudes toward foreign investment.

It is not necessary for the state government to have the same party affiliation as the central government for it to he investor-friendly. For example, Karnataka, where the ruling party is different from that of the union, has been very active in smoothing out bureaucratic approval processes. To facilitate foreign investment, its leaders have started an approval process much akin to that of the central government. These efforts are starting to pay off as more foreign investment is pouring into Karnataka.

A state’s political leadership is the most im- portant influence on the attitudes and activities of administrators toward business and foreign in- vestment. Note Joglekar et al. (1994), ‘.Only a pragmatic political leader, even if for reasons of expediency, can lay down a clear and attractive industrial policy. [Moreover]. the bureaucrats, no

matter how intelligent, need to be motivated and given a direction.”

A lack of clear political leadership, even in a relatively advanced state, may act as a major disincentive for foreign investors. Take, for ex- ample, Kerala, which is one of the top three states in infrastructure development and has one of the highest literacy rates in the country. De- spite these advantages, it has been unable to attract investment because of the lack of political leadership in settling the conflict between the state government and trade unions. Sensing the importance of political leadership in attracting investment, some state governments-Gujarat, LJttar Pradesh, Madhya Pradesh-have actively embarked on administrative reforms, such as instituting training programs to help bureaucrats cope with their new roles as facilitators rather than regulators.

Incentives

Individual states usually compete for foreign investment by offering subsidies, sales tax ex- emptions, power concessions, and tax holidays. These incentive packages, however, very often cancel each other out. For example, the packages offered by Maharastra, Gujarat, and Karnataka were almost the same, so their relative ability to gain an advantage in drawing foreign investment fizzled out. Some states, such as Rajasthan, rely heavily on incentives to draw foreign investment. However, such large incentives may be offered to make up for the lack of a coastline, major finan- cial centers, and a skilled work force. Thus, the attractiveness of a state’s incentive package should be counterweighed by factors that can make it difficult to do business in that state. In- centives should serve as a necessary-but not the only-condition for evaluating location decisions.

PARTNERSHIP DECISIONS

0 ne of the best ways to circumvent the costs of dealing with bureaucracy is to have the right partner in starting a joint

venture. How does a company choose the right partner? We suggest that the foreign investor fo- cus on two questions before forming a partner- ship: (a) Does the would-be partner know the ropes? (b) Has due diligence been exercised in investigating the potential partner?

Does the Partner Know the Ropes?

Besides some common business criteria used to evaluate a good partner-compatibility, commit- ment, combined strength-the ability of the part- ner to work the bureaucratic processes should be considered as an important criterion. Big indus-

trial groups are good candidates here. Various industrial groups in India, such as the Tatas, the Birlas, and the Reliance Group, have consider- able experience and a good history of operations. They are familiar with the Indian market and can open a lot of doors. Take, for example, AT&T, which already has two joint ventures with the Tata group: AT&T Switching Systems and Trans- India Network Systems. It recently signed a memorandum of agreement with the Birla group to explore telecommunication opportunities in India. In explaining the choice of Birla as partner, which had no prior telecommunication experi- ence, a spokesperson for AT&T replied, “We are comfortable with that because we have the tele- corn expertise. What we need is somebody who knows how to execute projects in the country, and is well versed with the customer set and customer expectation” (Mitra 1995).

The opportunity to form joint ventures with Indian industrial groups is not restricted to large multinational corporations alone. Even smaller companies can benefit by partnering with a firm within these industrial groups. Take the example of Liebert Corporation, a $500 million company based in Columbus, Ohio that manufactures unin- terrupted power supply and environmental con- trol systems. Liebert formed a joint venture (Tata- Liebert) with one of the companies within the Tata Industrial Group. Not only did Liebert ben- efit by having the backing of the recognized and respected Tata name, but it also had help in over- coming bureaucratic hurdles.

Has Due Diligence Been Used in Investigating the Potential Partner?

More and more, good partners from big industrial groups are difficult to find. “A lot of big industrial groups that have good political contacts and ac- cess to capital have their plates full,” says the vice president for international planning and development at Liebert (Oldenborgh 1995). So should a foreign investor look for other cand- dates? Yes, but it should proceed with extreme caution. Other candidates, such as agents or rep- resentatives, can be good, but there are chances of being duped into an agreement that may not be advantageous.

It is important to keep in mind that a com- pany that has served as an agent or representa- tive may not necessarily be the best choice for a partner in a joint venture. Some of these agents or representatives, though they may have served as capable “middlemen” in export-import transac- tions, do not have the necessary experience or resources to fulfill the responsibilities of being a full JV partner. Before forming a joint venture with the Tatas, Liebert’s vice president spent two years talking to a Bombay-based company that

Investing in India: Strategies for Tackling Bureaucratic Hurdles 13

had served as his firm’s representative in India. He finally realized that this company was putting up a good front but barely had enough resources to maintain a full-time office. He said, “I finally discovered that every time I came to visit, they rented a car and a fax machine, returning them as soon as I left.” This happened despite the fact that the vice president had lived in India for some time.

Beyond assessing whether an agent or repre- sentative has adequate resources, foreign inves- tors should gauge whether there is compatibility in business philosophy. For instance, before it formed its partnership with the Birla group, AT&T had a distributorship agreement with an- other company, Bharati Telecom, in India. It de- cided to leave Bharati for the Birla group be- cause, according to an AT&T spokesperson, “With the Birlas, we feel very comfortable. We share the same philosophies for integrity and customer focus” (Mitrd 1775).

In exploring all possible sources of back- ground information on a potential partner, non- competing firms may be a good place for a for-

eign investor to start. Existing partnerships with non-competing firms may not only serve as sources of information but also as springboards in forming future partnerships. When the S1.7 billion Duracell Corporation ~1s contemplating forming a joint venture with the Poddar group

in India, it talked to the Gillette Company first, which was already involved in an ongoing joint venture with Poddar. “Gillette shared a lot of information with us, because they have a similar distribution pattern and we‘re non-competing,“ said the \ice president of manufacturing for inter- national development at L>uracell (Oldenborgh 1775). Eventually. Gillette introduced Duracell to the Poddar group. resulting in a joint venture.

PERSONNEL DECISIONS

T he personnel decisions made by a for- eign investor can have a crucial impact on the firm‘s bility to deal with local

challenges as hvell as its overall chances of busi- ness success. An investor \vishing to do business in India should focus on four factors: (a) choos- ing managers who have the right temperament; (1~) dedicating personnel exclusi\,ely to govern- ment work; Cc) pro\+cling appropriate pre-depar- ture training for managers: and (cl) providing adequate infrastructure support in India for them.

Choosing Managers with the Right Temperament

Some firms have chosen expatriate employees of Indian origin to head their operations in India. These managers have the dual advantage of knowing the company and the country culture. However, as the president of AT&T India-him- self an expatriate of Indian origin-maintains, “Having an Indian is not as important as having someone with the right outlook, someone who really likes India, because there are lots of frus- trations, delays, and a different work ethic” (Abdoolcarim 1774).

Long-term thinking and patience are prob- ably two of the most crucial ingredients for suc- cessful managers-local or expatriate-in India. It may take much more time to negotiate and implement a project than initially anticipated. Take AES Corporation. which wanted to build a power plant in the state of Orissa. The project manager had initially anticipated being in India for six to nine months. But after almost a year and a half, AES had gone through various rounds of renegotiations in the power purchase agree- ment, seeking government approvals on every- thing from capital costs to technical design, and was still far from completing the project. A senior executive at GE said. “You’ve got to be prepared mentally to work in a challenging, not-so-stream- lined environment [in which1 certain inefficiencies such as low productivity, [poor] transport, and power shortages will take a few years to iron out. You have to stay three years before life gets exciting” (Abdoolcarim 1774).

Dedicate Personnel Exclusively to Government Work

Having one person taking care of government work is a \vorthn-hile expense. This is especially true initially. n+en the company is just starting off. Br):-Air, a 520 million maker of industrial drying equipment from Sunbury, Ohio, has heen conducting business in the Indian subcontinent for t\vo decades. But it still eniplq~s one person full-time to handle government paperwork. Though on the surface this expense may seem a bit unnecessary, it ends up saving many cost]) delays and interruptions. The person dedicated to taking care of government work helps establish the requisite contacts and becomes a “known face” in government circles. Moreo\:er. othct managers are free to pursue more value-added acti\+ties.

Provide Appropriate Predeparture Training

Many organizations provide some sort of pre- departure expatriate training to aid their effective-

ness in India. Courses focus on the cultural, so- cial, and business customs of the country and try to prepare managers for a smoother transition. This helps in creating better-adapted managers who have greater chances of business success. Often, however, what has been taught in these courses, though generally correct, may not equip managers very well for their particular assign- ment. For instance, the managing director of Goodyear India learned some Hindi before he left. But then he was posted in Madras, where the language of choice is Tamil. “I’d been taking lessons in Hindi. But I’m totally lost in Madras,” he said (Bansal 1994).

Many other subtle differences may not be covered in these courses but are nonetheless very important for cultural adaptation. For example, one of the first culture shocks is the adjustment to the Indian work-clock, which begins around 9:30 a.m. rather than 7:30 or 8:00, when most expatriates are accustomed to beginning work. The dress code is another source of concern. Expatriates may not know what to expect, partly because there is no rigid dress code in Indian business circles. Awareness of other subtleties, such as the preference for evasive rather than direct refusals for invitations or the custom of showing up a few minutes late for parties, may also help expatriate managers avoid embarrassing situations. Not knowing the decorum for any one situation may not be damaging, but taken to- gether such subtleties can become progressively frustrating. Offering training courses that focus on these subtleties, along with some generalities, can result in better prepared managers.

Provide Adequate Infrastructure Support for Managers

It takes time for expatriates and their family members to adjust to the inconveniences of daily living, such as inadequate water and power sup- ply, traffic snarls, and erratic telephone lines. Adjusting to these nonwork-related issues some- times takes the biggest toll on expatriates. For example, “living out of a suitcase” for many months has become an unwelcome reality for many expatriates. In some cities, such as Bombay, inadequate housing combined with steep rents has forced expatriates to live in hotels until suitable accommodations are found.

Many expatriates also find that their social circle is considerably narrowed. Social events may be restricted to business lunches and em- bassy dinners, so spouses may also have prob- lems adjusting. Though such cities as New Delhi have formed network groups to help families adjust to Indian living, others have no such provi- sions. It may be difficult to find the right schools for the children of expatriates. Lack of privacy at

home because of live-in help may cause addi- tional strain for some.

All of these irritants tend to extract a toll on expatriate managers. This in turn may limit their effectiveness on the job and hamper their ability to deal with work-related hurdles. In speaking about his posting in India, the principal econo- mist with the Canadian International Develop- ment Research Center warned that “companies now have to seriously consider providing ad- equate infrastructure to their expatriate employ- ees” (Bansal 1994).

F ree market reforms have greatly enhanced the attractiveness of foreign investment in India. Despite such great progress and

potential, however, the maze of bureaucracy may greatly increase business costs and frustrations for foreign investors and their executives. Though it is difficult to avoid red tape completely, investors can leverage their major decisions to reduce the anguish of dealing with bureaucratic hurdles. We suggest a three-pronged strategy-the right choices in location, joint venture partner, and personnel-for tackling bureaucratic hurdles and improving the chances of business success. 0

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Investing in India: Strateglrs for Tackling Bureaucratic Hurtlles Ii

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Sanjiv Kumar is an assistant professor of management and Leena Thacker- Kumar is an assistant professor of government, both at the University of Houston-Downtown in Houston, Texas.