Foreign Investment

What is the Best Market Entry Strategy for India?

Entry Strategy

India is wealthy in resources and manpower. Foreign entities find India to be an attractive destination to do business. India is among the fastest-growing economies in the world. To promote foreign entities to do business in India, Indian Government has eased the entry barriers. This has had a positive impact on the development of the country. In the last couple of years, despite Covid-19 restrictions and lockdown, India has shown a rise in the GDP[1] rate. Now that the world has come back to normalcy, the opportunity for growth is even better. In the year 2022, the World Bank Report has ranked India at 63rd position in the ease of doing business as compared to 142nd rank in 2014. This suggests that the coming years will be even more prosperous for India.

The foreign entities planning to come to India must decide on the market entry strategy to India. Every entity has to decide on a market entry strategy that best suits its business objectives. Market entry strategies can be either by investing capital in India or by having foreign ownership without any capital investment. The best market entry strategy for a foreign entity to enter India would depend upon the nature of the business, the structure of the business, and the type of product or service that entity has to offer. However, there are a few common market entry strategies that are used by emerging markets. These strategies have been discussed.

Common Market Entry Strategies in India – Best Market Entry Strategy

  1. Wholly Owned Subsidiary
    It is a type of entity where a foreign parent company establishes its subsidiary company in India. The subsidiary can be in the form of a private or public limited company. It is a type of foreign direct investment and is also known as Green-field Investment. A wholly owned subsidiary is established under the provisions of the Companies Act, 2013 and rules framed thereunder. Therefore, it is considered an Indian company for a tax levy. It is also a preferred market entry strategy if the foreign entity wishes to have a limited liability and exercise total control over the business.
    India has reduced the compliance procedures and with digitization, India provides a one-step incorporation process. This has reduced the cost and time taken to establish a wholly-owned subsidiary. The FEMA in India allows up to 100% investment in a subsidiary in sectors such as manufacturing, e-commerce, and IT via the automatic route. There is 100% control of the foreign entity on business operations. Therefore, establishing a wholly-owned subsidiary in India could be the best market strategy to enter India if the company is into manufacturing, e-commerce, and IT. 
  2. Joint venture/Equity Participation
    In joint ventures, generally, the foreign entity forms a strategic alliance with an Indian partner. Joint ventures are the most preferred market entry strategy after wholly owned subsidiaries. Two companies, one foreign and one Indian, come together to form a Joint Venture. The Indian partner with which the foreign entity forms a strategic alliance should be already carrying on business in the same field or area. There are two types of Joint Ventures (JVs), they are:
    Incorporated JV – These JVs are incorporated as distinct and separate legal entities and are governed by the laws framed by the Indian Government.
    Unincorporated JV – These JVs are not incorporated entities and are formed by contract only. They are governed by contractual terms and conditions.
    The benefit of having a local partner is that it will be able to share with the foreign entity the insights on the market conditions. Additionally, the Indian partner already has a marketing/distribution set-up, contracts, and networks when it comes to setting up operations. Even the financial resources get divided between the foreign entity and its Indian partner. This market entry strategy also helps the foreign entity retain control of the business operations.
  3. Limited Liability Partnership (LLP)
    An LLP is another form of business entity. It is a mixture of a limited liability company and a partnership firm. The FEMA rules allow investment in LLPs operating in sectors where 100% foreign investment is allowed under the automatic route. LLPs are incorporated at the centre level and registered under the Limited Liability Partnership Act, of 2008. It is easier to manage with fewer regulatory and compliance requirements. It also enjoys tax advantages.
  4. Branch Office
    Foreign entities can have their branch offices to carry out business in India. A branch office can carry out all activities as carried out by the foreign parent company except retail trading, manufacturing, and processing activities. If the foreign parent entity wants to carry out manufacturing services it has to sub-contract these services. However, if the foreign entity has a made profit during the preceding five financial years in the country where it is registered or a net worth of at least 100,000 USD, then the foreign entity has to take prior approval of the Reserve Bank of India (RBI) to establish a branch office.
  5. Liaison Office
    It is a common practice for foreign companies willing to enter India to establish a liaison office. However, the role of a liaison office is limited to collecting data about the market condition and providing information about the company to prospective Indian customers. Its role is primarily to act as a channel between the foreign parent entity and the Indian market. No commercial activities can be undertaken by a liaison office. The functioning of a liaison office is done from the inward remittances received from its foreign parent entity.
  6. Project Office
    If the foreign entity has any contract-based project in India, it can set up a project office in India to represents the interest of the foreign entity in India. The operation of a project office shall be limited to the execution of the project only. Further, the project office shall function only till the time of completion of the project. The Project Office can be established either based on the fulfillment of the terms and conditions of the contract or by seeking approval from the government. The project office established by foreign NGOs, non-profit organizations, or foreign governmental bodies requires prior approval from RBI.
  7. Export/Trading
    Another market entry strategy is to have an indirect presence in Indi. It can be done by Exporting goods into the Indian market. To export its goods to India, the foreign entity has to hire a local distributor who will perform the transactions with the customers. A benefit to the foreign entity by selecting export as a market entry strategy is that while working with the local distributors, the foreign entity can get a hand on the existing client base of the local distributor. The disadvantage is that the foreign entity has little to no control over the sales. Further, this market entry strategy can only be used if the foreign entity is dealing in products and not services.
  8. Licensing and Franchising
    These are the emerging market entry strategies in which a foreign entity can have an Indian presence. In both these market entry strategies, the foreign company allows an Indian entity/party to use the foreign entity’s name to produce and sell products or offer services. The difference between the two is that, under licensing the foreign entity, receives royalties for allowing to use its name while under franchising, the foreign entity receives a fee for allowing to use its name.
READ  How can a Foreign Entity enter into the Indian Market?

Conclusion

In this blog, we have seen the different types of market entry strategies that a foreign entity can adopt to enter the Indian market. However, the best market entry strategy may differ from entity to entity and market to market. Whether or not a strategy is best for a particular entity can only be determined based on the factors such as the nature of the business, the products, and services provided by the business, financial capability, and the objective that the entity aims to achieve.

Read Also: Market Entry Strategy in India for a Foreigner

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