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3Qs: India a mix of opportunity and challenge for Western multinationals

Despite the global economic slowdown, India has experienced rapid economic growth, and is now hoping to attract investment from global companies. At The Economist’s recent India Business Summit in Paris, Ravi Ramamurti, Distinguished Professor of International Business and director of the Center for Emerging Markets at Northeastern, was the first speaker on the opening panel. Ramamurti, who will also speak at The Economist’s upcoming Innovation Summit in Berkeley, California, here discusses the opportunities and pitfalls for Western business in India.

How interested are Western companies in India and why?

Today, Western companies are very interested in India because they see it as one of the major growth markets of the world. But many European and American firms have been slow to position themselves to succeed in India. President Obama noted during his India trip that the US does more trade with the Netherlands than with all of India.

Western firms realize they cannot ignore a market with a billion consumers, $1.5 trillion in gross domestic product and 8 to 9 percent growth. But they are finding it hard to capture customers and make money, because India is a heterogeneous market, with a very diverse population. Its middle-class may be getting wealthier at a fast clip but India’s consumers are still a lot poorer than those in the West and are very price conscious as well. And Indian firms are fierce competitors with a substantial home-field advantage. A few Western firms, like Honeywell, have learned how to win in countries like India. More will surely follow.

What should Western firms be aware of when partnering with Indian firms?

Indian firms can be valuable partners in penetrating the local market, because they understand local customers very well, they are well connected with important actors, they know how to run ultra-low-cost operations and they usually have strong local brands and distribution. But working with them can be challenging. Many are family-controlled businesses whose decision-making processes can be puzzling to Western managers.

In turn, local firms tend to be impatient with the slow decision-making of multinational firms. Buying out the local partner in a joint venture can also be difficult and expensive, should that become necessary. Western firms must also remember that many local firms aspire to global leadership, and may see joint ventures with multinational firms as stepping-stones to their own success. An interesting example is Suzlon Energy, whose CEO was at the summit. In just 15 years, his company has catapulted from nowhere to become the third largest wind-energy company in the world, joining the likes of GE and Siemens. Many Indian firms have similarly lofty ambitions.

Will India’s infrastructure be able to keep up with the country’s growth?

It hasn’t and it won’t. Infrastructure is India’s Achilles’ heel. It is a testimony to the Indian private sector that the country grows at 8 to 9 percent despite awful infrastructure. India’s success is not because of the state, as in China, but in spite of it. The country plans to spend $1 trillion to $1.5 trillion on infrastructure over the next decade, creating a potentially large market for Western firms.

But, as the CEOs of Accor, HSBC and Schneider noted, Indian projects take too long to get off the ground, long-term financing is a problem and land acquisition is cumbersome and controversial. The obvious contrast is with China, where projects move at lightning speed. Weak infrastructure could drag down India’s growth rate by a percentage point or two — unless India’s private firms find yet more creative ways to compensate for the shortcomings of the state.