Tesco Plc in India

Tesco PLC in India

Many developing countries are emerging markets in which are attractive tons of foreign investors to participate. Like China, Russia, and Brazil, India is one of the most conceivably profitable places. However, in order to have a successful business in such markets, the investors have to consider many factors of those countries such as level of freedom, corruption, competition and risks. In this case, although India has restrictions on foreign direct investment (FDI) in retail trading, it is perceivably a lucrative emerging market for Tesco. Therefore, the issue here is whether Tesco should enter the Indian market. If so, when should be the proper time--before or after the restriction relaxed and with what strategies? Also, should Indian government relax the FDI restrictions in the retail sector? And, what are the advantages that the country will obtain of doing so?

Although the Indian government had allowed foreign direct investment (FDI) in many industries, it is still questionable in retail sectors. That is because the foreign arrival can lead to the end of tons of local small and unorganized players. The Indian retail segment is worth £140 billion annually and over 95% of the retail market is unorganized and uncomputerized family-run stores--kiranas . However, there is a lot of motivation for the Indian government to issue FDI in retailing. First, the current local retail capacities (e.g. logistics systems and warehousing) and knowledge (e.g. supply chain management) of the Indian market are only partially mature. Thus, the coming of Tesco and other expert-global firms will enhance the local infrastructure and supply chain which is one of the current constraints of the Indian market to modern retail practices. For example, lifting the FDI regulation in retail sector would diminish the country's food dilemma since according to Telegraph.co.uk, up to 40 percent of Indian food produce has rotted annually before reached the market. Moreover, in 2010 there was more than 17 million tons of food grain left to rot because of no sufficient warehousing space, accounting for the loss of £2 billion. In other words, the entry of Tesco in India would get rid of this sort of problem. Second, through proper management and economic of scale, the foreign player can offer cheaper and better commodities to consumers. As a result, it will generate more demand and a fruitful market. Third, Tesco would create more high-income jobs for Indians when it can operate its own retail stores. For example it would provide IT services, finance, accounting, design, research and analytics services. In addition, it would promote thousands of its local employees globally. Last but not least, retailing segment in India needs to be an industry status because the retail sector is the second largest employer after agriculture and has a share 12% of GDP and 8 % of the employment in 2009. A lot of rural youth and mediocre educational qualified people are employed in this industry. Hence, with the organized and high-technology retail industry, Tesco can help India boost up quality of the labor market and the country's GDP.

Even though in the near future the Indian government may relax on the restrictions and allow Tesco to have its own retail outlets in India, the country should have limitations and new proper regulations to protect itself. First, it should rigidly limit the percent of ownership of foreign firms no more than 51%. Thailand is an important example for this issue. Before imposing the restrictions on FDI in Thailand, Tesco bought 75% of equity of a local supermarket--Lotus. That means every dollar that Thais spend at Tesco, 75 cents will go to the United Kingdom and only 25 cents will stay, which caused the imbalanced economy in Thailand. Another method to protect economic loss and fate of small local players is establishing new tax policy for foreign players. The new policy should be higher taxation on foreign retailers in order to partially control price efficiency of the retailers and increase the national revenue. Next, using zoning and timing regulations help the local small retailers survive such as barring the foreign retail stores from where the small stores located prevalently and limiting operating hours of the foreign retail stores in crowded small family outlets areas. In fact, the foreign retail stores must be located in suburban areas while some in the crowed areas would be required to close early for a few days a week. Also, the Indian government would impose that 100% of fruits, vegetables and grains that the retail stores will offer must be produced domestically. This regulation will stimulate the development of agriculture and farming locally by using agreements that ensure high quality produce and better earnings to poor Indian farmers.

Because the elimination of the restriction on FDI is still ambiguous, the entry to India must be based on prudential decisions. Tesco has to weight costs and benefits that it is going to get from entering to India while the restriction is ongoing. Not only financial concerns, but Tesco also has to be aware of non-financial factors including risks and stabilities in India. In 2010, India has fallen in the rankings of a new political risk index released by Maplecroft, a company that assesses global risks for businesses. Of the South Asian nations, India has seen the biggest fall in the rankings to the 27th, descending nine places from the last year (2009). The country is rated as high risk in the Dynamic Political Risk Index (DPRI), which includes