Dr. Richard Cuthbertson, Dr. Malobi Kar, and Dr. Mohua Banerjee share their perspective on FDI in retail, the future of Indian retailing and suggest Indians to consider the experience of other countries for the FDI debate in the country.
The debate over Foreign Direct Investment (FDI) in the retail sector reflects the importance, strengths, and weaknesses of the democratic process. Retail decisions are not just for the companies involved as they affect all: society, the economy, and the environment. It is important to address real hopes and fears even if they are not always based in reality. However, there comes a time when a decision must be made. At stake is the future of Indian retailing and all that this implies at the local, state, and national level.
Research at the Oxford Institute of Retail Management at the Saïd Business School, University of Oxford, with the International Management Institute, Kolkata, proposes four possible visions for retail development in India, each with its own benefits and costs: a kirana kingdom, sanskriti states, sasta world, or mishrit universe. India must decide on the appropriate vision, and then act on making it a reality that maximizes the benefits and minimizes the risks.
India is already a kirana kingdom, with the dominance of small retailers, suppliers, and farmers. The retailer– customer relationship is very strong in these locally based enterprises, but there is a lack of economies of scale.
Of course, there is much variation across India, and to some extent there are variations from state to state. If large variations between states are desirable, India could have a vision of retailing called sankriti states, where each community has a retail environment that reflects the local culture, traditions, and desires. While there may be some gains in economies of scale – for example, where states wish to allow large scale retailing – this may also lead to accentuating divisions within society, for example, between urban and rural.
If economies of scale are the key vision of Indian retailing, sasta world could be encouraged to develop. Large-scale retailing could become the norm, through large format hypermarkets and/or small-format discount stores. In this vision of Indian retailing, productivity would increase, but the dangers are a lack of choice and differentiation.
Finally, in a mishrit universe, the vision of Indian retailing would be an eclectic mix of different types of retailing offering choice and differentiation, but sacrificing some possible productivity gains. This is most easily achieved when price is not a key driver in consumer decision making.
All of these future visions of retailing in India have advantages and disadvantages. Any one of them can be achieved through a combination of public policy issues and retail practices, including decisions around FDI. Moreover, their respective downsides can be minimized and strengths maximized through the application of relevant laws and regulations such as planning, competition, and tax policies.
So, how does this relate to the current debate around FDI?
Without foreign input or large-scale investment, India will remain a kirana kingdom. In this situation, the addition of foreign knowledge and productivity gains through economies of scale are more difficult to achieve, but not completely impossible. Indian companies are already employing foreign techniques and making significant investments in the retail space.
The arguments around FDI are often confused because the term foreign direct investment includes two significant, overlapping but distinct, issues: “foreign” and “investment.”
The “foreign” element is a debate around the role of foreigners in India, and how to ensure that India benefits overall, and is not just exploited for the benefit of outsiders. This is a decision for India as a whole and may relate more to how things are done rather than what is done. It is worth noting that retailing is a decentralized activity. Primarily, it is local customers who are served; local people who are employed in stores; local property, sales, and employee taxes that are paid; and so on. Foreign retailing never works unless there is a local fit – which is why history suggests that foreign retailers will often fail rather than succeed. Even Wal-Mart, the most successful retailer in the world in terms of revenue, is still heavily reliant upon its home market in the USA and has failed in some foreign ventures, most notably in Germany.
The “investment”element is a debate around the role of large-scale retailing and how to ensure protection from the potential abuse of powerful corporations. Again, this is often an issue of how things are done rather than what is done.
It is worth noting that the bigger a corporation, the more important it is to protect their brand reputation, especially in a consumer-based industry. Thus, the need to protect corporate reputation can often lead to increasing standards, especially if it is done in an open and transparent environment. Without transparency, the abuse of power is not limited to corporations, as various scandals involving public organizations in India have provided sad evidence.
Many of the objections to FDI focus on large-scale retailing and the associated investment, rather than foreign retailers per se.
Are the fears of FDI real or imaginary?
While the fears surrounding FDI are real, the reality of those fears may prove somewhat different.
The experience of other countries should inform the FDI debate in India. In other emerging markets such as Brazil, Thailand, China, and Malaysia, there have been many positive effects as FDI rules have been relaxed, especially due to increases in productivity. In developed markets, quality standards are often higher, and there are more effective routes for local manufacturers to get new products to the whole consumer market.
For example, Thailand permits 100 percent foreign equity in retailing with no limit on the number of outlets. It has been argued that the entry of foreign players was instrumental in Thailand becoming a shopping destination. Moreover, FDI also enhanced the exports of Thai-made goods through the international networks of foreign retailers.
However, wholly open FDI is not the only way to develop. For example, in Malaysia, there are more restrictions on FDI even though the Malaysian government has designated the retail sector as one of the key areas of focus under their economic transformation program. Some of the initiatives include increasing the number of large-format stores, such as hypermarkets and superstores, modernizing smaller retailers to improve their competitiveness compared to large-scale retailers, and upgrading transport and infrastructure to facilitate retail distribution. One of the caveats in the Malaysian retail FDI legislation is to restrict store opening hours in major urban areas. As a result of this, investors are encouraged more towards investment opportunities in smaller urban areas. The government is now reassessing its store opening restrictions in order to increase foreign investment in the major urban areas while protecting small businesses.
Of course, there are potential downsides to opening up FDI. Increases in productivity through the introduction of large-scale businesses may result in some small stores, entrepreneurs, and farmers going out of business if they are unable to adapt o the new ways of working. However, his need to adapt is true in all markets, emerging and developed, and for all retailers, suppliers, and farmers – large or small, foreign or local. It is worth noting that there are successful, small, local retailers in every market in the world.
The experience of countries such as China and Thailand suggests that new employment opportunities are also created as FDI in retail develops. For example, Euromonitor research in the north-eastern region of Khonkaen and Udornthani reveals that local companies have benefited from access to national markets. Furthermore, new jobs may also be created through service businesses such as laundrettes, shoes bars, tailors, and pet groomers, taking advantage of the footfall created by a new shopping mall or hypermarket, such as has occurred in China at various locations.
As long as there is effective retail competition and efficient retail distribution accessible to the majority of people, then retailing, including the products sold and the additional services offered, is dependent upon customer choice. In other words, retailing becomes a democratic process and not a dictatorship. Therefore, the real fears surrounding FDI regulation, the role of foreigners and the role of large-scale investment (foreign or otherwise), should not be about whether the rules should be changed but about how they should be changed to improve retail competition and increase the efficiency of distribution.
So, what is the future of Indian retailing?
India needs to develop a vision of the future for retailing in India, including the pathway. For example, some people may prefer the vision of a Mishrit Universe of retailing, where large and small, Indian and foreign, food and non-food retailers work alongside one another to provide great customer choice, but this is only likely to be achieved when price is not a key issue. Given current economic forecasts in India, this is unlikely to be in the near future. So, what are the vision and pathway for retail development in India? Answering this question will enable constructive political debate, as well as provide a stable environment for potential investors and other stakeholders in which to make decisions.
Despite open markets, no one retailer dominates North American or European retailing, as each state and city has its own priorities and sets its laws accordingly. India can be the same. It is time to ensure that the correct policy framework is set for the benefit of India’s future economic and social development.
Compared to other sectors, such as manufacturing, energy or agriculture, retail has relatively little co-ordinated public policy as the relevant decisions are spread across different government ministries, departments, and functions. Effective retail competition and efficient distribution requires co-ordination between competition policy, planning laws, and local taxation, to name a few. With a common vision of retailing alongside a co-ordinated plan of action, based on the learning to be gained from the experience of other countries, India has the potential to be the best retail market in the world.
*Dr. Richard Cuthbertson, is a Research Director at Oxford Institute of Retail Management, Saïd Business School, University of Oxford. Dr. Malobi Kar is a Research Fellow at Oxford Institute of Retail Management, Saïd Business School, University of Oxford and Dr. Mohua Banerjee is Senior Researcher at International Management Institute, Kolkata.
**This article was originally published in January 2012 issue of Images Retail.