mncs in rural india
TRANSCRIPT
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 1/23
MNCs in Rural India: At a Turning Point
Published: May 06, 2010 in India Knowledge@Wharton
A "symbiotic relationship" is how Sanjeev
Chadha, chairman and CEO of PepsiCo
India, describes the work that the food and
beverage multinational undertakes with
thousands of farmers across India. "We help them withprogressive farming techniques and they are of huge benefit to
us in securing a reliable supply chain," he says. Some observers
would call what Pepsi is doing corporate social responsibility
(CSR); others more cynically might say it's simply another
example of multinational corporations (MNCs) trying to figureout how to make inroads in India's challenging, but potentially
lucrative rural market.
Whatever the words used by executives like Chadha for such
initiatives, it is impossible to discuss multinational strategies
in rural India without mentioning CSR. In its various forms,
it is a critical part of their rural growth plans, often out of
sheer necessity. Filling the gaps left by government, MNCs
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 2/23
have built roads in rural India that help them deliver their
goods, provided education and health care for communities
whose workforces they rely upon, and implementedenvironmental programs to protect precious natural
resources needed to keep supply chains running smoothly.
"In some cases, I am sure CSR activities are mostly rhetoric,"
says Harbir Singh, Wharton management professor and co-
author of a new book titled, The India Way: How India's Top
Business Leaders Are Revolutionizing Management . "But CSR
is more legitimate in India than in the U.S., where infrastructure
has been built and government is seen as addressing societal
development agendas."
Yet now there's a shift in how MNCs look at their entire rural
India investments beyond CSR. With growth drying up in
developed markets and their center of gravity shifting to
emerging markets, MNC businesses in India are under pressure
to prove that their rural strategies aren't just about doing wellfrom a CSR perspective. They also need to show head office that
these strategies are doing well from a business perspective. In
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 3/23
short, the strategies must start delivering top- and bottom-line
results.
After years of false starts, missed opportunities and flawed
strategies, a number of MNCs' India businesses are getting
close. Others already are there and are ramping up their rural
investments. None can take that fine balance between doing
good and doing business for granted, as Nokia, Coca-Cola and
Max New York Life -- among the companies profiled in this
special report -- show. And it's for that reason that at PepsiCo
India, "our rural agenda has been driven by purpose and now is
moving into performance," says Chadha.
Spending Power
For many MNCs, there's a lot more riding on their rural India
performance than there once was as India's growth story spreads
to the heartland. Two-thirds of the country's one billion
consumers live in rural India, where almost half of the national
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 4/23
income is generated. A report by Technopak Consultants and the
Confederation of Indian Industries, a trade body, estimates that
the country's rural consumer market generated US$425 billionof revenue, up from US$266 billion the previous year.
The big reason for the growth is that India's rural consumers are
steadily gaining more spending power. The number of rural
households earning less than US$760 a year is down from 65%
to 24% since 1993, while those with an income of US$1,525
have more than doubled from 22% to 46%. Combine these
factors with improved roads and other infrastructure in rural
India to help products reach their markets, and it's easy to see
rural India's attraction.
"We are finally beginning to see that rural India has cash and is
able to spend at the same time," says Vijay Govindarajan,
professor of international business at Tuck School of Business at
Dartmouth College in New Hampshire, who is also the chief
innovation consultant for General Electric. "This is a remarkablecombination for companies."
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 5/23
But any company coming to India for the first time that thinks it
will be easy to take advantage of that combination is mistaken.
Rural India is hugely complex, not least because of its diversepace of development. As a recent study from IMRB
International, a research company in Mumbai, notes, some
markets are big but not as affluent as other markets (Uttar, Bihar
Pradesh) while some are affluent but not very large (Himachal
Pradesh, Goa). Experts also say that strategies need to take intoaccount the vast number of languages and cultural differences
across India's hinterland, while keeping strategies highly flexible
and adaptable.
It can mean developing products and services tailored
specifically to the rural market. When LG entered India in the
mid-1990s, numerous brands were vying for shelf space with
hardly anything to distinguish them from competitors. The
South Korean company developed two color television sets for
the rural market, Sampoorna (which means "complete" in Hindi)
and Cine Plus. At US$65 and US$107 respectively, the sets
were priced slightly higher than the black-and-white televisions
that other manufacturers were selling in rural markets and that
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 6/23
had become obsolete in urban homes. LG was also the first to
offer gaming with its cut-price TVs and menus in English and
Hindi. Now LG has refrigerators, washing machines andmicrowave ovens targeted at price-sensitive consumers sold
from hundreds of retail and distributor outlets across the
hinterland, with rural markets contributing 40% of its revenue.
Much also depends on the sector and products sold. In fast-
moving consumer goods, for example, MNC products are
capturing a sizable portion of rural consumer spending in a
number of areas, with year-on-year increases in rural spending
in 2009 on MNC shampoos (70%), washing powder (60%) and
toothpaste (112%), say researchers at IMRB. What's more, they
say, the average spending on these products is growing faster in
rural than in urban markets.
Soap Operas
In the course of ramping up the performance of their rural
strategies, MNCs are applying the lessons already learned. One
of those lessons is that the benefits of a first-mover advantage
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 7/23
are tough to hang on to as rural Indian consumers' tastes change
rapidly, with questionable brand loyalty.
That applies even to a groundbreaker like Hindustan Unilever
Ltd. (HUL), the country's largest consumer-products company
owned by Anglo-Dutch Unilever. It made waves in the
hinterland in 2001 when its Shakti Project enlisted self-help
groups to develop a network of women -- largely from very low-
income households -- into entrepreneurs, selling baskets of HUL
products door to door. Today, 42,000 women earn a living by
selling HUL products in more than 100,000 villages in 15 states.
"India's rural narrative has been defined by HUL," notes Pradeep
Lokhande, founder of Rural Relations, a Pune-based consumer-
relationship management organization.
In the meantime, HUL has embraced other novel distribution
strategies, such as selling products like its Sunsilk and Clinic
shampoos in small, inexpensive packets for low-income Indians
in the hinterland with little spare cash. Thanks to those efforts,the company has one of the most extensive distribution networks
in the country, with 6.3 million retail outlets, including one
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 8/23
million that it services directly. Rural India currently accounts
for nearly half of HUL's revenue.
But HUL's lead regularly comes under threat. In December, for
example, rival MNC Procter & Gamble launched Tide Naturals,
which is a 30% cheaper version of its Tide detergent targeted at
rural consumers -- a global first for the Cincinnati-based MNC.
The launch was part of the parent company's "purpose-inspired
growth strategy" to "touch and improve more consumers' lives
in more parts of the world." Within weeks of its launch, Tide
Naturals shook up India's US$8 billion detergent market by
clinching a 0.6% share of the market, according to AC Nielsen.
HUL's response has been to turn to a local court to contestP&G's use of the word "naturals" to promote its new product.
With neither side backing down, the case continues.
While other MNCs aren't necessarily going to be airing their
competitive grievances in court, they can expect fast, nimble
competitors to take them by surprise and grab market share if
they don't stay close to their customers -- which is no small feat
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 9/23
in a country like India, which has 642,000 villages, some with
populations as low as 500.
'Uncharted Water'
Nowhere is that more evident than in mobile telephony. Mobile
phone penetration in India jumped from 1.4 units per 100 people
in 1995 to 51 units currently. In the 12 months to September
2009, the number of mobile subscribers increased 55% to 142million, according to the Telecommunications Regulatory
Authority of India.
Taking a lead in that growth has been Nokia, the US$55 billion
Finnish mobile handset maker, which is one of the companies
profiled in this special report. As part of a global emerging
market focus since 2006, rural India now accounts for 40% of
Nokia India's US$5 billion annual revenue. But it's a crowded
business to be in. Along with Samsung, LG, Sony Ericsson and
Motorola, there are a number of handset makers not only from
China selling cut-price handsets, but also from India's home-
grown companies that are chipping away at Nokia's market
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 10/23
share lead with hand sets that are cheaper, more practical or
both.
Now Nokia, like other handset makers, is branching out and
forging alliances with various partners to offer mobile banking
and other services along with its handsets. "It's uncharted water"
-- as Gerald Faulhaber, a business and public policy professor at
Wharton, puts it -- one in which "customers are pushing the
companies and taking them out of the comfort zone."
Doing so successfully requires one thing: "listen to people,"
states Karishma Kiri, a Seattle-based strategy and product
management consultant at The K2 Group, who was a director of
Microsoft's Unlimited Potential initiative which providescomputers, software and IT training in emerging markets. "A lot
of companies tend not to listen to [what] rural consumers say
they need."
That's not as clear-cut as MNCs might think. The jury is still out
on the mobile services launched by news agency Reuters last
year and other service providers to deliver agriculture
information to farmers' mobile phone. According to Rural
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 11/23
Relations' Lokhande, the demand hasn't been strong. "There's a
perception mismatch between the farmers and the service
provider," he notes. While the companies assert that the serviceis useful, affordable and personalized, many farmers figure they
can get daily rates from their state agriculture marketing boards
for two cents, or half the price.
In rural areas, finding the magic price points that don't eat into
margins yet boost volume is an ongoing battle, with a lot
hinging on distribution. "We have to build, and are building
much deeper 'go-to-market' systems in rural India. They have to
be extremely cost-efficient, much more so than they are in the
urban areas," says PepsiCo's Chadha.
The US$43.2 billion MNC has been in India for more than 20
years and now claims to have overtaken Nestle as the top food
and beverage company in the country. Overall, India has indeed
been treating the company well, even during the downturn. India
revenue at its drinks business grew 40% last year, while volume jumped 32%, well outpacing most other countries in PepsiCo's
portfolio.
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 12/23
But it's not resting easy. Last year, it invested US$200 million --
the most ever in any single year -- as part of a US$500 million
plan to expand its distribution infrastructure, while increasingR&D and adding four new plants to the 45 it already has in the
country.
To make those investments pay off, rural India -- which
currently accounts for 20% of PepsiCo India's business -- is
taking center stage. "Over the next 10 years, I see rural India
forming 40% to 50% of our national business, and in the future,
growth will be powered by the rural areas," says Chadha.
Is that a long time to wait? "If any company wants [quick]
financial results from the rural initiative, it is seriouslymistaken," says Tuck's Govindarajan. "You have to look at the
next decade and not the next quarter."
K2 Group's Kiri agrees. "The rural incubation work of
multinationals is part of their business," she says. "But they need
to be less focused on [year-on-year] success and spend more
energy on building innovative solutions and business models for
this segment. It's a long haul."
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 13/23
Multinational corporations (MNCs) are huge business
organizations which open up income-generating assets in more
than one country through branches or their Majority Owned
Foreign Affiliates (MOFAs). They are also known as
Transnational Companies or Corporations (TNCs). An MNC
engages itself in the production of goods or services outside the
country of its origin. By opening up income generating assets in
more than one country, it makes its presence felt in the global
market. It has been estimated that around a quarter of the world
economy is being controlled by the big MNCs. The combined
sales of these top MNCs are estimated to be much higher than
the combined worth of economies of around 182 countries. The
MNCs, because of their huge resources and international
presence, are able to conjure up desires for their products in the
minds of the people in the country of their marketing base.
The MNCs are characterized by their huge assets. The principaldecisions taken by the company take into account their global
market. The emergence of the MNCs has led to the
monopolization of the markets. Production and investment have
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 14/23
become global as a result of which economic activities
pertaining to production; investment and trade are being
conducted by the MNCs through their branches or firms in thedifferent countries. Inter-firm transactions have led to the
concentration of economic power across the countries. Initially,
the development of the MNCs was through 'creeping increment'.
Slowly, but steadily, the MNCs have established their
subsidiaries beyond their country of origin, in developed andunderdeveloped countries. The MNCs also aid in the transfer of
resources from the host country to the country of its operations
which includes technical expertise, equipment, managerial and
marketing skills, among others.
The MNCs help to initiate development processes in several
underdeveloped countries through the transfer of capital and
technology. To establish a proper base in a foreign country, the
MNCs invest in labor, raw materials, advertising and marketing.
This helps the underdeveloped countries to develop their
resources. The MNCs help in the development of human
resource generates further employment and also help to transfer
sophisticated western technologies to the underdeveloped
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 15/23
countries. The technological expertise, advanced production
skills and use of local labor in the units facilitate transfer of
technology to those countries. Through Research andDevelopment, the MNCs develop products which are superior in
all respects to those which are indigenously produced by the
host countries. This induces the indigenous industries to brace
up for competition and encourages them to develop superior
products. The MNCs, thereby, end the domestic monopoly of the indigenous industries. The MNCs, apart from the transfer of
technology for production, sometimes provide marketing
services for the export of indigenous products manufactured by
the host countries. Exports generate foreign exchange which
helps the host country in developing its economy.
The MNCs have been quite successful in India. In the post-
liberalization era, as the license regime has been more or less
abolished the MNCs are thriving in India. They are present in
almost every sector of the Indian economy, especially in the
consumer durable market and automobiles. Automobile
manufacturers like General Motors, Ford, Toyota and Hyundai
are making good profits. Korean companies LG and Samsung
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 16/23
have become market leaders in electronic goods. The entire soft
drink market of India is being monopolized by US
Multinationals Pepsi and Coke. Though the pesticidescontroversy has affected the popularity of Pepsi, Coke and
Cadbury's they are still key players in their segments.
Multinational corporation (or transnational corporation)
(MNC/TNC) is a corporation or enterprise that manages
production establishments or delivers services in at least two
countries. Very large multinationals have budgets that exceed
those of many countries. Multinational corporations can have a
powerful influence in international relations and local
economies. Multinational corporations play an important role in
globalization; some argue that a new form of MNC is evolving
in response to globalization: the ‘globally integrated enterprise.'
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 17/23
MNCs are not new in India if we look in the past British East
India Company and Dutch East India companies were there
which came to India for trade and by taking advantage of
political conditions of India gained power. After adopting new
economic policy by government of India in July 1991 many
MNCs came in the Indian economic scene because the
government of India gave many incentives to the foreign
investors. So it is clear that government opened the doors of
Indian market to MNCs .Now the question is how the MNCs are
affecting Indian economy whether they are useful for our
economy or not? Let us analyze some brief impacts of MNCs on
different sectors of the economy.
MNCs and Indian Industries:
Some economists think that MNCs are helpful for Indian
industrial sector they think that Indian companies learn new
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 18/23
technique of production and new management techniques with
the arrival of MNCs in the Indian economic scene. MNCs
increase competition in the industrial sector so when Indiancompanies compete with global giants they also improve in their
working. With the entrance of MNCs in India demand for
skilled persons increased to a great extent so more and more
people are becoming skillful and the problem of skilled persons
is solved for Indian industries also. MNCs also bring foreigncapital in the country, which help to expand the market and
Indian industries also take benefit of it.
There are some economists who have some different opinionaccording to them the technology transferred by them is not
useful for countries like India because MNCs use capital
intensive technique and developing countries have scarce capital
and labour abundant so the technology they transfer is of little
use. The competition increased by MNCs is also disastrous fordomestic industries only few strong domestic industries have
enough strength to face the competition with global giants. As
well as skilled persons are concerned MNCs give higher salaries
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 19/23
to the skilled persons and thus able to explore the services of the
most skilled persons and the Indian industries are still out of the
services of these skilled people. No doubt MNCs bring foreigncapital in India but this capital later becomes the cause of
reimbursement of profit to the MNC's parent countries, which
cause capital flight from the country.
MNCs and agriculture:
Indian economy is an agrarian economy; a major part of the
population depends on agriculture directly or indirectly. If we go
back to past few decades Indian agriculture was considered
backward but now the time is changing and MNCs such as
Mahyco-Monsanto help in modernizing Indian agriculture. They
provide modern agricultural inputs such as HYV seeds,
pesticides, fertilizers and modern agricultural equipments to the
Indian farmers and thus Indian agriculture has turned itself from
subsistence level to making profits. MNCs also encourage
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 20/23
research activities in the field of agriculture in developing
countries like India.
If we see the other part of the picture India with billion plus
population, has put agriculture at the heart of its economy and
food security at the center of its agriculture policy. In
developing countries, MNCs encourage commercial farmingbecause they need cheap raw material. Farmers also get good
amount for their crop so the result is danger of food security,
which the world is facing these days. A big number of Indian
farmers are small and medium farmers who are not able to use
expensive agricultural equipments so the gap is widening amongrich and poor farmers, which is disastrous for the agriculture.
Moreover MNCs are making Indian farmers dependent on HYV
seeds provided by them and thus the biodiversity of Indian
varieties are in danger.
MNCs from social and moral viewpoint:
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 21/23
MNCs are not fair in their working in the developing countries.
Many MNCs are not paying their tax liability, they prefer to
establish in that country where tax laws are not strict similarly
they prefer to establish in that country where environmental
laws are also not much strict and these are mainly developing
countries. They even send their toxic waste in these countries by
taking advantage of loose environmental laws even the quality
of their products vary with country to country we can take the
example of coca cola which is of superior quality in USA and is
of inferior in India. MNCs also responsible for misallocation of
resources in the developing countries. They provide mainly
luxurious products because there is more profit in it. Thus
demand for these products increase due to demonstration effect
and this leads to misallocation of resources towards luxurious
goods but the need of developing countries is to produce more
and more necessary goods because most of the people belong to
poor or middle class.
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 22/23
Another aspect, which judges MNCs morally, is political
interference. Generally it is the practice of MNCs to gain the
economic power in developing countries and then get politicalpower by giving help to the politicians at the time of elections
and then manipulate industrial policies in their favor they also
interfere in the important political matters of these countries
which can cause a big danger to the sovereignty of developing
countries.
Conclusion:
After discussing various aspects of MNCs in developing country
like India the big question before us is whether MNCs play
positive or negative role in developing countries? Generally the
governments of developing countries don't keep control on the
working of MNCs, which is major fault on their side. MNCs canbe helpful for developing countries only when they are kept
under control. We should not give incentives to the MNCs only
because they are coming from some powerful advanced
7/29/2019 MNCs in Rural India
http://slidepdf.com/reader/full/mncs-in-rural-india 23/23
countries. So MNCs should face same rules and regulations as
the domestic industries of the developing countries are facing.