mncs in rural india

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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



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



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



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."



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



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



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



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



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



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



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.



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."



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



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



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



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.'

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Country


http://en.wikipedia.org/wiki/International_relations




http://en.wikipedia.org/wiki/Corporation



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



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



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



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:



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.



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



countries. So MNCs should face same rules and regulations as

the domestic industries of the developing countries are facing.

mncs in rural india

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