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India has undergone a substantial and serious process of economic liberalization, allowing foreign countries to enter with far more latitude than ever before. But the emerging nation continues to impose multiple restrictions on foreign-owned companies, for reasons that it considers justifiable and appropriate. For retailers desperate to reach India’s growing consumer class, the market thus might be open, but it certainly isn’t easy to enter.

A key regulation is the mandate that at least 30 percent, by value, of all the products that any retailer sells in the country must be produced locally. This regulation replaces a previous rule that demanded all foreign entrants partner with an Indian company before they could enter the country. But even though firms such as Walmart and Carrefour could operate and function as independent entities in India, they found the bureaucratic process of doing so too difficult. In both those cases, the retailers have given up and removed their investments.Lo-res_WE046769-S

Others are still doing their best to overcome the hurdles. For example, IKEA was able to negotiate an extension on the deadline for when it had to meet the 30 percent local sourcing standard. With a “grace period” until 2022, IKEA thus has undertaken a massive search for local suppliers that can manufacture its products according to its own internal quality standards, as well as in accordance with ethical demands.

Unfortunately for IKEA though, India’s labor force remains relatively unskilled, and manufacturing accounts for only about 17 percent of the economy. The factories that are in place do not meet IKEA’s requirements for quality; for example, the laminated tabletops provided by one manufacturer contained unacceptable levels of formaldehyde. Furthermore, child labor remains relatively common in India, whereas IKEA seeks to enforce prohibitions against such practices. With these struggles, IKEA obtains only about 3 percent of its products from Indian producers.

Still, there are some hints of success. Following two years of intensive effort—including door-to-door campaigns asking families to allow their female members to work, setting up childcare facilities at the factory, and establishing bank accounts for every employee—one rug factory is running at full capacity and producing approximately 175,000 rugs annually. The retailer also has plans in place to contract with or open 10 additional factories in the coming year.

Discussion Question:

  1.  Why is it so difficult for non-Indian retailers to do business in India?

Source: Preetika Rana, The Wall Street Journal, February 23, 2016