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 with progressive 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 figure out 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 implemented environmental 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 coauthor 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 well from 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 remarkable combination 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 diverse pace 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 into account 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 and microwave 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 fastmoving 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 lowincome 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 consumerrelationship 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 contest P&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 142 million, 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 homegrown 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 provides computers, 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 service is 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 increasing R&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 seriously mistaken," 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 principal decisions 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 the different 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 and underdeveloped 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 and

Development, 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 postliberalization 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 pesticides controversy 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.'

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 Indian companies 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 foreign capital 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 opinion according 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 for domestic 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 foreign capital 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 farming because 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 among rich 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 political power 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 can be 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.