The interesting thing is that there is a large historical precedent for such activity by the Indian government. In 1977, they tried to do the same thing with IBM and Coca-Cola.[1] Both of the companies pulled out of the Indian market in a move that had widespread impact upon the nascent Indian economy. It is alleged that the desire for an equity grab by the existing power complex in India was the prime motivating factor for the acts that were sprung upon those companies. These acts were designed to force them to "partner" with an Indian company. At that time the market just wasn't big enough to warrant such sacrifice - even today Ikea refuses to enter the market because of this - and they pulled out.
Although there are several parallels over here, one of the key take-aways for me from this news is that India is just not a good place for anyone (other than its citizens perhaps) to do business. The system is inherently broken and flawed to the degree that any smart startup should look elsewhere if they're considering expanding to this market.
You did not factor in a few important aspects into your analysis:
a. A law was passed in India called the "Foreign Exchange Regulation Act" in 1973 with the aim of regulating payments and foreign exchange. It contained language that was extremely restrictive for any foreign investments, by all foreign entities including Indian citizens living abroad.
b. This was not initially a concern, but became a huge problem during a 21 month period between 1975-77 when a state of emergency was declared in India [[following the assassination of the then Prime Minister]] edit: incorrect attribution, emergency was declared, but the prime minister was assassinated a few years later.
c. The law was fixed/made more flexible in 1993, and foreign investments immediately started returning.
d. The act was repealed in its entirety in 1998.
e. The issue mentioned in the article revolves around a complaint being made to CCI and as "a complaint filed with CCI cannot be withdrawn" there is no choice but to investigate.
f. The $5B amount is baseless and pure conjecture with no source/comment from either the Competition Commission of India, Lawmakers or Google.
Strangely there are very few to no parallels over here. It definitely does not warrant a statement as broad as India is just not a good place for anyone (other than its citizens perhaps) to do business.
It definitely does not warrant a statement as broad as India is just not a good place for anyone (other than its citizens perhaps) to do business.
Agreed.
India has implemented both command economy policies[1] and free market policies[2] in recent history. But today they definitely seem to be leaning more towards free market policies, though not to the extent of the Western democracies[3].
>>>a. A law was passed in India called the "Foreign Exchange Regulation Act" in 1973 with the aim of regulating payments and foreign exchange. It contained language that was extremely restrictive for any foreign investments, by all foreign entities including Indian citizens living abroad.<<<
I'm pretty sure that you have misunderstood the law. Here's a report prepared by a group at the University of Illinois, Urbana-Champaign in 1987;
"""During 1977, IBM was asked to withdraw from India due to its unwillingness to comply with the Foreign Exchange Regulation Act (FERA) of 1973. Earlier, IBM commenced operations in India in 1952, with long term objectives of growth and increasing market share in the world com- puter and information systems market through an improved competitive stance. During a period of 25 years, IBM made total profits of approxi- mately U.S. $5 million on a total investment of $8 million. Total remittable profits, at the time of phasing out its operations in 1970, were approximately $10 million. These profits included a net asset value of approximately $5 million.
This poor performance was largely attributed to several factors, including compensation of approximately $7.5 million paid to employees and assets sold at less than book value. Other factors included a high rate of effective taxation of 80% to 85% as well as low rates of depreciation on equipment. IBM-India operations constituted only 0.06% of IBM Corporation's total business. IBM's activities in India during this period and the events leading to the IBM-India withdrawal are summarized in Appendix A.
During this period, the Government of India (GOI) alleged that a large number of foreign-owned and foreign-controlled corporations operating in India were making excessively high gross revenues and before-tax profits. Further, the repatriation of large amounts of capital by the multinational corporations constituted a serious drain on India's scarce foreign exchange reserves. The GOI contended that the multinational corporations were using monopolistic power to stifle competition in the Indian market. In addition, the multinational corporations, according to the GOI, gained favorable rates for large financial credits, thereby competing with domestic firms for scarce capital. Finally, the GOI per- ceived that the multinational corporations were transferring obsolete technology or current technology of minor importance for developmental purposes.
Surveying the industrial scene, the GOI found that most foreign direct investment had occurred in the consumer goods sector. These ventures yielded high rates of profit and required simple technology which could be furnished by domestic entrepreneurs.
Based on these findings, the GOI formulated its own priorities with regard to the country's development. With an abundance of natural re- sources and a large supply of low-cost skilled labor, India provided the multinational corporations with a large, untapped market and opportunity to enhance their international competitiveness.
Taking stock of its developmental priorities and increased bargaining strength, the GOI formulated its desire to influence the course of foreign direct investment in India. The primary objective was to ensure that foreign direct investment in India would fall in line with the nation's developmental priorities. The means adopted to achieve this objective was the Foreign Exchange Regulation Act (FERA) legislated on January 1, 1974.
Foreign Exchange Regualtion Act— The FERA affected all foreign companies with foreign equity exceeding 40 percent. According to FERA, four levels of foreign equity participation were permitted.
First, all trading companies engaged in purely commercial activities as well as manufacturing enterprises utilizing "non-sophisticated" technology, were required to reduce their foreign equity to 40 percent.
Second, "high technology" companies, utilizing "sophisticated" technology and/or engaging in "special" activities, as designated by the GOI, were permitted to retain a foreign equity holding of 74 percent.
A third intermediate level of 51 percent foreign equity was established for multi-activity companies engaged in both sophisticated technology fields and other commercial and trading activities.
The fourth level of 100 percent foreign equity was permitted only in those instances where foreign firms were engaged in purely export activities."""
>>> b. This was not initially a concern, but became a huge problem during a 21 month period between 1975-77 when a state of emergency was declared in India [[following the assassination of the then Prime Minister]] edit: incorrect attribution, emergency was declared, but the prime minister was assassinated a few years later.
c. The law was fixed/made more flexible in 1993, and foreign investments immediately started returning. <<<
The assassination in of itself was a result of an intense power struggle in the Indian state. It's not so hard to look at it and see that these people needed additional revenue and decided to pressure successful companies to get a cut of their business. You can call that market protection if you want or attach any other label, but the fact is that they saw (from their perspective) a potential source of revenue and they flexed their muscle to get a slice of the pie. It backfired and they had to drop the changes they made to get people back on the table.
>>> d. The act was repealed in its entirety in 1998. <<<
The protections were enshrined elsewhere. The only thing really changed was that now the Indian market was large enough and that the power players were willing to make nudge-nudge-wink-wink exceptions for much smaller fee.
>>> e. The issue mentioned in the article revolves around a complaint being made to CCI and as "a complaint filed with CCI cannot be withdrawn" there is no choice but to investigate.
f. The $5B amount is baseless and pure conjecture with no source/comment from either the Competition Commission of India, Lawmakers or Google. <<<
I've said nothing about the amount or the complaint, just that such shenanigans aren't out of the ordinary from the Indian power players.
>>>Strangely there are very few to no parallels over here. It definitely does not warrant a statement as broad as India is just not a good place for anyone (other than its citizens perhaps) to do business.<<<
So a country where you have to get a permit for doing every small thing and there's a bribe associated with each permit is a good place to do business?
That sounds more like a subset of protectionism. Its a simple economic concept where policies or doctrines are implemented which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
I prefer free markets and am generally biased against protectionism, but at times its required.
The most common argument for Protectionism is the "infant industry" justification. Considering in 1973 India was 25 years old. The infant theory can be given some merit.
Also note the "Indicators of foreign direct investment regulation in 87 economies"[0] study by world bank, which gives more insight into this.
The protections were enshrined elsewhere.
Please find me one economic law that was repealed anywhere due to being restrictive, where the sections of laws that worked or were still needed were not enshrined elsewhere.
Actually I know of one that was not enshrined elsewhere i.e. Glass–Steagall Act. But that's a whole different story.
such shenanigans aren't out of the ordinary from the Indian power players.
Such shenanigans aren't out of the ordinary from power players in ANY country that has ever implemented or enacted protectionism.
So a country where you have to get a permit for doing every small thing
I must be missing something here, I think procedures and permits are a sign of a developed or developing economy. Can you tell me a business in North America or EU where a Foreign Corporation or even a citizen could do business without getting any permits or licences? Some may have more streamlined systems to get the licenses, but I doubt the streamlined process was version 1 of the system.
There's a bribe associated with each permit
Finally something I agree on. I find the whole business with bribing extremely morally challenging. And I'd try and stay away from businesses and countries where this is required by default.
But I have to ask, from a capitalist point of view, if a corporation wants to do business in such an atmosphere, could this atmosphere be concluded as the cost of doing business?
Also read up on this a bit further, turns out Coke was the largest contributor to the previous government's political campaign in the early 70's which resulted in the opposition party exerting extra pressure on Coke when the opposition came into power in India.
I've said nothing about the amount or the complaint
Thank you for stating this. The topic is a discussion on Google being potentially fined for anti-competition and anti-trust behavior similar to the one's pursued and later settled by the FTC and EU. The complaints have been around for a few years, and not necessarily a money grab. Also as their(India's) current law does not have a provision for settlement or withdrawal, the country has no choice but to investigate the original complaint.
The alternative solution would be to make nudge-nudge-wink-wink type of settlement with a bribe or just letting it slip between the cracks and do nothing.
> These acts were designed to force them to "partner" with an Indian company.
FWIW, China does this in just about any manufacturing/tech-related sector, and it's been pretty successful for them. The not-very-hidden intent of the requirement is to ensure that there's a Chinese partner who, it is hoped, will gain enough expertise from the joint venture to jettison the foreign partner in the next iteration (this might include "borrowing" some trade secrets). Hence e.g. Exxon's plants in China are all joint ventures, because they aren't allowed to open fully self-owned/operated plants.
India of 1977 is different to India in 2014. So I think, it is not worth to go back in the past.
Ikea is looking for space to start stores in India. Please search in Google. Your information seems to be outdated.
https://www.google.co.in/#q=ikea+in+india
India's FDI in retail policy wants to protect its SME's. Elected Govt. is supposed to do that to distribute wealth across society.
India is still good place for business. It is complex, slow moving compared to west, chaotic at first glance but any one can adapt easily.
India has been fining international companies ridiculous amounts of money recently, I think the instability of the current government has something to do with it. Let's see what happens after the next election.
While retroactive applicability of Income Tax act is questionable, it is hard to argue for Vodafone or Hutchinson when they tried to avoid Tax by doing the transaction through a Cayman Island registered entity. To me, while it may be legal at that time, it sounds like pure corporate greed which Indian government is trying to fix. But that is not very different from other countries such as UK, Countries in EU trying to clamp down on Tax Haven exploits by Google etc.
Developed countries won't change rules for the past, since it is quite impossible to follow them...it just doesn't make sense. I'm also thinking of Nokia and uncertain tax liabilities, India is just a horrible place to do business these days, it's riskier than even china.
>> I think the instability of the current government has something to do with it.
Care to elaborate? I don't see the correlation between instability of a government and fining international companies for antitrust. Besides, the current United Progressive Alliance (UPA) government in India has been in power for 2 full terms (10 years). The second term is about to end now and the elections are due in April 2014.
Many of the comments on this thread are just lazy armchair theories, including this one.
You talk about a "historical precedent" that goes back to when India firmly identified itself as a socialist country. And from that distant, warped past, you fast forward 36 years to the present and to a country that in 1991 began its journey of economic liberation (which included jettisoning its socialist principles for all practical purposes), and expect us to believe that the two incidents are somehow related?
But what better examples to refute your ludicrous theory than Coca-Cola and IBM themselves, both of which came back to post-liberalization India. To the extent that India likely has IBM's largest global workforce [0], and Coca-Cola pours billions of dollars to maintain its leadership over Pepsi [1]
Surely those companies would know a thing or two about "historical precedents", don't you think?
As for the most likely reason behind this $5 billion figure (sorry conspiracy theorists, it isn't extortion either as Indian politicians know Google's power isn't something to be messed with in the age of social/Internet savvy voters) is the old-fashioned plant. I'm guessing Microsoft (the primary shadow-backer behind all anti-Google cases in India) laid out the worst-case scenario off-the-record to a PTI journalist, along with the $5 billion figure. And the journalist was either too lazy to question/research it, or too taken in (journalists like throwing up "exclusives" like this with billions of dollars in the headlines) to reduce it to the decidedly unsexy $~33M.
It's just a theory mind you, but having been a business journalist in India for nearly 6 years (and having done stories severely critical of Google, lest you think I'm a shill for them), I think it's much more likely than some of the other fantastic theories in this thread.
>>> Many of the comments on this thread are just lazy armchair theories, including this one.<<<
That's an ad hominem that adds very little in terms of substance to your argument as you do not know anything about me or my background.
>>>You talk about a "historical precedent" that goes back to when India firmly identified itself as a socialist country. And from that distant, warped past, you fast forward 36 years to the present and to a country that in 1991 began its journey of economic liberation (which included jettisoning its socialist principles for all practical purposes), and expect us to believe that the two incidents are somehow related?<<<
Entity X has demonstrated a history of Y actions. Ignoring that day while analysing the probability of X doing something in the future is foolish.
Further, while the dialogue might have change. The individuals that hold power in India haven't changed over time. It's highly family oriented and it's reasonable to assume that they will act in a similar manner to preserve their interests.
>>>But what better examples to refute your ludicrous theory than Coca-Cola and IBM themselves, both of which came back to post-liberalization India. To the extent that India likely has IBM's largest global workforce [0], and Coca-Cola pours billions of dollars to maintain its leadership over Pepsi [1]<<<
It's a large market. They dropped the statutes is it unreasonable to presume that they won't capitalise on that? I don't see the point on attributing any emotional qualities to this. There is no profit in petty vendettas.
>>>Surely those companies would know a thing or two about "historical precedents", don't you think?<<<
I'm sure they do. Doesn't detract anything from my point or the analysis I've posted elsewhere. I fail to see the argument you're making over here.
>>>As for the most likely reason behind this $5 billion figure (sorry conspiracy theorists, it isn't extortion either as Indian politicians know Google's power isn't something to be messed with in the age of social/Internet savvy voters) is the old-fashioned plant. I'm guessing Microsoft (the primary shadow-backer behind all anti-Google cases in India) laid out the worst-case scenario off-the-record to a PTI journalist, along with the $5 billion figure. And the journalist was either too lazy to question/research it, or too taken in (journalists like throwing up "exclusives" like this with billions of dollars in the headlines) to reduce it to the decidedly unsexy $~33M.<<<
I've never mentioned anything about that. I merely pointed out that such fines and the Indian government being onerous towards entrepreneurial interests is something well established.
>>>It's just a theory mind you, but having been a business journalist in India for nearly 6 years (and having done stories severely critical of Google, lest you think I'm a shill for them), I think it's much more likely than some of the other fantastic theories in this thread.<<<
Okay. You still haven't refuted the core argument of what I had stated which is simply that there is a power base that would like to do such equity grabs and so on and it's not a convenient place to do business. Is that wrong?
Didn't say it was "so bad there," just that there is substantial variance in the degree to which countries "protect their markets."
Compare India or China with the US or Australia. I can't think of any companies that have been completely shut out of the latter two, but there seems to be a substantial list that have been unable to continue operating (at some point in time) in India and China. Eventually they might work through it and re-enter, but it's clear that they have far from ideal circumstances for foreign companies.
They are like cockroaches always find their way. There was embargo on Germany during WW2 but IBM was renting their machinery to Nazi. Also Coca Cola was on every corner in Iraq during embargo :-)
My point is this: Google may not be entirely in the clear. The big G does lots of shady things (thankfully its pals in the US govt. help it out each time). There are lots of shady things done by the Indian govt. Lets us wait for more details before condemning an entire nation.
Coca-Cola is harmful for your health, so maybe they did the right thing after all. You're not supposed to choose things just based on how much money it can make you.
Although there are several parallels over here, one of the key take-aways for me from this news is that India is just not a good place for anyone (other than its citizens perhaps) to do business. The system is inherently broken and flawed to the degree that any smart startup should look elsewhere if they're considering expanding to this market.
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[1] http://content.time.com/time/magazine/article/0,9171,919167,...