The last two decades of the 20th century witnessed a dramatic
world-wide increase in foreign direct investment (FDI), accompanied by a
marked change in the attitude of most developing countries towards
inward FDI. As against a highly suspicious attitude of these countries
towards inward FDI in the past, most countries now regard it as
beneficial for their development efforts and compete with each other to
attract it. Today, the developing countries use foreign direct
investment (FDI) as an engine of growth. For a developing country, it is
the vehicle through which capital is provided and efficiency induced in
the industrial sector. The firm in the country of origin is encouraged
to invest in the developing country because of the lower resource costs,
a growing market and restrictive import policies. Foreign direct
investment is, therefore, an intertwining of interests of both the host
and the home country. A firm that undertakes foreign direct investment
gets involved in the purchase of an existing enterprise or facilities,
establishing and managing new ones and/or participating in the
management of an enterprise in a foreign country. It therefore requires
the firm to conduct operations in the foreign country either through
overseas subsidiaries or through joint ventures. Studies conducted so
far have concentrated mainly on studying trends, patterns and location
issues with respect to FDI, and therefore, have dwelt on the macro
factors and policy orientations of both the host country as well as the
country of origin. Though these dominate the movement of FDI into the
host country, a neglected area of research, as pointed out by Meyer
(2003), has been an analysis at the firm level of the conditions and
externalities that help or those which may deter the FDI flow.
This paper is an effort to understand the parameters considered by
the Japanese firms while entering the Indian market. The study looks
into the methodology of entry strategy of eight Japanese firms across
different sectors. A thumbnail sketch of the selected firms is given
below in tabular form.
Highlights of these selected companies are that first, apart from
the familiar Japanese FDI firms in the automobile sector, firms from the
pharmaceutical sector, agricultural machinery sector and the chemical
sector were chosen to understand if there are any differences in entry
strategy. Secondly, two distinct groups can be identified in those which
entered just after opening up of the economy in 1993 and those that came
in post 2001 when a more liberalized policy was adopted in many sectors.
At the firm level it essentially allowed the 'automatic route'
in more number of sectors (where prior government approval is not
required for FDI), as well as the fact that foreign direct investment
was increased to 100 percent, thus allowing for wholly owned
subsidiaries. Thirdly, sectors like agricultural equipment and
pharmaceutical industry were chosen as they are sunrise industry in
India. The idea for this kind of selection was to bring in diversity
thus allowing for a more insightful understanding. The focus of this
study is to understand the entry strategy of Japanese firms, and
especially, how they identify their Indian partners.
The study was conducted on the basis of a questionnaire circulated
to the organisations concerned, prior to the setting up of interviews
with key personnel. The questionnaire used open-ended questions since
the main objective was to get the opinion of the respondents. Before the
visit, some guidelines were drawn up to provide direction to the
interviews with select managers, of whom at least one was Japanese.
Since the top management of these companies was the target group, the
interviews were conducted in a conversational manner in order to gather
more information. A recording facility was used wherever permitted. In
most of the companies, a plant visit was also arranged. The companies
sent the completed questionnaires through electronic mail, at a later
Foreign direct Investment Regime of India
Independent India started off in the path of economic development
with a strong state presence. By the 1970's, India had moved
towards sustainable development with a strong policy of import
substitution. FDI was discouraged by India, as it was seen as an
encroachment of economic independence. The outcome was (a) imposing
severe limits on equity holdings by foreigners and (b) restricting FDI
to the production of only a few researched items.
India's story of foreign direct investment (FDI) participation
began with the opening up of selected sectors of the economy in 1991 as
an initiative under the large umbrella of economic reform. Under a new
industrial policy, foreign participation was allowed in the form of
equity participation of up to 51 percent in high priority sectors. This
was the first phase which lasted till around 1995. Subsequently, the
Government of India has progressively opened up the economy to many
other sectors and has also allowed for 100% equity participation in some
sectors. By far, today, the policy for FDI allows freedom of location,
choice of technology, and repatriation of capital and dividends.
[FIGURE 1 OMITTED]
According to the Department of Industrial Policy and Promotion,
"FDI Policy permits FDI up to 100% investment from foreign/NRI
investors without prior approval in most of the sectors including the
services sector through the automatic route. FDI in sectors/activities
under the automatic route does not require any prior approval either by
the Government or the RBI. The investors are required to notify the
Regional office concerned of RBI receipt of inward remittances within 30
days of such receipt and will have to file the required documents with
that office within 30 days after issue of shares to the investors."
i Prior Government approval for FDI/NRI is necessary for any activity
that is not covered under the automatic route. The sectors that do not
come under the automatic route are Gambling and Betting, the Lottery
Business, Business of chit fund, Nidhi Company", Housing and Real
Estate business, Trading in Transferable Development Rights (TDRs),
Retail Trading, Atomic Energy, Agricultural or plantation activities or
Agriculture (excluding Floriculture, Horticulture, Development of Seeds,
Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms
etc. under controlled conditions and services related to agro and allied
sectors) and Plantations (other than Tea plantations). The Foreign
Investment Promotion Board (FIPB) is the government agency which
approves all proposals that require government approval. The Department
of Economic Affairs, Ministry of Finance and Department of Industrial
Policy and Promotions are the other agents who play a major role in
assisting FDI follow up.
To attract FDI, India has set up special physical locations where
foreign companies can operate and avail of various benefits. These areas
come under the domain of the state government and are overseen by the
central government. These are:
a. Special Economic Zones: 100% FDI is permitted under automatic
route for setting up of Special Economic Zone (SEZ). Units in SEZ
qualify for approval through automatic route subject to sectoral norms.
Details about the type of activities permitted are available in the
Foreign Trade Policy issued by the Department of Commerce. Proposals not
covered under the automatic route require approval by FIPB.
b. Export Oriented Units (EOUs): 100% FDI is permitted under
automatic route for setting up 100% EOU, subject to sectoral norms.
Proposals not covered under the automatic route would be considered and
approved by FIPB.
c. Industrial Park: 100% FDI is permitted under automatic route for
setting up of an Industrial Park.
d. Electronic Hardware Technology Park (EHTP) Units: All proposals
for FDI/NRI investment in EHTP Units are eligible for approval under the
automatic route. For proposals that are not covered under the automatic
route, the applicant should seek separate approval of the FIPB.
e. Software Technology Park Units: All proposals for FDI/NRI
investment in STP Units are eligible for approval under automatic route.
For proposals not covered under automatic route, the applicant should
seek separate approval of the FIPB.
[FIGURE II OMITTED]
In India, FDI operates through subsidiaries or joint ventures with
Indian partners. At the firm level, FDI goes through three specific
phases, and to understand the firm's experience, each phase has to
be scrutinised separately. The first phase is when a firm initiates the
process of targeting the Indian market. There are various reasons for
entry into a market--for a Japanese firm, it is primarily for access to
the local market and to expand it for its own product(s).
Until recently, Japanese foreign direct investment into India has
been significantly lower when compared with FDI in other Asian
countries. At the firm level, this means that a large number of
companies have shied away from investing in India. One reason that is
often quoted for this is that India is not perceived as a viable
destination for investment by Japanese firms as it has alternative
locations in its immediate neighbouring countries and South East Asian
Entry Strategy of Japanese Firms into India
As India emerged as a market with a strong potential for growth,
some Japanese companies took the initiative to invest in India. For most
investing companies, competitors had already set foot in India.
Moreover, the central and state government policies were encouraging
enough to make India an alternative option for them.
India as a destination for FDI hinges on two important factors- low
cost advantage and a growing domestic market. While these factors drive
FDI from across the countries, it is interesting to note that there were
other reasons for Japanese firms to come into India. However, among the
firms studied, Toyota Kirloskar Motors (TKM), Satake and Koyo had come
to India in the past and tested Indian waters but their experiences had
not been rewarding. Toyota had partnered a joint venture with DCM to
build light commercial vehicles branded 'DCM Toyota'. They
found the outing very tiring, as DCM's approach to the partnership
was very high-handed. This resulted in a lot of friction. Thus, when DCM
decided to tie up with Daewoo, Toyota called off the partnership. Koyo
had a joint venture partnership with a state unit in Andhra Pradesh and
incurred huge losses due to operational inefficiencies and bureaucratic
indifference. Satake, too, had a poor experience in India. To test the
Indian market, it had sent 25 units of rice processing mill machinery in
knocked-down form to the Government of India under open bidding. Of the
25 units shipped through a shipping agency of Indian origin, only 12
units were supplied. The others went unaccounted for. Furthermore, in a
year's time, a product of an inferior quality with the same name as
that used by Satake to market its product hit the Indian market. Satake
reacted by turning away from the Indian market. When India opened its
doors to FDI investment in 1991, these companies stayed away because
their past experiences had made them hesitant and apprehensive about the
possibility of sustained operations in India.
Low Cost Advantage: Located in South Asia, India has a large
growing population and a sizeable number of the population who are
educated and technically skilled and where labour costs are relatively
low. This has encouraged multinationals to set up operations in India.
Japanese multinationals were no different. However it should be
remembered that for Japan there are many alternative destinations which
could provide similar environment. By 1993, most South East Asian
countries had seen influx of Japanese investment. Most of the ventures
had been a win-win situation for both Japanese multinationals and the
local host. Thus destination India had to provide a little more than
this simple cost advantage. It is interesting to note here that Kyocera
choosing India as a destination, apart from low cost semi trained
skilled workers was that the Indian workforce was English speaking and
thus servicing the European client was cheaper and easier.
Market: While low cost advantage for Japan exists in many of the
South East Asian countries and its immediate neighbours like South Korea
and China, for Honda and Toyota, the Indian domestic market with a
growing consumerism was an important reason to locate in India. In 1993,
Honda took the risk of investing in India and set up its operations in
1995. Known for being a maverick company in Japan, Honda felt that early
entry would help in penetrating the Indian market. Further, it had the
foresight to rightly target the upper segment of the income group in
India in which the desire for plush big cars had been curtailed during
the previous regime. Toyota, because of reasons explained earlier, felt
the disadvantage of late entry. However with savvy market study they
were able to penetrate Indian market. Eisai's reason for entry was
also centred on the volume of its business. Further, with Indian policy
makers giving importance to medical tourism, Eisai saw it as an
opportunity to make an early claim on the market.
The Jones' Effect: Among the companies studied, the late
entrants were also motivated by their competitor's success. While
Toyota's effort to establish itself was motivated by two main
Japanese competitors namely Suzuki and Honda, a company like Satake was
influenced by its German competitor's success in India.
Feasibility Study: In spite of the above advantages as a step to
enter India, each of these firms conducted detailed feasibility surveys.
Most of them used McKinsey or Ernest & Young for evaluation of some
parameters. Satake was the only company that had used the Japanese
trading company Marubeni and Mitsubishi. The locations identified by the
survey teams considered factors such as proximity to a national highway,
port or airport, as the need might be, as well as the available
infrastructure--from land to telephone connectivity, water supply,
internal roads, sewage system, tax holidays, specific requirements and
availability of low cost labour as well as skilled manpower. For the
automobile and chemical companies, the promises made by the state
governments also played a crucial role.
Physical Location: India, for all of the eight companies, was
geographically located in an advantageous position as it lay between the
East and West. Further, with global activities most Japanese
multinationals were sourcing a global workforce. India had the advantage
of being a low cost country with most industrial hubs providing a
lifestyle quite up to the international standard. Thus locating in India
As discussed, India had also worked on improving its image as an
attractive destination. Green-field areas in India are usually chosen by
the state government to promote industrial development. There are
broadly two types of zones namely, 'industrial development
zones' to give impetus to certain prominent sectors like
automobiles electronics and technology parks for the software industry
and 'export processing zones' dedicated to those manufacturing
units which plan to export some part of their products. In 1995 when
India opened up its economy, Japanese multinationals were riding high on
their success in transnational operations. India too was keen on
Japanese participation as they had respect for Japan as an Asian giant
as also because its political relationship with Japan was cordial. The
Maruti Suzuki venture had also created a lot of trust for Japanese
partnership. Thus in 1995 one saw many Japanese multinationals setting
up manufacturing units in India. All the Japanese multinational chose
green-field areas for their operations in India because this gave them
certain advantages. The state governments favoured the Japanese firms as
they were major investors and the respective state governments were more
cordial to their demands, giving them the advantage in negotiation.
Further, by positioning themselves in locations earmarked for industrial
development or special economic zones, they took the advantage of
taxation and land utilisation policies. Green-field areas also gave them
the benefit of sourcing raw talent, thus helping them to promote the
Japanese method of management.
Mitsubishi Chemical Corporation (MCC) is a case in point. Despite
having other options for locations, MCC's decision to locate in
West Bengal has always intrigued observers, since the state has a
communist government--a factor that is perceived as a deterrent to
attracting FDI. The various project teams from MCC that visited India
during 1994-96 essentially looked at coastal states which had port
facilities. In Haldia, they found Hindustan Petroleum Corporation
Limited (HPCL), an Indian public sector company, already in a similar
field of operation. They also found that George Soros held some shares
of HPCL. Moreover, Haldia was close to their Thailand operation.
Besides, the proximity of West Bengal to the textile industry in Eastern
India and Bangladesh was an important consideration. Since its major
competitors were based in western India, MCC felt that an operation in
the east would help them gain the markets in the north and north-east as
well. The lush green environment with large water bodies in Haldia was
an added attraction. All these factors played a role in finalising
Haldia as a preferred location.
While business considerations were the primary factors in the
choice of location, the local climate also played a part in some cases.
Toyota, for instance, had a choice between Chennai and Bangalore; it was
the climate of Bangalore that tilted the decision in its favour. Above
and beyond, many companies also factored in expatriate lifestyles to
select their locations.
Partnership: Companies like Honda and Toyota took the entry mode of
joint ventures with Indian business houses to operate in India.
Considerable time was spent by them in identifying compatible business
partners. Compatibility was sought not only in the financial capacity of
the partners but also in their philosophy towards business, their
attitude towards work and their interest in Japan and Japanese
management. Further, the individual personality of the Indian partner
also played a role in the signing of the joint venture document. They
then used their partners to establish links with the bureaucracy and
state political outfits. Honda, which came to India in the first phase
of liberalisation was allowed only 49 per cent equity participation but
as and when the Indian government allowed for more equity participation
Honda immediately increased its stakes and today it stands at 51 per
cent. Honda has always maintained that it would increase its stakes as
it gives them more rights legally. However, as far as the car segment is
concerned, Honda preferred to maintain the very harmonious relationship
with its partner instead of buying the partner out. Since Toyota came in
after 2001, they thus began with 51 per cent equity participation.
Sona Koyo Steering initially started operations as a vendor to
Maruti Udhyog Limited, a joint venture of government of India with
Suzuki Japan. This venture was set up in 1985 under the policy of pure
invitation by the government of India. Suzuki as a partner insisted on
using components produced by its vendors in the first lot of its
production. However, the agreement had insisted on indigenization of its
components. As a move towards meeting its promise, Suzuki helped its
vendors to find partners in India under technical collaboration. Koyo
Seiko was a trusted vendor of Suzuki and Suzuki desired its partnership
in India. However because of its past experience Koyo only attempted a
temporary arrangement with Sona Steering to provide technical help by
training its engineers in 1985. This small step grew into a partnership
overtime resulting in making this company one of the best with respect
to quality and efficiency in its industrial sector.
MCC and Eisai followed a more conventional entry strategy. It was
considered too risky to set up a distribution channel for a drug that
would be sold as an over the counter drug by chemists. MCC started to
export Purified Terephthalic Acid (PTA- a chemical essential for textile
industry) into India from 1993 and Eisai got into a licensing agreement
with Glaxo Smith Kline and Unichem for the sale of two of its most
popular drugs. By resorting to this option, both companies feel that
they profited by understanding both the market and the nuances of
administrative issues, albeit indirectly.
While entering India MCC intended to follow the Maruti Udyog
limited strategy of finding a government partner as Maruti had benefited
from it. Being in the chemical industry and producing PTA where there
were no foreign players it wanted to cover any externalities through a
government partnership. Further, its main competitor was an Indian
company called Reliance which was known for its alliance with political
power and the bureaucracy. Having considered all these factors it went
in for a government partnership.
Apart from the locational advantage envisaged with respect to West
Bengal, the clinching point was the keen interest shown by the
Government of West Bengal in attracting MCC. During negotiations with
the government, MCC found them to be cordial, sympathetic to MCC's
needs and eager to provide external support to make the Japanese
giant's Indian operations a success. Indeed, the issue of labour
was a major concern, but the Government of West Bengal repeatedly
assured MCC that it would extend all possible help to establish
congenial labour relations. It was the state Communist government's
strong cadre base in Haldia that boosted MCC's confidence in
setting up base in Haldia since it was felt that this provided it some
insurance against sabotage or opposition from the local population. MCC
PTA India decided to have the West Bengal Industrial Development
Corporation among its minor shareholders with a 5 per cent stake.
Through this strategy, it was assumed that MCC PTA India would be able
to iron out operational bottlenecks with respect to dedicated oil
pipelines and human resources.
According to YKK it was keen to operate India since the 1950s.
During the 1960s it had sent a mission to India to look at prospect of
an entry. However the industrial policy of India had placed metallic
zipper industry under small scale industry. Thus entry to YKK was
denied. In 1996, the zipper industry was moved from small scale industry
to large and medium scale industry. Seeing this opportunity YKK entered
and established itself. To YKK, this move had an added advantage in that
it was granted wholly owned subsidiary at the outset
Japanese Multinationals have known to flock together into a country
and set up operations. This clustering was often directed by its MITI
(now known as METI). However in the case of investing in India, no such
trend can be seen. Rather, the driving force for the early entrants has
been their foresight on opportunities in India and for the later
entrants it was the success of their competitors. Having been successful
in their outings in other countries, the Japanese companies have entered
India after a thorough investigation for which they have taken the help
of renowned consultant companies. A significant change has been that
other than Satake, the companies had used consultant firms of other
countries. Mitsubishi used the strategy of exporting to India before
starting a business operation, and Eisai used a distribution partner to
gain understanding of Indian markets. Honda, Toyota, and MCC chose the
option of joint ventures. In joint ventures the partnership was
concluded not because of fulfilment of financial needs but rather
because of comfort level of the Japanese top management with their
counterparts in India. Sona Koyo Steering partnership shows yet another
dimension. By forming a tentative alliance of providing technology
today, the partnership rests on equality between the partners. YKK found
that it was viable to enter India when the Indian government allowed
wholly-owned subsidiaries. An interesting observation is that due to the
changes in foreign investment policy although Honda and Koyo have the
option of buying out their Indian partners they have not done so as they
appreciate the relationships which is beyond economic or financial
considerations. Strategically, all of them located themselves in
green-field areas to build on the advantages in terms of assistance
offered by the government and sourcing of raw talent that could be
moulded. They believed that by locating their companies in green-field
areas, they could promote the philosophy of Japanese management into
their operations which continues to be vital for Japanese
* FICCI (2002), "Investment Environment in India-A survey of
Japanese Investors" Report -Federation of Indian Chambers of
Commerce and Industries, New Delhi.
* JETRO White Paper on "Outward Foreign Direct
Investment" Various Issues.
* Press Note No.1 (2005).Department of Industrial Planning and
Promotion, New Delhi India. Available at www.dipp.go.in.
* SIA News Letter (2007), "FDI Synopsis on Japan"
Department of Industrial Planning and Promotion, New Delhi India.
Available at www.dipp.go.in.
* Bala Komaraiah, J,(2003), "India-Japan Business Relations in
the 21st Century", in Japan's Role in South East Asia M.D
Dharamdasini (ed.), Lancer Books, New Delhi.
* Bartlett, C.A., Gita Piramal, Sumantra Ghoshal, (2000),
"Managing Radical Change", Viking, New Delhi.
* Belzowski, Bruce. M, et. al, (2007), "Inside India: Indians
View their Automotive Future", IBM Institute for Business Value.
* Delios, Andrew, et.al, (2008), "Political Hazards,
Experience and Sequential Entry Strategies: The International Expansion
of Japanese Firms", 1980-1998, Strategic Management Journal,
* Hideki Yamawaki, (2007), "Japanese Exports and Foreign
Direct Investment: Imperfect Competition in International Markets",
Cambridge University Press.
* IBEF's (2007) "India-Japan: A Little Japan in
India", available at www.ibef.org.
* Japan Bank for International Cooperation, (2008), "Survey
Report on Overseas Business Operations by Japanese Manufacturing
* Japan Bank for International Cooperation, (2002), "Foreign
Direct Investment and Development: Where Do We Stand?" Research
Paper no: 15.
* Kim, Bonghoon, (2009), "Recent Trends and Prospects of FDI
in India," available at firstname.lastname@example.org
* Makino, Shige, et. al. (2004), "The Characteristics and
Performance of Japanese FDI in Less Developed and Developed
Countries", Journal of World Business, 39(4):377 392.
* Nagraj, R. (2003), "Foreign Direct Investment in India in
the 1990s: Trends and Issues", Economic Political Weekly Review,
India, 38 : 1701-1712
* Patrick, Oskarsson, (2005), "India Attraction: Profitable
Multinationals as Subsidy Junkies-A Study of Incentives for Foreign
Direct Investment in India", Finnwatch, Finland.
* Narula Rajneesh, Lall Sanjay, (2006), (ed.), "Understanding
FDI-Assisted Economic Development", London: Routledge.
Selected Web Sites
World Bank, Delhi, India, available at www.worldbank.org.in Japan
Bank for International Cooperation, available at www.jbic.go.jp/en/
Doing Business 2009, available at www.doingbusiness.aol
Japan External Trade Organisation, available at
Toyota Kirloskar Motor Ltd., available at
Honda Siel Pvt Ltd., available at http://www.hondacarindia.com
Sona Koyo Steering Ltd., available at http://www.sonagroup.com/
YKK India Pvt. Ltd., available at http://ykkindia.com
Eisai pharmaceuticals Pvt. Ltd., available at www.eisai.co.jp
Kyocera wireless India Ltd., available at
Mitsubishi Chemical Corporation PTA, India, available
Satake India Engineering Ltd., available at
(i) Website of department of Industrial Policy and Promotion
(ii) A Nidhi company is a company registered under Companies Act
and notified as a nidhi company by Central Government under Section
620-A of Companies Act. It is a non-banking finance company doing the
business of lending and borrowing with its members or shareholders.
Srabani Roy Choudhury, Jawaharlal Nehru University, New Delhi,
Table1: Profiles of the Selected Firms
Name of Firms Year of Product
YKK 1934 Zippers
Honda Siel Pvt. Ltd 1948 Light automobiles
Sona Koyo Steering 1929 Auto components
Satake India 1896 Rice mill
Engineering Ltd equipment
Kyocera Wireless 2000 Mrjbile system
Mitsubishi Chemical 1950 PTA Chemical
Toyota Kirloskar 1934 Light vehicle
Eisai 1936 Drugs
Name of Firms Nature of Location
YKK Subsidiary Delhi
Honda Siel Pvt. Ltd Joint venture Greater Nd ida,
Sona Koyo Steering Technical Gurgacn, Haryana
Satake India Subsidiary Delhi
Kyocera Wireless Subsidiary Bangabre,
India ltd Kamataka
Mitsubishi Chemical Joint venture Kclkata.West
Corporation PTA Bengal
Toyota Kirloskar Subsidiary Bangabre,
Matar Ltd Kamataka
Eisai Subsidiary Murnbai,
Pharmaceuticals Pvt Maharashtra
Name of Firms Plant Location Year of
YKK Haryana 1997
Honda Siel Pvt. Ltd Greater Noida, 1995
Sona Koyo Steering Gurgaon, Haryana 1985
Satake India Not applicable 1996
Kyocera Wireless Not applicable 2003
Mitsubishi Chemical Haldia West 1997
Corporation PTA Bengal
Toyota Kirloskar Bangalore district 1997
Eisai Vizag, Andhra 2004
Pharmaceuticals Pvt Pradesh