Expert Commentary: Joint Ventures for Market Entry in India
By Chris Devonshire-Ellis
Posted: 3rd September 2014 09:17
While many foreign companies choose to access the Indian market through direct and indirect export rather than by establishing a local business presence, developing a joint venture (JV) with an Indian partner can sometimes be both the most strategic and affordable option for market entry. Although entering into a JV with a domestic partner is required for foreign companies seeking to operate in sectors that do not permit 100 percent FDI, a growing number of JVs with Indian firms are being established for strategic market advantage rather than legal necessity.
Entering into a JV with a local partner can provide Western firms with enhanced credibility, and local contacts, market experience, and can also facilitate the navigation of India’s complex regulatory framework throughout the market entry process. For foreign companies with an existing presence in the Indian market, JVs can expedite penetration into new geographic areas and enable product line expansion and diversification. JVs also provide advantages in risk management by diluting legal and financial liability between two or more partners, which can be beneficial at every stage of market entry and operational involvement.
In India, JVs can be incorporated as either private or public limited companies, and the precise type of JV may vary depending upon the number and origin of participants, duration and scope of the venture, and degree of participation. Two of the most popular joint venture options in India today are licensing and franchising JVs.
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Licensing JVs are common among Western companies and entail granting a domestic company the rights to produce and market a product in India under the foreign company’s brand name. In exchange for these rights, the foreign company typically receives a licensing fee and product and brand exposure in the Indian market at minimal cost and risk. However, the nature of licensing JVs can limit control over the marketing and image of a product in the Indian market and can sometimes lead to Indian partners becoming future competitors after a venture concludes and the foreign company decides to directly sell its own product in the country.
Franchising JVs entail granting Indian partners (franchisees) access to a company’s brand name, marketing materials, and business plan. In exchange for becoming a franchise of the foreign company (a franchisor), the partner will usually provide a percentage of turnover on a monthly or annual basis. Franchising JVs enable rapid market entry and also entail relatively low costs and level of risk for the overseas company. Some drawbacks include the need to build in contractual mechanisms for coordinating and controlling the activities of franchisees in addition to limited control over business image and reputation.
Entering or initiating a JV should always be carefully planned and undertaken with the advice and oversight of a professional services firm. As with all options for market entry and expansion in India, due diligence, a strategic vision, and meticulous planning are critical prerequisites to success.
This article was first published on India Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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