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Part - VII

3.7 Host country Government Policy and Regulatory Framework

The government policy and regulatory framework are the most important determinant of mode and quantum of FDI. This is amply demonstrated by India where the new government policy in 1991 led to de-licensing of several sectors and liberalization of policy on FDI. The foreign capital invested in the country increased from USD 0.l billion in 1991 to USD 4.28 billion in 2001 (World Bank Development Indicators).

Sector specific regulations are the key determinant of the transaction cost of doing business in a particular sector. The cap on foreign equity holding in an enterprise leads foreign companies to enter into JV with a local partner. A stable and investor friendly regulatory environment acts as a catalyst for FDI inflows. But an unstable regulatory environment acts as a dampener for the FDI inflows. So, in order to reduce their risks MNCs prefer JVs. This is illustrated by the telecom services sector in India.

The FDI in Indian telecom services sector is by "market seeking companies" like Singtel and Hutchison Whampoa. These companies have entered India either through JV's or have bought a stake later in an Indian telecom services company. The government's policy on maximum foreign equity holding puts a cap on the FDI in this sector. Also, the weak regulatory environment and TRAI's continuous flip-flops over CDMA-GSM issue has hurt FDI in this sector, and due to such regulatory risks MNCs prefer JVs.

3.8 Prior Experience with Host Country

The prior operational experience by the company itself or by a company similar to it plays a pivotal role in the entry strategy of the company. If the experience has been bad then the MNCs are likely to choose JV as the entry mode, in order to minimize the risks associated with the venture. One of the examples when a company preferred a JV as an entry mode while other similar companies in the same sector were going for the Greenfield projects is the case of IBM where it chose to enter India in JV with Tata in 1993. This was because IBM had to leave India in 1977 after the government reduced the maximum limit on foreign equity holding in any Indian company to 40%. Due to it's not so good experience earlier IBM was more cautious in 1993 and decided on a JV to cover its risks.

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* Contributed by: -
Abhishek Gupta & Anurag Ghuwalewala,
PGP-2, Batch 2003-2005,
IIM Bangalore.