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The Big Picture – Should Indian Startups be given Protection against Foreign Firms?

  • December 19, 2016
  • 3
The Big Picture- RSTV
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Should Indian Startups be given Protection against Foreign Firms?

 

TOPIC:

General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  • Inclusive growth and issues arising from it.

General Studies 2

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation

 

India’s most successful internet entrepreneurs Flipkart and Ola have raised the banner of nationalism in their fight against foreign origin rivals, urging the government to design policies which will favour home grown companies. This coordinated push, amounts to seeking protectionist stand against US internet giants- Amazon and Uber. The two poster boys of Indian internet defined their battle as the one in which the capital plays the most important part and not innovation implying that the US companies are burning cash in the price war.

Protectionism and its need

The murmur started a long time back when the startups said that they should get protection from foreign giants. But this was the first time it was publicly spoken about. This was prompted by the competition and tilt towards certain companies.

Demand for level playing field is justified and valid. But beyond that, because one company calls itself Indian and should get protection is not how the business works anymore.

Though the foreign companies have large capital but then the Indian companies are also financed by the same source of capital.

So, it should be about who is able to bring in more capital, who is having a nimbler business skills, who understands local demands better and the competition should be about it.

The request comes from a certain segment of industry which survives entirely on cycle of investments and function on wafer-thin margins and sometimes non-existent margins. This industry suffers from extreme attrition and it’s also an industry where the top management is sometimes accused of perhaps benefiting the most in terms of making the best of pay scales from each cycle of investments.

So, if the question is asked if there is any other way in which the business can be run better and expecting spontaneous help and support from government is not possible in this day and age.

Zomato is an India based company and is now spreading tis wings to other countries. If other countries also followed a protectionist policy, Indian companies would not have realised their potential. So things have to be looked at in terms of level playing field.

Should there be protectionism?

Asking for level playing field is one thing, but asking for protectionism doesn’t work. It shouldn’t be encouraged as it further encourages the mindset of a trader and not of an entrepreneur. India needs to encourage entrepreneurship more than mindset of trader where there is need to move to next level, and this is not going to come through protectionism.

Asking the government to help fund innovation is different question but asking the government to fend off competition is not the right thing.

The work approach

Giants like Ola and Flipkart don’t require protectionism. When the business is run on losses to capture the market, it is not a favourable way to do business. These giants are burning money and destroying the whole business system of the country. The retail business is being spoiled as they come out with certain prices which are below their purchase price and they are fighting war there. So, no government can come out with a policy where they can take care of such war. There should be laws to tell these companies that money cannot be given away as humongous discounts. There has to have a system which makes the business profitable rather than keep on giving deep discounts which are not sustainable.

If there is an indigenous entity in competition with an overseas company with deeper pocket and want to wash out the company, then there has to be seen what kind of protection can be given.

Categorisation of startups

It should be understood that companies like Flipkart and Ola can’t bring in radical innovations, hence, there needs to be categories of companies. Protectionism depends upon the category of the entrepreneur.

Manufacturing startup gets some kind of protection from government as they are capable of innovating and contributing. Import duty is a form of protection that domestic manufacturers get. They have other advantages of knowing the local customer, having a distribution network etc.

On one hand if there is a talk about a culture of innovation that needs to be brought into. When there is large scope of innovation into manufacturing industries, it is perhaps easier to discuss, even in small scale or startup category.

In services industry, there are fixed things and they have to be dealt with as it is the nature of business. The plunge into the business by Flipkart and Ola has been taken with full knowledge that scope for innovation is limited. Hence, they need to figure out

India and startups

For Indian business, the world is a playing field. They have the imagination to think big and operate big. Funds and talent is available more in India than elsewhere. So it is actually upto one’s entrepreneurial daring and imagination to do business.

Policies in place

Policy on FDI and retail actually says that the company cannot discount a product and subsidize the sale. The subsidies has to come from seller.

The Competition Commission of India has to play a more active role to make sure that the competition is fair.

As far as protectionism is concerned and the government brings it into being, protectionism within the realm of legal framework has severe consequences and implications.

  1. There will be a race triggered between several countries where there will be retaliation from other countries. If all started playing the nationalistic card in the context of entrepreneurship, it wont go down well particularly in the backdrop of India’s obligations treaty under the WTO and TRIPS.

If somebody uses trade barriers as a way of protecting their own national interest or get protectionist about it, they end up setting the ball rolling as far as international dispute resolution is concerned.

  1. The message sent out to people in terms of foreign investors is that wrt to certain segments of industry which is burning cash, there should be protectionist measures.

Predatory pricing is one thing that e-commerce industry has been accused of. Fairly or not, rightly or not is a different question. But these are not issues that CCI can seize unless and until certain conditions are satisfied within the realm of competition act. So, the act of predatory pricing would amount to dominance of position provided the company is in position of dominance.

Innovation and investments

During the recession in US and Europe, the German government’s policy needs to be looked at to know how to deal with recession.

Most countries said that there was no point in investing in R&D during recession because there was capital investment into something that may not have immediate dividends. But Germany chose to invest in higher education, research, innovation and particularly giving impetus to innovation in small scale industries and startups. Thus, startups provide that push when the situation demands out of the box thinking.

Similarly, Silicon Valley gets its reputation due to startups and not due to established bigwigs.

Thus there is need to focus more on innovation and see how it is that the government can leverage its policies to give impetus to innovation to all forms and all segments where innovation is possible. Hence, bail outs are not the best option. This argument is being done much late given that how much inroads the foreign firms have already been given. Now doing anything will send a wrong message.

Venture capital and India

Venture capitalists view has developed over time. The indigenous giants have gone way beyond the capacity of capital that India can provide. They are doing this because they did not think India had protective market. They wanted to run a business and get returns on investment.

Over the time, as it happens across the markets in the world, there is complete realisation that the Indian market is largest and fastest growing consumption market in the world. Thus, everybody wants to have a piece of this market. Amazon and uber had tough time in china because of local rules and competition.

The complicated part of argument is that capital does not follow a level playing field. Once the large investors have realised that it has become battle between infinite fund raising capability of global giants and the investor capital base, they make a tough decisions. So there is a growing awareness that the competition is with deep pockets. As a result, in last 6-12 months, there has been gradual withdrawal of investors. Hence there is no level between what an Indian company can source with its global counterparts.

Capital entry into India should not be restricted. Successive governments have gradually liberalised FDI into various sectors of economy. So more and more capital can come in and improve the prospects of new business seeding. It will create value for investors abroad but also for domestic employees and shareholders. So it is a great way of improving life in business.

Paytm has grown phenomenally, so the other e-wallet companies cannot say that as it has foreign investors and hence they all should be protected. India has a large amount of foreign capital. Foreign capital has been made part of overall financial ecosystem. Foreign firms bring in expertise also.

Advantage Indians

Indian companies should cash on their advantage which is that they understand consumer better than global companies. There should be innovation in providing better services. There cannot be a stagnation in e-commerce site in providing a better service. Only providing discount is not answer. This happened in China where didi overtook uber. Now uber has small stake in it. So, just more capital and discounts doesn’t guarantee success. This is lesson for Ola in India too.

The aftersale services is one area which can be improved. This is something which is not widely advertised in the local market.

Other options are invest more in market research, data analytics and reaching out to the untapped markets. For example, NDA government won in Uttar Pradesh in 2014 Lok Sabha elections is because they managed to reach out to those parts of UP which were previously not tapped. Thus, it was a strategy of ‘taking your message to the audience’.

Entrepreneurs have to learn from these strategies and know how to go beyond tier 1 cities to tier 2 cities and reach out to other side of market.

Implications of protectionism

  1. Push back venture capitalism growth behind several years because the late stage investors who have come into India and backed these companies. India has a achieved an internet network early by 5 years. This was possible due to large amount of venture capitalism.
  2. It will have flow over effect to younger companies. If they don’t have large markets getting built for them and late stage investors investing in India, they will have a smaller future compared to others.

There is lot of scope for innovation and importantly, as far as completion or legal framework is concerned, it is not to protect any particular player or class of players. It is meant to protect the consumer at the end of day and sees that it doesn’t run out of choices.

Conclusion

Protectionism is like an unreserved compartment of Indian train. Everyone who gets in first gets a seat and doesn’t want other person to have it. That’s the nature of protectionism.

The ecommerce’s policies are not correct. Deep discounts is not a good idea for e-commerce sites. The service is the delivery point. Each startup which is coming up has to understand that they have to make a difference in the system so that they can market themselves. Unless the differentiation is created and the value proposition is given, they will not succeed.

Connecting the dots:

  • What is protectionism? How will it affect Indian economy? Critically analyse.

 

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