FDI In Retail and Political Decision Making

The decision of the Government of India to bring in foreign companies to retail has generated much heat, controversy and opposition.  This brings us to the question: what is the right approach to arrive at such political decisions?  In this article we will not enter into the debate, but examine the nature of the decision-making process which can lead to right action.

The New Tide in Business

The first step in arriving at a right decision is to look at the issue from a larger context of the emerging trends in global business without any dogmatic preconceived or prototypal conceptions like for example, “all big business is exploitative and money-minded.”

We must learn to discern and tap the positive potentials emerging in life and not blindly deny things based on its present conditions.  The present conditions in a domain of life may be largely negative or dark.  But there may be a streak of growing light in it in the form of emerging new potentials and future possibilities which may become one day the dominant paradigm.  A visionary leader must have the forward-looking gaze to see and harness these future possibilities.   New winds are blowing in the corporate landscape.  The concept of corporate social responsibility is now gaining increasing acceptance among corporate leaders and it is on the threshold of becoming one of the core value of business in management thought and practice.  The editorial of a recent issue of the Harvard Business Review states, “In recent years corporate social responsibility became an imperative.” (1) Similarly there is a growing recognition that foreign firms, when they set up their operations in other countries, must make an effort to evolve a nation-specific, culture-sensitive strategy.  There are now an increasing number of foreign and multinational firms which are making a conscious effort to integrate corporate social responsibility into their strategic framework.  For example, Rosabeth Mass Kanther, in one of her articles in the Harvard Business Review states, “IBM’s CEO Samuel Palmisano, circumnavigates the globe six or seven times a year to meet with regional and national officials, discussing how IBM can help their countries achieve their goals.” (2)

Similarly, environmental sustainability is also becoming a corporate imperative.  In an article in the Harvard Business Review, well-known management guru, C.K. Prahalad argues that success of companies in the future world of business depends on their ability to innovate sustainable solutions in products and process and gives many examples of companies which are doing it. (3)  Even companies like Wal-mart, with questionable record in other domains, follow certain environmental standards and impose these standards on their large number of suppliers.

In the food and retail sector there are companies like Whole Food Market with its emphasis on providing organic, healthy and environmentally safe products to its customers.  Social issues are fundamental to what makes Whole Foods unique in food retailing and to its ability to command premium prices. The company’s sourcing emphasizes purchases from local farmers through each store’s procurement process. Buyers screen out foods containing any of nearly 100 common ingredients that the company considers unhealthy or environmentally damaging. The same standards apply to products made internally. Whole Foods’ baked goods, for example, use only unbleached and unbromated flour.

Whole Foods’ commitment to natural and environmentally friendly operating practices extends well beyond sourcing. Stores are constructed using a minimum of virgin raw materials. Recently, the company purchased renewable wind energy credits equal to 100% of its electricity use in all of its stores and facilities, the only Fortune 500 Company to offset its electricity consumption entirely. Spoiled produce and biodegradable waste are trucked to regional centers for composting. Whole Foods’ vehicles are being converted to run on biofuels. Even the cleaning products used in its stores are environmentally friendly. And through its philanthropy, the company has created the Animal Compassion Foundation to develop more natural and humane ways of raising farm animals. In short, nearly every aspect of the company’s value chain reinforces the social dimensions of its value proposition, distinguishing Whole Foods from its competitors. (4)

Companies like Whole Food may be at present only a few.  But there is a growing demand for organic food in the west and this trend is bound to have a positive impact on the retail and food sector with more and more companies following the model of Whole Food.  As science writer, Robert Frenay points out: “In the ten years from 1990 to 2000 organic food sales in the US boomed from $ 1 billion to over $ 6 billion–in Britain the growth rate is equally swift–not surprisingly, retailers have followed.”

Another similar example is Royal DSM.  This Dutch company makes nutritional supplements and energy efficient building materials.  As a part of its CSR initiative, Royal DSM, partnering with World Food Programme distributes DSM’s nutrient mixes, and fortified food to malnourished people in Nepal, Kenya, Bangladesh, and Afghanistan; 10 million will be served by the end of this year. But the company, which has 250 sites in 50 countries, also participates in many smaller initiatives. For instance, it has contributed lightweight composite modules to a new school in Pune, India, which reduced the costs, time, and environmental impact of construction; the school’s students will also be given access to a DSM nutrition program. Elsewhere in India, one of DSM’s anti-infective units offers free medical services to nearby villagers. And in Mexico, DSM employees hold monthly seminars on safety, health, and the environment for local schoolchildren. In India, one of DSM’s most important growth markets, the company has a subsidiary tasked with helping local base-of-the-pyramid businesses move toward more-sustainable production, primarily in agriculture (for example, by using better cow feed to improve milk yields) and energy (by providing enzymes to improve the efficiency of gas plants powered by animal manure). (5)

What are the implications of these trends for our present discussions? If the Government of India wants to admit FDI in retail it must choose firms like Whole Food and Royal DSM which represent the future trend in business.

An Alternative Decision-making Process

Let us now examine in some detail the nature of the decision-making process which can lead to the right choices.  In the Indian spiritual perspective, the most effective way to arrive at a decision is to intuitively perceive its long-term consequences in the silent mind.  But in the present condition of the world, very few political leaders have this ability for intuitive decision-making.   This capacity for intuitive decision-making is a leadership quality which can be developed through education and discipline.  This discipline has to be an integral part of training and development programmes for all leaders.  But this is an ideal of the future and not a part of the present reality.  Furthermore, in a democratic framework, a leader cannot impose his or her intuition on the nation like a dictator.  So let us examine another alternative.

At present, government first takes and announces its decision without allowing any open debate, discussion or dialogue on the issue or consultation with the effected parties.  And if the decision raises a big storm or strong opposition, the government is in trouble.  A better alternative would be to first float the idea as a suggestion and strive for a consensus among all stakeholders through a process of debate, discussion, consultation and mutual accommodation.  This means, instead of telling simply, “We have taken this decision to bring FDI in retail” government may say, “we would like to bring FDI to retail.  But first let us have a free and open discussion and debate on the subject.  We want to arrive at an arrangement which is acceptable to all the stakeholders.”  The government should invite and encourage the representatives of all the stakeholders like the foreign firm, shop owners, farmers, customers or the general public and also the thinking sections of the community like the academia, to present, argue and debate their case in the media.  As the debate proceeds, the pros and cons and possibilities of the issue become more clear and precise, and which help in decision-making.

Along with media debate, the government should organize direct, face to face meetings among the stakeholders with competent government moderators, persuading the different groups to arrive at a mutually beneficial solution.  The key to success in this task is to ask practical questions to each shareholder like the foreign company, for example “Your entry may lead to considerable displacement and jobloss in the retail distribution system.  Can you do something to minimize this adverse effect?”

Another factor which can be a great help in this task is to bring to the negotiating table role models of corporate responsibility who are able to achieve socially constructive solutions which are beneficial to all the stakeholders and who can say to the foreign company, “We have done it in our own company why not you do it” and provide practical suggestions how to do it.

After the debating and negotiating phase, if the government decides to admit FDI in retail, it must be careful in choosing the right foreign firm.  It is better to keep out firms like Wal-mart which has a questionable reputation and overwhelming corporate power.  We can’t negotiate much with the largest and one of the most powerful companies in the world, which is focused on its bottomline and cares little for the interests of the nation or community in which it functions.  Wal-mart has a reputation for smoothening competition and other smaller players wherever it enters or operates.  Most of the studies on the impact of Wal-mart on the national economy indicate a negative trend.  For example a study by Kenneth Stone of Iowa University on the impact of Wal-mart on rural communities has found,  “Over the course of [a few years after Wal-Mart entered a community], retailers’ sales of men’s’ and boys’ apparel dropped 44% on average, hardware sales fell by 31%, and lawn and garden sales fell by 26%. In towns without Wal-Marts that are close to towns with Wal-Marts, sales in general merchandise declined immediately after Wal-Mart stores opened. After ten years, sales declined by a cumulative 34%.”

A better alternative would be to bring in smaller foreign firm with a better record of social and environmental responsibility, more willing to accommodate the interests of our nation and other vulnerable groups into their strategic framework.  We have already discussed briefly two examples of such firms which may be willing to negotiate on these lines. Let these foreign firms compete or partner with other Indian corporate retailers on a level playing field.  The government should appeal to the social responsibility of these corporate retailers and encourage them to arrive at an innovative solution to minimize the adverse impact on employment and other vulnerable groups.  For the non-corporate and unorganized retailers the government should provide sufficient financial and technical support to modernize their business and make it more efficient, productive, quality-conscious and cost-effective.  Another form of government intervention could be to sponsor and reward innovative academic research, which can lead to a creative resolution of the problem.  This will bring all the benefits of foreign and corporate retail–like greater efficient, quality, environmental standards–into the industry and minimize the adverse impact of the “Wal-mart effect.”

But the corporate player is only one aspect of retail industry.  The other equally important stakeholder in retail is the farming sector.  In this domain, the Indian government should vigorously promote organic farming.   Most of the recent research in organic farming shows this natural method of farming is not only more ecological and healthy but also more profitable in the long run than the present approach based on fertilizers and pesticides.  This unnatural and artificial method of agriculture is at present the dominant paradigm in agricultural because of two main factors: first, most of the farmers may not be fully aware of the benefits of organic farming; second lack of support from the government’s agricultural department.  The Government of India must address these two hurdles and promote organic farming on a larger scale.

References:

1.    From the Editor, Harvard Business Review, November 2011.
2.    Rosabeth Mass Kanther, ‘How Great companies Think Differently, Harvard Business Review,  November, 2011
3.    C.K. Prahalad, Ram Nidumulu and M.R. Rangaswami, ‘Why Sustainability is Now the Key Driver of Innovation,’ Harvard Business Review, September 2009.
4.    Michael E. Porter and Mark R. Kramer, ‘Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility,’ Harvard Business Review, 1st Dec 2006.
5.    Alison Beard and Richard Hornik, ‘Its Hard to be Good’, Harvard Business Review, Nov 2011.

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