MNC’s should customise the governance framework to suit Indian situation and have appropiate internal control design review mechanism . Most Multinational Companies are able to manage their businesses very well at home, but often struggle in other countries. While their business processes are well run in their home country, they find that the same processes perform unsatisfactorily or at least sub-optimally in their overseas entities.
This is mostly a result of replicating the business models, organisational structure, processes and practices in different countries without full appreciation of the fact that businesses have to be organised and their risks managed differently, in foreign land. There are various underlying factors why governance of business has to be customised to local situations. MNCs entering different countries need to understand such local factors and identify an appropriate response to them, when designing, setting up and running businesses.
Here are some of the top reasons for why and how MNCs face some typical business risks in India. Market behaviour:Customers, vendors and channel partners behave differently in different parts of the world, and India is no exception. The local behavioural pattern, commercial practices, expectations, traditions, culture and ethical standards in India market are much different than in the western world, West Asia or East Asia. This throws up the risk that a foreign company’s business rules, policies and processes that may have been working successfully elsewhere may be quite misaligned to the local needs in India.
In many cases, even the business model needs adjustments to meet local market requirements. Besides, there is a higher risk of inadequate screening of business associates in a foreign land. Local regulatory: In India’s case, the regulatory is generally said to be complicated. Besides, environment is perceived to be somewhat lacking in terms of speed and transparency, though it is changing for the better. This is in contrast to the situation in the home country of the MNCs.
This difference comes with its risk that the time tested business models, supply chain design, accounting policies and procedures, and record to report processes of many foreign companies may be suboptimal or tax inefficient in India. Further, owing to a difference in regulatory framework and in the general environment, MNCs face a heightened risk due to insufficient supervision over local regulatory compliance besides other risks such as Foreign Corrupt Practices Act of USA (FCPA) and Code of Business Conduct (CoBC) violations.
Overdependence on local management: Long distance and inadequate local knowledge leads to multinationals depending too much on the local top management in India. This coupled with inadequate direct communication with country’s local staff tends to increase the risk of power abuse and control failure. Besides, influence of the local top management discourages the staff to speak up. Another risk that MNCs generally face in India is that of disruption in strategy implementation and operational control due to higher attrition even at the senior levels, since India is a fast growing economy and offers lucrative job opportunities.
Work environment:With its cultural difference from other parts of the world, India’s work environment is different, and expectedly so. The difference in employees’ expectations from the job, societal pressure, and stress level leads to the existence of a different set of drivers for their motivation and engagement, giving rise to a set of challenges in human resource management that is much different from those in the developed world.
Foreign companies that replicate their global HR practices without adequate alignment with local work environment and employee mentality, often struggle with sub-optimal employee engagement and thus lower performance. Performance and customer satisfaction risks are therefore higher. Further, in far off business units, the risk of collusion between employees and business associates or amongst the employees themselves is high.
Internal control design that may be working well elsewhere in the company may prove to be inadequate or ineffective to mitigate these risks in India. Size of business: Very often, the relatively smaller contribution of an Indian entity to the global revenue and/or the bottom-line of the MNC, takes its toll on the attention that its governance deserves. While the executive attention is mostly focused on the market share, technology, revenue and cost targets, there is generally less than required allocation of budget for governance, risk and compliance review.
The global internal audit effort is also very often minimal due to the size of the India entity. This emboldens local non-conformity. Proprietary issues and frauds, if any, remain unknown or are not properly or timely investigated. Finally, given that MNCs in India face some different and heightened business risks than they do in their home country, it is only prudent that they customise the governance framework to suit Indian situation.
Business operations should be analysed in the right context, benchmarks should be relevant, internal control design and review mechanism have to be appropriate and adequate, regulatory compliance framework should be comprehensive, people policies and practices need to be customised, ears must be close to the local staff in general and communication must be direct, business associates must be effectively screened and above all, companies must be vigilant in hiring so as to have honest and capable people who take a medium to long term view of the business rather than simply focus on meeting short term targets and reporting attractive numbers.