Can Wal-Mart Build a Nation?

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Anand Sharma, the commerce minister, told India Ink the government’s decision was prompted by the need for the “creation of an infrastructure, an integrated food chain, bringing in the newest technology.” Foreign retail giants would help rural farmers, he said, as well as salvage the huge amount of food that rots before getting to consumers. Prime Minister Manmohan Singh promised during an address on Friday that the move would “create millions of good quality new jobs,” and improve earnings for farmers.
Foreign multi-brand retail chains will be allowed to open stores in India and own a majority stake, the commerce ministry said September 14, but have to follow strict conditions.

Some analysts are just as optimistic about the Wal-Mart effect. Ernst & Young said in a Sept. 14 report that India’s changes will “improve the supply chain infrastructure, regulate food inflation, secure remunerative prices for farmers and generate employment opportunities.”
That’s a pretty tall order for a retail chain, even one as powerful as Wal-Mart. After all, many of the basics necessary to regulate inflation, or build infrastructure, are tasks traditionally done by the government, from building roads to setting feasible agriculture policy.

How realistic are current expectations about big foreign retailers?
There is a substantial body of research on the effects of foreign investment in emerging markets, looking at Central Europe (including this 2002 working paper on Hungary and this oft-cited 2004 report that includes data from Lithuania), Latin America and South East Asia. Unfortunately, the sum total of these studies is inconclusive – some show positive “spillovers” (academia’s preferred term for effects) from foreign investment, others find negative “spillovers.” This 2009 research report, co-written by professors at Rice University and Peking University, includes a good summary of other research.
One thing, though, is certain: There is no precedent for big retail chains like Wal-Mart, Britain’s Tesco or France’s Carrefour to enter an emerging market and building foundational infrastructure like roads, or improve railways, said Milos Ryba, senior retail analyst with Planet Retail in London, a global research company. Much of India’s rotting food problem is attributed to the country’s shambolic transportation network, which means produce takes much longer to travel from farm to consumer than it should. Trucks carrying cargo in India travel an average of 250 to 300 kilometers (150 to 186 miles) a day, compared to twice that in the developed world, according to a McKinsey report, and that is unlikely to change just because foreign investors come in.

Still, Wal-Mart and other big retail players may have a transformational effect on manufacturing and distribution in other ways, analysts say. Wal-Mart’s Mexico operations, its largest internationally, provide some good clues for what could change in India.
In 1997, Wal-Mart took full control of a joint venture in Mexico, now named Wal-Mart de Mexico, or Walmex. By 2003, it was Mexico’s largest private employer, “transforming not only the retail sector, but the consumer goods industries that supply it,” said a 2009 report sponsored by the World Bank, which involved the University of Oxford and University of Colorado.
Among other things, Walmex provided its affiliated manufacturers with a much larger national market, the report found, and the possibility to export. But that was accompanied by “continuous pressure to raise the quality of the product, lower one’s price, or a combination of the two.”

Ultimately, the nation’s manufacturers were bifurcated, with those who worked with Wal-Mart spending more on technology and research and development, and those who did not spending less than before Wal-Mart entered the market. In Mexico, Wal-Mart brought “massive changes to the manufacturing sector,” Mr. Ryba said. “Some manufacturers cooperated, and became larger, and some died.”
That’s because when Wal-Mart buys from local companies in the country, it expects them to innovate by changing their products every year, or it pays a discounted price for the products from the year before, Mr. Ryba said.

Wal-Mart also enacted some changes in the trucking industry in Mexico that might be welcome in India. The company introduced centralized warehouses, required delivery trucks to have appointments, carry standardized identification cards and deliver shipments on standard-sized pallets. Drivers that missed appointments would be fined, the World Bank report said, and deliveries subject to third-party audits.

But real comparisons between India and Mexico remain tough to make – Mexico’s proximity to the United States has made it a growing manufacturing destination for numerous foreign companies, despite a rise in violence attributed to the drug trade, an advantage India does not have. India’s complicated labor laws may discourage Wal-Mart and its peers from hiring permanent employees here, creating an entirely new generation of lower-paid contract workers without job security or medical insurance.
And any long-term impacts of Wal-Mart’s Mexico business have been overshadowed this year by the company’s involvement in a bribery scandal there. The company paid “bribes to obtain permits in virtually every corner of the country,” amounting to some $24 million, and then hushed up its own investigation into the bribes, The New York Times reported in April.

Wal-Mart is sure to find similar demands for bribes in India – especially now that ample evidence exists that the company has paid them elsewhere.
In June 2010, Wal-Mart’s chief executive, Michael T. Duke, promised an Arkansas shareholders meeting that Wal-Mart was becoming a “a truly global company,” one that would add 500,000 jobs worldwide in the next five years. The glitzy meeting featured performances Mariah Carey and Enrique Iglesias and included delegations from Brazil, Mexico, China, Japan, Argentina, India and Britain, among other countries.

In August, Wal-Mart said it would slow down the opening of stores in China, Brazil and Mexico, after growth in those markets eased, Reuters reported — leaving India one of the few big emerging markets it could look to for growth. Perhaps those nation-building skills will be put to the test shortly.