tMichaelB is the web site for Tom Bengtson, who writes about business, religion, family and politics.

Wednesday, October 24, 2007

A cost of doing business

Business in India is predicated on licensure and compliance with various government regulations, on both the state and national level. I learned today that many businesses routinely pay local officials to expedite approvals. It seems like a major problem for American businesses that want to set up shop in India, particularly in light of a U.S. federal law known as the Foreign Corrupt Practices Act which prohibits companies from paying bribes in other countries.

Naraya Manepally, CEO of an Indian manufacturer, explained that small bribes are simply part of the cost of doing business in this country. He called the demands for cash from state and municipal inspectors “obligations” and said small companies like his really have no choice but to pay them. The company has a subsidiary which partners with a Minnesota company. Together, they make filters for automobiles and industrial uses.

“We plan for obligations,” he said in a veiled reference to bribes that initially went over my head. “Obligations come on a daily level. Inspectors and others come and ask for money. You will have to pay them,” he said in a matter-of-fact tone.

Gul Iqbal, who worked 30 years for IBM, said government employees are underpaid and that is why they frequently ask to be paid on the side. “The biggest problem in India is the low-paid government employees,” he said.

Several experts on conducting business in India advised our delegation that U.S. companies should find an Indian partner if they want to succeed here. They said it is very difficult for a foreign company to come to Indian and launch a business without local help – a believable assertion given the complexity of life here, from its numerous languages, untenable logistics, and multiple layers of government.

“You have to find an Indian partner if you want to sell here, especially if you are new,” explained Mark Russell of U.S. Commercial Service with the American Embassy. “New products need licenses and you need clearances. It is almost impossible for a U.S. company to get clearances without a local partner.”

Manepally implied that local partners could take care of nuisance bribes, insulating the American company. He clarified, however, that business people considering operating in India should follow the law. “Only deal with white money, don’t deal in the gray areas,” he advised.

I asked him about the seeming contradiction. He noted that on big, federal requirements, like the payment of taxes, enforcement is strict and business people need to comply. “You will get caught if you don’t,” he said. Municipal inspections, however, are less formal although local inspectors can shut an operation down. “You should just plan in your budget to set aside some money for them,” he said.

Not everyone, however, agreed that people need to pay bribes in order to do business here. Gayatri Yadav, who works for General Mills’ operation in India, said they do not pay bribes. “The multi-nationals make it clear from the outset they will not do bribes in India. You can do business honestly in India,” she said.

Som Mittal, a senior vice president for Hewlett Packard in India, commented: “We have done six joint ventures and we never paid. There were delays, but when word gets out that you don’t pay, they leave you alone.”

When I asked other members of the Minnesota delegation what they thought about the need to pay bribes, they all said that no business person should ever consider it. Even acknowledging delays in getting licenses and other municipal approvals, they uniformly said they would never pay a bribe.

“Bribe,” of course, is my word and perhaps it is too strong. Manepally may have used the word “obligation” for more purpose that merely obfuscation. The delegation is staying at the magnificent Leela Palace and when the bellhop brought my bag to my room he held out his hand. I gave him money. Was it a tip or a bribe? Certainly if I refused him I could expect my luggage delivery to be a little slower the next time. The bellhop, like the factory is inspector, is paid a wage. In both cases, their official earnings are probably small. Is it wrong for them to ask for a little more? Is it wrong for me, the customer, to give the guy a few bucks, or I mean rupees?

The bribery issue certainly complicates the thinking a business person might put into the prospects of doing business here. If you work for a large, well-branded company, it is easy to say you will never pay a bribe. The country wants these kinds of companies so much that it is not likely to push for bribes if they run into initial resistance. A small start-up with no reputation certainly would not get similar treatment. A clerk at a license bureau just might not get around to notarizing your application until an under-the-table payment is made. Inspectors may well hold up construction approval on a new factory for such a company for months, if not years. This kind of lost time is costly and could sink the company.

Business can be messy and an entrepreneur has to decide when they embark on a new venture whether they really want to get their hands dirty, especially if they want to do business in India.

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