Japan’s Journey into Vibrant India

By Himanshu Srivastava & Shyam Ramakrishnan

India, with its robust economic growth and evolving consumer landscape, has become a priority destination for global businesses, including Japanese companies. As the world’s fifth-largest economy, India offers immense opportunities across sectors like manufacturing, technology, and renewable energy. However, entering this diverse and dynamic market requires careful planning and strategic execution. From understanding regulatory frameworks to navigating cultural nuances, Japanese firms must approach India with a well-rounded perspective. This article explores the various modes of market entry, key considerations, and latest trends shaping India’s business environment, providing a comprehensive guide for companies looking to establish a strong presence in this burgeoning economy.

A.    THE STRATEGIC OPPORTUNITY

India’s economy has demonstrated robust growth, even during global downturns, making it an attractive destination for Japanese businesses. Its strategic location provides access to key regions like South Asia, the Middle East, and Southeast Asia. With a young and skilled workforce, India is a hub for manufacturing and technology services. Strong bilateral relations, supported by agreements such as the Comprehensive Economic Partnership Agreement (CEPA), further enhance trade and investment opportunities. Additionally, sectors like automobiles, IT, electronics, pharmaceuticals, and infrastructure present significant growth potential, aligning well with Japanese expertise and innovation. This convergence of economic, geopolitical, and policy-driven factors makes India not just a market but a long-term strategic partner for Japan, offering avenues for sustainable growth and global influence.

B.    MODES OF ENTRY

Wholly Owned Subsidiary: Japanese companies looking to enter the Indian market have several modes of entry to choose from, each catering to different business objectives, risk appetites, and operational needs. One common approach is establishing a Wholly Owned Subsidiary (WOS), which allows the foreign company to maintain 100 per cent control over its operations. This is usually incorporated as a Private Limited Company under the Companies Act, 2013. A wholly owned subsidiary offers the advantage of full operational control and the ability to repatriate profits easily. However, it requires adherence to stringent regulatory compliance and involves significant upfront investment. The process of incorporation usually takes about 30–45 days, provided all documentation is complete.

Joint Venture: For companies looking to mitigate risks and leverage local expertise, forming a Joint Venture (JV) with an Indian partner is a viable option. A joint venture provides access to local networks and shared operational costs, making it an attractive entry model for many businesses. However, establishing a joint venture requires clear agreements on profit-sharing, decision-making processes, and exit strategies to avoid conflicts. Identifying a suitable partner and finalizing agreements can take approximately 3–6 months.

Liaison Office: Another cost-effective mode of entry is establishing a Liaison Office (LO), which acts as a representative office to explore the market and build relationships without engaging in commercial activities. Liaison offices are ideal for market research and initial networking. However, they are restricted to non-commercial operations, and setting one up requires prior approval from the Reserve Bank of India (RBI), a process that can take 3–4 months.

Branch Office: For companies seeking a slightly broader scope of operations, a Branch Office (BO) may be a suitable alternative. A branch office can undertake activities such as importing and exporting goods, consultancy services, and research and development. While it offers greater operational flexibility than a liaison office, it is still restricted to activities specified in the RBI approval. Establishing a branch office involves a similar timeline of 3–4 months.

Acquisition: Acquiring an existing Indian company is another popular method of entry, especially for companies looking for immediate market access. Acquisitions provide the benefit of established infrastructure and a ready customer base. However, they require thorough due diligence to identify potential liabilities and ensure compliance with Indian regulatory requirements. Depending on the complexity of the deal, acquisitions can take anywhere from 6 to 12 months to complete.

Export Model: Lastly, Japanese companies can also test the Indian market through an Export Model, where they serve Indian customers directly from Japan without setting up a physical presence. While this model involves minimal risk and investment, it is often less effective for building customer relationships and can incur high tariffs and logistical costs. This mode is typically considered as a preliminary step before establishing a permanent presence in India.

Each of these modes of entry offers distinct advantages and challenges, and the choice ultimately depends on the company’s objectives, resources, and risk tolerance. Proper planning and a clear understanding of regulatory and cultural nuances are critical for success in entering the Indian market.

C.    KEY CONSIDERATIONS

Entering the Indian market requires navigating a complex mix of regulatory, cultural, and operational challenges. India permits 100 per cent Foreign Direct Investment (FDI) in many sectors under the automatic route, but some sectors impose caps and conditions. Adhering to legal requirements, including GST, the Companies Act, and labour laws, is essential, and manufacturing companies may also require environmental clearances.

Market research: Understanding Indian consumers through thorough market research is critical. Known for being price-sensitive and value-conscious, Indian consumers often expect products tailored to local tastes and conditions. Additionally, India’s diverse regions, with varying regulatory frameworks, languages, and preferences, necessitate region-specific business strategies for effective market penetration.

Cultural integration plays a vital role in success. Building trust and personal relationships is key to doing business in India. Japanese companies must adapt to differences in decision-making processes and communication styles. Competitive compensation packages and compliance with labour laws are also crucial for attracting and retaining skilled talent.

Infrastructure in India offers opportunities but presents challenges, especially in rural and semi-urban areas. While urban centres are well-developed, companies must account for potential delays and costs in supply chain management when distributing nationwide.

Intellectual Property (IP) protection is essential for businesses entering India. Early registration of trademarks, patents, and copyrights helps safeguard against counterfeiting and infringement, particularly in manufacturing and technology sectors.

D.   LATEST TRENDS IN INDIA ENTRY

As the market evolves, foreign companies are adapting their entry strategies to leverage emerging opportunities while navigating unique challenges. Here are the latest trends shaping foreign companies' entry into India:

China + 1 Policy

The "China + 1" policy reflects global efforts to reduce dependency on China while maintaining it as a key player in supply chains. De-risking involves diversifying production hubs to mitigate disruptions. India, with its growing manufacturing capabilities, favourable policies, and skilled workforce, is emerging as a strong alternative, particularly in electronics, textiles, and pharmaceuticals, positioning itself as a pivotal global supply chain player.

Advantage with respect to other emerging markets

India stands out among emerging markets like Vietnam, Indonesia, and Brazil due to its unparalleled market size, rapid economic growth, and expanding consumer base. Its young, skilled workforce and investor-friendly policies, such as tax incentives and infrastructure development programs, further enhance its appeal. Unlike its peers, India's diverse industrial base and strong digital ecosystem position it as a global economic powerhouse.

Focus on manufacturing and localized production

India’s “Make in India” initiative, coupled with Production-Linked Incentive (PLI) schemes, has made manufacturing a key entry point for foreign companies. Japanese firms are localizing supply chains and shifting production from China to India. These efforts align with government incentives and the need for a stable manufacturing ecosystem to meet local and global demands.

Growth in digital and e-commerce Sectors

India’s digital economy, fuelled by affordable internet and smartphone penetration, offers vast opportunities. Foreign firms are leveraging direct-to-consumer models, partnering with e-commerce giants and adopting AI-driven analytics. These strategies enable personalized services, making India’s digital ecosystem an essential entry point for global businesses.

Green and sustainable investments

With sustainability at the forefront, companies are investing in renewable energy, electric vehicles, and eco-friendly business models. Government policies and corporate social responsibility (CSR) initiatives have further encouraged investments in clean energy and environmentally sustainable projects, making sustainability a cornerstone of market entry strategies.

Regional and state-level focus

Foreign companies are tailoring their strategies to specific states like Gujarat, Tamil Nadu, and Karnataka, which offer competitive incentives and superior infrastructure. Recognizing India’s regional diversity, companies are adapting to local languages, consumer preferences, and regulatory frameworks to maximize market impact.

Expansion into tier-2 and tier-3 cities

Foreign businesses are targeting India’s tier-2 and tier-3 cities, driven by rising incomes and aspirations. These regions offer cost-effective operations with significantly lower real estate and labour costs. E-commerce growth has further enabled businesses to penetrate smaller cities without extensive physical infrastructure investments.

CONCLUSION

India represents a dynamic and unparalleled opportunity for Japanese companies seeking growth and global diversification. With its rapidly expanding economy, strategic government policies, and a vast consumer market, India offers a fertile ground for innovation and investment. While navigating regulatory complexities and cultural nuances requires strategic planning, the rewards of entering one of the world’s fastest-growing economies are immense. From manufacturing and digital technology to renewable energy and emerging industries, India’s potential is vast and evolving. By adopting a localized approach, building strong partnerships, and leveraging India’s demographic and economic strengths, Japanese companies can establish a strong foothold and ensure long-term success in this thriving market.

Author Profiles:

Himanshu Srivastava

Partner - Business Advisory Services, Baker Tilly India ASA LLP

Head - Japan Practice

Himanshu is a qualified Chartered Accountant (FCA), He is an active speaker at national and international fora and regularly contributes white papers on Exchange Control Regulations as well as Corporate and Industrial Laws. With over 20 years of experience in promoting investments into India, Himanshu advises overseas investors on complex legal issues, regulatory compliances, land acquisitions, factory set-ups, regulatory approvals, incorporation of legal entities, including joint venture formation, partner search and distributor search and liquidations and bankruptcy procedures.

Shyam Ramakrishnan

Associate Director - Business Advisory Services,

Baker Tilly ASA India LLP

Shyam is a seasoned Company Secretary and LLB graduate with extensive expertise in corporate and business advisory. Known for a strategic and detail-oriented approach, Shyam helps businesses navigate complex regulatory landscapes and achieve their operational goals efficiently.