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INTERNATIONAL BUSINESS: CONCEPT,
DEFINITION AND MANAGEMENT
MASTER OF BUSINESS ADMINISTRATION(MBA)
SUBMITTED BY:
VIVEK VERMA
03011403910
BPIBS GGSIP UNIVERSITY, NEW DELHI
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AN INTRODUCTION TO INTERNATIONAL BUSINESS
International business is a term used to collectively describe all commercial transactions
(private and governmental, sales, investments, logistics, and transportation) that take place
between two or more regions, countries and nations beyond their political boundary.
Usually, private companies undertake such transactions for profit; governments undertake
them for profit and for political reasons.
It refers to all those business activities which involves cross border transactions of goods,
services, resources between two or more nations. Transaction of economic resources
include capital, skills, people etc. for international production of physical goods and services
such as finance, banking, insurance, construction etc.
A multinational enterprise (MNE) is a company that has a worldwide approach to markets
and production or one with operations in more than a country. An MNE is often called
multinational corporation (MNC) or transnational company (TNC). Well known MNCs
include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers
such as General Motors, Ford Motor Company and Toyota, consumer electronics companies
like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most
of the largest corporations operate in multiple national markets.
Areas of study within this topic include differences in legal systems, political
systems, economic policy, language, accounting standards, labor standards, living
standards, environmental standards, local culture, corporate culture, foreign exchange
market, tariffs, import and export regulations, trade agreements, climate, education and
many more topics. Each of these factors requires significant changes in how individual
business units operate from one country to the next.
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The conduct of international operations depends on companies' objectives and the means
with which they carry them out. The operations affect and are affected by the physical and
societal factors and the competitive environment.
DEFINITIONS, CONCEPTS AND MANAGEMENT OF INTERNATIONAL BUSINESS
“International business refers to business across countries. It includes any type of business
activity that crosses national boundaries international business involves transfer of goods,
services capital knowledge and information across national boundaries with a view to satisfy
the needs of individuals, organizations and governments.”
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Definition 1
The economic system of exchanging good and services, conducted between individuals and
businesses in multiple countries.
Definition 2
The specific entities, such as multinational corporations (MNCs) and international business
companies (IBCs), which engage in business between multiple countries
IMPORTANCE OF STUDYING MANAGEMENT OF INTERNATIONAL BUSINESS
Most companies are either international or compete with international companies.
Modes of operation may differ from those used domestically.
The best way of conducting business may differ by country.
An understanding helps make better career decisions.
An understanding helps decide what governmental policies to support.
Therefore, managers in international business must understand social science disciplines
and how they affect all functional business fields.
DOMESTIC V/S INTERNATIONAL TRADE
Difference between domestic trade and foreign trade and their peculiar problems Trade, no
doubt, implies exchange of goods between persons, but there are marked differences
between domestic trade and international trade.
The differences and the complications arise therein are as follows
Distance
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The distance involved in export of goods in external trade is generally greater than on the
domestic trade.
Language differences
There are differences in the languages of the nations of the world. The overseas traders
should be very careful in preparing the publicity material in the languages of the trading
country
Cultural difference
A producer should have full knowledge about the market of his products. For exporting
goods particularly a thorough research is undertaken.
DocumentationsIn the home trade there are few documents involved in the exchange of goods.
Payments
In the internal trade, the goods are exchanged in the currency unit of the country. In case of
foreign trade currencies differ widely throughout the world and those also vary in value.
Transport and insurance cost
The transport and insurance costs are less in case of domestic trade. For the exports, on the
other hand the cost of transport is high and the insurance is complicated.
Technical difference
In the national market the difference in the technical specification for goods and their
requirements is not wide.
Tariff barriers
In the national trade, there are no custom duties, exchange restrictions, fixed quotas or
other tariff barriers.
WHY GO INTERNATIONAL?
Growth – The primary reason for initiating an international effort is to gain exposure
to longer term and higher impact projects.
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Niche Opportunities - Many countries have few, if any, indigenous oil and gas
companies. This can translate into less competition for the type of opportunity that
would fit an independent company’s risk appetite and capital exposure target.
Exposure - The concessions or acreage positions that are available internationally
generally are far more extensive than domestic offerings. It is possible to acquire
acreage with multiple prospects and multiple play types.
Higher rate of profits
Severe competition in home country
Limited home market
Political stability/ instability
Availability of technology and managing competencies
High cost of transportation
Nearness to raw material
Human resources
Increased market share Liberalisation/ globalisation policies of the host country
REASONS FOR RECENT INTERNATIONAL BUSINESS GROWTH
Expansion of Technology:
Transportation, telecommunications;
Transportation and telecommunications costs are more conducive for
international operations.
Liberalization of Cross-Border Movements:
Goods, services, labour, Capital
Development of Supporting Institutional Arrangements: development by
business and governments of institutions that enable us to effectively apply that
technology.
Increase in Global Competition:
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New products become global; Globalization of production
SCOPE OF INTERNATIONAL BUSINESS
(STAGES OF INTERNATIONALISATION)
International business is a generic term used to refer to any business that includes more
than one country. It includes the following types of business.
Export Business (Domestic Company): Production in home country; Exports
outside.
International firm: Locates branch in foreign market.
Multinational firm: An International firm turns into a Multinational firm when it
responds to specific needs of foreign markets in terms of product, price,
promotion and distribution.
Global firm: A global firm also has business operations in different countries but
there is coordination between different subsidiaries which operate under a
common strategy.
Transnational firm: A Transnational firm produces, markets, invests and operates
across the globe. It is an integrated global enterprise which “thinks globally but
acts locally.”
INTERNATIONAL ISSUES TO CONSIDER
Huge foreign indebtedness
Political factors
Exchange instability
Entry requirement
Tariffs, quotas and trade barriers
Corruption
Bureaucratic practices of the government.
Technological pirating
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High costs
CHALLENGES AND LIMITATIONS OF INTERNATIONAL BUSINESS
Different Currencies
Varying trade policies
Different market conditions
Different languages
Long distance
Laws and regulations
Thus, international firms operate in a highly uncertain, ambiguous, complex and dynamic
environment.
INTERNATIONAL TRADE THEORIES
(1) MERCANTILISM: MID-16TH CENTURY
A nation’s wealth depends on accumulated treasure
Gold and silver are the currency of trade
Theory says you should have a trade surplus.
Maximize export through subsidies.
Minimize imports through tariffs and quotas
Mercantilism-zero-sum game
David Hume in 1752 pointed out that:
Increased exports leads to inflation and higher prices
Increased imports lead to lower prices
Result: Country A sells less because of high prices and Country B sells more because
of lower prices
In the long run, no one can keep a trade surplus
(2) THEORY OF ABSOLUTE ADVANTAGE
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Adam Smith: Wealth of Nations ( 1776) argued:
Capability of one country to produce more of a product with the same
amount of input than another country can vary
A country should produce only goods where it is most efficient, and trade for
those goods where it is not efficient
Trade between countries is, therefore, beneficial
Assumes there is an absolute balance among nations
Adam Smith: Wealth of Nations ( 1776) argued:
Capability of one country to produce more of a product with the same
amount of input than another country can vary
A country should produce only goods where it is most efficient, and trade for
those goods where it is not efficient
Trade between countries is, therefore, beneficial
Assumes there is an absolute balance among nations
(3) THEORY OF COMPARATIVE ADVANTAGE
David Ricardo: Principles of Political Economy ( 1817).
Extends free trade argument
Efficiency of resource utilization leads to more productivity.
Should import even if country is more efficient in the product’s production
than country from which it is buying.
Look to see how much more efficient. If only comparatively efficient, than
import.
Makes better use of resources
(4) HECKSCHER (1919)-OLIN (1933) THEORY
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Export goods that intensively use factor endowments which are locally abundant
Corollary: import goods made from locally scarce factors
Note: Factor endowments can be impacted by government policy -
minimum wage
Patterns of trade are determined by differences in factor endowments - not
productivity
Remember, focus on relative advantage, not absolute advantage
(5) PRODUCT LIFE-CYCLE THEORY- R. VERNON,(1966)
As products mature, both location of sales and optimal production changes
Affects the direction and flow of imports and exports
Globalization and integration of the economy makes this theory less valid
(6) NEW TRADE THEORY
In industries with high fixed costs:
Specialization increases output, and the ability to enhance economies of scale
increases
Learning effects are high. These are cost savings that come from “learning by doing”
New trade theory-applications
Typically, requires industries with high, fixed costs
World demand will support few competitors
Competitors may emerge because of “ First-mover advantage”
Economies of scale may preclude new entrants
Role of the government becomes significant
Some argue that it generates government intervention and strategic trade policy
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LIST OF THE LARGEST TRADING PARTNERS OF INDIA
According to Department of Commerce, the fifteen largest trading partners of
India represent 62.1% of Indian imports, and 58.1% of Indian exports as of December
2010. These figures do not include services or foreign direct investment, but only trade in
goods.
The largest Indian partners with their total trade (sum of imports and exports) in billions of
US Dollars for calendar year 2009-2010 are as follows:
Country Exports Imports Total Trade
United Arab Emirates 23.9 19.4 43.4
China 11.6 30.8 42.4
United States 19.5 16.9 36.5
Saudi Arabia 3.9 17.0 21.0
Germany 5.4 10.3 15.7
Switzerland 0.6 14.6 15.2
Singapore 7.5 6.4 14.0
Australia 1.3 12.4 13.7
Iran 1.8 11.5 13.3
Hong Kong 7.8 4.7 12.6
South Korea 3.4 8.5 11.9
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Indonesia 3.0 8.6 11.7
United Kingdom 6.2 4.4 10.6
Japan 3.6 6.7 10.3
Belgium 3.7 6.0 9.7
This list does not include the Gulf Cooperation Council (GCC), which includes two (UAE and
Saudi Arabia) of the above states in a single economic entity. As a single economy the Gulf
Cooperation Council (GCC) is the largest trading partner of India with almost $100 billion in
total trade.
As a single economy, the EU is the second largest trading partner of India with €27.5 billion
worth of EU goods going to India and €25.4 billion of Indian goods going to the EU as of
2009, totaling approximately €52.9 billion in total trade. It includes three (Germany, United
Kingdom, and Belgium) of the above states in a single economic entity.
INDIA TAX TREATIES WITH OTHER COUNTRIES
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The Central Government, acting under Section 90 of the Income Tax Act, has been
authorized to enter into Double Tax Avoidance Agreements (tax treaties) with other
countries. The object of such agreements is to evolve an equitable basis for the allocation of
the right to tax different types of income between the 'source' and 'residence' statesensuring in that process tax neutrality in transactions between residents and non-residents.
A non-resident, under the scheme of income taxation, becomes liable to tax in India in
respect of income arising here by virtue of its being the country of source and then again, in
his own country in respect of the same income by virtue of the inclusion of such income in
the 'total world income' which is the tax base in the country of residence. Tax incidence,
therefore, becomes an important factor influencing the non-residents in deciding about the
location of their investment, services, technology etc.
Tax treaties serve the purpose of providing protection to tax payers against double taxation
and thus preventing the discouragement which taxation may provide in the free flow of
international trade, international investment and international transfer of technology.
These treaties also aim at preventing discrimination between the tax payers in the
international field and providing a reasonable element of legal and fiscal certainty within a
legal framework. In addition, such treaties contain provisions for mutual exchange of
information and for reducing litigation by providing for mutual assistance procedure.
Treaties signed with countries for avoidation of double taxation
S.No. Name of the Country Effective from Assessment Year
1 Australia 1993-94
2 Austria 1963-64
3 Bangladesh 1993-94
4 Belgium 1989-90; 1999-2000 (Revised)
5 Brazil 1994-95
6 Belarus 1999-2000
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7 Bulgaria 1997-98
8 Canada 1987-88; 1999-2000 (Revised)
9 China 1996-97
10 Cyprus 1994-95
11 Czechoslovakia 1986-87; 2001-2002 (Revised)
12 Denmark 1991-92
13 Finland 1985-86; 2000-2001 Amending protocol
14 France 1996-97 (Revised)
15 F.R.G 1958-59 (Original)
F.R.G. 1984-85 (Protocol)
D.G.R. 1985-86
F.R.G. 1998-99 (Revised)
16 Greece 1964-65
17 Hungary 1989-90
18 Indonesia 1989-90
19 Israel 1995-96
20 Italy 1997-98 (Revised)
21 Japan 1991-92 (Revised)
22 Jordan 2001-2002
23 Kazakhstan 1999-2000
24 Kenya 1985-86
25 Libya 1983-84
26 Malta 1997-98
27 Malaysia 1973-74
28 Mauritius 1983-84
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29 Mongolia 1995-96
30 Namibia 2000-2001
31 Nepal 1990-91
32 Netherlands 1990-91
33 New Zealand 1988-89
(1999-2000 amending notification) (2001-2002 Supp. Protocol)
34 Norway 1988-89
35 Oman 1999-2000
36 Philippines 1996-97
37 Poland 1991-92
38 Qatar 2001-2002
39 Romania 1989-90
40 Singapore 1995-96
41 South Africa 1999-2000
42 South Korea 1985-86
43 Spain 1997-98
44 Sri Lanka 1981-82
45 Sweden 1990-91; 1999-2000 (Revised)
46 Switzerland 1996-97
47 Syria 1983-84
48 Tanzania 1983-84
49 Thailand 1988-89
50 Trinidad & Tobago 2001-2002
51 Turkmenistan 1999-2000
52 Turkey 1995-96
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53 U.A.E. 1995-96
54 U.A.R. 1970-71
55 U.K. 1995-96 (Revised)
56 U.S.A. 1992-93
57 Russian Federation 2000-2001
58 Uzbekistan 1994-95
59 Vietnam 1997-98
60 Zambia 1979-80
These Agreements follow a near uniform pattern in as much as India has guided itself by the
UN model of double tax avoidance agreements. The agreements allocate jurisdiction
between the source and residence country. Wherever such jurisdiction is given to both the
countries, the agreements prescribe maximum rate of taxation in the source country which
is generally lower than the rate of tax under the domestic laws of that country. The double
taxation in such cases are avoided by the residence country agreeing to give credit for tax
paid in the source country thereby reducing tax payable in the residence country by the
amount of tax paid in the source country.
These agreements give the right of taxation in respect of the income of the nature of
interest, dividend, royalty and fees for technical services to the country of residence.
However, the source country is also given the right but such taxation in the source country
has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross
receipts without deduction of expenses.
Mode of taxation in different types of income
Capital Gains:
So far as income from capital gains is concerned, gains arising from transfer of immovable
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properties are taxed in the country where such properties are situated. Gains arising from
the transfer of movable properties forming part of the business property of a 'permanent
establishment 'or the 'fixed base' is taxed in the country where such permanent
establishment or the fixed base is located. Different provisions exist for taxation of capitalgains arising from transfer of shares. In a number of agreements the right to tax is given to
the State of which the company is resident. In some others, the country of residence of the
shareholder has this right and in some others the country of residence of the transferor has
the right if the share holding of the transferor is of a prescribed percentage.
So far as the business income is concerned, the source country gets the right only if there is
a 'permanent establishment' or a 'fixed place of business' there. Taxation of business
income is on net income from business at the rate prescribed in the Finance Acts. Chapter X
may be referred to for a discussion on the subject.
Professional Services:
Income derived by rendering of professional services or other activities of independent
character are taxable in the country of residence except when the person deriving income
from such services has a fixed base in the other country from where such services are
performed. Such income is also taxable in the source country if his stay exceeds 183 days in
that financial year.
Personal Services:
Income from dependent personal services i.e. from employment is taxed in the country of
residence unless the employment is exercised in the other state. Even if the employment is
exercised in any other state, the remuneration will be taxed in the country of residence if -
I. the recipient is present in the source State for a period not exceeding 183 days; and
ii. The remuneration is paid by a person who is not a resident of that state; and
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iii. The remuneration is not borne by a permanent establishment or a fixed base.
Others:
The agreements also provides for jurisdiction to tax Director's fees, remuneration of persons
in Government service, payments received by students and apprentices, income of
entertainers and athletes, pensions and social security payments and other incomes. For
taxation of income of artists, entertainers sportsman etc, CBDT circular No. 787 dates
10.2.2000 may be referred to.
Unique clauses of agreement
Agreements also contain clauses for non-discrimination of the national of a contracting
State in the other State vis-a-vis the nationals of that other State. The fact that higher rates
of tax are prescribed for foreign companies in India does not amount to discrimination
against the permanent establishment of the nonresident company. This has been made
explicit in certain agreements such as one with U.K.
Provisions also exist for mutual agreement procedure which authorizes the competent
authorities of the two States to resolve any dispute that may arise in the matter of taxation
without going through the normal process of appeals etc. provided under the domestic law.
Another important feature of some agreements is the existence of a clause providing for
exchange of information between the two contracting States which may be necessary for
carrying out the provisions of the agreement or for effective implementations of domestic
laws concerning taxes covered by the tax treaty. Information about residents getting
payments in other contracting States necessary to be known for proper assessment of total
income of such individual is thus facilitated by such agreements.
Favourable Domestic Law
It may sometimes happen that owing to reduction in tax rates under the domestic law
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taking place after coming into existence of the treaty, the domestic rates become more
favourable to the non-residents. Since the objects of the tax treaties is to benefit the non-
residents, they have, under such circumstances, the option to be assessed either as per the
provisions of the treaty or the domestic law of the land.
Tax Deducted at Source
In order to avoid any demand or refund consequent to assessment and to facilitate the
process of assessment, it has been provided that tax shall be deducted at source out of
payments to non-residents at the same rate at which the particular income is made taxable
under the tax treaties. As a result of amendment made by the Finance Act, 1997 exempting
from tax income from dividend declared after 1.6.1997, no deduction is required to be
made in respect of such income.
Countries with which no agreement exists
(1) If any person who is resident in India in any previous year proves that, in respect of his
income which accrued or arose during that previous year outside India (and which is not
deemed to accrue or arise in India), he has paid in any country with which there is no
agreement under section 90 for the relief or avoidance of double taxation, income-tax, by
deduction or otherwise, under the law in force in that country, he shall be entitled to the
deduction from the Indian income-tax payable by him of a sum calculated on such doubly
taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the
lower, or at the Indian rate of tax if both the rates are equal.
(2) If any person who is resident in India in any previous year proves that in respect of his
income which accrued or arose to him during that previous year in Pakistan he has paid in
that country, by deduction or otherwise, tax payable to the Government under any law for
the time being in force in that country relating to taxation of agricultural income, he shall be
entitled to a deduction from the Indian income-tax payable by him-
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of the amount of the tax paid in Pakistan under any law aforesaid on such income
which is liable to tax under this Act also; or
Of a sum calculated on that income at the Indian rate of tax; whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm
assessed as resident in India in any previous year and such share includes any income
accruing or arising outside India during that previous year (and which is not deemed to
accrue or arise in India) in a country with which there is no agreement under section 90 for
the relief or avoidance of double taxation and he proves that he has paid income-tax by
deduction or otherwise under the law in force in that country in respect of the income so
included he shall be entitled to a deduction from the Indian income-tax payable by him of asum calculated on such doubly taxed income so included at the Indian rate of tax or the rate
of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the
rates are equal.
Explanation.-In this section,-
the expression "Indian income-tax" means income-tax charged in accordance with
the provisions of this Act;
the expression "Indian rate of tax" means the rate determined by dividing the
amount of Indian income-tax after deduction of any relief due under the provisions
of this Act but before deduction of any relief due under this Chapter , by the total
income;
the expression "rate of tax of the said country" means income-tax and super-tax
actually paid in the said country in accordance with the corresponding laws in forcein the said country after deduction of all relief due, but before deduction of any
relief due in the said country in respect of double taxation, divided by the whole
amount of the income as assessed in the said country;
the expression "income-tax" in relation to any country includes any excess profits tax
or business profits tax charged on the profits by the Government of any part of that
country or a local authority in that country.
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THE ECONOMY OF REPUBLIC OF INDIA
Rank 10th (nominal) / 4th (PPP)
Currency 1 Indian Rupee (INR) ( ) = 100 Paise
Fiscal year 1 April – 31 March
Trade
organizations
WTO, SAFTA, G-20 and others
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Statistics
GDP $1.53 trillion (nominal: 10th; 2010)
$4.06 trillion (PPP: 4th; 2010)
GDP growth 8.5% (2010-11)
GDP per capita $1,265 (nominal: 138th; 2010)
$3,339 (PPP: 129th; 2010)
GDP by sector Services (55.3%), industry (28.6%), agriculture (16.1%) (2010)
Inflation (CPI) 9.44% (June 2011)
Population
below poverty
line
37% (2010)
Labour force 478 million (2nd; 2010)
Labour force
by occupation
Agriculture (52%), industry (14%), services (34%) (2009 est.)
Unemployment 9.4% (2009 –10)
Main industries telecommunications, textiles, chemicals, food processing, steel,
transportation equipment, cement, mining, petroleum, machinery,
information technology, pharmaceuticals
Ease of Doing
Business Rank
134th(2011)
EXTERNAL
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Exports $247.4 billion (2010)
Export goods petroleum products, precious stones, machinery, iron and steel, chemicals,
vehicles, apparel
Main export
partners
UAE 12.87%, US 12.59%, China 5.59% (2009)
Imports $359.3 billion (2010)
Import goods crude oil, precious stones, machinery, fertilizer, iron and steel, chemicals
Main import
partners
China 10.94%, US 7.16%, Saudi Arabia 5.36%, UAE 5.18%, Australia 5.02%,
Germany 4.86%, Singapore 4.02% (2009)
FDI stock $35.6 billion (2009-10)
Gross external
debt
$237.1 billion (31 December 2010 est.)
Public finances
Public debt $758 billion (2010); 55.9% of GDP
Revenues $170.7 billion (2010 est.)
Expenses $268 billion (2010 est.)
Economic aid $2.107 billion (2008)
Credit rating BBB- (Domestic)
BBB- (Foreign)
BBB+ (T&C Assessment)
Outlook: Stable
(Standard & Poor's)
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Foreign
reserves
$319 billion (July 2011)
Until the liberalization of 1991, India was largely and intentionally isolated from the world
markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to
import tariffs, export taxes and quantitative restrictions, while foreign direct
investment (FDI) was restricted by upper-limit equity participation, restrictions on
technology transfer, export obligations and government approvals; these approvals were
needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI
averaged only around $200 million annually between 1985 and 1991; a large percentage of
the capital flows consisted of foreign aid, commercial borrowing and deposits of non-
resident Indians. India's exports were stagnant for the first 15 years after independence,
due to general neglect of trade policy by the government of that period. Imports in the
same period, due to industrialization being nascent, consisted predominantly of machinery,
raw materials and consumer goods.
Since liberalization, the value of India's international trade has increased sharply, with the
contribution of total trade in goods and services to the GDP rising from 16% in 1990 –91 to
43% in 2005 –06. India's major trading partners are the European Union, China, the United
States and the United Arab Emirates. In 2006 –07, major export commodities included
engineering goods, petroleum products, chemicals and pharmaceuticals, gems and
jewellery, textiles and garments, agricultural products, iron ore and other minerals. Major
import commodities included crude oil and related products, machinery, electronic goods,
gold and silver.[103]
In November 2010, exports increased 22.3% year-on-year to
85,063 crore (US$18.97 billion), while imports were up 7.5% at 125,133 crore (US$27.9
billion). Trade deficit for the same month dropped from 46,865 crore (US$10.45 billion) in
2009 to 40,070 crore (US$8.94 billion) in 2010.[104]
India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947
and its successor, the WTO. While participating actively in its general council meetings, India
has been crucial in voicing the concerns of the developing world. For instance, India has
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continued its opposition to the inclusion of such matters as labour and environment issues
and other trade into the WTO policies.
Cumulative Current Account Balance 1980 –2008 based on IMF data
Since independence, India's balance of payments on its current account has been negative.
Since economic liberalization in the 1990s, precipitated by a balance of payment crisis,
India's exports rose consistently, covering 80.3% of its imports in 2002 –03, up from 66.2% in
1990 –91. However, the global economic slump followed by a general deceleration in world
trade saw the exports as a percentage of imports drop to 61.4% in 2008 –09. India's growing
oil import bill is seen as the main driver behind the large current account deficit, which rose
to $118.7 billion, or 9.7% of GDP, in 2008 –09. Between January and October 2010, India
imported $82.1 billion worth of crude oil.[91]
Due to the global late-2000s recession, both Indian exports and imports declined by 29.2%
and 39.2% respectively in June 2009. The steep decline was because countries hit hardest by
the global recession, such as United States and members of the European Union, account
for more than 60% of Indian exports. However, since the decline in imports was muchsharper compared to the decline in exports, India's trade deficit reduced to
25,250 crore (US$5.63 billion). As of June 2011, exports and imports have both registered
impressive growth with monthly exports reaching $25.9 billion for the month of May 2011
and monthly imports reaching $40.9 billion for the same month. This represents a year on
year growth of 56.9% for exports and 54.1% for imports.
India's reliance on external assistance and concessional debt has decreased since
liberalization of the economy, and the debt service ratio decreased from 35.3% in 1990 –91
to 4.4% in 2008 –09. In India, External Commercial Borrowings (ECBs), or commercial loans
from non-resident lenders, are being permitted by the Government for providing an
additional source of funds to Indian corporates. The Ministry of Finance monitors and
regulates them through ECB policy guidelines issued by the Reserve Bank of India under
the Foreign Exchange Management Act of 1999.
India's foreign exchange reserves have steadily risen from $5.8 billion in March 1991 to$283.5 billion in December 2009.
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FOREIGN DIRECT INVESTMENT
Share of top five investing countries in FDI inflows.
(2000 – 2010)
Rank CountryInflows
(million USD)Inflows (%)
1 Mauritius 50,164 42.00
2 Singapore 11,275 9.00
3 USA 8,914 7.00
4 UK 6,158 5.00
5 Netherlands 4,968 4.00
As the fourth-largest economy in the world in PPP terms, India is a preferred destination for
FDI; India has strengths in telecommunication, information technology and other significant
areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery.
Despite a surge in foreign investments, rigid FDI policies were a significant hindrance.
However, due to positive economic reforms aimed at deregulating the economy and
stimulating foreign investment, India has positioned itself as one of the front-runners of the
rapidly growing Asia-Pacific region. India has a large pool of skilled managerial and technical
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expertise. The size of the middle-class population stands at 300 million and represents a
growing consumer market.
During 2000 –10, the country attracted $178 billion as FDI. The inordinately high investment
from Mauritius is due to routing of international funds through the country given significant
tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius,
and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel.
India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.
Industrial policy reforms have substantially reduced industrial licensing requirements,
removed restrictions on expansion and facilitated easy access to foreign technology and
foreign direct investment FDI. The upward moving growth curve of the real-estate sector
owes some credit to a booming economy and liberalized FDI regime. In March 2005, the
government amended the rules to allow 100% FDI in the construction sector, including built-
up infrastructure and construction development projects comprising housing, commercial
premises, hospitals, educational institutions, recreational facilities, and city- and regional-
level infrastructure. Despite a number of changes in the FDI policy to remove caps in most
sectors, there still remains an unfinished agenda of permitting greater FDI in politically
sensitive areas such as insurance and retailing. The total FDI equity inflow into India in
2008 –09 stood at 122,919 crore (US$27.41 billion), a growth of 25% in rupee terms over
the previous period.
INDIA: FOREIGN TRADE POLICY
Although India has steadily opened up its economy, its tariffs continue to be high when
compared with other countries, and its investment norms are still restrictive. This leads
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some to see India as a ‘rapid globalizer’ while others still see it as a ‘highly protectionist’
economy.
Till the early 1990s, India was a closed economy: average tariffs exceeded 200
percent, quantitative restrictions on imports were extensive, and there were stringent
restrictions on foreign investment. The country began to cautiously reform in the 1990s,
liberalizing only under conditions of extreme necessity.
Since that time, trade reforms have produced remarkable results. India’s trade to GDP ratio
has increased from 15 percent to 35 percent of GDP between 1990 and 2005, and the
economy is now among the fastest growing in the world.
Average non-agricultural tariffs have fallen below 15 percent, quantitative restrictions on
imports have been eliminated, and foreign investments norms have been relaxed for a
number of sectors.
India however retains its right to protect when need arises. Agricultural tariffs average
between 30-40 percent, anti-dumping measures have been liberally used to protect trade,
and the country is among the few in the world that continue to ban foreign investment in
retail trade. Although this policy has been somewhat relaxed recently, it remains
considerably restrictive.
Nonetheless, in recent years, the government’s stand on trade and investment policy has
displayed a marked shift from protecting ‘producers’ to benefiting ‘consumers’. This is
reflected in its Foreign Trade Policy for 2004/09 which states that, "For India to become a
major player in world trade ...we have also to facilitate those imports which are required tostimulate our economy."
India is now aggressively pushing for a more liberal global trade regime, especially in
services. It has assumed a leadership role among developing nations in global trade
negotiations, and played a critical part in the Doha negotiations.
Regional and Bilateral Trade Agreements
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India has recently signed trade agreements with its neighbors and is seeking new ones with
the East Asian countries and the United States. Its regional and bilateral trade agreements -
or variants of them - are at different stages of development:
India-Sri Lanka Free Trade Agreement,
Trade Agreements with Bangladesh, Bhutan, Sri Lanka, Maldives, China, and South
Korea.
India-Nepal Trade Treaty,
Comprehensive Economic Cooperation Agreement (CECA) with Singapore.
Framework Agreements with the Association of Southeast Asian Nations (ASEAN),
Thailand and Chile.
Preferential Trade Agreements with Afghanistan, Chile, and Mercosur (the latter is a trading
zone between Brazil, Argentina, Uruguay, and Paraguay).
World Bank Involvement
As a number of research institutions in the country provide the Government with good, just-
in-time, and low-cost analytical advice on trade-related issues, the World Bank has focused
on providing analysis on specialized subjects at the Government’s request.
In the last three years, the Bank has been working with the Ministry of Commerce in a
participatory manner to help the country develop an informed strategy for domestic reform
and international negotiations.
Given the sensitivity of trade policy and negotiation issues, the Bank’s role has been
confined to providing better information and analysis than was previously available to
India’s policymakers.
World Bank Reports
Over the last two years, the World Bank has completed two reports:
Sustaining India’s Services Revolution: Access to Foreign Markets, Domestic Reforms and
International Negotiation: The study concludes that to sustain the dynamism of India’s
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services sector, the country must address two critical challenges: externally, the problem of
actual and potential protectionism; and domestically, the persistence of restrictions on
trade and investment, as well as weaknesses in the regulatory environment.
From Competition at Home to Competing Abroad: The Case of Horticulture in India: This
study finds that the competitiveness of India’s horticulture sector depends critically on
efficient logistics, domestic competition, and the ability to comply with international health,
safety and quality standards. The study is based on primary surveys across fifteen Indian
States.
A third study, dealing with barriers to the movement of professionals is under preparation.
The Bank has also held a number of workshops and conferences with a view to providing
different stakeholders with a forum to express their views on trade-related issues.
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BILATERAL INVESTMENT PROMOTION AND PROTECTION AGREEMENTS (BIPA)
As part of the Economic Reforms Programme initiated in 1991, the foreign investment policy of the Government of India was liberalized and
negotiations undertaken with a number of countries to enter into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to
promote and protect on reciprocal basis investment of the investors. Government of India have, so far, (as on May 2011) signed BIPAs with 80
countries out of which 70 BIPAs have already come into force and the remaining agreements are in the process of being enforced. In addition,
agreements have also been finalised and/ or being negotiated with a number of other countries.
The objective of Bilateral Investment Promotion and Protection Agreement is to promote and protect the interests of investors of either
country in the territory of other country. Such Agreements increase the comfort level of the investors by assuring a minimum standard of
treatment in all matters and provides for justifiability of disputes with the host country
LIST OF COUNTRIES WITH WHOM BILATERAL INVESTMENT PROMOTION AND PROTECTION AGREEMENTS (BIPA) HAS BEEN SIGNED (AS ON
MAY 2011)
S.N Country Date of Agreement Date of Enforcement
1. United Kingdom 14th March 1994 6th January 1995
2. Russian Federation 23rd December 1994 5th August 1996
3. Germany 10th July 1995 13th July 1998
4. Malaysia 3rd August 1995 12th April 1997
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5. Denmark 6th September 1995 28th August 1996
6. Turkmenistan 20th September 1995 27th February 2006
7. Netherlands 6th November 1995 1st December 1996
8. Italy 23rd November 1995 26th March 1998
9. Tajikistan 13th December 1995 23rd November 2003
10. Israel 29th January 1996 18th February 1997
11. South Korea 26th February 1996 7th May 1996
12. Poland 7th October 1996 31st December 1997
13. Czech. Republic 11th October 1996 6th February 1998
14. Kazakhstan 9th December 1996 26th July 2001
15. Sri Lanka 22nd January 1997 13th February 1998
16. Vietnam 8th March 1997 1st December 1999
17. Oman 2nd April 1997 13th October 2000
18. Switzerland 4th April 1997 16th February 2000
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19. Egypt 9th April 1997 22nd November 2000
20. Kyrgyz Republic 16th May 1997 12th May 2000
21. France 2nd September 1997 17th May 2000
22. Spain 30th September 1997 16th October 1998
23. Belgium 31st October 1997 8th January 2001
24. Romania 17th November 1997 9th December 1999
25 Mauritius 4th September 1998 20th June 2000
26 Turkey 17th September 1998 18th October 2007
27 Bulgaria 26th October 1998 23rd September 1999
28 Morocco 13th February 1999 22nd February 2001
29 Indonesia 10th February 1999 22nd January 2004
30 Australia 26th February 1999 4th May 2000
31 Qatar 7th April 1999 15th December 1999
32 Uzbekistan 18th May 1999 28th July 2000
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33 Argentina 20th August 1999 12th August 2002
34 Austria 8th November 1999 1st March 2001
35 Philippines 28th January 2000 29th January 2001
36 Portugal 28th June 2000 19th July 2002
37 Sweden 4th July 2000 1st April 2001
38 Thailand 10th July 2000 13th July 2001
39 Lao PDR 9th November 2000 5th January 2003
40 Mongolia 3rd January 2001 29th April 2002
41 Croatia 4th May 2001 19th January 2002
42 Kuwait 27th November 2001 28th June 2003
43 Ukraine 1st December 2001 12th August 2003
44 Cyprus 9th April 2002 12th January 2004
45 Yemen 30th October 2002 10th February 2004
46 Finland 7th November 2002 9th April 2003
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47 Belarus 27th November 2002 23rd November 2003
48 Taiwan 17th October 2002 25th February 2005
49 Serbia (Yugoslavia) 31st January 2003 24th February 2009
50 Armenia 23rd May 2003 30th May 2006
51 Sudan 22nd October 2003 18th October 2010
52 Hungary 3rd November 2003 2nd January 2006
53 Bahrain 13th January 2004 5th December 2007
54 Saudi Arabia 25th January 2006 in New Delhi 20th May 2008
55 Bosnia & Herzegovina 12th September 2006 in New Delhi 14th February 2008
56 Slovak Republic 25th Sept. 2006 in Slovak 16th June 2007
57 China 21st Nov. 2006 in New Delhi 1st August 2007
58 Jordan 1st December 2006 in New Delhi 22nd January 2009
59 Trinidad & Tobago 12th March 2007 in New Delhi 7th September 2007
60 Hellenic Republic (Greece) 26th April 2007 in Athens 12th April 2008
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61 Mexico 21st May 2007 in New Delhi 23rd February 2008
62 Libya 26th May 2007 in Libya 25th March 2009
63 Iceland 29th June 2007 in Iceland 16.12.2008
64 Macedonia 17th March 2008 in Skopje, Macedonia 17th October 2008
65 Brunei Darussalam 22nd May 2008 in New Delhi 15th February 2009
66 Syrian Arab Republic 18th June 2008 in New Delhi 22nd January 2009
67 Myanmar 24th June 2008 in Myanmar 8th February 2009
68 Senegal 3rd July 2008 in Dakar, Senegal 17th October 2009
69 Mozambique 19th February 2009 at New Delhi 23rd September 2009
70 Latvia 18th February 2010 at New Delhi 27th November 2010
71 Djibouti 19th May 2003 -
72 Ethiopia 5th July 2007 -
73 Ghana 5th August 2002 -
74 Uruguay 11th February 2008 -
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75 Zimbabwe 10th February 1999 -
76 Bangladesh 9th February 2009 -
77 Colombia 10th November 2009 -
78 Democratic Republic of Congo 13th April 2010 -
79 Seychelles 2nd June 2010 -
80 Lithuania 31st March 2011 -
81. Bulgaria (Protocol) 12th September 2007 in New Delhi 12th May 2008
82. Romania (Protocol) 16th February 2009 in Bucharest 21st October 20095
83. Czech Republic (Protocol) 10th June 2010 in Prague 24th March 2011
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CASES
CAFÉ COFFEE DAY
Café Coffee Day is a division of India's largest coffee conglomerate, Amalgamated Bean
Coffee Trading Company Ltd. (ABCTCL). ABCTCL grows coffee in its own estates of 10,000
acres (4047ha). The land value of the plantations is U$250-300 million.] It is the largest
producer of Arabica beans in Asia. Apart from this, the group also sources coffee from
11,000 small growers.
ABCTCL is one of India’s leading coffee exporters with clients across USA, Europe and
Japan.
LOGO
CAFÉ EMPORIO
Café coffee day, in June 2010, acquired Café Emporio- A café chain from Czech Republic.
Cafe Emporio has 11 cafes in Czech Republic- 7 of them in Prague and 1 each in Brno andOlomouc and 2 at Freeport-Hate. Café Emporio runs on 2 formats similar to CCD’s regular
cafés and Lounge & Square set ups. The regular cafes are pure play cafés serving hot and
cold beverages and ready to eat snacks while the lounges and squares come with a broader
menu and elegant layouts.
CAFE COFFEE DAY –BRAND STRATEGY
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“CCD today has become the largest youth aggregator, and from a marketing stand point,
the success has come by focusing on the 3As: Accessibility, Affordability and
Acceptability .” - BidishaNagaraj, the Marketing president of Cafe Coffee Day
“Although demographically, a typical consumer would be male or female between 15-29
years of age, belonging to middle or upper middle class, we call our consumers young or
young at heart. We are about juke boxes, good and affordable coffee and food. The brand fit
is with youth or the young at heart. So we often look out for brands that are aspirational in
nature.” – SudiptaSen Gupta, Marketing head, Café Coffee Day.
CCD –AN ESTABLISHED BRAND IMAGE IN INDIA
Cafe Coffee Day (CCD) has an established brand image in India and ranks No 2 in the Brand
Equity’s Most Trusted Brands 2008 survey – in the food services category. Rival Barista is at
No 5. CCD has been able to make a connection with the Indian consumers, predominantly
among the youth. CCD is the market leader in India and was awarded the ‘Exclusive Brand
Retailer of the Year’ by ICICI Bank in its Retail Excellence Awards 2005 for the organized
retail sector.
CCD’s wide network –the anytime, anywhere cafe
CCD has been able to make its brand presence felt through the sheer number of stores. CCD
has 620 cafes at present and it has ambitious plans to launch more than 900 cafes by the
end of the current financial year. This means launching one store every other day which is
not surprising from a company which launched a cafe (in 2005) in Vienna, the coffee capital
of the world. CCD also has three cafes in Vienna, and two in Karachi, Pakistan. Lagging
behind CCD in the Indian market, Barista has about 200 cafés, Java Green (around 75 cafés)
and Mocha (around 25 cafés). The Indian organized sector has potential for around 5,000
cafés but fewer than 1,000 cafés exist currently.
Exhibit 1: Total number of stores/cafes of Café Coffee Day and its competitors
CCD’s vision: To be the only office for dialogue over a cup of coffee
CCD’s Expansion Strategy: Cafe Coffee Day has around 821 outlets in 115 cities in India.
CCD plans to take the total number of cafes to 1,000 by March 2010 and double it to
2,000 by 2014. In October 2009, CCD announced that it will increase its international
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presence from the current six outlets in Vienna and Pakistan to a total of 50 stores across
Europe and Middle East in two years time.
International coffee chains in India – Recent entrants in the Indian market includeGloria Jeans, Coffee Bean & Tea Leaf and Illy Café.
Operating Formats – Café Coffee Day operates in both regular (Coffee Day Square) and
premium formats (Lounge).
Highway Cafes: In 2004, CCD began cafes on highways. By 2009, the total number of Café
Coffee Day highway cafes rose to 30 owing to the overwhelming response it received
from travellers.
CCD’s new brand identity: In October 2009, CCD unveiled a new brand logo, a Dialogue
Box, to weave the concept of ‘Power of Dialogue’. In accordance with this new brand
identity, CCD planned to give all its existing outlets a new look by the end of 2009. Cafés
would be redesigned to suit different environments such as book, music garden and
cyber cafes suitable for corporate offices, university campus or neighborhood. Thechange plan included new smart menu, furniture design, among others.
Coffee consumption in India is growing at 6% per annum compared to the global 2%
plus. In India, the per capita consumption of coffee is around 85 grams while it is six kgs
in the US.
Milk production in India – India is the largest producer and consumer of milk in the
world with 98% of milk being produced in rural India.
Coffee production in India – India ranks sixth as a producer of coffee in the world
accounting for 4.5% of the global coffee production. India has about 170,000 coffee
farms cultivating around 900,000 acres of coffee trees.
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CCD’s International Expansion Strategy – In June, 2010 Cafe Coffee Day chain acquired
Emporio for Rs 15 crore. Emporio is a Czech Republic-based café chain present at 11
locations. CCD plans to co-brand the chain as Café Coffee Day Emporio and later
transition it to Café Coffee Day. CCD is also present in Vienna. The company wants toexpand in the East European region, West Asia and the Asia-Pacific region.
Cafe Market in India – Coffee retailers cover only 170 cities out of 3,000 in India (early
2011 reports). In 2008, according to Technopak Advisors, the Indian food servcies market
– cafes, full-service restaurants, fast-food outlets/quick-service restaurants was
estimated to be $6 billion (Rs 26,000 crore) with organized players taking 13% of the
market. (By 2014 this number is expected to increase up to 27 %.). According to
Technopak Advisors, the café market in India is estimated at $150 million (Rs 678 crore)
and growing at 40 per cent over the last five years.
Organized coffee market in India: The organized coffee market in India is about Rs 600
crores. This is approximately 20% of the total domestic coffee consumption (Rs 3,000
crores).
New Entrants in Indian Coffee Cafe market: In early 2011, Hindustan Unilever, the FMCG
giant planned to open a cafe outlet in Mumbai named ‘Bru World Café‘ to popularize its
in-house coffee brand Bru (HUL’s only coffee brand sold only in India).
CCD to double its human resources count: CCD has 6,500 employees (as per Feb 2011
figures) with each cafe requiring about 6 employees. CCD plans to double its employee
count by 2013.
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MAHINDRA REVA ELECTRIC VEHICLES PRIVATE LIMITED
Mahindra Reva Electric Vehicles Private Limited, formerly known as the Reva Electric Car
Company, is an Indian company based in Bangalore, involved in designing and
manufacturing of compact electric vehicles. It is one of the first companies to introduce
electric vehicles worldwide. The company's flagship EV REVAi is the world's best selling
electric vehicle so far. The company has been acquired by Indian conglomerate Mahindra &
Mahindra in May 2010, and now operates as one of its parent's marquees.
HISTORY
The Reva Electric Car Company (RECC) was founded in 1994 by Sudarshan Maini, chairman
of the Maini Group of Bangalore, as a joint venture with Amerigon Electric Vehicle
Technologies (AEVT Inc.) of the USA. The company's sole aim was to develop and produce
an affordable compact electric car. Several other automakers were also aiming to do so, but
in 2001 RECC launched the REVA, its first model, and the world's first mass produced electric
car.
REVAi electric vehicle
RECC joined up with several automotive experts to develop components for REVA. Curtis
Instruments Inc. of USA developed a Motor Controller specifically for the car. The car had a
high-tech power pack for which Tudor India Limited supplied
customized Prestolite batteries. The Charger for Reva was developed byModular Power
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Systems of USA (a division of TDI). Later, RECC started manufacturing the charger
themselves through a technical collaboration agreement between MPS and the Maini
Group.
In 2004 GoinGreen of the UK entered into an agreement with RECC to import REVA cars and
market them under the G-Wiz moniker.
In 2006 Riva received an additional investment of $20 million from Draper Fisher Jurveston
and Global Environment Fund (GEF).
In 2008 a revamped REVA model was launched called the REVAi. The company started
production of a Lithium-ion variant called the REVA L-ion in 2009.
In 2009 at the Frankfurt Motor Show, Reva presented its future models Reva NXR and Reva
NXG. During the event Reva and General Motors India declared a technical collaboration to
develop affordable EV for the Indian market. As a result of this General Motors India
announced an electric version of their hatchback in the New Delhi Auto Expo 2010: named
the e-Spark, Reva was to provide battery technology.
On May 26, 2010, India's largest sports utility vehicles and tractor maker Mahindra &
Mahindra bought a 55.2% controlling stake in Reva. Following the deal, the company was
renamed Mahindra Reva Electric Vehicles Private Limited. Mahindra’s president of
automotive business, Pawan Goenka, became the new company’s chairman. As a result of
the ownership change General Motors pulled out of the tie-up with Mahindra Reva that was
to produce the e-spark.
In Feb 2011 GoinGreen, the UK's exclusive importer of the G-Wiz, announced that it would
only sell G-Wiz models until Autumn 2011.