COUNTRY RISK ANALYSIS OF INDIA AND CHINA FOR OPENING A TEXTILE

SUBSIDIARY

SUBMITTED TO

SIR SYED ASIM SHAH

SUBMITTED BY

AQSA GUL (01-112201-009)

AQDAS RIAZ (01-11220

BAHRIA UNIVERSITY ISLAMABAD CAMPUS

DEPARTMENT OF MANAGEMENT STUDIES

 1. Introduction:

Country risk analysis is the systematic analysis conducted by a company before opening

a subsidiary in a particular country to assess its political and economic risk factor. China and

India have become two of the most significant players in the textile sector, giving enormous

possibilities for investment and growth. The world's top exporter of textiles, China has a highly

developed textile sector with a large capacity for production. It has become a center for textile

production worldwide due to its strong manufacturing infrastructure, scientific innovations, and

trained labor force. China's strategic position, excellent operational systems, and well-established

supply chains all contribute to the nation’s attraction as an investment site. China continues to

draw foreign direct investment due to its large market, solid trade relations, and access to

international markets despite the recent rises in manufacturing prices.

On the other hand, India with the GDP of 7 th in ranking, is the fastest growing economy

in the world. India provides a huge potential for textile producers with its developing middle

class and growing population. The nation is known for its skilled craftsmanship, wide fabric

choice, and rich textile tradition. India is a desirable location for a manufacturing base because of

its cost-competitiveness, accessibility to raw resources, and trained labor force. In addition,

recent government programs like "Make in India" tried to support domestic manufacturing and

foster an atmosphere that welcomed global investors. India is positioned as a promising market

for textile products due to its high domestic consumption and expanding exports.

Therefore, in order to choose between both the countries to open a textile subsidiary we

will do country risk analysis of both the countries one by one and then compare to select the best

one.
 2. Country Risk Analysis, India

2.1. Micro Political Risk factor:

2.1.1 Inefficient bureaucracy:

India has been known to face inefficient bureaucracy challenges, which effects the

companies on the micro level such as; delays in operations and increased administrative burden.

Thus the competitiveness of a corporation in the market might be significantly impacted by

ineffective bureaucracy; the process of acquiring necessary documents can be slow and

cumbersome. Delays in obtaining licenses can prolong the timeline for establishing operations

and lead to increased costs. The company's ability to adapt rapidly to shifting market demands

and customer wants could be affected by delays and administrative hurdles. Competitors

operating in countries with more efficient administrative procedures may benefit from this,

which might have an impact on market share and profitability.

2.1.2 Blockage of funds transfer

The transfer of money from an Indian subsidiary to its parent business is generally

unrestricted. India has put in place a more liberalized foreign exchange system that permits the

repatriation of money with little to no restriction. Indian businesses, including subsidiaries of

international businesses, are free to transfer profits, dividends, revenue, and other legal payments

to their parent corporations in other countries.

2.1.3 Attitude of consumer in the host country:

Consumers in India usually see foreign subsidiaries positively. They frequently believe

that foreign companies provide better quality, more innovative, and superior goods and services.
Foreign firms tend to be highly regarded, especially in industries like technology and luxury

products. In India, consumer opinions are significantly influenced by brand reputation. Indian

consumers may choose well-known international textile companies with a positive repute and a

history of producing high-quality goods.

2.1.4 Environmental regulation:

In India, there are no specific environmental laws for textile industry.

2.1.5 Political influence on business operation

India is the world's largest democracy, characterized by regular elections and a multi-party

political system. Political parties and their ideologies can influence policies and regulations

impacting businesses. Changes in government or shifts in political dynamics may lead to policy

adjustments that can affect business operations.

1.1. Macro Political Risk Factors, India:

2.2.1 Geopolitical Relations:

India geopolitical relations can influence the textile industry. Historical conflicts exist

between India and its neighbors, namely Pakistan and China, with which it has complex

relations. A higher likelihood of local conflicts or development can also be driven on by regional

dynamics and conflicts in places like Jammu and Kashmir, Northeast India, or domestic safety

concerns (Kumar, May 22, 2023). Trade disputes, tensions, or changes in diplomatic relations

with key trading partners may affect market access, supply chains, and international business

relationships.

2.2.2 Tariffs and Trade Barriers

 The South Asian Free Trade Area (SAFTA) and the ASEAN-India Free Trade Area

(AIFTA) are two preferential trade agreements that India has signed. Although these agreements

may offer certain benefits and discounts for trade with member nations, they also have particular

rules of origin and compliance requirements.

2.2.3 Government intervention and control

India has generally adequate copyright laws, but enforcement is weak and piracy of

copyrighted materials is widespread. Trademark protection is good and meets international

standards. However, Indian law provides no protection for trade secrets. Regarding FDI, India

has particular rules for the textile industry. FDI is typically permitted, although depending on the

nature and size of the textile business, there can be restrictions on foreign ownership or equity

participation. However, political instability, poor infrastructure, confusing tax and tariff policies,

Draconian labor laws, well entrenched corruption and governmental regulations makes the

India’s performance poor in the FDI.

2.2.4 Currency Inconvertibility

India does not currently face significant currency inconvertibility political risk. Over the

years, India has undertaken several economic reforms to liberalize its foreign exchange

regulations and facilitate the convertibility of its currency, the Indian Rupee (INR).

2.2.5 Corruption and control

India has experienced instances of corruption across various sectors, including

government, bureaucracy, judiciary, and business. Corruption can manifest through bribery,

embezzlement, nepotism, favoritism, and abuse of power. Perception-based indices, such as the
Corruption Perceptions Index by Transparency International, have highlighted corruption

concerns in India.

Transparency International, in Corruption Perceptions Index, ranked India 85th out of 180

countries, giving it a score of 43 out of 100.

2.3 Micro Economic risk Factors, India:

2.3.1 Labor Market Dynamics

Thanks to its vast pool of highly skilled labor and the stable political climate, India is one

of the most attractive investment places in the world. It has liberalized the economy during the

last 25 years and the government has a business-friendly policy. India is known for its

competitive labor costs compared to many other countries. The availability of abundant labor

resources often translates into lower wage rates, making it attractive for businesses to establish

manufacturing operations and take advantage of cost efficiencies.

2.3.2 Industry growth

India is the 7th largest growing GDP in the world. The country recorded its high-ever

textiles and apparel exports (including handicrafts) in the financial year 2021-2022 at USD 44.4

billion, with an increase of 41% YoY. Exports of readymade garments, including cotton

accessories, stood at US$ 6.19 billion in FY22.

2.3.3 Supply chain risk

Supply chain risk refers to potential challenges, or weaknesses that might affect the

effective transportation of materials, processes, and finished goods through the supply chain.
Weather conditions, infestations of insects, natural catastrophes, and geopolitical issues can have

an impact on the cost and availability of raw materials, disrupting supply chains.

2.3.4 Consumer Demand Behavior

Consumer behavior and demand can be volatile, especially in a dynamic market like

India. Changes in economic conditions, consumer preferences, fashion trends, and purchasing

power can significantly impact the demand for textile products. Indian consumers are also known

to be price-sensitive, seeking value for money in their purchases. Price competition is intense in

the textile industry, and consumer behavior is strongly influenced by price comparisons and

perceived value.

2.3.5 Industry competitiveness

Indian companies compete intensely for market share with both domestic and foreign

firms. Existing rivals, such as well-known exporters and manufacturers, might provide

difficulties in terms of price, product differentiation, and market penetration. Thus providing

high risk factor.

2.4 Macro Economic risk Factors, India:

2.4.1 Inflation

Inflation in India is 5% where as in China it is 1% which makes India suitable host

country for opening a subsidiary. The reason is that, when the inflation in the country is high its

consumer’s demand for foreign goods and services is high which will definitely benefit the

subsidiary. However, inflation can also increase the cost of input such as raw material cost, labor

cost etc.
2.4.2 Interest rate

Interest rate in India is 6.50% pa which is comparatively high which indicates high cost

of obtaining loans or financing for the subsidiary's operations, such as acquiring equipment,

establishing production facilities, or expanding business operations. Higher borrowing costs can

potentially limit the subsidiary's investment capacity or impact its profitability.

2.4.3 Exchange rates

India has a more flexible exchange rate system influenced by market forces thus which

can place it to more exchange rate risk as compared to china.

2.4.4 Infrastructure and logistics

The huge area and diversity of India's industries might make logistics and transportation

issues. The timely delivery of raw materials, components, and finished goods along the supply

chain can be impacted by inadequate transportation infrastructure, delays at ports, congested road

networks, and restricted connection.

2.4.5 Financial stability

Due to the increasingly developed banking network in India, SWIFT bank transfers are

becoming more popular for both international and domestic transactions. Standby Letters of

Credit constitute a reliable means of payment, as a bank guarantees the debtor’s credit quality

and repayment abilities. As per Financial Stability Report (FSR), the country’s financial system

remains stable despite weakening domestic growth despite the risks from global economic

uncertainties and geopolitical developments.

 2. Country risk Analysis, China

2.1. Micro Political Risk Factors

3.1.1 Regulatory environment

China has a complex regulatory environment with numerous laws and regulations that that

can impact the textile industry. The government's policies on labor, environmental regulations,

import/export controls, and product safety standards can affect operations, compliance costs, and

market access.

3.1.2 Political influence on business operation:

The stability of the Chinese political system and the potential for political changes within the

ruling party can have implications for businesses. Sudden shifts in leadership or policy priorities

may lead to changes in regulations, trade policies, or market conditions.

3.1.3 Inefficient bureaucracy:

Opening a textile subsidiary in China involves obtaining various licenses, permits, and

approvals from government authorities. In an inefficient bureaucracy, the process of acquiring

these necessary documents can be slow and cumbersome. Delays in obtaining licenses can

prolong the timeline for establishing operations and lead to increased costs.

3.1.4 Rules and Laws of Judicial independence:

The Heritage Foundation’s ‘Index of Economic Freedom’ survey 2021 assigns China rank

107 out of 184 economies (up from rank 144 in the 2016 survey), reflecting good scores with

regards to business freedom, tax burden, judicial effectiveness and trade freedom, though

weaknesses remain in particular with regards to investment freedom and financial freedom.
Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey

indicate that the rule of law and measures to combat corruption have all improved since 2016.

3.1.5 Blockage of funds

China maintains certain capital controls to manage its financial system and currency stability.

These controls can involve restrictions on the movement of funds into and out of the country. In

some cases, funds may be blocked or subject to delays due to regulatory requirements or

approval processes. These capital controls can pose challenges for businesses, including textile

subsidiaries, by limiting their access to funds and creating uncertainties in cash flow

management.

2.2. Macro Political Risk Factors:

3.2.1 Geopolitical Relations

China's geopolitical relationships with other countries can influence the textile industry.

Trade disputes, tensions, or changes in diplomatic relations with key trading partners may affect

market access, supply chains, and international business relationships.

3.2.2 Tariffs and Trade Barriers

Participation in trade agreements can help mitigate the impact of tariffs and trade barriers.

China has various trade agreements in place, such as the ASEAN-China Free Trade Agreement

and the Regional Comprehensive Economic Partnership (RCEP). These agreements provide

preferential tariff rates and reduce trade barriers between participating countries, creating

opportunities for the textile subsidiary.

3.2.3 Government intervention and control

 The Chinese government has the authority to impose market access restrictions and entry

barriers for foreign businesses, including textile subsidiaries. These barriers can include

limitations on foreign ownership, requirements for joint ventures or partnerships with local

companies, and restriction on market entry in certain regions or sectors. Government control

over market access can influence the feasibility and ease of opening a textile subsidiary in China.

3.2.4 Corruption

Corruption in China involve demands for bribes or kickbacks by government officials or

individual with influence. These illicit practices can increase the cost of doing business and

create ethical dilemmas for the textile subsidiary. Bribery and extortion can affect various

aspects of the subsidiary's operations, such as obtaining permits and licenses, securing contracts,

or accessing necessary resources.

3.2.5 Currency inconvertibility

China maintains strict foreign exchange controls to manage capital flows and maintain

stability in its financial system. These controls include regulations on currency exchange, cross-

border transactions, and foreign currency holdings. These restrictions may limit the subsidiary's

ability to transfer profits, dividends, or capital back to its parent company or investors in their

desired currency.

3.3 Micro economic Risk factors

3.3.1 Labor market dynamics

China has traditionally been known for its relatively low labor costs, which have attracted

many textile companies. However, in recent years, labor costs have been rising due to increased
demand for higher wages and improved working conditions. The cost of labor can impact the

overall production costs of a textile subsidiary.

3.3.2 Industry Growth

If the textile industry in China is experiencing slow or stagnant growth, it may indicate

market saturation. This can result in intense competition, shrinking profit margins, and limited

opportunities for new entrants like a textile subsidiary. The presence of numerous established

players and a crowded marketplace can pose challenges to the subsidiary's market positioning

and growth prospects.

3.3.3 Supply chain risk

China's vast size and diverse geographic regions can introduce unique supply chain risks.

For example if the textile subsidiary is located in a region prone to natural disasters like

earthquakes or floods, it may face disruptions in the supply of raw materials or transportation

networks. Understanding and mitigating such geographical risks is crucial for ensuring supply

chain stability.

3.3.4 Consumer behavior demand:

Consumer behavior and demand can be volatile, especially in a dynamic market like

China. Changes in economic conditions, consumer preferences, fashion trends, and purchasing

power can significantly impact the demand for textile products. Chinese consumers are also

known to be price-sensitive, seeking value for money in their purchases. Price competition is

intense in the textile industry, and consumer behavior is strongly influenced by price

comparisons and perceived value.

3.3.5 Industry competitiveness

E-commerce has experienced significant growth in China, with a large number of

consumers preferring to shop online. The textile subsidiary should consider the impact of e-

commerce platforms, online marketplaces, and digital marketing channels to reach a broader

customer base. Developing an effective online presence, optimizing the user experience, and

leveraging digital marketing strategies can help capture the attention and purchasing power of

Chinese consumers.

3.4. Macro-Economic Factors:

3.4.1 Financial stability:

China's overall economic growth and stability can have a significant impact on the textile

industry. A robust economy with increased consumer spending can drive demand for textile

products, while economic downturns can result in reduced consumer purchasing power. Policies

and incentives, such as tax breaks, subsidies, and export promotion measures, can directly impact

the profitability and competitiveness of textile companies. Understanding and utilizing these

policies can provide advantages for a textile subsidiary in China.

3.4.2 Infrastructure Development:

China's infrastructure development, including transportation networks, logistics

capabilities, and technology advancements, can enhance the efficiency of textile operations and

supply chain management.

3.4.3 Inflation and Price Stability:

 If inflation in China leads to a significant appreciation of the currency, it can impact the

export competitiveness of the textile subsidiary. A stronger currency can make textile exports

more expensive relative to products from other countries, potentially reducing demand in

international markets. This can hinder the subsidiary's growth and expansion plans, particularly

if export markets are a significant part of its business strategy.

3.4.4 Currency Exchange Rates:

It was verified that China has experienced a rapid and strong economic growth mainly

supported by exports and foreign investment, and its exchange rate policy is often cited as a

determining factor of this growth. This fact has aroused a growing interest in the international

community, not only because of its intensity but also because of the relative sustainability of its

growth, concomitant with a period in which the world as a whole showed medium economic

growth. If the Chinese Yuan (CNY) is relatively weak compared to other currencies, it can

enhance the competitiveness of Chinese textile products in international markets. On the other

hand, if the CNY strengthens against other currencies, it can increase the cost of importing raw

materials, machinery, and equipment for the textile subsidiary. This can affect the profitability

and cost structure of the subsidiary.

3.4.5 Interest rates:

The prevailing interest rates in China is 3.65 that can impact the cost of borrowing for the textile

subsidiary. If interest rates are high, it can increase the cost of obtaining loans or financing for

the subsidiary's operations, such as acquiring equipment, establishing production facilities, or

expanding business operations. Higher borrowing costs can potentially limit the subsidiary's

investment capacity or impact its profitability.

 For calculations of country risk analysis of India we take assumed information

(1) (2) (3) (4)=(2)*(3)

POLITICAL RISK FACTORS RATING ASSIGNED WEIGHT WEIGHTED VALUE

BY COMPANY TO ASSIGNED BY OF FACTOR
FACTOR (WITHIN A COMPANY TO
RANGE OF 1−5) FACTOR
ACCORDING TO
IMPORTANCE
Micro-Political Risk Factors

Inefficient bureaucracy 1 20% 0.2

Regulatory Environment 4 5% 0.2

Political influence on business 2 10% 0.2

operations
Blockage of Funds Transfer 5 0% 0
Attitude of consumer in the host 3 5% 0.15
country
40% 0.75
Macro-Political Risk Factor
Currency inconvertibility 5 5% 0.25
Tariffs and Trade Barriers 3 10% 0.3
Geopolitical relations 2 10% 0.2
Corruption 1 30% 0.3
Government intervention and 2 5% 0.1
control
60% 1.15
Total 100% 1.9
Financial Risk Factors
Micro-Financial Factors
Labor market dynamics 4 5% 0.2
Industry growth 3 5% 0.15

Consumer behavior and demand 2 5% 0.1

Industry competitiveness 1 15% 0.15
Supply chain risk 2 10% 0.2
40% 0.8
Macro-Financial Risk Factors
Inflation 3 15% 0.45
Interest rate 2 10% 0.2
Exchange rate 1 20% 0.2
Infrastructure and logistics 2 10% 0.2
Financial stability 3 5% 0.15
60% 1.2
Total 100% 2

Overall country risk ratings

(1) (2) (3) (4)

Category RATING AS WEIGHT WEIGHTED RATING
DETERMINED ASSIGNED BY
ABOVE COMPANY TO
EACH RISK
CATEGORY
Political risk 1.9 40% 0.76
Financial risk 2 60% 1.2
Total 100% 1.96 =(Overall country
risk-rating)
 For the calculations of country risk analysis of China we take assumed information

(1) (2) (3) (4)=(2)*(3)

POLITICAL RISK RATING ASSIGNED BY WEIGHT WEIGHTED VALUE
FACTORS COMPANY TO ASSIGNED BY OF FACTOR
FACTOR (WITHIN A COMPANY TO
RANGE OF 1−5) FACTOR
ACCORDING TO
IMPORTANCE
Micro-Political Risk Factors
Inefficient bureaucracy 3 10% 0.3
Regulatory Environment 1 15% 0.15
Political influence on business 5 5% 0.25
operations
Blockage of Funds Transfer 2 15% 0.3
Attitude of consumer in the 1 15% 0.15
host country 60% 1.15
Macro-Political Risk Factor
Currency inconvertibility 1 20% 0.2
Tariff and trade barrier 4 5% 0.2
Geopolitical relations 3 5% 0.15
Corruption 3 5% 0.15
Government intervention and 4 5% 0.2
control 40% 0.9
Total 100% 2.05
Financial Risk Factors
Micro-Financial Factors
Labor market dynamics 3 5% 0.15
Industry growth 2 20% 0.4
Consumer behavior and 2 10% 0.2
demand
Industry competitiveness 1 20% 0.2
Supply chain risk 4 5% 0.2
60% 1.15
Macro-Financial Risk
Factors
Inflation 3 10% 0.3
Interest rate 3 10% 0.3
Exchange rate 4 10% 0.4
Infrastructure and logistics 5 5% 0.25
Financial stability 5 5% 0.25
40% 1.5
Total 100% 2.65

Overall country risk ratings

(1) (2) (3) (4)

Category RATING AS WEIGHT WEIGHTED RATING
DETERMINED ASSIGNED BY
ABOVE COMPANY TO
EACH RISK
CATEGORY
Political risk 2.05 70% 1.435
Financial risk 2.65 30% 0.795
Total 100% 2.23 =(Overall country
risk-rating)
4. Conclusion

India has a country risk rating overall of 1.96, which indicates a high level of risk. This shows

that while India may have some political difficulties, its financial difficulties are far more

serious. On the other hand, China has a slightly higher total country risk rating than India, at

2.23. China may provide more political dangers, its financial stability is often higher. Thus on

the basis of the country risk analysis we chose China because of its risk sore which is high than

the China’s overall country risk rating. Thus suggesting a better place to open a textile subsidiary

than India as the financial risk factor in India appears to be more prominent due to high inflation,

exchange rate risks and higher interest rates which can impose difficulties for the foreign

subsidiary. Therefore, it would be difficult to penetrate into Indian textile industry than China

although the political conditions there are favorable.

References

Kumar, S. (May 22, 2023). India’s geopolitical rise in context: Regional implications. Atlantic

Council.

BRIAN PERRY. (June 22, 2022), Evaluating Country Risk for International Investing