India Market Entry: Benefits, Challenges, and How Japanese Companies Can Succeed

India continues to maintain one of the world’s highest economic growth rates, and projections indicate that its market will expand even further in the years ahead.

Many Japanese businesses are recognizing this potential and exploring opportunities to enter the Indian market.

In this article, we’ll explore:

• Why India’s market is so attractive

• Key drivers of India’s economic growth

• The main benefits and challenges of expanding into India

• Practical insights for Japanese companies considering expansion

Whether you’re planning an initial entry or looking to strengthen your presence, this guide will help you assess the landscape and plan strategically.

Business Opportunities in Entering the Indian Market

Before diving into strategies for market entry, it’s essential to understand why India is currently one of the most attractive markets in the world. Recognizing the key drivers behind its growth — as well as the activity of Japanese companies already expanding there — provides a strategic advantage.

Reasons for India’s Economic Growth

India’s economy continues on an upward trajectory and is said to be the only market in the world projected to maintain a 6% growth rate.

In 2022, India’s economic size surpassed that of the United Kingdom, ranking it 5th globally.

Similarly, in the stock market, as of November 2023, the Sensex Index has continued to hit record highs.

Although temporary, India’s market capitalization overtook that of the UK, reaching 4th place, showing no signs of slowing down.

In Japan’s stock market as well, there has been a growing movement to actively seek business development opportunities in India.

Below are the key reasons why the Indian market continues to grow.

In 2023, India overtook China to become the world’s most populous country. A significant portion of its population consists of individuals in their teens and twenties, representing a large, young, and productive workforce — one of the key drivers behind its economic momentum.

Additionally, the government-led Digital India initiative has contributed to a sharp drop in communication costs, accelerating internet and smartphone adoption across the country.

This surge in digital connectivity has fueled the rapid rise of web-based startups and IT-related services, positioning India as a highly promising and scalable market for global businesses.

With sustained growth expected in the coming years, India presents a compelling opportunity for companies looking to enter an emerging, tech-savvy, and high-demand economy.

Reference: Okasan

India Is an Ideal Country for Startups

India is becoming one of the world’s leading startup nations, following the United States and China. The following data is from a 2017 study by the Development Bank of Japan.

Survey Results: Promising Countries for Business Expansion in the Medium Term (Approx. 3 Years)

Reference: Zenwaves

India Is Already a Key Destination for Japanese Companies

According to the data above, India had already emerged as a promising destination for Japanese companies’ mid-term business expansion as early as 2017.

Furthermore, JETRO’s “Survey on the Business Activities of Japanese Companies Overseas” reports that as of 2023, approximately 1,500 Japanese companies had expanded into India — and notably, around 70% of them are operating in the black.

This is a remarkable turnaround, considering that only a few years ago, 70% were reportedly operating at a loss. It clearly indicates that the business infrastructure in India has significantly improved.

Even on a global scale, many companies are establishing operations in India. Therefore, now is the time to enter the market and leverage its growth potential.

For companies launching new ventures in India, rather than starting from scratch, partnering with fast-growing local startups is a smart move.

Trends in Japanese Companies Expanding into India

The following outlines the trend of Japanese companies entering the Indian market as of October 2022.

Data/image source: JETRO

According to the data above, there are currently 1,400 Japanese companies operating in India, with a total of 4,901 business locations.

While the number of companies slightly decreased and the number of business sites slightly increased compared to 2021, the figure has grown to approximately 1,500 companies by 2023, as previously mentioned.

Notably, about half of the Japanese companies in India and one-third of their business locations are in the manufacturing sector.

Other sectors showing a steady increase in business locations include wholesale and retail, finance, and insurance.

Advantages of Entering the Indian Market

From here, we will introduce the specific advantages for Japanese companies expanding into the Indian market.

The main advantages are the following three:

The ease of securing development talent and operational bases, along with the significant growth potential of the market, are key reasons why India is attracting attention as a major business opportunity.

Abundant IT Talent

India has a relatively young population structure, which translates to a large and growing pool of IT talent.

Currently, the country is experiencing a “demographic dividend” period, with more than half of its 1.3 billion population under the age of 30.

Young Indian business professionals also tend to have stronger English proficiency and better communication skills compared to their Japanese counterparts.

This abundance of forward-thinking and capable talent makes it easier for companies to secure skilled developers and engineers.

While Japanese companies are struggling to secure human resources due to an aging population, in India, labor costs are said to be only about 20% of those in Japan.

Considering that China — the most populous country — has entered a “demographic onus” phase, India’s long-term economic growth potential is even more promising.

Many companies that have already entered and succeeded in the Indian market tend to leverage India’s advanced IT capabilities to deliver innovative services.

On the other hand, Indian firms are eager to collaborate with Japanese companies known for their manufacturing excellence and product technology, making the supply-demand relationship a strong match.

Reference: Digima

Growing Local Purchasing Power

India’s middle-income population — those with actual purchasing power — continues to expand.

In 2000, the middle-income class made up just 28.8% of the population. By 2020, that figure had grown to 50.2%.

Data/Image Source: METI Ministry of Economy, Trade and Industry

According to the following data, the proportion of low-income earners in India is expected to decline, while the share of affluent and upper-middle-class segments is projected to increase in the coming years.

India’s Expanding Upper-Middle and Affluent Class Presents Major Business Potential

By 2030, upper-middle and affluent households are projected to account for 37% of India’s total population. This shift highlights India as a high-potential market for diverse business expansion.

Moreover, India has a strong admiration for high-quality Japanese products and technologies. This cultural affinity fuels consistent demand for Japan-origin services. With growing interest in premium products and services, businesses that can differentiate on quality and design have a strong competitive advantage.

Tax Incentives and Entrepreneurial Spirit Drive R&D Investment

India offers favorable tax incentives for targeted investments, particularly in research and development (R&D). Bangalore, a rapidly growing city in southern India now known as the “Silicon Valley of India,” owes much of its growth to these incentives.

One such policy grants a 10-year tax holiday to foreign companies whose primary purpose of entry is R&D. This has attracted global tech firms to establish innovation hubs in India.

Additionally, Indian professionals are known for their entrepreneurial mindset, often showing strong initiative in launching new businesses or supporting the establishment of overseas operations. For Japanese companies, this presents a valuable foundation for successful market entry and local collaboration.

Disadvantages of Entering the Indian Market

Lastly, let’s take a look at the potential disadvantages when expanding into the Indian market.

If you are considering launching a new business or establishing a local office in India, it’s important to understand the following three key challenges in advance.

Influence of the Caste System and Cultural & Religious Diversity

First and foremost, it’s important to be mindful of the unique ethnicity and cultural gaps present in India.

India has a traditional social hierarchy known as the caste system, and it is essential to have a solid understanding of this structure.

Within the caste system, the concept of “Jati” is similar to Japan’s historical occupational inheritance system.

Due to established social networks within communities, issues such as family monopolies in Indian businesses and the preservation of vested interests have often been viewed as obstacles to modernization.

However, this is not necessarily the case in emerging industries such as IT.

In fact, the influence of the caste system is becoming less pronounced among the younger generation and in urban areas, indicating that the system is gradually becoming obsolete.

Additionally, India is a multi-religious and multilingual country, and consumer preferences and values vary significantly by region.

Religious customs also impact business operations — influencing purchasing behavior, business hours, and more.

Therefore, it is essential to incorporate religious values into product design and marketing strategies and to ensure a proper understanding of those values among employees.

Weakness in the Power Infrastructure

India is an emerging market with strong infrastructure demands, but its current infrastructure development has not kept pace with domestic industrial growth.

There are challenges across basic utilities and transportation systems, but the most pressing issue is the unstable power infrastructure.

Problems include more than just weak electricity signals.

Insufficient power generation capacity during peak demand, widespread electricity theft, and an inadequate billing and collection system all remain unresolved.

As a result, Japanese companies entering the Indian market are often required to install their own power generation systems to ensure a stable energy supply.

While infrastructure improvement is a critical national priority for India, it also presents an opportunity for Japanese firms looking to expand into the infrastructure sector.

Challenges Related to High Turnover Rates

According to JETRO’s “Survey on the Actual Situation of Japanese Companies Operating Overseas,” many Japanese firms in India face HR-related challenges.

Key concerns include high employee turnover rates and rising labor costs.

These issues stem from differences in values due to cultural traits and the rigid organizational structures of Japanese companies.

Main reasons why local employees leave their jobs include the following: (The original list follows here):

To prevent local employee turnover, it is important not to rigidly adhere to Japanese management styles. Instead, fostering mutual understanding through flexible management that aligns with local values is essential.

Conclusion

India’s continuously growing market presents a highly attractive business opportunity for Japanese companies.

With favorable conditions for startups and unicorns to scale, the Indian market is well-positioned for expansion.

However, successful market entry requires a deep understanding of the cultural differences between Japan and India. Recognizing and adapting to these differences is essential.

By taking into account the potential challenges discussed in this article and preparing countermeasures in advance, businesses can position themselves for long-term success in the Indian market.