Walmart’s Struggles in India: How Institutional Contexts Can Limit Foreign Entry

Posted in 2012 Journal


Social relations play a vital role in economic transactions. Acknowledging social interactions has become even more critical with current trends of globalization. Diverse groups are interacting more today than ever before, highlighting differences in social behaviors. It is no longer enough for corporate retailers to work solely on garnering customers within their own country. Rather, the world’s biggest firms have turned their focus to capturing international markets. The clash of cultures, languages, and habits that has now become the norm is also illustrative of potential problems when differences in background and contexts are not properly acknowledged by firms.
International retail chains like Walmart hope to expand into emerging markets in developing countries like India, especially as the country’s middle class – and their levels of disposable income – continues to grow (Hanna, 2004). As flows of information and people become increasingly networked, India is becoming increasingly westernized. Furthermore, despite high sunk costs involved in setting up foreign branches, the Walmarts of the world have never been more financially powerful. But here a contradiction arises. As of 2006, sales from Western retail corporations like Walmart made up only 4% of India’s total domestic market of $322 billion (Joseph, Soundararajan, Gupta, & Sahu, 2008).
Surprisingly, the small traditional stores (STS) that dot India’s roadsides have not been edged out by giant retailers. Quite the opposite trend has appeared: STS continue to dominate the market. In fact, a 2008 report conducted by the Indian Council for Research on International Economic Relations (ICRIER) suggested that even by 2013, these traditional stores will still control 85% of the Indian market (Unshackling, 2008). These mom-and-pop STS might be only a little bigger than a closet, but they continue to dominate when measured against international conglomerates like Walmart, Tesco, and Carre-four (V.V.B., 2011). In fact, some Indian marketers have gone so far as to suggest that retail chains should abandon their current strategies and instead aim “to be the neighborhood store” (Hanna).
That contradiction raises a compelling question about the elements that shape international corporate development and, more broadly, exchange. When comparing the presence of Walmart and small traditional stores (STS) in India, how can the institutional context – formal policy and informal constraints – help explain the differences in economic success? There is no lack of academic study on corporate expansion into developing countries, especially the booming markets of China and India. However, what many studies fail to acknowledge is the presence of embedded institutional factors that are tantamount, if not more important, to determining economic performance. Even a recent study done by Chattopadhyay, Dholakia & Dholakia (2010) on the reasons that STS have continued to be frequented in light of corporate presence like Walmart does not go far enough to explain the theoretical role of institutional contexts, choosing instead to focus on anecdotal evidence and interviews.
Instead of conducting an economic analysis on Walmart’s international expansion, this paper focuses on the many factors that become embedded in a given institutional setting, informal and formal. Institutional factors include cultural behaviors of a community as well as social parameters for exchange, both of which need time to emerge in consumer habits. Global expansion requires that a firm has not only the capital to build new shops but also the ability to adjust its institutional structure to fit within these existing cultural and social paradigms. In the case of India, such paradigms have been further preserved by governmental reluctance to open its borders to foreign direct investment (FDI) until relatively recently. However, despite recent formal legislation to boost foreign corporate presence via FDI requirements in India, the broader institutional context of the country’s marketplace – particularly the informal constraints that allow STS to thrive – has limited the efficacy of large Western retailers like Walmart.
The paper will first set up the theoretical foundation of institutions and networks, and how in less developed countries where formal infrastructures are not so easily enforced, social norms are key determinants of economic exchange. In contrast to socially based parameters, corporations have put together vast global networks of production and distribution, relying on intricate coordination to set up their infrastructure around the world. Often during this network-building, social contexts are overlooked. Here, my argument will take a historical slant, looking to the emergence of small traditional stores (STS) in India. STS’ gradual development over time has created tacitly understood norms for exchange and ensured these norms’ embeddedness in Indian consumer habits.
From there, I will look at the slow entry of foreign companies via corporate growth and Indian legislation dating from the 1990s. As explained, Walmart will serve as the extended case study of a foreign corporation trying to enter India’s market. My argument will draw upon recent news reports looking at Walmart’s struggle and recent legislation by the Indian government to raise FDI caps late last year. After laying out recent economic and political shifts, I will take a step back and look closely at the influence that informal constraints have had on formalized decision-making in the Indian economy. This paper asserts that institutional elements – later defined in more detail as “informal constraints” – have actually played a central role in limiting foreign corporate entry into India thus far. While it is important to look at transaction costs and transformation costs involved in a firm’s process of globalization, it is ultimately the underlying institutional structure, rather than formal policies alone, that have created the contradictory situation that Walmart currently finds itself in. Ultimately, this paper draws attention to how cultural and social practices continue to shape economic exchange, and why it is critical that, in an era of relentless corporate growth, retail conglomerates are aware of broader embedded obstacles.
The Power of Institutional Contexts and Networks
Contexts are the characteristics of a setting; they impact how and what type of exchange occurs. That setting is always mediated by larger social norms and practices. To ignore these social norms would be to try and isolate the pure economics in a neoclassical vacuum – impossible and ultimately not useful. When looking at the marketplace environment in India, the social norms that frame exchange must first be analyzed. Only then can these norms’ construction be contrasted with the complex coordination systems set up by global production networks (GPN) like Walmart.
Social norms can be culturally, linguistically, or even politically based. It is by deconstructing social norms dictating Indian consumer behavior that we can dissect the contradiction of Walmart’s struggle to succeed in the South Asian country. Better understanding the way that these norms of exchange have seeped into the collective understanding of Indian society is the first step. It is thus necessary to acknowledge the role of institutions in enabling and maintaining such norms to then make sense of their large economic impact.
Before getting too far into analyzing institutions, we must first define them. North (1990, p.3) explains that institutions are “the rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction.” This definition never uses the word “economics.” It also emphasizes that institutions are not organizations, firms or otherwise. Rather, North’s definition ties institutions to interactions, implying the central role of social relations in exchange. From that definition, we can extrapolate the meaning of institutional context as the social and political atmosphere in which such “humanly devised constraints” arise.
When describing institutions, North distinguishes between two types of characteristics: formal rules and informal constraints.  The former is perhaps the more intuitive of the two phrases, referring to explicit policies and contracts that can be legally enforced (North, p.47). Informal constraints, on the other hand, include any type of “socially transmitted behavior” that becomes part of the larger framework of interactions (North, p.37). The two types of institutional factors are not mutually exclusive. Informal constraints can evolve as extensions of formalized laws; they can also emerge in the absence of any properly enforced rules (North, p.91). In India’s context, the latter has been the norm, a phenomenon traditionally seen in developing countries, where weaker political and legal infrastructures often leave space for informal norms to dominate (North, p.38). As Neurwirth (2011) describes through his illustrations of the vast System D economy, these norms are still enforced but more through the individuals who participate in the exchange rather than a 3rd-party entity. This process of “self-enforcing,” as North (p.60) labels it, is based on different interactions among individuals. Raiser (1997) explains that over time, the interactions create collective conventions that people internalize, thus setting precedents for the next round of interactions, and so on and so forth, until the self-enforcing is woven into the interaction itself.
How exactly do these informal constraints and the ways that they are enforced endure on the large-scale level to become part of the general exchange structure of a place like India? The answer is an extension of Raiser’s argument and, as expected, again rooted in institutional contexts. As customs of exchange spread across networks of buyers and sellers, these customs become embedded in the networks and help establish different roles and hierarchies. To understand the large-scale embedding process, it is necessary to turn to Grewal and his discussion of networks and power.
Grewal (2008, p.20) describes a network as “an interconnected group of people linked to one another in a way that makes them capable of beneficial cooperation, which can take various forms, including the exchange of goods and ideas.” Similar to North, Grewal takes a broader approach to understanding how power is established and maintained in networks, emphasizing the ways that people are connected – via interactions – rather than the economic outputs of their connections. The focus shifts to the social atmosphere and the non-quantifiable elements that can still have a very concrete impact on the configuration of an economy. Connected to Grewal’s conceptualization of networks is a distinction between the types of power that arise within them, sociability versus sovereignty:
“We live in a world in which our relations of sociability – our commerce, culture, ideas, manners – are increasingly shared, coordinated by newly global conventions in these domains, but in which our politics remain inescapably national, centered in the nation-states [and their governing bodies] that are the only loci of sovereign decision-making.” (Grewal, p.50; italics added)
The limitations of the nation-states and their governing bodies in the context of India will become clearer later on in the paper, as the economic trajectory of India’s markets is explained. What is important to take away from Grewal’s distinction between sovereignty and sociability is that each arises from different contextual elements, but they both create systems of power.
The process of creating legislation and other formal rules can be long and tedious because of the bureaucratic steps involved in making rules to reflect sovereign power. Furthermore, today’s formal rules usually have transnational consequences and are often the products of multilateral negotiations. If they are passed, the formal rules are always artificial constructs; on the other hand, social norms are inherently organic in how they emerge from habits. Because they are easier to share amongst groups, informal constraints revolving around systems of sociability usually diffuse faster. People’s social desires in economic contexts naturally lead to the adoption of regular habits that, in time, become collective conventions (Raiser, 1997).
Since social norms are so influential, how have multinational corporations circumvented informal constraints and successfully built up global networks of production and distribution? It turns out that global production networks (GPN) like Walmart essentially construct their own institutional contexts, and create architectures of enforceable norms by which their business is conducted. Ernst & Kim (2001, p.5) depict GPN as concentrated yet pervasive: “[the firm] must be present in all major growth markets (dispersion)… and also integrate its activities on a worldwide scale, in order to exploit and coordinate linkages between these different locations (integration).” The simultaneous goals of dispersion and integration become that much more important to coordinate when GPN venture into international markets, such as those in developing countries.
In the last few decades of the 20th century when Western multinational corporations were starting to reach outward into emerging markets, especially in Asia, they did so under the unfurled banner that they were bringing new resources – in the form of technology, products, and expertise – to those nations (Sklar, 1976). Sklar explains that the corporations saw their economic expansion as distinct from earlier forms of politically-driven imperialism, a mindset that set the foundation for today’s GPN. Yet taking a closer look at current GPN’s institutional infrastructures reveals remnants of the idea that conglomerates can help developing countries progress by introducing them to Western capitalist and corporate systems (Sklar). In other words, those conglomerates were erecting their own institutional contexts in emerging markets. The strategy of blending political and economic motives has led many GPN to ignore the weight of the cultural differences in their international markets time and time again. To use North’s vocabulary, GPN can sometimes shrug off the influence of informal constraints, instead focusing on the more easily enforceable formal rules and contracts. In areas with weak or corrupt governments, it is that much easier for private enterprise to step in and serve as a provider and institutional presence.
However, such a limited awareness of informal constraints embedded in a given setting can have far-reaching economic consequences for GPN, leading them to make quasi-imperialistic mistakes. Fligstein & Dauter (2006, p.12-13) capture that mistake when explaining the organic nature of markets: “Markets were not ‘given’ by outsiders, but instead [reflect] the social and political construction of each society where the history and culture surrounding class relations and the various kinds of interventions by governments produced unique constitutional orders.” Fligstein and Dauter’s assertion makes sense; infiltrating years of cultural uniqueness is not as easy as setting up shop. Foreign corporations, the “outsiders” when discussing international markets, too often forget about the embedded nature of unspoken norms and habits among the resident populations. “Tacit understanding” stemming from social awareness of “specific exchange relations” between shoppers and shopkeepers in a given region, as Grewal illustrates with his discussion on sociability, help to shape the larger power structure of that region’s economic system (Ernst & Kim, p.12; Zelizer as cited by Fligstein & Dauter, p19). It is not impossible for GPN to overcome those exchange relations. By using capital and systems of coordination, GPN can overwhelm existing – and often smaller – local suppliers (Ernst & Kim, p.12). But multinational corporations tend to assume that this strongman approach will automatically work in all contexts. Simply put, GPN too frequently fail to recognize the clout and durability of embedded informal constraints.
The approaches used by GPN in erecting institutional parameters are vastly different than the more emergent process through which social norms – in North’s words, informal constraints – frame economic interactions. What is critical to remember about how informal constraints get embedded in social networks of exchange is the element of time. Embedding cannot happen overnight, unlike passing a formal policy. As North (p.83) explains, although formal policies are more easily enforceable – and can endure via more explicit mechanisms – informal constraints “have a tenacious survival ability because they have become part of habitual behavior.” Behavioral and legislative architectures have radically different impacts on economic systems. The next section illustrates the economic trajectory within India and how much STS, and later Walmart, have shaped these two types of architectures related to exchange.
Economic Development in India: From Bazaars to FDI Behemoths
Time enables informal constraints to be absorbed into the habits of individuals and into the institutional context of a given society. This section will build upon the previously defined concepts of institutions and power embedded in networks – and the shortcomings of GPN today – by explaining their relevance to the economic development of India’s marketplaces.
The Advent of Small Traditional Stores (STS)
            Bazaars have been the definitive setting for exchange of goods and information in Asia for thousands of years, stemming from the time of simple merchant trading in the Mesopotamian region (McMillan, 2002). Indian marketplaces continued to be bazaar-dominated during colonial rule. These centers of gathering became a way for the colonized Indian population to assert their cultural uniqueness as well as carve out a space that was not directly coordinated by the British (McMillan). Unlike more traditionally Western models of marketplaces motivated by efficiency and large-scale design, bazaars are primarily shaped by the cultural habits of the people who participate in them – the shoppers and the shopkeepers. Behavior-driven architecture often allows informal norms, which need time to develop and strengthen, to trump more formal policies or contracts. Bazaars still have systems of enforcement, but they are enabled and enacted by the people who frequent such marketplaces.
The system of self-enforcing that has emerged in Indian bazaars and STS reflects Grewal’s ideas of power manifested through sociability. There are often no large managerial hierarchies in road-side STS; in most cases, there is one shopkeeper and perhaps a part-time assistant – usually a younger relative. Rules are enforced through verbal interactions among shopkeepers and shoppers (Chattopadhyay et al., p.6). The reason why an interaction-based system of enforcement works is loyalty: the average shopkeeper-shopper relationship in India spans nine years (Chattopadhyay et al., p.10). Again, the element of time proves to be invaluable.
Bisen (2012) provides a glimpse at the variety of ways that diversity in India impacts shoppers’ behaviors:
“Few would disagree that in India, prevalence of local tastes and traditional practices cannot be undermined for a single moment. A benign food like papad can have 100 different flavors with each flavor dominating a region or a community. A survey of local kirana [STS] stores in different regions will reveal diversity of food items that occupy the shelves of these stores. Buraa – a type of powdered sugar – occupies kirana shelves in Uttar Pradesh while curry leaves are inseparable from the kirana shelves in Tamil Nadu.”
Such variance might – and does – worry larger retailers. But such issues of scale do not apply to STS. STS shopkeepers never have to try to entice all of the shoppers in a given location; they simply need to carve out a sufficient product niche for a neighborhood. They have developed with such lightweight infrastructure that they have found success precisely by notscrabbling to woo all of the customers they come across. Rather, because of the draw of long-enduring shopkeeper-shopper relationships that develop from verbal interactions over the years, STS can be content with a limited amount of high-frequency customers (Neuwirth). That business strategy may not seem incredibly profitable at the individual STS level, but the numbers add up. In 2006, total revenue in the unorganized retail sector was US$309 billion – compared to US$12.8 billion by foreign retail chains – and was expected to reach US$496 billion by 2011 (Joseph et al.).
Age of the Walmarts
The development of India’s marketplaces based on social centers of gathering reflects why STS became the dominant model. Especially when understood using the lens of Grewal and North with the role of contexts and networks of sociability, the informal constraints that organically came to shape shopkeeper-shopper interactions become that much more powerful. However, the power of STS is only part of the puzzle. The narrative laid out above still does not sufficiently explain why Walmart has not been able to stamp out these shops. Intuitively, one corporate Goliath should be able to easily defeat even numerous roadside Davids if there are enough formal policy changes, as is illustrated below. Yet despite the perfect hypothetical scenario for Walmart’s success, what emerges from is even more evidence that supports the relative strength of informal constraints that have ensured STS dominance.
On paper, Walmart appears to be a promising candidate to cater to a variety of markets, but especially to the savvy younger generation of Indians who look to American goods as symbols of success and wealth.  Founded in 1962 by Sam Walton in Rogers, Arkansas, Walmart has come to typify the American department store experience of mass products at low prices (Our Story, 2012). In the past fifty years, the retailer’s slogan of “Save Money, Live Better” has become a global brand; as of 2007, Walmart was the most globalized of all U.S. retailers, with offices and stores in more than 14 countries (Joseph et. al). In 2011, Walmart’s global revenue was over US$422 billion, making it the highest ranked corporation in CNN Money’s Fortune 500 Global Companies list for the second year in a row (Walmart Revenue, 2011; Global 500, 2011). Walmart’s financial prowess has also made it a worrisome presence for mom-and-pop retailers in the United States, a phenomenon that Goetz & Swaminath (2006) label the “Walmart effect”: the chain’s entry into a given setting is welcomed for its low prices but feared for its success at crushing smaller local shops.
In 2008, the Indian Council of Research on International Economic Relations (ICRIER) released a report titled “Impact of Organized Retailing on the Unorganized Sector” that pointed out that STS failure to keep up with Indian consumer demand – a logistical as well as cosmopolitan-based obstacle – should further help organized foreign retail’s chances of success in the coming years (Joseph et al.). They cite the upcoming boom of younger populations, aged 20-35 years, in developing countries as one of the main reasons for that predicted success (Joseph et al.). The ICRIER report claims that younger populations in developing countries like India will be prime customers for organized retail – even more potential for Walmart to succeed. This forecast of foreign retail success also has to do with the continued Westernization, often through Western-branded products like those of Walmart, and its cultural impact on Indian consumerism. More consumers, especially younger generations of India’s upper-middle class, are starting to see ready-made clothes and other department store products as status symbols. Tailors and all-purpose roadside shops that used to satisfy that younger demographic just do not seem as cosmopolitan anymore. This trend has continued since the economic reform of the 1990s, when “relaxed import commodity choices allowed multinational corporations into the country and opened up a dizzying world of commodity choices to middle-class Indian consumers” (Ganguly, p.183). Global flows of people, information, and goods – and the social value placed in such flows – ensure that commodity-driven Westernization will continue. Culturally, this is where STS have faced growing opposition. Yet some are trying to get more brand-name products to counter a potential customer exodus.
Walmart’s inevitable success becomes even more intuitive when one looks at the liberalization policies that India adopted in the 1990s under the rule of Prime Minister Narasimha Rao, starting a series of legislative moves that opened up India’s domestic markets for foreign corporations (Hambrock & Hauptmann, 1999). Ganguly (2010, p.181) links legislative change with India’s push towards globalization, explaining that in the last two decades, “private enterprise and (global) competitive market relations have replaced state-controlled developmental models of economy.” The “Walmart effect” has been made potentially more plausible in India due to recent business alliances made between the U.S. chain and Indian corporations. Walmart has continued to appear, on the surface, poised for great economic success in India. In order to situate itself more strategically in the Indian market recently, Walmart established a partnership with Bharti in 2007 called Bharti Walmart Private to coordinate its system of “cash-and-carry and supply-chain management” (V.V.B.). This move allowed the U.S. corporation to side-step Indian legal limitations related to foreign direct investment (FDI) at the time. The 2008 ICRIER report also claimed that such partnerships are the precursors of sizable foreign corporate growth in India in the coming years. Furthermore, the explicit ownership-related need to create partnerships may not be relevant in the future; the report projected that foreign organized retail would increase from 4% to 16% of the Indian economy by 2011-2012 (Joseph et al.).
The Indian government has no choice but to become aware of this trend. Recent legislation reflects that awareness; one economic reform raises FDI limits for multi-brand retailers from 26% to 51% (Fontanella-Khan, 2011). Single-brand foreign corporations can invest 100% of their own funds into Indian branches, up from 51% (Unshackling). India’s current Finance Minister Mukherjee has been an active proponent of further liberalizing the Indian economy, and that recent reform also benefited from the vocal backing of Indian Prime Minister Manmohan Singh. The legislation is designed to cater to a wide variety of retailers, but it was especially geared towards three main foreign chains that have been aching to gain fuller entry to India’s markets: UK’s Tesco, France’s Carrefour, and U.S.’s Walmart (V.V.B.).
The narrative laid out above suggests, at first glance, that Walmart should be doing much better than it has. At least, it will experience significantly improved success in the near future. But now it becomes necessary to widen the perspective and consider how these formal policy changes fit into the larger environment of the Indian economy. Keeping informal constraints and contexts in mind, it slowly becomes clearer why the FDI legislation passed in November 2011 may not be enough to help Walmart’s progress. Besides the fact that it will take some time for these policies to be properly implemented, there are larger institutional obstacles in place.
North warns against the idea that legislation automatically solves problems – an assumption that Western corporations often make when venturing into developing countries without enough awareness of the differences in behavioral norms. He explains that “significant changes in an institutional framework must involve a host of changes in a variety of constraints, not only legal constraints but norms of behavior as well” (North, p.68). In other words, changing the law on maximum FDI does not translate into the disassembly of embedded informal constraints that revolve around STS as dominant settings for exchange. A simple top-down enforced law can only do so much. But if we take a closer look at country-wide norms, perhaps it isn’t the actual STS that Walmart has to blame for their limited success in garnering the Indian market, but rather the broader influence that these road-side shops wield. In fact, the institutional scenario needed to make “a host of changes” in India might never fully come about.
How Informal Constraints Seep Upwards
By looking at the recent – but reluctantly slow – liberalization moves by the Indian government, the limited entry of foreign corporations like Walmart becomes that much easier to understand. Walmart’s futile attempt to establish more of a foothold in the Indian economy is further problematized when looking at the way informal constraints, whose origins can be traced back to STS’ early establishment of influence, have steered formal policies. Here we see a reversal of North’s original claims, namely that informal constraints are extensions of formal rules. I stated earlier that legislative architecture, or formal policies, can impact the economy very differently than behavioral architecture, or informal constraints, can. In India’s case, because of the relatively young governmental infrastructure, social norms have had a longer time to get embedded into people’s mindsets. Thus they can more easily guide the formation of legislation and other formal rules. Interestingly enough, the impact of STS over time has somehow seeped upwards into the governmental strategy of the country. Reluctance, or perhaps even obstinacy, to let go of cultural-economic traditions has woven into the mindsets of those in the Indian government. Resulting regulations indirectly favor STS, ultimately showing that the 2011 FDI-related legislation is only a half-hearted attempt at reversing embedded motivations.
Because of India’s linguistic, cultural, and religious diversity, it is challenging for large chains to encompass customers’ nuanced demands and be able to cater to disparate needs. STS have already been shown to fill this void merely by the sheer quantity of roadside options that Indian consumers can choose from. Furthermore, Indian government figures continue to insist that STS, rather than organized retailers, have the flexible model needed to cater to the country’s diverse consumer base:
“Government officials point out that while these [larger organized chain] stores are growing, STS, however, continue to exist and offer valuable services, particularly to customers in lower income neighborhoods or interior parts of the country. Even in the most modern and urban settings, such as Andheri West area of Mumbai – where outlets of all modern retail chains are present within about two square kilometers – the most adaptive STS outlets continue to thrive.” (Chattopadhyay et al., p.4).
STS clout has been internalized not only in shoppers’ behavior but also in the minds of many Indian politicians.
Additionally, the very idea of catering to cultural diversity by protecting Indian STS has become institutionalized in the policies of the Indian government. Clearly informal constraints can influence institutional contexts at the formal level. Not only are STS touted for their continued success at fulfilling diverse needs, but they are further protected by regulations that make it difficult for outside companies to set up their own networks. As Grewal and Ernst & Kim have demonstrated, without the capability of setting up strong enough networks – be they socially or politically driven – any entity, firm or otherwise, will be limited in its success. In India, culture has greatly informed economic policy.
Recent issues of the World Bank’s Doing Business report provide concrete evidence of regulatory moves by the Indian government that also reflect reluctance towards FDI. Published annually since 2002, the Doing Business report assesses business regulation in economies around the world, based on a framework of ten indicators, each of which refers to a different aspect of business reform (World Bank Group staff, 2011). Several indicators highlight ways in which India’s regulations still indirectly favor STS. The 2011 issue, shows that India ranks 177/183 worldwide for its procedures of acquiring construction permits; in the 2012 issue, India dropped to 181st place (World Bank Group staff, 2010; World Bank Group staff, 2011). The struggle of retailers to set up in new locations in India is mirrored in a recent article from The Economist: “organized retailers must leap over as many as 33 regulatory hurdles, from signboard licenses to anti-hoarding measures, before they open their doors” (Unshackling). In contrast, STS exhibit a lightweight infrastructure and often do not have to follow the same rules as organized retailers. Furthermore, Doing Business 2012 explains that in the context of imports, India – and South Asia overall – has done little to boost its efficiency by implementing electronic systems of document processing (World Bank Group staff, 2011). As of October 2011, India ranks 109th with trading across borders; it takes 9 different customs & trade documents and 20 days on average to import goods into the country (World Bank Group staff, 2011). Importing remains bureaucratically tedious, another set of obstacles for foreign companies to deal with if they want to enter the Indian marketplace.
In addition to showing India’s country-wide reluctance to shift completely towards an organized retail chain model, the Doing Business reports also suggest that STS are in no policy-related danger of being edged out by the Walmarts of the world. That assertion directly contradicts the optimistic projections made by Joseph et al. in the 2008 ICRIER report. Sharma (2011) explains that STS owners are still worried about the possibility of losing customer loyalties and becoming redundant because of big retailers’ relative bargaining power. Granted, as the 2008 ICRIER report on organized retail shows, smaller retailers tend to lose 23% of their sales in that first year (Joseph et al.). Yet, from a more long-term perspective, roadside shopkeepers’ worry is misplaced and often the result of a lack of broader awareness of economic regulations. The same ICRIER report also explains that within five years, these smaller retailers have bounced back to pulling in their original revenue amounts (Joseph et al.).
Such explanations cast India’s recent FDI limit-raising legislation in a different light. Walmart is fighting an uphill battle in its push to enter the Indian marketplace, meeting obstacles of both cultural and political natures. Even with economic liberalization reform, reluctance to open up markets to foreign retailers still lingers. Despite the supposed change of heart by some members of the current administration towards liberalization, there are still many parts of the Indian government that oppose such measures, and more importantly, they use STS preservation as their defense (Bisen, 2012; McCabe & Winkler, 2011). McCabe & Winkler (2011, p.1) describe this hesitation as rooted in tradition: “Some officials and public commentators have also portrayed the debate as an issue of culture and values, arguing that kirana [STS] stores constitute an important part of India’s cultural legacy and community identity.”
What does this suggest? STS have not only made an impact on the development of the Indian economy, but they have also woven themselves into the cultural fabric of the nation to the point where they can impact government decisions. In a country that is still so driven by informal norms and traditions, embeddedness cannot be overlooked – or overstated. Walmart cannot easily reproduce embeddedness, no matter how much capital it has or how well-coordinated its global production networks are. It is also not a phenomenon that formal policies can easily undo, another testament to the enduring qualities of institutional contexts and informal constraints. North (p.45) says that “informal constraints that are culturally derived will not change immediately in reaction to changes in the formal rules.” I take that claim one step further. In certain institutional contexts, some culturally-derived constraints will never change, no matter how persistent formal policy might try to be.
Walmart’s presence in India today cannot be assessed only by contemporary or economic factors. When using the narrow lens of economic performance via the enforcement of formal rules, it appears as if the U.S. retail giant has run into and will continue to run into very few obstacles on its way to setting up shop in the South Asian country – which is why the contradiction behind the retail giant’s struggles in India continues to be a puzzle. Existing academic literature on the topic simply does not present a holistic narrative behind Walmart’s and other foreign retailers’ struggles. In order to understand the myriad factors at work, both formal and informal, we must study the story of Walmart in India using the concept of institutional contexts.
North’s discussion of informal constraints and formal rules – and the way in which each depends on the other – is an advantageous starting point for deconstructing this puzzle. North’s argument helps shed light on the often overlooked institutional contexts at play. Institutional contexts are so deeply embedded that we ignore them; that embeddedness ensures their durability. Additionally, understanding Grewal’s assertion of how sociability functions as a way of creating and maintaining power among networks of individuals helps show why STS, the seemingly weak parts of the Indian economy, have in reality been able to dominate the marketplace for decades. When it comes to the Indian marketplace, size does not necessarily matter.
India is an example of a setting where informal constraints are not merely extensions of formal rules. In fact, they have indirectly shaped legislation. It is critical to understand how tacit norms have achieved this – not by brute force but rather through an organic emergence of traditions that have affixed to the very structure of markets and policy-making. Informal constraints have seeped upwards into the very way that the government functions, impacting economic regulations precisely by being embedded in politicians’ – and generally Indians’ – ways of life. The centuries-long role STS have played in India has been crucial. As was started earlier, embedding takes time.
But perhaps the winning strategy for Walmart and other foreign retail chains already exists, and has been implemented. Consider, Big Bazaar, a domestic hypermarket retail chain founded in Mumbai in 2001. Big Bazaar has 214 stores scattered across 50 different Indian cities, and in 2011 its revenues were more than 6000 crores – approximately US$1.1 billion (Big Bazaar: About Us). It is one of the few organized retail chains that has figured out how to woo and keep Indian shoppers coming back – one of the few Goliath success stories:
“Big Bazaar shows how far such adaptation will have to go [to secure Indian customers]. Instead of copying the narrow aisles in Western stores, designed for individual shoppers with carts, the firm has packed its stores with clusters through which shoppers have to navigate. This recreates the organized chaos Indians know from shopping in real bazaars: bumping into people, chatting and eating.” (V.V.B.)
Big Bazaar has deliberately shied away from imitating more modern Western models, instead embracing India’s informal constraints from bazaars and institutionalizing them. By adopting this strategy, the chain has managed to protect itself from being cannibalized by STS and also avoided falling victim to the same woes that haunt foreign chains. Importantly, Big Bazaar also has had freer reign in building up its infrastructural network under the protection of being a domestic company. While Big Bazaar’s Indian roots have helped it experience a more welcoming attitude, its approach of mimicking bazaar environments has also played a valuable role.
The example of Big Bazaar shows the ideal strategy for Walmart – in theory. It would have to internalize the established informal constraints and build those into its pre-existing infrastructure – hardly a task that can be done overnight, if at all. Walmart will always have the resources to chip away at developing countries’ markets to secure its own foothold. That has never been, and will still not be, the issue at hand. Rather, Walmart must decide how much it wants to invest to potentially capture the more than a billion Indian consumers. The US retail chain would still have to depend on future legislation passed by the Indian government.
Is it more prudent for the Indian government to protect its own stores? Will the country’s reluctance to fully allow foreign retailers into its borders eventually hurt its economicwell-being? Indian politicians and economists will have to weigh the costs and benefits of future decisions about existing barriers to market entry. At the same time, they will have to be aware of the priorities of both retailers and STS owners; they cannot afford to alienate either one of these populations. However, as is the case with any globalized network today, such a decision will not be made in an economic or social vacuum. Foreign retailers themselves, with their growing global political clout, will certainly make their voices and goals known.
Sometimes it is easy to brush aside contextual differences and rely on the idea of “the global.” After all, technological and political infrastructures have made it so easy for global flows of goods, people, and ideas; surely economies must be able to function adeptly in the same transnational way. Perhaps surprisingly, however, the advent of globalization has also made cultural differences that much more glaring in matters of trade. The obstinacy of social traditions, embedded into institutional frameworks and networks of individuals, continues to play a central role in shaping the way that exchange occurs. Despite their vast resources and systems of coordination, foreign corporations will not be able to simply steamroll over embedded constraints when entering new marketplaces.

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