foxconn-400x260-1Why is one of the world’s worst places to do business also one of the world’s most attractive destinations for investors? India rates 6th on the top 10 list of the world’s worst business environments, according to a recent CNBC survey, but it also lands on the top 5 most attractive destinations for investors, according to Business Week. Although India has the world’s seventh largest economy according to the International Monetary Fund’s projected GDP rating for 2015, it is plagued by endemic government corruption, a post-colonial caste system, a persistent Pakistani terror threat, and a Maoist insurgency that fuels growing social tensions and persistent civil unrest.

Despite India’s troubles, investors continue to pour billions of dollars into its economy. Foxconn, a Taiwanese producer of Apple products and the world’s top electronics manufacturer, signed a $5 billion dollar agreement to build a production facility in the state of Maharashtra on 1,500 acres in Taloja. In the same month, August of this year, General Motors announced plans to invest $1 billion in Maharashtra and South Korean steelmaker POSCO teamed with Uttam Galva to set up a $1.5 billion steel plant.

As these investment take place, social unrest of a uniquely Indian flavor has caused delays and stoppages to production for companies already invested. Due to insurgent activity, Tata and Essar’s combined $3 Billion in steel processing plants have temporarily shut down. A South Korean steelmaker with a $12 Billion investment in Odisha may scrap its project due to protests by local communities and environmentalists. And a group of Maoist insurgents in the jungles of India’s “Red Corridor” has disrupted a multi-billion dollar mineral extraction enterprise. All are a microcosm of the social risks that plague Indian society.

Social Risks in India

The social risks faced by investors operating within the country are complex, vary from region to region, and are woven throughout the fabric of the entire country. These uniquely Indian phenomenon present challenges for companies new to the country as well as those that have been operating in the region for decades. For example, India’s caste system is so fundamental to daily interactions that it is not enforced by law but rather by customs and beliefs. More importantly, unrest among castes is expected to escalate as they struggle to advantage themselves economically and socially. Into this sort of social environment one company with a history of employee dissatisfaction so great that twelve employees jumped to their deaths from roof tops and remaining employees threatened mass suicide — a threat that was met not with negotiation but with the installation of suicide nets around buildings — is investing billions into the country and assuming that the cheap labor force in India won’t protest working conditions. The assumption is unfounded.

The magnitude of social unrest due to caste conflict alone was recently demonstrated during riots in the Western Indian state of Gujarat. Riots initiated by the influential Patel clan were not only unexpected, but surprising given their numbers — 30,000 strong — which stemmed from perceived social inequities. The upper-middle class caste demand reservations in government institutions and jobs claiming India’s version of affirmative action has elevated lower castes to such an extent that they are now over-advantaged. The riots led to civilian deaths and a complete shutdown of government offices, transportation systems, and businesses.

A much greater threat to investors, however, originates from a recent surge in political and sectarian fringe groups. Hindu extremist have clashed with both the Congress and BJP parties and have lifted the slogan “Maharashtra for Marathis” an anti-immigration, anti-English language, and anti-Muslim agenda, all backed up with violence. Shiv Sena in Maharashtra has been involved in attacks against non-Marati speakers, immigrant communities, and businesses owned by non-Marathis. Both the BJP and Shiv Sena conduct terror campaigns and have effective grass roots support from lower-castes that live in slums. These groups gain popular support by providing free health camps and ambulance services. As the poor and disenfranchised become dependent upon fringe group’s services, they tend to adopt the ideology of the group, which is typically anti-state and anti-business. Companies investing in Maharashtra should be aware that it is home to Dharavi, one of the world’s largest slum and a continual source of unrest and violence.

Additional sources of potential violence include: the “Hindutva” movement, Unified Liberation Front for Assam (ULFA), National Democratic Front of Bodolad (NDFB) Jihades, Maharashtra Navnirman Sena (MNS), Pakistan based jihadist groups, and ISIS. Maharashtra is also on a Central Intelligence Agency Red Alert since July 28th due to credible terrorist threats and is home to Abu Junda — a key conspirator of the Mumbai attacks, who was recruited locally.

External forces

International investors receive government assurances of cooperation that includes police and, when necessary, military protection. However, local police forces and military units are unable to protect multinational corporations operating in some areas of India. In the Red Corridor, for example, Maoist extremist have conducted an insurgency for over 30 years and control significant amounts territory. Ineffective security forces, porous borders combined with disenfranchised individuals and communities, create environments where activist groups and terrorist networks operate freely and negatively impact company’s operations along the entire value chain. In an extreme case, between 50–200 Indians who traveled from Mumbai to join ISIS have returned from fighting against Iraqi and Syrian forces to “spread Jihad in India.”

Glaring gaps in coastal security and the vulnerabilities to transportation systems compound social risks and external threats. Approximately 70 percent of Maharashtra’s coastline is vulnerable to attack according to the states’ Home Ministry. The 1,020 km long creek is even more vulnerable because of its low visibility making vessels difficult to detect. Airports are unprepared for security emergencies due to poor contract management of vital security projects, inadequate equipment for security forces, the proximity of Naxal (Maoist insurgent) forces, and failure to maintain adequate manpower in security forces according to the Ministry of Home Affairs. These factors increase the threats to oil refineries, railway stations, and hotels frequented by foreigners and are the security problems in Maharashtra alone.

Adding to India’s social complexity are the challenges created by climate change. Droughts are affecting rural communities. Reduced agricultural production and lower crop yields lead to large-scale migration to metropolitan areas for individuals seeking alternatives to subsistence farming. Massive urbanization leads to caste, ethnic, and religious conflicts in overcrowded urban centers with inadequate infrastructure to support basic needs. As conflicting groups compete for ever-diminishing resources, increased hostilities are projected, with violence directed toward companies seen as responsible.

Impacts on foreign investors

India’s unique social risks spark unrest that can lead to violence without warning. Assurances by the Indian government are an illusion. Traditional policing, military intervention, and old-fashioned reliance on bribery are not only ineffective but counter-productive methods that escalate problems rather than diminishing them. Local governments pander to overseas investors because each state creates its own laws regarding land purchases and enforces regulations that include tax collection.

The good news is that investors do not have to design expensive, comprehensive strategies to address the entire spectrum of risks that India’s complex environments present. Companies that want to invest in India, however, must focus their attention on the complexities of regionally specific civil, environmental, and security threats in the areas where they invest. The languages, customs, religious and caste conflicts vary from one region to the next meaning solutions effective in one region may be disastrous in another. Companies that create stakeholder relations with local communities can effectively safeguard their investments and mitigate negative influences of external forces. Proactively garnering popular support to safeguard investments against the numerous internal and external threats is more cost effective than attempting to navigate manifestations of Indian social risks.