Case in Point: How countries’ water policies affect multinationals

May 3

The big idea: Water policies in specific countries affect the business decisions of multinationals.

The scenario: India-based Jain Irrigation Systems, a manufacturer of drip and sprinkler irrigation systems, employs 9,000 people globally and had revenue of more than $800 million in 2013. Its founder, Bhavarlal H. Jain, regarded drip irrigation, which delivers water in a controlled fashion directly to the crop’s root, as a necessary tool to alleviate the poverty of small farmers, especially in India’s water-stressed regions. Because agriculture accounts for most water withdrawal in India, drip irrigation technology might free up water for alternative uses and increase agricultural yields.

Jain often sells equipment to small farmers with limited capital. India’s water policies, however, have not made farmers eager to invest in water-saving irrigation. In part because of the failing irrigation infrastructure, there has been little appetite to pay for the (unreliable) water supply. In addition, the widespread use of small-scale pumps that run on subsidized energy and the poorly defined groundwater rights have made unlimited amounts of groundwater available at low cost. This has contributed to the depletion of some of India’s aquifers at an alarming rate.

In an effort to promote drip irrigation, the Indian government subsidized 50 to 90 percent of the upfront costs. Over time, however, this dependence on external financing strained Jain’s working capital as the government typically did not disburse subsidies for up to 12 months after the sale date. Jain’s mission to “leave this world better than you found it” by helping India’s cash-strapped small farmers was weighing on its operations; Jain’s stock price was suffering, too.

The resolution: In 2012, Jain started its own non-banking finance company. It hoped that providing credit to the agricultural sector would alleviate the financial strain that was slowing sales.

Jain also needed access to growth markets in economically developed countries where farmers would be less dependent on its financial assistance. This would help shield the company from adverse economic and environmental conditions in India. In 2012, Jain Irrigation acquired Israel-based NaanDan Joint Venture, a privately held, well-reputed irrigation technology firm. The move gave Jain access to more than 50 markets internationally and a broader range of products and technologies for the domestic Indian market. The emergence of NaanDanJain showed India as a global player whose multinationals acquired high-tech companies in more advanced economies. At the same time, the merger illustrated the centrality of India’s water policies to Jain’s business decisions.

The lesson: Water policy is a key driver in multinationals’ business strategies. When confronting challenges or looking to expand, global corporations consider how different states address water scarcity and/or regulate water use.

Peter Debaere and Allison Elias

Debaere is a professor and Elias is a research associate at the University of Virginia Darden School of Business. This “Case in Point” is based on an original case by the authors.

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