a6: intercontinental interaction · study employs a mixed methodology using a combination of...
TRANSCRIPT
A6: Intercontinental InteractionChair: Werner Pascha
Reza Aboutalebi, Hui Tan and Reshma Trupti Lobo
Inter-Continental Strategy Implementation
1
Inter-continental Strategy Implementation
Abstract
This paper explores the dominant modes of outward foreign direct investment (OFDI)
employed by Indian enterprises in the UK. It also explores their competitive advantages in
various industries, and the link between strategic aspirations and post-entry performance. This
study employs a mixed methodology using a combination of questionnaires and semi-
structured interview as two complementary research instruments in data collection. Mergers
and Acquisitions are revealed to be the preferred mode of entry into the UK. However, the
study finds that not all theoretical predictions are supported.
Keywords:
Internalization Theory, Theory of FDI and the MNE, International Business Theory, Indian
MNEs, Outward Foreign Direct Investment (OFDI)
Competitive Paper
2
Introduction
Background
Recently outward Foreign Direct Investment (OFDI) from emerging economies (EE) is fast gaining
momentum. According to UNCTAD’s recent World Investment Report (2010), not only is there a
growing trend of OFDI from emerging economies; more interestingly, there has been a dramatic
increase in the number of enterprises originated from developing economies investing in developed
host countries. This ‘reverse’ globalisation has been termed “unconventional” (Kedia et al., 2012), as
it does not follow the conventional internationalization path previously predicted based on experiences
of firms out of developed (primarily western) economies.
Several EE proponents have argued that the traditional theories fall short in explaining FDI patterns
from emerging economies. The emergence of these new multinational enterprises (MNEs) raises the
need for further study and development of new theory. A few renowned management advisory
organisations have published informative reports (BCG, 2006; Price WaterhouseCoopers, 2010) and
attempted to predict the possible long-term consequences.
India is currently one of the fastest growing economies, with the second highest growth rate in the
world, at roughly 9% (World Bank Data, 2009), just behind China. The emerging enterprises from
India are ambitious, looking to increase visibility and brand recognition on the global business scene
(BCG, 2006; PWC, 2010). The recent spate of cross border acquisitions of global brands by Indian
companies - such as Tata’s acquisition of Jaguar/LandRover and Ranbaxy’s acquisition of generic
pharmaceutical brands in Germany, Italy and the USA - has prompted business professionals to
predict that by 2018, the number of Indian multinationals would far exceed the rest of the emerging
countries (PWC 2010). Needless to say it is not only very interesting but also important to study the
activities and the underlying patterns of outward FDI by Indian companies.
The United Kingdom (UK) - a developed economy - has become the second most favoured destination
for Indian FDI, after USA, according to leading financial and economic newspapers in the recent past
(World Investment Report, 2010). Moreover, there has been constant and active collaboration between
India and UK with respect to business connections between the two countries; the most recent
3
evidence being a diplomatic visit by the UK Prime Minister with the largest delegation of business
leaders to India (The Guardian, 2010).
This study is important for several reasons: despite close collaboration between India and the UK,
there is limited academic research conducted on the factors that have influenced this exponential
increase in trade between the two countries. Existing literature has mainly looked at either the country
specific or industry specific push factors for emerging MNEs, and very little research has been
dedicated to pull factors. Furthermore, research on the subsequent success or failure of the intrepid
emerging MNEs in developed economies has been painfully limited (Ramamurti, 2009). There is also
scarce literature on comparative studies of various industries from a single emerging economy
investing in a single developed recipient economy.
Following recent trends in extant literature that there is a marked increase in Outward FDI by Indian
(developing country) Enterprises into the United Kingdom (developed economy) over the last decade,
this paper will endeavour to address the weakness by examining the strategic behaviours of Indian
firms in the UK, in particular, which are preferred entry strategies for Indian Enterprises in the United
Kingdom, and how does this reflect on subsequent strategic success?
The structure of the paper is as follow: after the theoretical frameworks that highlight
internationalization theories regarding multinationals from emerging economies, Indian multinational
in the UK, research methodology and finally discussions and findings are presented.
THEORETICAL FRAMEWORKS
Modes of Internationalization
The issue of modes of internationalization has been discussed since the 1960s (Hymer, 1960 & 1976)
so it is a familiar field of study (Benito et al., 2010). As Nummela and Saarenketo (2012) state, choice
of internationalization mode has been examined from varied dimensions, including steps of
internationalization (Johanson and Vahlne, 1977; Johanson and Vahlne, 1990; Johanson and
Wiedersheim-Paul, 1975), drives of internationalization (Dunning, 1981), internationalisation and
transaction costs (Kogut and Singh, 1998) and knowledge-seeking (Kedia et al., 2012; Kogut and
4
Zander, 1993). However, almost all of them have been developed based on studies regarding
companies in Western and developed countries.
Although there is a considerable degree of agreement amongst scholars regarding existing modes of
internationalizations such as direct export, foreign direct investment (FDI), or franchising (Nummela
and Saarenketo, 2012), noticeable discrepancy is evident in terms of classifying these foreign entry
modes. While Daniels and Radebaugh (2004) classify entry mode choices into three groups including
export (direct and indirect), licensing (franchising, management contract, and turnkey), and investment
(portfolio and FDI), Kotler et al., (2008) group direct and indirect export as exporting, licensing,
contract manufacturing, management contracting, joint ownership as joint venturing, and assembly
facilities as well as manufacturing facilities as direct investment. Focus of this research has been
mainly on direct investment by Indian MNEs in the UK.
MNE ‘Evolution’
Ramamurti (2009) cautions that the very context of globalisation for the present day EMNEs is
different, which therefore necessitates new reasoning to understand the current stage of individual
firms. Contradicting all previous theories (as demonstrated in the evolution chart below), he points out
that MNEs from emerging economies are largely ‘Infant MNEs’ or ‘Adolescent MNEs’ (in some
cases), and therefore, it is inappropriate to measure them on the same platform (competencies,
advantages, strategies) as ‘Mature MNEs’ from the West. Pananond (2007) and Cuervo-Cazurra
(2007) illustrate a similar opinion in their research papers that studied diverse organisations from
South East Asia and Latin America.
On a different note, although extant international business models are more pertinent to early mover
MNEs (i.e. developed economies); these traditional theories could be juxtaposed with the new
international business theories to complement each other (Li, 2007 and 2010). This is especially so
since neither the new, nor the old models appear capable of explaining all phases of
internationalisation, as each model caters to just one aspect of the MNE and internationalisation
evolution process. Li goes on to propose that ‘Learning’ is the single most unifying concept, with the
5
vital contrast that the early MNEs engaged in “exploitative learning”, while the latecomer EMNEs
engage in “exploratory learning”.
Many traditional internationalisation theories exist on why and how firms internationalise. However,
these are contradicted by newer theories that focus on internationalisation by emerging economy
firms. Diverse scholarly opinions abound on why firms from emerging economies “frog-leap”
(Mathews, 2006; Ramamurti, 2009) into the international domain, some even before establishing
themselves in their home market.
Motivations of EMNEs
UNCTAD (2006, p. 54) defines emerging markets as “low income, high growth economies that are
using market liberalization as their main means of growth” (such as Brazil, Russia, India, and China).
Some motives for internationalization of EMNEs are internal, such as “institutional reform within the
home country, increased competition, and increased opportunity” (Peng et al., 2008, p. 12). The other
can be the offered advantages in host countries, such as availability of the required knowledge or
technology (Kedia et al., 2012). Desire for rapid expansion and going global are two other strong
drives of EMNEs (Gammeltoft et al., 2010).
Rugman (2009, p. 53) claims these foreign investments by EMNEs “reveal a search for the
technology, management, and strategy skills missing in these firms”. The objection to this claim is if
these companies really lack management capabilities, how they can so successfully beat their Western
MNEs counterparts. Kedia et al., (2012), who have more realistic perspectives, state that EMNEs rely
on home country location advantages (e.g., access to low-interest loans, low-cost labor, or supportive
national government) that are different from advantages available to MNEs in developed countries.
These competitive advantages help EMNEs to “seek and build knowledge-based firm-specific
advantages through FDI” (Kedia et al., 2012, 156). Although these MNEs initially exploit their own
home-country location advantages, big ambition of these companies cannot be fulfilled fully so they
need much more than what are available in their home counties (Lessard and Lucea, 2009).
Industry Factors in Attracting OFDI by EMNEs
6
It is not strange to see that considerable number of EMNEs invest in similar industries abroad such
investment by Lenovo, a Chinese computer company, in IBM (Tolentino, 2010). However, some
EMNEs built on their diversification strategy, have invested in varied industries some of which are
related and the other are unrelated industries such as Tata, an Indian conglomerate (Kumar, 2008).
In the context of India, which is focus of this research, when compared with the previous decades,
manufacturing declined severely while services increasingly showed an upward trend (Gammeltoft,
2009). However, after the turn of the century, manufacturing has made a comeback, albeit in different
sectors from before (Athukorala, 2009) as illustrated through the table below:
Figure 1: Approved Indian Outward FDI by Economic Category, 1999/2000 – 2007/2008 %
To begin with, the extractive sector comprising of oil and gas firms and their affiliates have gained a
greater share in outbound FDI (Kumar, 2008; Athreye and Kapur, 2009), which is not surprising
considering the heavy domestic demand of India’s burgeoning economy. While the traditional role of
leather goods and textiles has diminished in the manufacturing sector, chemicals and fertilizers have
once again risen in prominence.
The manufacturing segment itself is rising in ranks as compared to the previous wave and has been
part of much OFDI, notably in the automobiles and industrial ancillaries manufacturing (Ray and
Gubbi, 2009). The acquisition of Jaguar and Range Rover by Tata Motors in 2008 has become an
iconic transaction between emerging enterprise and global brands in a developed market. Other
notable activities have been in aluminium, steel, electrical equipments and similar industries by Tata
Steel, Punj Lloyd, Essar Group, Hindustan Dorr and others.
It is also clear that a ‘knowledge based’ global economy (Pradhan, 2005, 2006), and the pace at which
the Indian economy is merging with the global knowledge economy have resulted in yet another shift
in the dominance of industries. In conjunction with chemicals, in the last decade, the healthcare
7
manufacturing comprising of pharmaceuticals, drugs and related biotechnology has been one of the
foremost industries to expand across borders, especially in the USA and Europe (Pradhan and
Alakshendra, 2006; Chittoor and Ray, 2007; Chittoor, et al, 2008) . This is evidenced by the increasing
surplus in yearly exports as well as several cross-border ventures of Indian pharmaceutical companies
such as Wockhardt, Ranbaxy, Dabur and Dr. Reddy’s Labs, largely in the USA, Germany and UK
(Pradhan, 2006).
The services segment has been represented progressively by new sectors in software and media,
publishing and broadcasting services (Kumar, 2008). This is reasonable considering the boom in IT
outsourcing and software, as well as the globally recognised Indian speciality firms in cinema and
broadcasting - where arguably, Indian firms may have some competitive advantage. Notably, firms in
the Information Technology (IT) sector and its related services of consulting, outsourcing and media
(IT Enabled Services - ITES) have internationalised far in excess of other industries. This is clearly
evidenced by the foray of IT giants such as Infosys, Wipro, NIIT and several smaller firms into the
western hemisphere through mergers, acquisitions and joint ventures.
According to the report by BCG (2006), currently the top three globalising industries from India are
Automotive Equipments and Parts, IT Services/ITES and Pharmaceuticals (in that order), based on
their internationalisation activity in developed countries, primarily USA.
Challenges and Barriers for EMNEs
It is evident that there is a large diversity in the MNEs rising from emerging economies, not only in
terms of region, but also in terms of firm size, sector/industry, motivations, preferred strategies and
entry modes and destinations. It is a painstaking process and yet, apart from the economic costs of
internationalising that were pointed out by Hymer (1960) in his dissertation and subsequently explored
by some scholars, very few studies have been conducted in recent times in the area of challenges that
EEs face (more so while investing in economies far more developed than they are) and the operational
barriers that they are subjected to due to bias, discriminatory policies, market response or other social
constructs (Eden and Miller, 2004).
8
While authors such as Ramamurti (2009) propose that EMNEs have unconventional advantages,
others (such as Khanna and Palepu, 2004) insist that the primary challenge that emerging economy
enterprises face is due to their lack of many advantages in the global market. Furthermore, not only do
these emerging multinationals have difficulties competing globally, but when their home markets
liberalise, they are further set back in their domestic markets by the entry of stronger foreign
multinationals. Other challenges that have been emphasised include the challenges of accessing capital
for expansion or R&D compared to western multinationals and the lack of supportive and institutional
infrastructure and managerial talent pool (Khanna and Palepu, 2004).
Zaheer (1995) and Li (2007) propose that internationalising companies are subjected to the ‘liability of
foreignness’ which goes beyond the obvious costs to companies and encompasses the “unfamiliarity,
relational and discriminatory hazards” (Eden and Miller, 2004: p2) that enterprises face in the host
markets. Differentiating this from the operational and economic challenges which arise due to
geographical distance, Eden and Miller propose that the liability of foreignness arises due to the
psychic and cultural/institutional distance of the host and home markets.
Although all cross border business results in some liabilities, it is more pronounced in the case of the
challenges faced by emerging economy enterprises, possibly fed by western prejudices towards “third
world” countries (Li, 2007), the assumed lack of genuineness of foreign enterprises (Zaheer, 1995)
and geocentricism (Rugman and Collinson, 2009). The case of the introduction of the first Japanese
automobiles into the US markets and their reception (or rather the lack thereof in the host market
could be quoted as a classic example of this social ‘liability of foreignness’.
Shareholder confidence is affected due to the poor reputation that some EMNEs hold. Issues such as
accountability and corporate governance systems may be distinctly differently managed than their
western counterparts, resulting in trust issues by host country policymakers and authorities (Luo and
Tung, 2007). Therefore, in order to compensate for these liabilities or to effectively manage them, not
only do the strategies and entry modes employed by EMNEs become critical in determining their
acceptance and their success in foreign economies (Eden and Miller, 2004) but also differ from and for
different host regions (Peng, 2002).
9
Post-Entry Performance of EMNEs
Unfortunately, there are a very limited number of studies on post-entry performance of Indian firms in
any host country. This is not unexpected considering that such heavyweight international expansion
from an economically poor country is a relatively new occurrence. Moreover, the few studies on post-
entry performance that do exist are all over a decade old, restricted to activities of OECD countries
only (see Geringer and Herbert, 1991; Wagner, 1994; Vivarelli and Audretsch, 1998); or specifically
on International Joint Ventures (IJV) (Brito and Mello, 1995) or Exports (Aulakh, et al. 2000); and of
those, fewer still agree on resultant outcomes.
Geringer and Herbert (1991) point out that there are many practical difficulties in measuring the
performance of IJVs. Finances pertaining to contracts, management fees and technology licensing fees
for example are almost never included in performance calculations, which in turn distort data obtained
through studies. Moreover, although an event study of the stock market may provide some evidence,
the fluctuations associated with stock market often lead to unreliable indicators.
Despite the drawbacks, a few researchers have studied the performance of EMNEs in the context of
mergers or acquisitions, and find that a large percentage of these ventures are abandoned or fail to
achieve their goals (Aulakh et al. 2000). The failure rate is attributed to either lack of synergy between
the target and the acquirer or to a failure on the part of the management team to effectively manage the
subsidiary (Kale, 2009). In addition, out of the acquisitions that are completed, the average
shareholder value was found to be only a little over 2% during the first five years. However, from the
aforementioned studies, it can be safely assumed that immediately after entry, the financial
performance of the firm may decline before a reasonable upturn can be demonstrated (Kumar, 2008).
INDIAN MULTINATIONALS AND THE UK
Outward FDI of Indian Multinationals
As a country with the second highest population and GDP growth in the world (World Bank 2009),
India has attracted the attention of the business world for over a decade. Although Indian enterprises
have been investing internationally for several years at a very low volume (Chittoor 2009; Gammeltoft
2008; Kumar 2007), the last decade has witnessed a tremendous increase. Due to its rapid
10
industrialisation and economic growth, India has made a significant impact on the world economy,
prompting several speculative studies on its emerging firms. An industry analysis model by PWC
(2010) that extrapolates growth patterns for emerging countries based on their GDP growth rate
predicts that China and India will give rise to the highest number of multinationals between 2010 and
2024; and that India may overtake China in the next decade.
Figure 2: OFDI from India (1996-2006). (Based on data from the Indian Ministry of Finance)
Whereas formerly Indian enterprises focussed on developing economies that were similar to
themselves for expansion, they are increasingly investing in economically developed countries like the
USA, Canada, United Kingdom and The Netherlands (Gopalan and Rajan 2010). The aggressive
growth of Indian firms and their propensity to expand beyond their borders, combined by their
remarkable impact on globalisation deserves an extensive study along various respects, and are bound
to throw light on internationalisation of developing-world MNCs in general (Goldstein 2007; Kumar
2007; Ramamurti 2009; UNCTAD 2004).
The United Kingdom as a Trading Partner of India
The UK is the sixth largest exporter of goods to India at 2.3% of the total and the fifth largest importer
of goods from India, at nearly 4.0% of its total imports. In Services too, India makes a significant
contribution towards UK’s economy. Bilateral relationships between India and the UK have increased
steadily for several years, not only in terms of trade and commerce but also in the fields of education,
technology, tourism and cultural exchange (Indian Ministry of External Affairs, 2010). According to
recent news from the UKTI (2011), India is the third biggest investor in the UK, and the UK receives
11
over fifty percent of India’s investment in Europe. According to the Commonwealth Business Council
(CBC), the United Kingdom (UK) is the fifth largest economy in terms of market exchange rates with
favourable investment policies and an open market. It is also one of the strongest economies within the
European Union, with considerable trade connections with the EU.
Therefore, for the purposes of this paper on Indian Outward FDI, research was restricted to the
investment in the UK, mainly due to the increasing political and economic emphasis on bilateral trade
and investment between the two countries (British High Commission 2010; The Guardian 2010) the
elevated status of ‘Strategic Partnership’ of the two countries since 2004 (UKTI 2010) and the current
lack of literature on the UK-India relationship.
RESEARCH METHODOLOGY
Research Design
Although both quantitative and qualitative approaches have their merits, in keeping with the
aforementioned pragmatist philosophy, a stance of mixed approaches could have greater benefits
(Tashakkori and Teddlie 2010) for this particular research. An integrated research philosophy of
pluralist pragmatism, incorporating qualitative as well as quantitative aspects into the data collection
and analysis (i.e. mixed method design) could provide with the best insight to the researcher (Creswell
1994) on the FDI activities of emerging enterprises within the larger internationalisation sphere.
Research Strategy
Reflecting on the nature of the research and the research philosophy, the research strategy is a survey.
Although surveys are used for large amount of data sampling through questionnaires, it also caters to
smaller sampling in terms of in-depth interviews (Saunders et al., 2009).
This research was conducted in two phases and through a combination of primary as well as secondary
data. The first phase involved gaining access to relevant databases pertaining to Indian origin firms in
the UK. Sampling was carried out to estimate sample sizes and acceptable response rates in
preparation for the second phase. The second phase involved a survey of executives through online
questionnaires and semi-structured interviews.
Research Instrument
12
Semi-structured questionnaire surveys as well as semi-structured interview were employed for primary
data collection to benefit from combination of these two complementary research instruments.
According to Saunders et al. (2009 p. 142) “the use of interviews can help to gather valid and reliable
data that are relevant to your research question (s) and objectives.” Nine managers (3 from each of
the top three industries) were interviewed. Seven questions were asked in the interviews. These
questions covered three main issues including motives behind FDI in the UK, utilized strategies for
investment, and finally, post-FDI financial and strategic performance in the UK.
The survey questionnaires were deployed through an online webhost to randomly sampled respondents
from Software and IT Services, Industrial Goods and Cyclic Consumer Services. A total of 200 survey
invitations (proportionate number to the FDI intensity in each sector) were sent to upper or senior
executives in all three sectors. Seventy two (72) responses were obtained, calculated as a response rate
of 36% which is higher than what Baruch (1999) states as reasonably sufficient for such social
research. Hence, the responses that were obtained can be assumed to be representative of the sample
and can be used to make some generalisations within the industries.
Although several international business studies on emerging economy enterprises have been
conducted through the Cluster Sampling technique (for example, Chittoor and Ray 2007), some
argued this could result in decreased accuracy (Henry 1990), besides being time consuming and
complex to apply. Since this research seeks to compare and analyse the individual industry sectors, a
sampling technique that provides equal representation of these sectors is essential to ensure validity.
Consequently, in the interests of simplicity as well as greater precision of groups, the Stratified-
Random sampling method would be most appropriate (Saunders, et al 2009, p233). This choice is
supported by Cooper and Schindler who state that stratified sampling is the most suitable method of
sampling in order to gain efficiency and “to provide adequate data for analyzing the various
subpopulations or strata” (Cooper and Schindler 2008, p 169). This study investigates FDI-related
issues in three different industries and each industry is a separate strata so stratified sampling was the
best sampling method for this research.
The data collected from the questionnaires were categorically analysed. The central tendencies of
response will be calculated in order to demonstrate the most common responses and attitudes of
13
respondents (Tashakkori and Teddlie 2010). The transcribed notes of interviews were analysed and
coded. These codes were subjected to a comparative analysis, developed into themes, followed by
descriptive and explanatory approach.
FINDINGS & DISCUSSIONS
Dominant Modes of FDI & Recipients of FDIs
The challenges in collecting and analysing FDI data concerning emerging economies has been well
documented by Hoskisson, et al (2000), and more recently by Aykut and Goldstein (2006). Of
particular concern are the issues of the currency of recorded data due to constantly changing market
dynamics, thereby affecting accuracy. Keeping these in mind, secondary data on Indian enterprises in
the UK was procured from the Capital-IQ database and then cross-referenced with that available from
the Office of National Statistics (ONS). During the data sample procurement, it became evident that
not only did Mergers & Acquisitions greatly outnumber the other modes of FDI but also that they had
the most accurate record-keeping. Eliminating the minority modes of FDI, Mergers & Acquisitions
(M&A) was determined to be the preferred mode of investment. The data available was in the form of
completed M&A deals involving Indian buyers and UK sellers between the years 2001 and 2010.
As shown in the pie chart (see Figure 3), the major industry categories were Industrials (36 deals),
Consumer Discretionary (35 deals) and Information Technology (32 deals). However, this
categorisation method is internal to Capital IQ and not globally utilised as an exhaustive classification.
Therefore, the individual firms were re-classified manually, based on the standardised and more
widely used Thomson Reuters Business Classification (TRBC) codes index (Thomson Reuters 2009).
14
Figure 3: Indian firms in the UK between 2001 -2010 (Source: Capital IQ, 2011)
Software and IT Services (also called as IT Enabled Services or ITES), at 31 deals had the highest FDI
intensity in terms of volume and value between 2001 and 2010 from Indian firms into the UK.
Industrial Goods (henceforth ‘Industrials’ or IG), at 20 deals was second highest, and Cyclic
Consumer Services (henceforth coded as ‘Cons Serv’ or CCS) at 11 deals had the third highest FDI
intensity.
Firm Age and Internationalisation
One of the questions asked the respondent to input the number of years the Indian enterprise had been
in existence before internationalising in the United Kingdom, with a view to test claim of some
authors that Indian enterprises that internationalised into a developed economy were predominantly
young enterprises.
It is important to note that this question focuses on age while first entering the UK, and not age while
first investing abroad. Therefore it is possible that these companies have subsidiaries elsewhere in the
developing or even developed countries before entering the UK.
15
Figure 4: Average firm age in the three sectors when first investing in the UK
Based on several traditional as well as modern FDI theories it is believe that Indian Enterprises that
had undertaken FDI in the UK were probably ‘young’ MNEs (Singh 2008). However, at average ages
of 33.8 years (Industrial Goods) and 18.9 years (Cyclic Consumer Services) and 9.9 years (ITES), the
firm age appears to refute theories of ‘International New ventures’ and ‘Born-Global’ (Oviatt and
McDougall 1994) that assert the surmise that emerging MNE firms are always young while
undertaking cross border investment. Evidently, at 33.8 years, Industrials sector is nearly two and a
half times older than the average of ITES firms - a technology and time intensive sector that is
comparatively speaking, ‘the new kid on the block’. Yet, the ITES sector has ventured abroad much
earlier and with greater intensity than the other two sectors.
Maturity of industries is not just based on age. Although average ages of 9.9 years for ITES industry
seemingly represents a very young sector, industry-based theories explain something different. An
examination of the theory of Industry Life Cycles (Klepper 1997) or Firm Life Cycles (Miller and
Friesen, 1984) brings a contrasting perspective. The theory posits that industries undergo various
stages from birth to maturity to decline, similar to that of the lifecycle of products. If this concept is
applied in juxtaposition with Ramamurti’s theory of MNE evolution (2009; Ramamurti and Singh
2008), the ITES firms actually ‘Mature MNE’ in light of the nature of the industry, their
16
“entrepreneurial and strategic postures” (Covin and Slevin 1990) and the normally shorter industrial
life cycle they undergo.
Motivation for FDI in Specific Industries
A comparison of the three industries showed that firms in the ITES business sector tended to invest in
acquisitions of firms that functioned in the same industry (50%) or acquisitions that would assist the
vertical or horizontal integration of the Indian parent firm. Contrastingly, while nearly a third (29%) of
CCS responses indicates diversification into a different industry as a driver, none of the Industrials
responses indicated that it mattered.
Figure 5: Reasons to invest in a particular industry sector in the UK
Delving further into this theme through interviews, respondents elaborated that there were multiple
aspects to the FDI strategy. While at a macro level the aforementioned reasons were the drivers to
internationalisation, at the industry and firm level there were several other influencing factors. For
instance, while nearly a third of the researched CCS firms had diversified their portfolio during
internationalisation, the majority of ITES remained in the same speciality within the sector. The
overriding factor for all three sectors was the fact that the acquired firm vertically/horizontally
supported the functions and capabilities of the parent. In other words the acquired firm had
complementary capabilities and was capable of adding to the value chain of the parent rather than
simply compensating for capabilities the parent did not possess.
17
Competitive Advantages
Dunning’s OLI theory (1988; 1993; 2000) in particular, vehemently stresses the influence of
Ownership advantages in determining the internationalisation paths and strategies of firms. Although
Dunning’s later works (2003; 2008) have been modified to encompass the changing nature of global
business dynamics, he asserts that without ownership advantages it is impossible for expanding firms
to achieve any form of success in foreign soil. He further posits that emerging economy firms do not
have any of the competitive advantages that would ensure sustained success across borders.
However, when surveyed and interviewed, a majority of participants of this research in all the three
sectors quoted they strongly believed that their organisation possessed some form of competitive
advantage. When asked to elaborate briefly, the keywords such as “Niche industry specialists”,
“Reputable business/conglomerate” “global brand name”, emerged with the CCS. “Strong engineering
reputation”, “high quality accreditations”, “global presence”, “domain expertise” were the main
themes from the IG sector; while “Leading diversified IT company”, “global delivery model” and
“CMMi Level 5 accreditation” emerged as themes from the ITES responses.
Figure 6: Did your competitive advantages play an important role in selecting UK as the investment
destination?
These responses may be moderated by the subjective nature of the question and whether all the
respondents in question were actually privy to such a level of strategic decision making process within
18
the organisation. Nevertheless, the prominent observation was the conspicuous contradiction to what
most theorists in the literature review claimed on the supposed lack of competitive advantages that
emerging EMNCs possess.
Conversely, however, upon questioning whether their competitive advantage played an important role
in their decision to undertake FDI in the UK, a significant number of respondents (with the exception
of Industrials) believed that their choice to invest in the UK was not influenced by the firm’s
competitive advantages. However, in the Industrials sector more than half the respondents felt that
their competitive advantage was important for their FDI strategy in the UK. Thus this finding
contradicts one out of three pillars of Dunning’s OLI theory that claims ownership of a competitive
advantage is one of the main motives of internationalization in general and FDI in particular.
Drivers for FDI in the UK
Regarding the reasons for investment in the UK, respondents are asked to choose the three most
important reasons for their FDI in the UK from a list of eight options. A text box as ‘other’ was
provided in order to encourage respondents to elaborate on their answers.
Figure 7: Main Reasons for FDI in the UK
19
Figure 7 charts out the percentage responses of the three sectors. As evident from the chart,
‘Access to the UK Market’ at nearly 80% was the most important motivation for the ITES industry,
followed by ‘Access to Technology’ at just under 60%. In the Industrial Goods sector, access to the
UK market and access to certain ‘Capabilities’ were equally important, followed by ‘Access to
Resources’. The Cyclic Consumer Services was the only sector to cite access to the UK as well as
strategic access to the European markets as top motivations. Access to resources, technology and
capability were equally important drivers, though second when compared to the former. Overall,
access to the UK market was the top cited motivation in all sectors.
Choice of Entry Strategy
Eighty percent of the Industrial Goods sector responded that acquisition of a local company (wholly
owned subsidiary) was the only mode that was considered. In ITES, 60% indicated acquisition while
40% indicated a Greenfield investment. Although a small percentage of this sector also indicated that
acquisitions in the UK as well as in the USA were being considered.
Figure 8: Choice of Entry Strategy in the UK
Regarding the drivers influenced their choice of entry strategy for the UK. The respondents were
asked to choose the three points that they felt had the most impact on strategic decisions.
20
Figure 9: The top motivations for choosing particular mode of entry
It was found that opinion was divided between the three sectors as well as within the sectors. “Speed
of growth of the company” was the largest majority in the IG sector at 33%, while “Product/Service
diversification” had the majority (29%) in CCS and ITES (27%). The chart below displays the
resultant divisions.
Based on a review of extant literature, it was predicted that access to technology, capabilities and
strategic assets were primary motivations for the internationalisation strategies of Indian enterprises.
The fact that the majority of respondents cited “Access to UK markets/Strategic access to EU” and
“Access to capability” as reasons for FDI in the UK more or less strengthens the extant literature on
this topic. Further, while “access to resources” was an important consideration for Industrials,
“…technology” was at the corresponding level of importance for the ITES segment. This is
understandable as technology is a vital element of India’s burgeoning IT services industry, as are
manufacturing facilities and networks for the Industrial Goods segment. Therefore, although asset
augmentation (WIR 2006) in general lends itself as a critical factor in driving OFDI, the influence of
“industry effects” (Gupta and Wang 2009) appear to be equally crucial in the decision to
internationalise.
Post-Entry Performance
21
The post-entry performance of the parent firms was measured on two aspects: The extent to which the
strategic aspirations of the firm were met, and the extent to which the financial aspirations were met.
These questions were specifically to obtain subjective responses (Geringer & Hebert 1991).
The fact that nearly 80% of the participants consider the realisation of their strategic objectives as
‘excellent’ is striking. This response is even more significant given that there were not a single
participant in any of the three sectors that indicated dissatisfaction. Most of the respondents believed
that they had either achieved (the older firms) or were in the process of achieving (the newer firms) the
foothold that they needed in the European markets.
Figure 10: Executives’ perspectives on post-entry realisation of Strategic Objectives
Figure 11: Executives’ perspectives on post-entry realisation of Financial Objectives
22
The fact that a majority of the participants are highly satisfied with the post entry performance
(strategic objectives as well as financial) despite a global recession causing overall poorer financial
performance of most large, medium or small enterprises worldwide is noteworthy. Assuming that to
some extent this situation was aided by the financial crisis affecting the survival of developed country
firms, it can only be speculated whether this would not have continued to be the case, had there been
no financial recession.
Therefore, it is possible that certain cultural aspects may have enhanced the chances of successful
ventures across borders for Indian enterprises. Strong cultural dimensions such as Uncertainty
Avoidance and Long Term Orientation (Hofstade 1984) which are especially extreme in Indian culture
(including business culture) may be a case in point.
RECOMMENDATIONS & CONCLUSION
Recommendations
It is evident that the internationalisation trends of Indian enterprises are here to stay and therefore,
certain theories and generalisation can be built around the themes that emerged through this paper. It is
recommended that:
Host countries that are keen on attracting FDI are urged to keep these dynamics in mind while
formulating trade policies. International organisations such as the UNCTAD can act as an essential
platform in this context by providing relevant analyses and assistance in order to exploit these
emerging and developed economy synergies.
It is also common knowledge that activities of cross-border FDI for emerging enterprises is especially
challenging due to their ‘liability of foreignness’. Decision makers in industry as well as trade
authorities are urged to formulate favourable trade policies that encourage increasing commerce from
EMNEs. The OECD countries in particular, are encouraged to harness the opportunities that emerging
enterprises could create within developed economies.
This study has found that despite sub-par economic conditions, Indian enterprises have continued to
flourish and have reported satisfactory post-entry strategic and financial performance. This clearly
23
demonstrates that there definitely is place for more firms within the knowledge based industries such
as Software and IT and service based industries such has hospitality and media.
However, considering the precarious economic situation of the UK economy at the time of writing this
paper, it is recommended that Indian firms eager to expand in the UK markets exercise caution,
especially in any non-dominant business sectors. Further, it is suggested that companies from
emerging economies undertake expansion into developed countries only if they possess essential core
competencies to compete with rivals in the new markets.
Due to the fact that the financial performance during the first few years of post-entry into the
developed countries may pose imminent threat and burden (no profits or marginal profitability),
companies from emerging economies should be financially in a sustainable situation with considerable
capital before expanding into the developed countries' markets.
Researchers are urged to undertake further research focussing on the pull factors of country-specific
and industry-specific origin that contribute towards globalisation of emerging MNEs. While some
generalisations have been made, greater study is required into the internationalisation dynamics of
other emerging economies such as Russia, China and Brazil.
Conclusion
This research has gone beyond the traditional perspectives of the globalisation of western economies
or MNCs into emerging markets, rather viewing the developed economies as receptors of outward FDI
from the very economies that, until recently were considered weak. Furthermore, this study has taken
the stance of evaluating the pull factors rather than the push factors that the emerging economy
proponents have thus far focussed on. In these two aspects, this study is unique and contributes
towards new insights in globalisation trends.
A majority of the extant literature claimed that Indian enterprises in the UK were only aggressive
‘young MNCs’ that invested in the UK because they mostly lacked competitive advantages; however,
through this research it has been established that this is not necessarily so, and that the majority of
surveyed enterprises strongly believed that they had significant advantages in comparison to their
rivals.
24
Regarding the preferred mode of Indian FDI in the UK between 2001 and 2010, through archival
study and record keeping of Trade Firms cross referenced with the data from the Office of the
National Statistics (ONS), it was found that Acquisitions (and mergers) were the favoured form of FDI
for many reasons. Further, it was found that Software and IT, Industrial Goods and Cyclic Consumer
Services were the fastest growing sectors that receive the highest FDI volume and intensity. ‘Speed of
growth of the company’ and increasing ‘Product/Service diversification’ are two strategic motivations
for choosing to invest in the UK. The subsequent post-entry performance of the Indian MNEs in the
UK has been satisfactory and promising.
References
Athreye, Suma and Sandeep Kapur (2009), “The Internationalisation of Chinese & Indian firms:
Trends, Motivations and Strategy,” Industrial and Corporate Change, 18 (2), 209-221.
Athukorala, Prema C. (2010), “Outward Foreign Direct Investment from India,” Asian Development
Review, 26 (2), 125-153.
Aulakh, Parkash S. (2007), “Emerging Multinationals from Developing Economies: Motivations Paths
and Performance (Editorial),” Journal of International Management, 13, 235-240.
Aykut, Dilek and Andrea Goldstein (2006), Developing Country Multinationals: South-South
Investment Comes of Age. OECD DEVELOPMENT CENTRE Working Paper No. 257
Balakrishan, Karthik (1976), “Indian Joint Ventures Abroad: Geographic and Industry Patterns,”
Economic and Political Weekly, 11(22), M35-M48.
Beugelsdijk, Sjoerd, Roger Smeets, and Remco Zwinkels (2008), “The Impact of Horizontal and
Vertical FDI on Host Country’s Economic Growth,” International Business Review, 17, 452-472.
Bishop, Karen, Jack Forth and Robert Riley (2010), Final Report for UKTI: Analysis of the
International Business Strategies, Barriers, and Awareness Monitoring Survey.
Cavusgil, Tamer, Gary Knight and John R. Riesenberger (2008), International Business: Strategy,
Management and the New Realities. New Jersey: Pearson Education Ltd.
25
Chalapathy Rao, Krishna, Mama Murthy, and Keshava Ranganathan (1999), “Foreign Direct
Investments in the Post-Liberalisation Period: An Overview,” Journal of Indian School of Political
Economy, 11(4), 423-454.
Chittoor, Raveendra, Sougata Ray and Preet Aulakh (2008), “Strategic Responses to Institutional
Changes: ‘Indigenous Growth’ Model of the Indian Pharmaceutical industry,” Journal of International
Management, 14, 252-269.
Chung, Wilbur and Juan Alcacer (2002), “Knowledge Seeking and Location Choice of Foreign Direct
Investment in the United States,” Management Science, 48 (12), 1534-1554.
Cuervo-Cazurra, A. (2007), Sequence of Value- Added Activities in the Multinationalisation of
Developing Country Firms. Journal of International Management, 13, 258-277.
Daniels, J. D. and Radebaugh, L. H. (2004), International Business: Environments and Operations
(11th ed). Pearson Education.
Dasgupta, A. and Siddharthan, N. (1985), Industrial Distribution of Indian Exports and Joint Ventures
Abroad. Development and Change, 16, 159-174.
Dunning, John H. (1998), “Location and the Multinational Enterprise: A Neglected Factor?” Journal
of International Business Studies, 29, 45-66.
Eden, L. and Miller, S. R. (2004), “Distance Matters: Liability of Foreignness, Institutional Distance
and Ownership Strategy,” Bush School Working Papers. Paper #404, 1-43.
Elango, Bob and Chinmay Pattnaik, C. (2007), “Building Capabilities for International Operations: A
Study of Indian Firms,” Journal of International Business Studies, 38, 541-555.
Kedia, B., Gaffney N., and Clampit, J., (2012), EMNEs and Knowledge-seeking FDI. Management
International Review. 52, 155-173.
Gammeltoft, P. (2008), Emerging Multinationals: Outward FDI from the BRICS countries. Paper
presented in the IV Globelics Conference at Mexico City, September 22-24.
Gammeltoft, P. Barnard, H. and Madhok, A. (2010), “Emerging Multinationals, Emerging Theory:
Macro and Micro Level Perspectives,” Journal of International Management, 16, 95-101.
Goldstein, A. (2005), Emerging Multinationals in Global Value Chains: Arcelic, Haier, and Mabe.
Paris: OECD.
26
Goldstein, A. (2008), The Internationalisation of Indian Companies: The case of TATA. Paris: OECD
Johanson, J. and Vahlne, J.-E. (1977), “The Internationalization Process of the Firm - A Model of
Knowledge Development and Increasing Foreign Market Commitments,” Journal of International
Business Studies, 8(1), 23-32.
Khanna, Tarun and KrishnaPalepu (2004), “Emerging Giants: Building World Class Companies from
Emerging Markets,” Harvard Business School Working Paper. Boston: HBS
Kumar, Nagesh (2007), “Emerging TNCs: Trends, Patterns and Determinants of Outward FDI by
Indian Enterprises,” Transnational Corporations, 16(1), 2-26.
Kumar, Nagesh (2008), “Internationalization of Indian Enterprises: Patterns, Strategies, Ownership
Advantages and Implications,” Asian Economic Policy Review, 3, 242–261.
Li, P. P. (2007), Toward an Integrated Theory of Multinational Evolution: The evidence of Chinese
Multinational Enterprises as Latecomers. Journal of International Management, 13, 296-318.
Luo, Yadong and Rosalie L.Tung (2007), “International Expansion of Emerging Market Enterprises:
A Springboard View,” Journal of International Business Studies, 38, 481-498.
Mathews, J. A. (2006), Dragon Multinationals: New Players in 21st Century Globalisation. Asia
Pacific Journal of Management, 23, 5-27.
Melen, S. and Nordman, E. R. (2009), “The Internationalisation Modes of Born Globals: A
Longitudinal Study,” European Management Journal, 27, 243-254.
Moon, H. and Roehl, T. W. (2001), Unconventional Foreign Direct Investment and Imbalance Theory.
International Business Review, 10, 197-215.
Nummela, N. and Saarenketo, S. (2012), Switching Operation Mode: A Strategic Approach. In S.
Harris, O. Kuivalainen and V. Stoyanova, International Business: New Challenges, New Forms, New
Perspectives. UK: Palgrave; 125-136.
Oviatt, B. M. and McDougall, P. P. (1994), Toward a Theory of International New ventures. Journal
of International Business Studies, 25 (1), 45-64.
Pedersen, J.D. (2008), The Second Wave of Indian Investments Abroad. Journal of Contemporary
Asia, 38 (4), 613-637.
27
Pradhan, J. P. (2005), Outward Foreign Direct Investment from India: Recent Trends and Patterns.
Gujarath Institute of Development Research. No. 153. Ahmedabad: GIDR.
Ramamurti, Ravi (2009), “The Theoretical Value of Studying Indian Multinationals,” The Indian
Journal of Industrial Relations, 45 (1), 101-114.
Ray, Sougata and Sathyajit Gubbi (2009), “International Acquisitions by Indian Firms: Implications
for Research on Emerging Multinationals,” Indian Journal of Industrial Relations.
Saunders, Mark, Adrian Thornhill and Philip Lewis (2009), Research Methods for Business Students.
5th Eds. Essex: Pearson Education.
Tashakkori, Abbas and Charles B. Teddlie (1998), Mixed Methodology: Combining Qualitative and
Quantitative Approaches. California: Sage Publications Ltd.
Tashakkori, Abbas and Charles B. Teddlie, eds., (2010), Mixed Methods in Social & Behavioural
Research. 2nd
Ed. California: Sage Publications Ltd.
Tolentino, P.E. (2010), Home Country Macroeconomic Factors and Outward FDI of China and India.
Journal of International Management, 16, 102-120.
UNCTAD. (2004), India's outward FDI: a giant awakening? New York: United Nations.
UNCTAD. (2009), World Investment Report 2009: Transnational Corporations, Agricultural
Production and Development. New York and Geneva: United Nations.
World Bank (2009). Data: India. Accessed on 10/01/2012, available from:
http://data.worldbank.org/country/india.
Yeung, H. W. Ed (1999), Competing in the Global Economy: The Globalisation of Business Firms
from Emerging Economies. Cheltenham: Edward Elgar.
Yin, Robert (2009), Case Study Research – Design and Methods. 4th Ed. London: SAGE
Zaheer, Sri (1995), “Overcoming the Liability of Foreignness,” The Academy of management Journal,
38 (2), 341-363.
Zahra, Shaker A. (2005), “A Theory of International New Ventures: a Decade of Research,” Journal
of International Business Studies, 36, 20–28.