The Choice of Entry Mode in India

The choice of entry mode in India

Aston Business School

International Business BSM933

Assignment 002 – Part A – Question 1

Introduction

The objective of this essay is to determine what mode of entry should be embraced by a company –from a developed country - when entering the Indian market. The essay will go through the various key internal and external factors that should be considered while evaluating different entry strategies. It will be analysed the India environment considering its strengths and weaknesses, using the indicators examined in the Global Competitiveness report. The essay will conclude recommending how Joint Ventures could represent the ideal choice to approach the Indian market. To support the analysis, two cases of North-American companies will be briefly discussed, as well as an empirical analysis based on 64 companies.

Factors influencing the choice of entry mode

The choice of entry mode in a foreign country is crucial step that must be taken by companies seeking efficiencies abroad or new markets. Before taking this step it is necessary to evaluate the current internal situation of the firm and the external environment. Koch (2001) identified a few internal factors such as company’s strategic orientation, stage of internationalization, strategic objectives, overseas market selection experience and international competitiveness. Root (1994) considered external factors such as target country market and production factors, environmental factors and geographic distance; Bell (1995) added psychic distance as a key external factor.

Bedi (2014) tries to summarize the previous literature identifying eight macro categories: in his analysis are pointed out internal factors such as firm size, international experience, technological capabilities and product characteristics. For what regards external factors, he considers cultural distance, market size and growth, country risks and legal barriers.

Figure 1: Internal and external factors affecting choice of entry mode. Source: readapted from Bedi, P. (2014)

Internal Factors

Companies must consider their internal situation when evaluating foreign entry modes. For instance, the size of the firm plays an important role: large MNEs have a stronger financial leverage, trained human resources and economies of scale that allow the company to absorb a higher degree of risk.

Also, companies that already expanded to other countries tend to have a greater international experience, which makes them more confident in managing foreign operations and evaluating correctly opportunities and threats.

Technological capabilities also influence entry modes decision: firms with strong R&D departments might face the risk of losing control over their technological know-how, especially when opting for non-equity modes or partial acquisitions with low control; however, the reverse situation is also possible, companies can locate in clusters in order to benefit from potential knowledge spillover (Peng and Meyer, 2015).

Characteristics of the products sold also represent an important factor: products with a low unit price (such as soft drinks) tend to be produced locally through licenses as the high volumes demanded generate higher transportation costs. Some products require after sales assistance and service, in this case production and offices should be local in order to deliver efficient customer assistance (Winer, 2000). Table 1 considers the internal factors of General Motors.

General Motors – Internal factors

Firm Size

- 156 Billion $ (2014)

- 216K employees (2015)

International Experience

- 396 facilities in 6 continents, employees speak more than 50 languages in 23 time zones

Technological Capabilities

- 1643 patents registered

- 6 laboratories

- 6 science offices

Characteristics of products

- Costly to be transported

- Require after sales assistance and therefore local presence of facilities

Table 1. General Motors Internal factors. Source of information: GM corporate Website.

External Factors: the Indian environment

Cultural distance is the extent to which countries and cultures differ: it should be taken into account to understand approximately the probability of having integration issues with a foreign company. According to Hofstede (2001), there are five main cultural dimensions: individualism, power distance, masculinity, uncertainty avoidance and indulgence. Ivancevich (2005) mentions another dimension, represented by a culture’s orientation towards long- or short-term prospects for the future.

Figure 2. Cultural distance India-USA. Source: http://geert-hofstede.com/india.html

For instance, in figure 2 the six dimensions are compared between USA and India. It is important to note how Indians tend to be more long term orientated and are more likely to accept power inequalities, while Americans tend be more indulgent and individualist. American companies must pay attention especially to the long term orientation and individualist attitude, especially when considering entry modes that require integration processes such as Joint Ventures (JVs) and acquisitions. However, this model only gives the overall picture of two countries and does not tell anything about individuals; cultural dimensions may differ within various companies or regions of the same country (Dimitrov, 2014).

The current situation of market size and growth is a factor that influences the level of commitment of a company in a foreign market, as well as the long or short term decisions. The larger the market and its average growth rate, the more companies will be willing to invest more resources and increase their commitment in their operations in the long haul. According