A6: Intercontinental InteractionChair: Werner Pascha

Reza Aboutalebi, Hui Tan and Reshma Trupti Lobo

Inter-Continental Strategy Implementation

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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

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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

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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

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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

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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

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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

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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).

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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).

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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

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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

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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

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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

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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).

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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.

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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

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“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.

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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

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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

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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.

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