BSM 933 International Business

Candidate no. 432997

Assignment 2- A

Section A

Select a BRICS or N-11 country that is NOT your home nation. If you were to advise a

company from a developed country on the choice of entry mode when entering that

emerging market economy, what choice of entry mode would you recommend? Use the

Doing Business data (http://www.doingbusiness.org/) of the World Bank and the Global

Competiveness Report of the World Economic Forum (http://reports.weforum.org/global-

competitiveness-report-2012-2013/#info), as well as other measures, such as cultural

distance etc., to justify your recommendation. You should contextualise your work as you

see fit.

Introduction

Netflix Inc. is to considering to enter the Indian OTT1 as part of its plan to go “nearly” global” by the end of

2016. This research has been designed to assist Netflix to assess which internal and external factors could

influence its choice of entry. This assessment would in turn aid the company choose the most appropriate

entry mode given the market context.

As Table 1 illustrates, the paper will conclude that given all factors, a cautious approach has to be

undertaken given technological and competitive pressure present in the Indian market context suggesting

an initial small scale entry through a minority principal with two different partners operating in two

different business sectors, namely the content production one and a local Telecom Giant.

Multi-stage JV with local film producer. Start small scale then gradually increase stake.

American (home country) operations business model

Licence agreement with Indian Telecom service provider.

1 OTT: Over-the-Top content refers to delivery of audio, video, and other media over the Internet. In this specific case delivering video streaming (films/tele-series/sports etc.)

Hollywood-Bollywood Coproduction trend

India is the largest film producer as in 2009 it produced a total of 1,288 films. By contrast, as reported by

BBC (2011), Hollywood produces an average of 500 productions per year. The Indian film production

industry is a lucrative market given its valuable local resources as technical knowhow, low-price multimedia

facilities (cost saving exceeding $20 million/film), industry specific experienced workers and vast viewership

(global audience, 30% of Bollywood’s revenue accrue outside its domestic market2) drawing attention

Hollywood giants to earn revenues not just by serving their domestic market but also in global markets

(Bettig & Hall, 2003; Wasko, 2004).

One way Hollywood is making inroads is by coproducing with local production houses that well know

culture and taste of the Indian market. Hollywood studio giants as Disney, Sony and Warner Brothers have

also caught the trend engaging with Indian directors and production houses to co-produce together

Bollywood films. SPT3 signed a co-production and distribution agreement with Eros International for Hindi

movies. Warner Brothers instead undertook small risk commitment entry with an agreement with People

Tree Films for the production and distribution of three movies. Disney’s entrance in India most recently was

interesting given its strategy: through an initial collaboration with Yash Raj Films and then gradually

increasing its equity in UTV Software Communication.

2 All Hindi/Urdu speaking countries as well as all countries with an historical diaspora presence as UK, USA, Mauritius etc.

3 SPT: Sony Pictures Entertainment

Drivers to Entry Success

Having contextualized the market entry context for Netflix this section will cover factors that impact a firm’s

entry decision. This will be done by considering the below illustrated conceptual framework.

Within the first endogenous differentiation construct, two important aspects are: firm strategy (assessed

through ‘Entry Mode’ and ‘Entry Time’ preference) and firm resources (evaluated by ‘Firm Size’). Regarding

country differentiation construct, external variables as ‘Cultural Distance’, ‘Economic Distance’, ‘Country

Openness’ and ‘Country Risk’ have been analyzed to assess these factors’ impact on mode of entry.

Internal Factors

One of the key attributes distinguishing different modes of entry is the degree of control a firm has over its

operations in the host country (Gatignon & Anderson, 1998). The Resource-based-View (RBV) suggests that

such controlling dimension is positively correlated with firms’ success chances of entering a new market as

a result of its ability to deploy key resources essential to success (Gatignon & Anderson, 1998; Isobe et al,

2000). The RBV also explains why a higher degree of control is preferable in emerging markets. As

supported by Luo, the higher degree of control helps to safeguard key resources from external leakages

and assist internal operational control, essential to a firm’s success in an emerging market. Moreover, an

equity-based entrance is recommended for MNEs entering emerging markets also by Peng, as he argues

that collaborating with local firms may help MNEs overcome the lack of local knowledge regarding their

target markets.

Market entrance timing is also an important factor to consider. Being the pioneer within a market may

contribute to build a company’s competitive advantage as gaining technological competitive edge,

accessing first to scarce resources and creating switching costs to lock in consumers. However, being first-

entrants may in turn result facing pioneering costs. These are the costs derived from not having pre-existing

knowledge of the new market’s underlying dynamics. The first-entrant will be the one creating such

knowledge from “scratch”, incurring in free riders problem linked to second-comers’ ability to leverage the

pioneer’s market knowledge and perhaps on enjoying the fact they find a market educated on the new

product. Lanzolla & Suarez suggest that a company should consider when to enter, upon two determinants:

the pace of technological growth and pace of market growth. A third dimension entry time decision is a

company’s prior presence in the market (in any form).

The final internal factor influencing a firm’s entry mode decision is ‘Firm Size’. As Terpstra suggests, large

size (i.e., 500+ employees) US firms have engaged to global markets more successfully than smaller firms,

mainly due to their financial and managerial assets. Moreover, Krugman (1980) and Porter (1990) state that

firm-specific advantages also impact international trade success, suggesting that firms with large resources

could perform better in relation to small-sized firms.

External Factors

Having used parts of the RBV in covering internal factors influencing entry mode choice we’ll now use parts

of the Institutional-based-view (IBV) in considering the external Indian business and cultural environment

condition entry mode selection, complementing the previous analysis focused on an internal perspective.

As Table 1 depicts, cultural distance between India and USA occurs mainly to differences in the ‘PDI’4, ‘IDV’5

and ‘IND’6 dimensions of Hofstede’s 6-D model. India’s PDI score of 77, indicates appreciation of a

hierarchical structure in society leading employees to expect clear directions on how to carry out their jobs,

4 PDI: Power Distance Index5 IDV: Individualism Vs Collectivism6 IND: Indulgence Vs Restraint

Table 1- Hofstede cultural divergence India-USA

facilitating a top-down communication and managerial control. The second difference lays on the collective

aspect of the Indian society. With an index of 48 relative to USA’s 91, the Indian society is neither too

‘Individualistic’ nor ‘Collectivistic’. US Companies may exploit this difference by recruiting local managers

and employees to increase its business networks. This could in turn be beneficial to impact the content

production ability (Coe, 2000). The final difference rests in the IND dimension, suggesting that the Indian

society is keener on ‘Restraint’ than on ‘Indulgence’. This may be beneficial for US executives to have a

disciplined and productive pool of actors and directs. Tes & Pan (1997) state that two cultural dimensions

(namely, PDI and UAI7 dimensions) greatly affect market entry decision as they argue that their distance

suggest an equity-based entry mode. Therefore, it can be said that both nations differ in the 6-d model,

even through advantages may advantages may be drawn from such differences, committing to an equity

based mode.

The Global Competitiveness Report suggest that ‘Economic distance’ between India and USA is relatively

small in terms of PPP8, domestic and foreign market size indexes and GDP. ‘Country Openness’ dimension is

also encourage entrance in India given government entertainment tax cuts9policies enabling 100% FDI

inflow in most industries. In 1998 the government also gave Bollywood an industry status, thus facilitating

production studio’s access to loans (enabling financial leverage). However, inadequate supply of

infrastructure (mentioned as the most problematic factor impacting businesses) and rising inflation (ranked

88th globally) may increase ‘Country Risk’ associated with India. Nonetheless, India offers above the average

investor protection and minority shareholders are particularly protected (good for investors to start small

scale entrance in India through a minority JV with local partners).

7 UAI: Uncertainty Avoidance Index8 PPP: Purchasing Power Parity9 Varies from state to state, on average is 30.95%. Source. FilmFed.org

Recommended entry mode

All considered, I would recommend Netflix to enter the Indian market with a cautious approach, as efficient

broadband connections are available just in main metropolitan areas. However Netflix shouldn’t not wait

for broadband connectivity reaching rural areas as its user base is largely composed by 18-35 age segment

who like popular western shows.

Initially, Netflix should enter the Indian market small-scale serving just in cosmopolitan areas where

premium broadband connections are available. To penetrate this segment in depth, Netflix could form a

non-exclusive agreement (licensing) with Reliance Jio Intercomm Ltd to distribute Netflix for Reliance’s

clients, following the entry mode Netflix chose to enter the Italian market10. Netflix would gain in terms of

lower risk and distribution costs besides increasing its market knowledge.

Moreover, given Netflix’s corporate goal to create own content distributed through its platform, after

completing the licence agreement with Reliance it should form a JV with Yash Raj Films to co-produce

content (both western and Hindi) at lower price and to distribute Yash Raj films on Netflix through licensing

agreements. Netflix’s commitment to the JV should follow the example of the UTV-Disney case: once Netflix

has well understood the dynamics of the Indian market, it should attempt to increase its stake from

minority JV to majority one. This would ultimately consent Netflix to distribute its services independently,

interrupting its licence agreement with Reliance, to capture good part of the market by 2020, when India’s

economical amazing growth11 will consent an improvement in its internet infrastructure, a substantial

increase of the middle class segment and have what analysts’ project as the world’s largest internet base.

10 Through a non-exclusive license agreement with Telecom Italia.11 Today assessed at 7%, the fastest in the world surpassing even China.

Conclusion

The proposed entry mode was an outcome of an academic and empirical analysis given Netflix’s internal

and external dimensions. The models used have shown to be a good starting point for making entry mode

decisions. However, list of drivers affecting entry success may not be exhaustive, the selected ones where

the main ones contextualized for the specific case in study.

Moreover, a more precise measure of culture has to be used also, as Hofstede’s 6-D model fails to offer an

aggregate and dynamic analysis, notwithstanding it offers insights on what specific dimensions affect

cultural differences among the 2 countries.

Finally political risk and technological development are variable factors difficult to predict in advance.

Therefore a periodical update is required to consider pivoting strategies.

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