Implementable Internationalization Strategies for Companies from Emerging Economies

Reza Aboutalebi & Reshma Trupti Lobo

Reza Aboutalebi School of Management, Royal Holloway, University of London, Egham, Surrey, TW20 0EX, Email: reza.aboutalebi@gmail.com, Telephone: + 44 (0) 1784 276213, Fax: + 44 (0) 1784 276100 Reshma Trupti Lobo London School of Business and Management, Dilke House - 1 Malet Street - London WC1E 7JN

Abstract This paper illustrates the theoretical discussions of an ongoing research that aims to explore the dominant modes of outward foreign direct investment (FDI) employed or favoured by Indian enterprises to internationalize in the UK, leading to a comparison of FDI intensity in various industry sectors and explore the link between strategic aspirations and post establishment performance. The study looks to find the strategic motivations behind the choice to invest in the UK, the entry modes that were considered for investing and the expectations after establishment. Literature review has contributed to identification of 5 facts include: Indian Enterprises in the UK are predominantly young that may lack exceptional competitive advantages; mergers or acquisitions are dominant modes of investment by Indian enterprises; access to technology and strategic assets are the two top reasons for investing in the UK; the three industries to receive the highest FDI intensity would be Information Technology (IT/ITES), Pharmaceuticals and Automotive; in the short term after establishment, overall performance of the firm drops, but may improve in the long term. These 5 findings have been used as hypotheses that are being tested in our ongoing field research. Keywords: Strategy implementation, Internationalization, Emerging economies, Outward FDI, Indian MNCs.

Proceedings of the 28th Annual Euro-Asia Management Studies Association Conference

“The Changing Competitive Landscape in Euro-Asia Business Relations” School of Business, Economics and Law, University of Gothenburg

Gothenburg, Sweden 23rd - 26th November, 2011

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Introduction

International trade has come a long way from the “economic exchange across national

boundaries” Morgan and Katsikeas (1997, p. 68) stage and has now evolved into a global

marketplace. „Internationalization‟ per say includes a vast number of foreign market

penetration strategies inclusive of export trade, importing/sourcing, portfolio investments, and

foreign direct investment (Cavusgil et. al. 2008). The following chapter will explore the

existing literature that underpins the subsequent research on the FDI activities of emerging

economy MNCs in developed countries; with special significance given to the activities of

Indian enterprises in the United Kingdom.

Some authors note (see Aykut and Goldstein, 2006; Goldstein, 2007; Aulakh, 2007; Li,

2007; Athreye and Kapur, 2009) that the shortcomings of the classic internationalization

theories such as the Uppsala Model (Johanson and Vahlne, 1977, 1990) or the Eclectic

Paradigm (Dunning, 1988) are a result of them being conceived during an era when the process

of internationalization was attempted by only industrialized western MNCs. This undeniably

lends a theoretical bias towards a western or „developed‟ country mentality (Ramamurti, 2009),

hence fails to explain conflicting business trends from the less industrialized parts of the world

(Li, 2007), and therefore is the greatest drawback of all extant theories (Chittoor, 2009; Ray

and Gubbi, 2009).

Theories on Emerging Economy MNCs

A growing school of thought now advocates that the traditional international business (IB)

theory is based on the “conventional FDI” activities (Moon and Roehl, 2001; Ramamurti,

2009) of the MNCs from the economically developed triad. The evolution of international

trade, coupled with the relative ease of internationalizing brought on by the technological

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developments and cost effective worldwide transit has led to the formulation of new IB

theories that challenge the traditional models.

In particular, three theories prominently contest the validity of the extant IB theories in this

“unconventional FDI” context (Yeung, 1999). They are:

i. Linkage –Leverage -Learning Framework proposed by Mathews (2002, 2006)

ii. International New Ventures by Oviatt and McDougall (1994) and endorsed by

Zahra (2005).

iii. MNE ‘Evolution’ proposed by Ramamurti (2009).

Linkage –Leverage -Learning Framework (LLL)

In his Linkage – Leverage – Learning (LLL) argumentative paper, Mathews (2002) contends

that the first mover advantages, barriers to entry and competitive (ownership) advantages

stressed by existing literature does not articulate the success of „latecomer‟ firms rising from

emerging economies. He further argues that in the case of the emerging economies, firms

employ the LLL aspects to formulate internationalization strategies in order to „catch- up‟ with

the incumbents. Therefore, the firms were internationalizing not because they had ownership

advantages as suggested by Dunning and others, but because they did not; and that these

strategies were formed by forming linkages with exiting firms, leveraging resources to exploit

the linkages made and organizational learning through repeat exploits of linkage and leverage,

thereby acquiring capabilities or competitive advantages.

International New Ventures (INV)

Oviatt and McDougall (1994) proposed a fairly groundbreaking theory of International New

Ventures (INV). They argued that since the traditional IB theories focussed on established and

mature MNCs from the industrialized Triad, the growing trend of „Born –Global‟ firms (Oviatt

and McDougall, 1994; Melen and Nordman, 2009) were ignored and left unexplained. Unlike

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the extant IB theories that focussed on firm size, their INV theory zoned on the firm’s age;

thereby highlighting the point that International New Ventures were driven by their

entrepreneurial actions to create value (Zahra, 2005).

MNE ‘Evolution’

Ramamurti (2009) cautions that the very context of globalisation for the present day emerging

enterprises is different; and therefore necessitating entirely 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 organizations from South East Asia and Latin America.

Table 1: Stages of MNE Evolution (Source: Ramamurti, 2009)

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Despite originating from similar ideas- namely, that the older theories did not address the

activities of newer firms from poorer economies - it is interesting to note that the two of the

contending theories (LLL and INV) themselves focus on completely dissimilar aspects.

On a different note, although extant IB models are more pertinent to early mover TNCs (i.e.

developed economies); these traditional theories could be juxtaposition with the new IB

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 internationalization, as each

model caters to just one aspect of the MNC and internationalization evolution process. Li goes

on to propose that „Learning‟ is the single most unifying concept, with the vital contrast that

the early MNCs engaged in “exploitative learning”, while the latecomer MNCs engage in

“exploratory learning”.

Based on a study of several prevalent theories old and new, it is predicted that:

Hypothesis 1: Indian Enterprises in the United Kingdom are predominantly young

enterprises that have invested in the UK because they may lack exceptional competitive

advantages.

Emerging Economy Enterprises

The following section will expand on the current trends of internationalization of emerging

economies enterprises, followed by challenges and barriers for these emerging companies.

Current Outward FDI trends

The expansion of developing-country enterprises has drawn academic and business attention

for roughly 25 years (Goldstein, 2006) and particularly the last decade has demonstrated

exponential positive trends of FDI outflows from several of these developing economies.

Although the description of „Emerging Economies‟ has been applied to several countries in

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East and South East Asia, Latin America, and some Eastern European countries, greater focus

has been afforded to the BRIC nations -Brazil, Russia, India and China (Gammeltoft, 2008;

Goldstein, 2006; Chittoor, 2009).

According to Aykut and Goldstein, (2007, drawing from UNCTAD data), in the year 2005,

13 % of the world FDI flows came from emerging economies, compared with only about 7% in

1990. However, major sources of FDI have emerged from the large Asian economies, which

have accounted for roughly 60% of the total outward FDI. Of the hundred largest EEs that

BCG (2006) analysed, Asia had the biggest representation with 70%, followed by the 18%

from Latin America, and Egypt, Russia and Turkey forming the last 12%.

Russian firms are also in an upswing as illustrated by Kalotay and Sulstarova (2010) in their

study showing that in 2007 Russia‟s outward FDI had reached US$370 billion, which was

almost 20 times more than that in the year 2000. Internationalization has been undertaken

overwhelmingly by companies dealing in natural resources such as oil, gas, minerals and ores.

In fact, according to UNCTAD data (2008), Russia has had greater outward FDI stock in

natural resources compared to all other emerging economies collectively. Although the modes

and strategies of their internationalization have changed over the years, currently, cross-border

mergers and acquisitions show a radical increase.

Although, in Latin America, such diverse firms as Petrobras (Brazil), Cemex (Mexico),

Techint (Argentina) have been leading the foray into outward FDI, largely into other Latin

countries in the region lending affirmation to Rugman‟s Regionalisation theory (2009), in spite

of the United States of America (USA) becoming a significant recipient to some of them. In an

in-depth study involving 20 Latin American TNCs, Cuervo-Cazurra (2007) has tested some

illuminating hypotheses on their internationalization modes and drivers.

By all accounts, Asian firms particularly have by far exploded onto the IB scene, although

Chinese and Indian firms have outstripped the rest of the continent. In 2008, the size of the

Chinese outward FDI stood at around 7% of total stock from developing countries (UNCTAD,

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2009), and in spite of a late start and lesser degree than China, India‟s outward FDI stock has

also grown exponentially in the 2000s (UNCTAD, 2009). Interestingly, while the financial

recession of 2008-2010 severely hit many emerging countries, the economies of China and

India proved to be comparatively resilient (Athukorala, 2010). Machinery, equipment and

electronics constitute the biggest portion of Chinese FDI as demonstrated by Huawei

Technologies, Haier, Lenovo, and several others; while IT services, automotive and

pharmaceuticals industries have lead the Indian FDI. For example, Tata, Infosys, Wipro,

Ranbaxy Labs and others.

Although the recent spate of cross border transactions from emerging enterprises may

suggest that it may be an easy process, the reality of it couldn‟t be further from this

assumption.

Challenges and Barriers for Emerging Enterprises

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 also a painstaking process. Yet, apart from the

economic costs of internationalizing 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).

While authors such as Ramamurti (2009) propose that emerging enterprises 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

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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 accessing capital for

expansion or R&D compared to western multinationals, lack of supportive and institutional

infrastructure and managerial talent pool (Khanna and Palepu, 2004). Although these raise

valid points in their own respect, they are studies that were on the perspective of firm specific

advantages that offset the costs of internationalization rather than studies on the challenges and

barriers themselves.

Zaheer (1995) and Li (2007) propose that internationalizing 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 businesses 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, 2009). The case of the

introduction of the first Japanese automobiles into the US markets and their reception (or rather

the lack of) 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 emerging enterprises

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

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these liabilities or to effectively manage them, not only do the strategies and entry modes

employed by emerging enterprises 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).

Indian Multinationals and the United Kingdom

This section will discuss the significance of outward FDI by Indian enterprises in the

developed world, followed by a brief on the conditions behind the choice of host locations in

general and then narrowed to the choice of UK as a FDI recipient.

Outward FDI of Indian Multinationals

As a country with the second highest population and GDP in the world (World Bank, 2009),

India as attracted the attention of the business world for over a decade. The fascination with the

newly liberal trade policies, plentiful cheap labour and its rapidly growing middle class

consumer markets for western multinationals is obvious. A by-product of the same exponential

growth, liberal policies and production cost control is the prolific international expansion of its

formerly domestic enterprises. This aspect of integration of India‟s economy with the global

economy has been a key point of scholarly interest (Athukorala, 2009).

Although Indian enterprises have been investing internationally for several years at a very

low volume (Kumar, 2007; Gammelhoft, 2008; Chittoor, 2008), the last decade has witnessed a

tremendous increase. Due to its rapid industrialisation and economic growth, India (along with

China, Brazil and Russia) has made a significant impact on the world economy, prompting

several speculative studies on these emerging country firms. An industry analysis model by

PWC (2010) that extrapolates growth patterns for emerging countries based on their GDP

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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 1: Projected Growth –New Multinationals Vs GDP (Source: PWC, 2010)

Figure 2: Outward Foreign Direct Investment from India (1996-2006). (Based on data from the Indian

Ministry of Finance)

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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 (UN-ESCAP, 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 internationalization of developing-world

MNCs in general (UNCTAD, 2004; Ramamurti, 2009, Goldstein, 2007; Kumar, 2007).

Conditions Affecting the Choice of Host Locations

Although it has been established that Indian Enterprises are increasingly moving towards

investing in developed/industrialised economies, what are the factors that influence a

company‟s decisions on where to internationalize?

In a commanding article entitled Distance Still Matters by Ghemawat (2001) argues that the

location choice of an international investment venture largely depends more on the Cultural,

Administrative, Geographical and Economic (C-A-G-E) distance between the home and host

countries and supersedes the advantages brought on by a destination country‟s untapped

markets and GDP. It is interesting to note that while this article provides thought provoking

ideas on the effect of distance, it fails to consider the offsetting influence of modern

information technology and communication which is one of the leading sectors of international

business. However, Ghemawat‟s argument on distance could be tied in as a subset of what

Hymer (1960) listed as the costs of international business that may occasionally manifest into a

competitive disadvantage for the firm if not analysed thoroughly.

Contrary to Ghemawat‟s (2001) theory, Lachum, et al (2008) argue that it is not the distance,

but the nearness of a country to “Knowledge, Markets and Resources” that has a greater impact

on the selection of an international location. Their study shows that the choice of destination

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location depends more on where that country stands with respect to the global pool of not only

markets and resources but also knowledge.

Whereas studies by Chung and Alcacer demonstrate the importance of knowledge spillovers

(2002) and research investment (2007) on the choice of host locations; Gammeltoft (2008) and

Khanna and Palepu (2004) highlight the power of state/government policies, tax and trade

treaties. The latter is strongly supported by the transactions of „round tripping‟ of investment

between India and Mauritius, primarily to utilise the double tax avoidance treaty between the

two countries; and the significant investments towards the tax havens of British Virgin islands

and Bermuda, collectively accounting for more than twenty five percent (UN-ESCAP, 2010) of

the bilateral investment of Indian companies.

However, when controlled for the tax-break factor, the USA and the United Kingdom (UK)

emerge as the choice destinations for Indian FDI in the past several years in various sectors.

Paradoxically, on one hand, Indian companies defy the notion of regionalisation by expanding

outside their region. On the other hand, by targeting distant developed economies as hosts, they

demonstrate that the integration of the host economy within their local geographic region is a

paramount factor that influences the choice of hosts. Regional agreements like the EU and

NAFTA appear to have made the UK and the USA choice locations for outward FDI (Anwar,

et al. 2008).

There is no dearth for literature on Indian companies in the USA focussing on region of

investment (Khanna and Palepu, 2004) mode of entry (Anwar, et al. 2008), industry sectors,

(Pradhan, 2005 and 2006); and others; However, despite the historical ties and strengthening

trade relations between India and the United Kingdom, literature on Indian companies

investing in the UK is clearly lacking.

Therefore, for the purposes of this dissertation on Indian Outward FDI, research will be

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

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Commission, 2010) and the elevated status of „Strategic Partnership‟ of the two countries since

2004 (UKTI, 2010).

Cross- Border trade between India and United Kingdom

Although owing to conservative trading policies, India‟s FDI was rather restricted in the 1990s,

India has been progressively taking great strides in the UK in terms of direct investment,

arguably as a result of the aforementioned trade partnership in 2004. Investing in the UK holds

several benefits for growing enterprises from 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. In terms of FDI, in FY2007-2008,

UK was the third biggest investor in India (Commonwealth Business Council, 2008). Bilateral

relationships between the 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 the Commonwealth Business Council (CBC, 2008), the United Kingdom (UK)

has emerged as 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.

However, according to the same analysis by the CBC, it is also stated that investment in the

UK faces several threats, primary of which are - a heavy recession, low economic growth, large

fiscal deficits, high consumer debt leading to lower purchasing power and lately, tight labour

immigration policies - all of which would potentially have considerable impact on investing

firms.

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Motivations and entry strategies of Indian Enterprises

Competitive Advantages of Indian MNCs

Dunning‟s OLI Framework asserts that firms can only internationalize when they have the firm

specific advantages of ownership, location and internalisation in place, which they then exploit

during expansion (Li, 2007). It is evident though, that with an exception of large

conglomerates, emerging enterprises – and by extension, Indian enterprises - hardly have the

luxuries of domestic assets such as financial capital, globally recognised brand names or

technology (Aykut and Goldstein, 2006; Luo and Tung, 2007) and may therefore

internationalize primarily in order to overcome their ownership disadvantages and to acquire

strategic competencies and build ownership advantages, rather than as a result of ownership

advantages (Mathews, 2002, 2006; Athreye and Kapur, 2009; Chittoor, 2009).

On the other hand, as discussed, the very assumption that emerging enterprises have no firm

specific advantages may in itself be a testament to the western bias against towards western

MNCs (Ramamurti, 2009; Ray and Gubbi, 2009). Yet, in the case of Indian enterprises, while

it may be true that they do not hold what could be described as „conventional‟ advantages, they

do hold several unique strengths.

For instance, competitive advantage of these enterprises may lie in their capacity to reduce

operational costs of imported products and technology or (Pananond, 2007) or in other words,

“frugal engineering” (Athreye and Kapur, 2009). Kumar (2008) argues that this “frugal

engineering” skills are the single most prominent advantage that Indian companies own. The

capacity to adapt any technology, process, or design to suit local circumstances is also argued

to be high up on the list. The capacity to learn and absorb technology and the ability to operate

in difficult domestic conditions are other important factors that influence Indian enterprises as

pointed out by Ramamurti (2009). Besides, since much effort and research has been dedicated

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into empirically studying competitive advantages of Western MNEs, a similar effort should be

afforded to the study of emerging enterprises.

O-FDI Entry Modes and Strategies

While early internationalization of Indian enterprises was confined to neighbouring countries

and other lesser developed countries, Indian organizations are now increasingly investing in

developed countries. In fact, during the period of 2000 -2006, over 80% of Indian FDI went

into developed economies (UNCTAD, 2006). In essence, the „south-south cooperation‟ (Aykut

and Goldstein, 2006), of the previous decade has given way to strategic „global

competitiveness‟ (Pradhan, 2005).

Therefore, it stands to reason that current entry modes and internationalization strategies of

Indian organizations will also have evolved from those employed in the 1960s-1990s. During

the early years of 1960s and 1970s when internationalization itself was rather rare of Indian

companies except a few conglomerates, entry strategy was almost always in the form of

Greenfield investments, establishing manufacturing or production centres in less developed

economies like the neighbouring Sri Lanka or African countries like Ethiopia and Kenya

(Pradhan, 2005) or in some instances, Joint Ventures (Balakrishnan, 1976). Further, the then

Indian OFDI policy ruled that all equipment and machinery that may be required in the foreign

subsidiary had to have been exported from India. In fact, until the mid-1990s, all recorded

cases of overseas investment have been limited to Greenfield investments.

Post 1991, when the government of India undertook some policy reforms, organizations

were given more liberty while investing in foreign markets, however, some amount of

restrictions prevailed. For instance, the maximum investment approvals allowed for an

enterprise was no more than the value of US$2, 000,000. These constraints ensured that all at

most, Indian enterprises would only hold minority share in foreign joint ventures. Successive

reforms in policy have increasingly reduced restrictions on Indian companies, providing them

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greater opportunity to invest abroad, and in the several years, international activities of Indian

companies have expanded multi-fold from even the 1990s (Kumar, 2007 and 2008).

In the last decade, Mergers and Acquisitions (M&As) have emerged as the dominant form of

outward FDI in most cases, modifying ownership structures and allowing Indian firms to

become majority owners or even fully own its foreign subsidiaries. A study by FICCI (2006)

revealed that over two thirds of Indian overseas acquisitions resulted in complete ownership

and less than one fifth of the cases resulted in minority ownership. Of these, only the minority

acquisitions happened to be in developing economies.

FDI strategies of emerging enterprises, irrespective of whether they are latecomers or

newcomers, tend to be aggressive (Chittoor, 2009; LiSun et al, 2010) mainly due to their need

to „catch-up‟ with incumbents from the developed as well keep ahead of those from the

developing world (Li, 2007; Goldstein, 2007). Determinants of entry modes and strategies

comprise not only such vectors as the transaction cost, but also places a higher premium on

transaction value, which translates into the opportunity for organizational learning. Therefore,

strategic alliances in the form of international joint ventures or mergers constitute a significant

part. This explanation has been evidenced by a spate of cross-border mergers and acquisitions

(Li Sun et al, 2010) by organizations like Tata Tea, Tata Motors, Mahindra & Mahindra, HCL

Technologies and others, which have focussed on acquiring internationally reputed brands.

However, motivations of internationalization and thereby the entry strategy of organizations

vary greatly depending on various factors, including issues such as whether the

internationalizing firm is owned by shareholders, privately owned or backed by the

state/government. Other factors pertaining to industry sector of the firm, firm size and

organizational culture of the firm also influence where and how the firm internationalizes.

Naturally, the entry strategies of a state controlled oil and gas company will differ from that

employed by a conglomerate such as Reliance or Birla, or that of a shareholder controlled IT

firm like Infosys.

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Moreover, the product range and category offered by the firm also dictates the mode of entry

strategy for organizations (Athurkorala, 2009). Presumably, the strategies or motivations of the

manufacturing sector will defer from that of the information technology sector.

Motivations and Drivers of Internationalization for Indian Enterprises

The choice of the internationalization paths and entry strategies are inherently dependent on the

motivations and drivers behind the internationalization (Luo and Tung, 2007). So what

motivates Indian enterprises to aggressively invest abroad?

Dunning‟s work on the categorisation of the motives behind the internationalization process

is illuminating. In his book Multinational Enterprises and the Global Economy Dunning

(1993) argued that all internationalizing companies (MNCs) could be slotted into one of four

groups: resource seeking, efficiency seeking, market seeking and strategic asset or capability

seeking. UNCTAD (2006) on the other hand makes a clear distinction between the motivations

of developed country MNEs and emerging MNEs. They interpret the OFDI aim of developed

country firms as asset exploration and that of emerging enterprises as asset augmentation and

that therein lays the critical difference.

While internationalization paths of western MNCs and Indian MNCs are admittedly

different, some common ground is evident. Scholars suggest that one of the main motivations

behind internationalization of emerging firms is to seek assets (Athreye and Kapur, 2009) and

has evolved from earlier decades when it was mainly market-seeking.

The primary drivers that contributed to the early internationalization (pre-1991) of Indian

firms were possibly to spread risk of operating in a single home market, secure suppliers and

buyers and create export hubs that cater to other markets. Kumar (2007) and Pradhan (2005)

suggest that the then stringent economic and trade laws of India were a critical driver to

outward investment because it restricted the growth and diversification of businesses within the

country, mainly in order to prevent the creation of domestic monopolies. Therefore, investing

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abroad was almost as a “means of escape” and was more convenient for these organizations,

especially since other South-East Asian markets were opening their borders for trade and

investment.

Subsequently, it has been theorised that Indian enterprises now expand in order to compete

effectively in a global arena by way of acquisition of strategic assets (Kumar, 2007and 2008)

and seek opportunities. In addition, apart from their own strategic motives for international

expansion, there may be other drivers that compel Indian enterprises to expand internationally:

primarily the need to overcome their late mover circumstances, exacerbated by the advance of

foreign MNE rivals into their domestic market-space, with access to infrastructure, low cost

labour and supply chains (Luo and Tung, 2007).

International competitiveness can be strengthened by subsidiaries in foreign markets which

can deal directly with local suppliers and buyers. This idea could explain why recent Indian

FDI has been concentrated in countries that were formerly key export destinations, such as the

United States and the Western Europe, rather than other developing countries, despite the

advantage of a closer psychic and cultural distance.

Kumar (2007) further postulates that irrespective of the actual mode of entry employed, the

key drivers themselves remain similar - namely, to realise networks in foreign economies and

fill in missing capabilities (gaps) of the parent organization. According to the Federation of

Indian Chambers of Commerce and Industry (FICCI, 2006) strong motives for outward FDI

have been listed as access to raw materials, superior technology and the desire to become a

global leader.

Although most agree that current trends are predominantly due the need for organizations to

seek strategic assets in order to fill gaps in their capabilities, or in order to catch up with

incumbent western MNCs. Based on all the above considerations, it is predicted that:

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Hypothesis 2: The majority of Indian enterprises would have invested in the UK

through mergers or acquisitions of local companies. However, it is debatable whether between

mergers route and acquisitions route, which is more prevalent.

Hypothesis 3: It is further proposed that access to technology and access to strategic

assets such as global brands would be the two top reasons for investing in the UK.

Sectorial Composition and Post-entry Performance

Dominant Industrial Sectors

An increased focus on certain industries can be due to the confluence of many factors, such as

the country specific advantages, supportive infrastructure, geographical advantages, trade and

investment treaties (Aulakh, 2007). Conditions of war or peace, the income group of the

population and ethnic culture may also dictate which industry dominates trade at any given

time.

Following an earlier discussion of the history and „waves‟ of internationalization of

emerging countries, it is evident that not only has there been a shift in regional focus, but also

in the mode of investment and the sectorial composition from one wave to another.

Sectors in the First Wave

During the first wave, FDI from emerging countries was aimed at other countries that were at a

similar stage of economic development, largely in the same geographical region (Aulakh,

2007; Gammeltoft, 2008). During this era, Indian OFDI, as elementary as it was, was bound

towards a few South East Asian countries which received nearly 56% of the Indian investment

(Balakrishnan, 1976), and East African countries to a modest extent. The international

expansion of Indian enterprises was dominated by Greenfield investments, and a few joint

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ventures, which were restricted to a minority ownership where the Indian Firm‟s role was

primarily to provide the production machinery and know-how.

The manufacturing sector contributed to over 80 percent of O-FDI from Indian enterprises

(Kumar, 2007) and was mainly comprised of the industrial segments of Machinery and

equipment, chemicals and fertilisers, or basic metals such as iron and steel (Chalapathy Rao et

al. 1999). These fledgling enterprises were usually large conglomerates that could leverage

their financial and political clout, such as the Birlas who established the first textile production

unit in Ethiopia.

This may have been caused due to India‟s trade policies that restricted foreign direct

investment in an effort to protect local entrepreneurs and national industries, promote exports

and self-reliance (Chalapathy Rao, et al. 1999). In addition, firms interested in cross border

investments were required to undertake a tedious process in order to seek permission from the

ministries of commerce and the Reserve Bank of India (RBI) (Pedersen, 2008). Other

restrictions in what is now called the „import substitution era‟ (Dasgupta and Siddharthan,

1985) also contributed towards this movement.

Sectors in the Second Wave

A few changes were then introduced in trade policies around the mid 1980s and also the

inclusion of policies relating to Wholly Owned Subsidiaries, resulting in slightly improved

outward investment (Aulakh, 2007). Still, despite many restrictions on the volume of outward

investment, O-FDI increased, defining the start of the „second wave‟ of Indian outward FDI.

This enabled the second wave of outward FDI, leading to an increasing number of

international joint ventures (IJV) on foreign shores, although limited to South Asian, South

East Asian countries and Africa. Thailand, Malaysia, Indonesia and Singapore were increasing

recipients, as were Senegal, Ethiopia, Nigeria and Kenya (Ranganathan, 1984). Compared to

21

the previous decades, O-FDI increased greatly, although still several government restrictions

applied.

At the forefront of this investment were industries that dealt in engineering, machinery and

electrical, oils, chemicals and drugs, textiles, wood, pulp and paper products, followed by a

lesser number of pioneers in the industries of cement, glass, leather goods, mosaic and flour

mills (Balakrishnan, 1976) as well as non traditional extractive industries such as oil and

energy (Chalapathy Rao et al, 1999). Although towards the latter end of the second wave the

diversity and ownership patterns within the manufacturing sector increased, the share of

manufacturing OFDI suffered. On the other hand, OFDI share of services such as

telecommunications, as well as hotels and tourism greatly increased (Kumar, 2008) and drugs

and pharmaceutical sector started its foray (Gammeltoft, 2009). This trend continued into the

third wave.

Current Sectorial Trends

Although due to challenges in collating and reconciling investment data there appear

discrepancies between data obtained from different sources (Aykut and Goldstein, 2006), the

general trends of outward FDI are clearly visible. Indian OFDI has increased dramatically

since the policy reforms in 1990/1991 as illustrated in the chart below.

Figure 3: Indian OFDI (Source: Chalapathy Rao, et al. 1999).

22

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:

Table 2: Approved Indian OFDI (Source: Athukorala 2009).

To begin with, the extractive sector mainly comprising of oil and gas firms and their

affiliates have gained a greater share in outbound FDI (Kumar, 2008), which is not surprising

considering the heavy domestic demand of India‟s burgeoning economy. While the traditional

role of leather goods and textiles as FDI 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 the Tata

Motors in 2008 has become an iconic transaction between emerging enterprise and global

brand 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 (Kumar, 2008).

23

However, it is clear that a „knowledge based‟ global economy (Pradhan, 2005, 2006), and

the pace at which Indian economy and enterprises are merging with the knowledge based

economy have resulted in yet another shift in the dominance of industries. In conjunction with

chemicals, in the last decade, the healthcare 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 surpluses and 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) which is logical 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) and its related services of

consulting, outsourcing and media (IT Enabled Services - ITES) have internationalized in far

excess compared to other industries. This is clearly evidenced by corporate 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 Boston Consulting Group (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 internationalization activity in developed

countries.

Post-entry Performance

24

The entire journey of the study of the outward FDI of Indian enterprises, their competitive

advantages, entry modes, strategies, and their motivations and drivers culminates in a final

question: how well have the Indian enterprises coped and progressed post- establishment in the

host country?

Unfortunately, there are a very limited number of studies on the aspect of post-entry

performance of Indian firms in the host country. This is not unexpected considering that such

heavyweight international expansion from an economically poor country is a relatively new

phenomenon (despite some nominal amount OFDI that has existed for several decades).

Moreover, the few studies on post-entry performance that do exist are inevitably over a decade

old, restricted to activities in 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 including that, financial returns are not limited to dividends. Finances

pertaining to contracts, management fees, technology licensing fees for examples are almost

never included into performance calculations, which in turn distort data obtained through

studies. Although an event study of the stock market may provide some dependable evidence

that has some limitations (Kumar, 2008).

Despite the drawbacks, a few researchers have studied the performance of emerging

enterprises in the context of mergers or acquisitions, and find that a large percentage of these

ventures are abandoned or fail to be implemented (Aulakh, et al. 2000). The failure rate is

attributed to either lack of synergy between the target and the acquirer or due 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 was found to be only a little

over 2% during the first five years (Kale, 2009).

25

By considering the discussion in this section on Indian enterprises in the UK, it is evident

that:

Hypothesis 4: Following along global trends of Indian Enterprises investing in

developed countries, the three industries to receive the highest FDI intensity would be

Information Technology (IT/ITES), Pharmaceuticals and Automotive Industrials.

Owing to the minimal literature on post-entry performance of Indian enterprises, it is gleaned

from some related literature that:

Hypothesis 5: In the short term after establishment, overall performance of the firm

drops; but may improve in the long term.

Conclusion

Many traditional internationalization theories exist on why and how firms internationalize.

However, these are contradicted by newer theories that focus on internationalization 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. Based on a study of several

prevalent theories old and new, it is predicted that Indian Enterprises in the United Kingdom

are predominantly young enterprises that have invested in the UK because they may lack

exceptional competitive advantages.

There are two schools of thought on the topic of Competitive advantages of emerging

enterprises: One asserts that emerging enterprises do not have ownership advantages, which is

why they undertake cross-border investment; and the other posits that these enterprises may not

26

have conventional advantages, but they do hold unique characteristics that are effectively

leveraged when investing overseas.

Outward FDI from Indian enterprises tended to be Greenfield investments in prior to the

1990s, as a mechanism to escape state‟s control on domestic expansion. However, through

subsequent policy reforms, they have evolved correspondingly to joint ventures and minority

ownerships in developing countries in the 1990s and to largely M&As and majority or whole

ownership in the 2000s.

A variety of opinions abound on why Indian enterprises are undertaking cross border

investments aggressively. Although most agree that current trends are predominantly due the

need for organizations to seek strategic assets in order to fill gaps in their capabilities, or in

order to catch up with incumbent western MNCs. Based on all the above considerations, it is

predicted that majority of Indian enterprises would have invested in the UK through mergers or

acquisitions of local companies. It is further proposed that access to technology and access to

strategic assets such as global brands would be the two top reasons for investing in the UK.

There appears to be more or less unanimous agreement on the sectorial composition of

Indian enterprises abroad through the decades. Presently, according to the report by Boston

Consulting Group (2006) and several independent studies by researchers, the top three

globalising industries from India are Automotive Equipments and Parts, IT Services/ITES and

Pharmaceuticals, in that order based on their internationalization activity in developed

countries. So it is believed that following along global trends of Indian Enterprises investing in

developed countries, the three industries to receive the highest FDI intensity would be

Information Technology (IT/ITES), Pharmaceuticals and Automotive Industrials.

Regarding post-entry performance of Indian enterprises, it can be claimed that while there is

a short term drop in overall financial performance of the firm after mergers or acquisitions, in a

long run, performance may improve considerably after all.

27

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Illustrations and Tables

Table 1: Stages of MNE Evolution (Source: Ramamurti, 2009)

32

Figure 1: Projected Growth –New Multinationals Vs GDP (Source: PWC, 2010)

33

Figure 2: Outward Foreign Direct Investment from India (1996-2006). (Based on data from the Indian

Ministry of Finance)

34

Figure 3: Indian OFDI (Source: Chalapathy Rao, et al. 1999)

35

Table 2: Approved Indian OFDI (Source: Athukorala, 2009)