Entry Strategy of Mnc

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Entry Strategies of M ulti-nationals

Indian Context

By

S. Ram esh Kumar

M J . Xavier

August 1996

Please add ress all correspondence to:

Ramesh Kum ar/M.J. Xavier

Assistant Professor/Professor

Indian Institute of Management

Barmerghatta Road

Bangalore 560 076

India

Fax: (080) 6644050


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ENT RY STRATEGIES O F MU L T I-N AT IO N AL S

-

INDIAN CONTEXT

by

Prof. S Ramesh Kumar

Prof MJXavier

Abstract

India with a population o f over 92 0 million people with 300 million of them in the middle

income category, is a country that cannot be ignored by any foreign multinational company. The

hitherto protected Indian market wa s opened t o foreign companies in the year 1992 through the

liberalization policies initiated by the Government of India.In this article some of the unique

characteristics of the Indian market and the entry strategies followed by foreign companies in

different industries are discussed.


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EN T RY STRATEGIES OF MUL T I-N ATIO N ALS -

IN D IAN CO N TEXT

India is a country full of contradictions. There are islands of prosperity where one can findthe

f the global products from ice-creams to automobiles; throughout the length and breadth of

ar the sky scrappers while computers coexist with the common man. While the illiteracy ratio is

avary large pool of software professionals and scientific

as a giant in the awakening.

mic Prestroika:

After attaining independence in 1947, India followed a socialistic democratic path with central

ntry. Hence in the year 1992, the G overnment ofIndia took several steps to integrate India

est o f the global economy. T he highlights o f these steps are (Vasantha, 1992):

T he Indian Rupee was devalued in two stages against major currencies.

A substantial volume of import licensing was eliminated and export incentives were

strengthened.

F oreign equity investment w as permitted upto 51% in 34 categories o f industries. Equity

participation up to 100 per cent w as allowed in certain cases.

Key changes were introduced ininancialmarkets which enabled the entry of foreign banks in

order to enable the efficiency of the banking sector.

Controls on Indian companies raising equity funds in the domestic market were abolished.

G old imports were legalized and a proposal was m ooted to float gold bonds.

As a result o f the aforesaid m easures a number oflargeglobal corporation, such as Sony,

&T , Coca Cola, Compaq and many others have set up shops in the Indian subcontinent.

he L ucre of Indian market.

According to a report prepared by NCAER (National Council of Applied Economic

this 3.7 million earn over Rs. 7 8,0 00 /- per annum . O ne million households earn

Rs. 1 lakh per year. Per capita income has increased at 5.5% per year through the 80s.

91, the average Indian had a purchasing power equivalent to $1 ,15 0 (R s 35 ,650) per year

gher than the India's per capita income $3 50 (Rs. 10,850/- ). In the nineties, through

th per capita has fallen to 3.5% annually, the top 1% has had an annual increase of

i


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10%.Even if one million households form a small part of the Indian popu lation, it is comparable

e size of may foreign m arkets. (For example, No rw ay h as a population 4 million, Austria has

T R E N D S IN T H E IN D IA N M A R K E T S - 2 00 0 A . P .

sion - 4 million units ( Current Dem and 1.35 millions)

ercial vehicles - 1.6 lakhs per year (Cu rrent demand 90,000)

- 8 lakhs (Curren t demand 2.4 lakhs)

- 4 million uni ts (Cu rrent demand 1.5 million)

Computers - 1.4 million units (curren t demand 2.5 lakhs)

ioners - 7.5 to 9.0 lakh units (Current demand 2 to 3 lakhs)

Soft-drinks - Increase in per capita consumption from the present 3 to 6 bottles

- Expected to grow toRs.1500 crores (Current m arketR s. 750

crores)

(Adapted from A&M, April 1995)

zation policies of the government, changing lifestyles, enhanced purchasing pow er of

ers are some of the significant aspects which influence the Indian marke ts. From a handful

brands across product categories, there is a proliferation of brands in almost each

1

segments (Ramesh Kumar, 1994) are probably certain

e interesting t o analyse the strategic advantages multi-nationals have in

markets. Th e emerging scenario will requ ire an examination of several inter-related

ng aspects for a firm to decide its strategies. These aspects could range from the

firm has in strategic alliances to positioning strateg ies which deal with the psyche of

The article attemp ts to prob e into the existing state of the market and trends in

specific product categories with a view t o provide inpu ts on the strategic entry of multi- nationals.

Kinds of entry strategies

kinds of entry strategies for new m arkets (Shama, 1995). They ar e -

Expo rt/Import. T hisis a comm onstrategy An existing product is merely shipped to a foreign

The adv antage of this strategy is that it has low degre e of financial risk and it extends


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he dom estic market into international marketing. (R ice , raw cotton exports are typical ofthis type

of entry. Rock phosphate, potash, chemicals used for dental applications are imported by India )

icensing: T his involves granting the rights and methods for production to a host country firm

in return for a royalty fee. Advantages are low capital requirements and circumvention of import

estrictions It is a low-risk strategy but also generally offers low returns.

) Joint Venture: This involves two companies that form a partnership under a new corporate

T his is very suitable for large and successful multi-nationals which want to expand from

r own markets which have reached maturity or which want

ess to new sources o f raw materials. Advantagesare the

synergies between the host countryirm socalized know ledge and

skills and the foreign company's capital and technology It

allows a foreign company to enter a market which is otherwise

naccessible due to trade barriers. (D CM -D aewoo and Pal-Peugot are typical example of joint

entures in India).

) Franchising: T his is a form of licensing and it combines the fran chise e's local knowledge,

apital and entrepreneurial talent with the franchisor's standard bundle of

ise and support systems. Advantage of th is strategy is the speed with which a

gn company can enter a domestic market. (M e D onald in India), e) Consortia: In this

trategy, a group of companiesjointo take advantage o f the participant's location or technological

Consortia merge resources and reduce the risk of individual companies. (C o-operative

agar-bathis, fireworks in India).

anufacturing/wholly-owned subsidiary: T his is the highest- risk strategy with the highest

dvantages are capitalizing on low/labour costs, avoiding import taxes and transportation costs

nd access to raw materials. In this strategy, the company is much more subjected to the vagaries

of political instability and government policies. (CO CA-CO L A, KF C are examples in the Indian

ontext)

TO RS AFFECTING CHO ICE O F EN TRY

wnership advantages:

ompanies will have to be strong in their asset base to directly com pete with host country. Costs

f marketing will have to be balanced with economies of scale (H ood and Y oung, 1979). T he size

of a company reflects its potential for talking on these cos ts (Buckley and Casson 1976) .

ost country firm s. Resources are required for high costs of marketing and for achieving

conomies of scale. T he sifce of firm represents its capability for the absorption of these costs ;

umar 1984)


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study on the mode of market entry with five major factors - product differentiation, size and

ultinational experience, market potential, investment risk and contractual risk (cost of making

nd enforcing contracts) has yielded the followin g results (Agarwal and Ramaswam y 199 1)

a) Multinational firms appear to have a higher propensity for entry through a joint venture mode

n high potential markets

he incorporation o f global strategic variables

In the attempt to expand the existing entry mode analysis, Chan Kim and Peter Hawang (1991)

suggest that the following aspects could be considered by a firm

1) G lobal Concentration

3) Global Strategic Motivations

n a number of markets around the globe, limited number of multinationals compete with each

other U nder these situations the action of a firm in a market may influence other markets T his is

global concentration (Watson 198 2 and Kim and Maubornjne 19 88 ) A multinational could use its

inputs across several markets around the world (Honda's core comptence in engines to expand in

autom obiles, lawn m overs and snow blow ers), (Willing, 19 78) Strategic motivations o f

multinationals may be linked with future expansion plans, errecting barriers for future global

com petitors or any strategy to enhance the corporate efficiency o f the firm

N T R Y - M O P E MO D E L S

Stopford and Wells (1972) observed that entry is contingent upon firm's experience in global

markets and its ability to d iversify product lines K og ut and Singh (19 8 8 ) found that industry,

irm, and country-specific factors influence the selection betw een joint venture, acquisition and

ew venture

e shall now look at the entry strategies followed by various multinationals into India in various

roduct categories

C O N S U M E R E L E C T R O N I C S / A P P L I A N C E S

Matsushita Electric Industrial Co , the $84 billion multinational entered India with its wholly

ow ned N ational Panasonic India (N PI ) and it has set for itself a sales target o f Rs 31 00 crores in

year 20 00 M atsushita had earlier entered India duringthe early seve ntie s wi th joint venture s

facture dry cells It w as not allowed to take a controlling stake in the tw o com panies

Indo N ational L td and L akhanpal N ational L td ) In 1993 it launched the rice coo ker (under


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FationaT brand). In order to understand the local markets it has chosen 'Salora International

1

owns a plant for manufacturing colour T Vs) as its partner for consumer electronics (for

turing) and in 1994 it formed N PI. It's rice cookers are being made by 'Indo Matsushita

es Co.' a joint venture with the Madras based O bul Reddy G roup. N PI's strategies in

vast number of product categories and offer the widest variety in each of these, b) to

etitive pricing structure and then move to the upmarket segments.

1

to put together knocked-down kits

o lakhs colour T Vs and four lakhs audio units per year)

launch an advertising campaign only after its products are available nationally, e) N PI aims

et share of 15 per cent in all markets it enters. It has the futuristic plan of introducing

1997. It has also fina lised a deal with 'Sab Electronics

1

for the manufacture of key telephone

ystems. By 2 000 N PI plans to have 6000 dealers (A&M, 15 July, 1995).

t

G O L D S T A R

l

a leading Korean Company is the only company which might challenge

1

in the Indian market with regard to all its product categories (A & M 15 July, 1995). It

ut 50 branches. It sells in 170 countries around the world (A & M, Jan, 1995) 'G O LD STAR

1

an operations in 1984 w ith a liaison office at D elhi and began exporting colour

ture tubes to the former U SSR through this office (L G Electronics). In 1994 , it launched its

V's and VCR ranges in the Indian market. 'G O LD STAR'S strategies in India are

introduce top/end audio systems each with double/deck and CD player

o introduce a range of home appliances by '96

ise its low production costs to price its products competitively. (A

&

M Jan, 1995).

he Korean (L G G roup) group produces over 25,00 0 products from petrochemicals,

icals to electronics and its turnover was $3.5 billion in 1994 (A&M 15 June, 1995).

'SAMSU N G ' has entered India through 'SAMSU N G EL ECT RO N ICS IN D IA L T D ' which has an

liance (51% stake) with 'REASO N ABLE CO MPUT ER L T D .', AHMED ABAD . It has

llocated $100 crores for its first phase of operations. It plans to spend Rs.100 crores for its

It has launched the world's flatest T V in India (29"). It's strategies in India

use models launched in the top end of the market for building its equity

develop its dealer network (it plans to build 3000 in the next few years)

O N Y : 'SO N Y IN D IA PVT . L T D .', a wholly owned subsidiary of 'Sony Corp' ($45 billion

er in 1994) has launched its 'T rinitron' color T V in India. It is made with 99 per cent

sets. It has investedRs.15crore ($5 billion) A&M, 31 July, 1995). T he company's strategy

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"SHELL " has entered India through the joint venture Bharat Sheil L td.

1

(Shell has 51 per cent

&M , 15 May, 1995). It's strategies are

set up demonstration pumps to explain its concept of retailing (Economic T imes 29 D ec ,

1995) CRetail Visual Identity Programme

1

),

make soft drinks facility available and Bank of Baroda

1

t card facility available at petrol bunks (A

&

M , 15 May, 1995).

make use o f 400 0 outlets o f 'Bharat Petroluem

1

.

'CALTEX

1

has entered India through its alliance with Tndo- Burma Petroleum

1

and EXXO N

1

rlier U SSO

1

) has entered India through its alliance with "Hindustan Petroleum Corporation.

ibution strengths and they would be using it for marketing lubricants (as 70% of sale of

cants in India occurs at petrol stations) (A&M, 15 May, 1995).

T ID E WATER OIL' (

w

VEED O L " brand) is another player. It plans to raise the advertising

in 1996. "ELF' is another company which has developed about 6000 dealers and has

1

for another 30,000 outlets (T he E conomic T imes

1

29 D ec, 1995).

1

('G U L F brand) which has entered India has introduced a range ofcarcare products

1

. It also plans to develop its brand image

U L F ( A & M , 15 May, 1995). 'PEN N ZO IU another multinational to enter India has put up

1

). It has tied up with *Rallis

1

and has access to 40,000 outlets of the company. It also plans to enhance advertising

nditure in 1996 (A&M, 15 May, 1995).

A number of multi-nationals have entered India especially to cut software costs. India will

ore computers than the dom estic industry can produce. India has emerged as a global

ourcing market. India can produce software at a frac tion o f the cost in the U .S ., Europe or

pan (N ancy Hass, 1992). A survey shows that in 19 94 -95, the PC market exploded, growing

ent from 1.5 lakh unite to 2.5 lakh units. T he table-2 below (A & M , 30 June, 1995)


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Table

-

2

Revenue 1994

in SBillion

3 2

9 1

2 3

1 00

1 3 4

6 0

25 0

64 0

Indian Partner

Wipro

W ipro, Odin

Digitron, Usha, AMD

CMC, ICIM, Unicorp,

Microland, Tangerine

Digital Equip - India

Modi Olivetti

HCL-HP

Tata Infor Systems

Apple

ST

EC

P

M

Major multi-nationals are adopting one of tw o strategies in India They have a financial stake in

iple partners (Apple, AS T, CO M PAQ ) The only exception is DE LL which markets its

ucts through PC L Several multi-nationals are opting for multiple distributorships ACT

nine partners (like CA LS, USH A, CMS , PCS , DA TA, GEN ERA L and DD E ORG )

CTR ON ICS SY STE M S P LTD ) International brands have gone up from 11,000 units in

I99 3J9 4 to 60,000 units in 1995

EW LETT -PACK ARD The company entered India m 1976 with one alliance of HC L

1994-

f

95 turnover of HC L-H P is R s6 0 5 crores) It has the highest selling PC brand (35,000

in 1994-'95) (A & M, 30 June 1995) HC L-H P introduced its international range

VECTRA

oiu sty le . The Hindu Busin esshne 14 JuK

40 Ramesh Kumar S . le ve ls of Brand Co nscio usne ss The Hindu. 12 Jan 1996

41 Shama Arvind, Kntr\ strategies o i l

1

S Firm to the newly indepen dent state s. Baltic States

and Eastern Kuropean Co untries California M anagem ent Review. Yol 37. No > (Spring

199^)90-93^

42 Stopford. John M & Louis I Wells M anaging the multinational enterprise New York

Basic Bo oks 1972

43 Tee ce. David J Tow ards an econ om ic theor> of the multi-product firm Journal

o

Kconomic Behaviour and Organization, (I9$2) 3 39-63

44 The Kcon omic Times 22 Jun e 1994

45 The Econ omic Times 22 June 1994

46 Th e Eco nom ic Times 29 Dec 1995

47 T erpstra, Yern & Chw o-M ing Yu Dete rmin ants of foreign investment of J/ S advertising

ag en cie s Journal of International Business Studies, (Sprin g 1988) 19 33 -46

48 Yasan tha Bharuc ha Policy Libe ralization in India with special referen ce to trad e and

investment in K Fasbender, O M ayer and D Cha tterjee (eds ) Indian - Europ ean T rade

Relations, Prospects of the Liberalization Process in India and Europe, Verlag, Weltrachiv

Gmbh, Hamberg (1992), 6-21

49 W einstein, Arnold, K Foreign investmen ts by service firms Th e case of the multinational

advertising agency Journal of International Business Stud ies, (Sprin g-Su mm er 1977) 8

83-91

50 Yip. Ge orge S Global strategy In a world of na tion s

9

Sloan M anag em ent Review (Fall

1989) 29-41

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