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
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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
5
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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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