International business the internationalization of quixote into the emerging economy of india

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Msc International Management @ University of Sussex: International Business Assignment …

Msc International Management @ University of Sussex: International Business Assignment

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  • 1. University of Sussex:Department of Business and ManagementInternational Business“The Internationalization of Quixote A/S into theEmerging Economy of India”
  • 2. 2EXECUTIVE SUMMARYThe rate of global investments for renewable energy is increasing. To help facilitate andpromote such investments, Governments from industrialised and emerging economies arechanging their policies.Quixote A/S is a Danish wind turbine producer, who is witnessing low growth rates in the homemarket. The growth rates in certain emerging economies, on the other hand, have largelyexceeded their own.The following report proposes an internationalization option for Quixote A/S, and highlightsIndia to be a positive prospect. The subsequent sections will discuss the current industrysituation, provide the rationale behind internationalization, and consequently highlight whyIndia is a suitable emerging economy to enter.The main factors for the internationalization are: Availability of high qualified low cost workers Governments providing incentives India being the fifth ranked country in the world for wind power generation Existing industry with networks of suppliers Presence of technological centres and intrinsic knowledge Wind energy can play a crucial role in India’s energy production in both the short andlong term Refer to page 6 for a full PESTEL analysis
  • 3. 3As a result, Quixote A/S should internationalize through an acquisition of a minor wind turbinemanufacturer, as well as establish new factories for manufacturing and create specific R&Dplants to not only help Quixote to adapt to the local environment, but also to exploit locationspecific knowledge.
  • 4. 4TABLE OF CONTENTSSection Page NumberEXECUTIVE SUMMARY .......................................................................................................21. INTRODUCTION .................................................................................................................52. INDUSTRY SITUATION.....................................................................................................53. RATIONALE FOR INTERNATIONALIZATION AND MARKET CHOICE...................64. INDIA: ANALYSIS OF THE MARKET..............................................................................74.1. PESTEL Analysis............................................................................................................74.1.1. Political Environment...............................................................................................74.1.2. Economic Environment............................................................................................84.1.3. Social Environment ..................................................................................................84.1.4. Technological Environment .....................................................................................84.1.5 Environmental Factors...............................................................................................94.1.6. Legal Environment ...................................................................................................94.2. Porter’s National Diamond..............................................................................................94.3. Market Competition ......................................................................................................104.4. India as a location for FDI.............................................................................................105. CHOICE OF ENTRY MODE .............................................................................................116. CONCLUSION....................................................................................................................12BIBLIOGRAPHY....................................................................................................................13
  • 5. 51. INTRODUCTIONThe following report will discuss different strategic options presented to Danish wind turbineproducer Quixote A/S, and will provide arguments for the internationalization into an emergingeconomy. Using journals, articles and books, the subsequent sections will explore theopportunities of entering an emerging market, and argues which market to subsequently targetand why. After having highlighted the current renewable energy industry situation, as well asspecifying the rationale behind internationalization, the report focuses on India as an attractiveFDI location. As a result, the analysis of the Indian market will provide the justification behindthe preferable entry modes and investment strategies that are addressed.2. INDUSTRY SITUATIONWind energy, and renewable energy in general, are emerging as key economic topics whereglobal investment is rapidly increasing (Global Wind Energy Council, 2010). An importantdriver for this growth is credited to the current macroeconomic development, which is puttinga high pressure on the reserves of fossil fuels available on the market, increasing the prices andraising concerns over the global climate (Sen, 2008).Governments of both industrialized and emerging economies are implementing policies topromote the production of energy from renewable sources ( Renewable Energy Policy Network,2011). The presence of these policies is fundamental for the companies operating in this sector,characterized by high costs of implementation and low levels of performance (Lewis & Wiser,2007).The high price of fossil fuels is increasing firms’ and investors’ awareness of the opportunitiesof clean energy (United Nations Environment Programme, 2009). These opportunities appearto be particularly attractive in the case of emerging economies. The ongoing process ofindustrialization and the growing population of these countries require a sustainable andefficient method of power generation to meet the growing energy needs (Sadorsky, 2009) ofthe future.
  • 6. 63. RATIONALE FOR INTERNATIONALIZATION AND MARKET CHOICEQuixote A/S is a wind turbines producer headquartered in Denmark, and operates successfullyin its home market. This market, considered in terms of capacity installed, appears to berelatively stable (Lewis & Wiser, 2007) but exhibits a slow growth rate that is largely exceededby that of several emerging economies (Global Wind Energy Council, 2010). This situation,characterized by stability in the home market and the presence of growing markets abroad, isan incentive for Quixote A/S to implement an internationalization strategy (Lewis & Wiser,2007).Several factors suggest that the best strategy for Quixote A/S to internationalize into anemerging market is through FDI. Firstly, Quixote A/S will be able to take advantage of thenumerous policies that the governments of emerging countries are adopting to support thedevelopment of a local wind power industry (Lewis & Wiser, 2007).Secondly, assuming that the success of Quixote A/S in its home market can be partiallyattributed to competitive advantages embedded in the firm, and accumulated during years ofactivity in the form of a “tacit knowledge” (Kogut & Zander, 1993), the resource-based theorysuggests that an equity-based entry mode would allow the company to better exploit theseadvantages (Brouthers & Hennart, 2007). According to the transaction costs theory(Williamson, 1985; Brouthers & Hennart, 2007), a control-based entry mode is preferable overa market-based one, considering the wind turbine industry is evolving toward high levels ofassets specificity (Dobrajska, 2010).Moreover, and according to Dunning (1993), a company choosing to internationalize throughFDI can pursue several objectives in addition to tapping the host market (market seekinginvestment). In fact, depending on the company’s motivation to invest abroad, three other typesof FDI can be identified: resource-seeking1; efficiency-seeking2; and strategic asset seeking3(Dunning, 1993). As a result, taking FDI objectives into consideration, the following sectionwill argue that India appears to be an attractive candidate for this internationalization.1Resource seeking is the seeking of natural resources2Efficiency seeking attempts to rationalize the production by transferring parts of the value chain abroad3Strategic asset seeking is the seeking of existing assets (Dunning, 1993)
  • 7. 74. INDIA: ANALYSIS OF THE MARKETThis section will apply the PESTEL theoretical framework (Kotler, Armstrong, Wong, &Saunders, 2008) to the economic environment of India in an attempt to identify the main driversthat attract FDI. The findings of this analysis will be addressed in the conclusion of the section,which will justify the choice of India as a recommended country for the internationalizationtrajectory of Quixote A/S.4.1. PESTEL Analysis4.1.1. Political EnvironmentIn 2003, the Indian government, following a trend common to several other emergingeconomies (Lewis & Wiser, 2007), started to support both local and foreign investment inrenewable energy technologies. Several key financial incentives for wind power developmenthave been implemented since (REEP, 2009).From 2003, companies operating in this sector have the possibility to claim accelerateddepreciation up to 80% of the project cost for the first year of operation and a tax exemptionon all earnings generated during the first 10 years of activity (Global Wind Energy Council,2011).In 2009 the government approved a generation-based incentive scheme for wind power projects,granting wind energy producers an incentive tariff of Rs 0.50/KWh (USD 1.1 cents) for a ten-year period. (Global Wind Energy Council, 2011). However, this incentive and the accelerateddepreciation are mutually exclusive (Global Wind Energy Council, 2011).These measures of the Indian government are complemented by additional incentivesoriginating from the regional authorities of the countries. In fact the majority of the 25 StateElectricity Regulatory Commissions of the country have issued feed-in tariffs for wind powerproducers in 2011 (REEP, 2009).
  • 8. 84.1.2. Economic EnvironmentIndia is the fifth ranked country in the world for wind power generation, representing thesecond fastest growing country in the sector after China, with a 68% annual growth in 2010(Global Wind Energy Council, 2010). The Indian market is emerging as a major manufacturinglocation for wind turbines in Asia, with a large presence of foreign MNES operating in thissector (Global Wind Energy Council, 2011).The GDP in the country is experiencing rapid growth, and forecasts indicate that this trend willcontinue (The World Bank, 2011). Research indicates that this growth will result in aproportional increase in the national electricity consumption (Chen, Kuo, & Chen, 2007). Thisfactor, combined with the continuous increase of the price of fossil fuel, will create newopportunities for producers of renewable energy (Perrot & Filippov, 2010).4.1.3. Social EnvironmentA significant social trend, capable of positively affecting the attractiveness of India for power-related FDI is the country’s consumption of electricity. A report published in 2008 indicatesthat India is facing a strong increase in power demand due to a rapid industrialization processand the development of the power grid connectivity (RNCOS Industry Research Solutions,2008). Moreover, the increasing population is also fuelling the power requirement of thiscountry (World Bank, 2008).India presents a low cost workforce, characterized by high levels of education especially in thecase of engineering graduates, and a good knowledge of the English language (Kamath, 2011).4.1.4. Technological EnvironmentFDI in India’s wind power sector is usually accompanied with a low rate of technology transferfrequency (23%), as compared to other emerging countries such as China (75%) and Mexico(68%). This indicates that India is more advanced in technologies related to the wind industrythan the average of emerging economies (Dechezlepretre, Glachant, & Meniere, 2009).In addition, India hosts several advanced technology centres reputed for high qualityengineering research, such as the Indian Institute of Technology in the Chennai region, whichis currently collaborating in a joint initiative with a large wind turbine manufacturer (HinduBusiness Line, 2012)
  • 9. 94.1.5 Environmental FactorsAccording to a study published by Berkley Lab based on an assessment of wind intensity, landavailability and soil characteristics, it appears that wind energy can play a substantial role inIndia’s energy mix both in the short and in the long term (Phadke, Bharvirkar, & Khangura,2011).4.1.6. Legal EnvironmentThe Indian industrial regulatory system requires at least 51% domestic equity ownership inalmost every industry (Balasubramanyam & Mahambare, 2003). However, in 2009, the Indiangovernment liberalized investments in the renewable energy sector, allowing 100% FDI fromforeign countries (Abdullah, 2009)4.2. Porter’s National DiamondTaking into consideration the key factors from the PESTEL analysis, Porter’s national diamondapplied to India can depict the fundamental advantages, strengths, and weaknesses of theeconomy, and thus support the internationalizing proposition.
  • 10. 10Figure 4.2.1. Porter’s National Diamond for India4.3. Market CompetitionThe Indian market for wind turbines is currently controlled by four large manufacturers, whichin turn make up 85% of the industry (Global Wind Energy Council, 2011). The presence oflarge competitors in the country represents a challenge for Quixote A/S. However it alsosuggests the existence of a network of suppliers and manufacturing bases suitable to supportthe company in the early phase of its internationalization (Perrot & Filippov, 2010). Moreover,the fast expansion of the market for wind turbines in India suggests the existence of largeoperational margins for potential new entrants (Mabel & Fernandez, 2008).4.4. India as a location for FDIFindings from the previous sections support the notion that India is a suitable location for theinternationalization of Quixote A/S. Collectively, the country presents a growing market forFactor (Input)ConditionFirm Strategy,Structure &RivalryRelatedSupportingIndustriesDemandConditions Technology centres More advanced wind technologythan average emerging economy Refer to section 4.3 Location Low cost workforce withhigh levels of education Abundance of naturalresources (wind) Advanced technologycentres High consumer demand New government policiesattracting renewable energy Increasing population andneed for sustainability Refer to section 4.3. Rivalry pushes Quixote to focus ontheir technological advantage
  • 11. 11wind energy, a supportive policy environment, and the necessary natural resources (wind) thatare important requirements for this type of industry (Perrot & Filippov, 2010).Moreover, also due to the presence of a low-cost workforce, India represents an ideal locationfor efficiency–seeking investments. In making these investments, Quixote A/S should considerto transfer several elements of the value chain overseas. In fact, due to high levels of educationand the presence of important technology centres already involved in wind energy-relatedproject, India appears to be a suitable region for the creation of both manufacturing and R&Dplants (Kristinsson & Rao, 2005).With regard to the presence of large competitors in the country, forecasts on the growth ofenergy demand, driven by several factors, suggest the idea of a local market in rapid expansion,and therefore suitable for new entrants (Kotler, Armstrong, Wong, & Saunders, 2008).5. CHOICE OF ENTRY MODEDrawing from the findings of the previous two sections, the following will try to identify themost efficient way for Quixote A/S to enter India through FDI.Firstly, it can be argued that due to the characteristics of the firm, the establishment of whollyowned subsidiaries would be preferable over the creation of an equity joint venture. In fact, asthe wind turbine industry is a technology-intensive sector (Dobrajska, 2010), this choice ofentry mode would allow Quixote A/S to better protect its technologic knowledge (i.e. patents)(Hill, Hwang, & W.Chan, 1990).On the other hand, by choosing this entry mode, Quixote A/S incurs some issues that could bemitigated by choosing a joint venture with a local partner: a higher risk and a higher liabilityof foreignness (Johansons & Vahlne, 2009). However, research indicates that the latterproblems can be overcome by choosing to enter a foreign market through an acquisition(Johansons & Vahlne, 2009).By taking over a minor wind turbines producer in the Indian market, Quixote would acquireimportant assets (i.e. knowledge and technology) to balance the lack of experience in themarket (Johansons & Vahlne, 2009). Moreover, an acquisition appears to be the most rapid
  • 12. 12way for a company to build a position in a foreign market (Woodcock, Beamish, & Makino,1994).With regard to the parts of the value chain to be internationalized, Quixote A/S should initiallyestablish a manufacturing plant in the Indian market. This type of investment would conferseveral benefits to the company, not limited to the exploitation of the low cost local workforce.First, by reducing the physical distance between the manufacturing and the market, thecompany could reduce transportation costs and the production could be adjusted more quicklyin response to market changes (Ghemawat, 2001). In addition, the establishment of amanufacturing hub in India could be used at a later stage of the internationalization process ofQuixote A/S as an export base to serve other market in the Asia-Pacific region.With regard to the internalization of R&D functions, Quixote A/S should make two types ofR&D investment in India. Firstly, a home-base exploiting R&D plant should be implementedto support the manufacturing plants in adapting their production to the local needs (Kuemmerle,1998). Moreover, India’s centers of technological excellence, such as the Chennai region,should be targeted by asset-seeking investments. In fact, by tapping these locations withspecific home-base augmenting R&D plants, the local knowledge base could be absorbed andchanneled through the entire network of Quixote A/S (Kuemmerle, 1998).6. CONCLUSIONGlobal investment into renewable energy is increasing, and government policies are changingto help facilitate this. Quixote A/S has been advised to participate in FDI in an emergingeconomy as their market growth rate largely exceeds that of their home market. As India isfollowing the trend of supporting local and foreign renewable energy ventures, an equity-basedFDI approach could create competitive advantages for the firm. In light of the Indian industryanalysis and important factors influencing market choice, Quixote A/S are advised tointernationalize into this emerging economy.
  • 13. 13BIBLIOGRAPHYRenewable Energy Policy Network. (2011). Renewables 2011 Global Status Report.Available at: http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR2011.pdf.Abdullah, F. (2009, December 15). 100% FDI in renewables . Retrieved March 2, 2012 fromThe Times of India: http://articles.timesofindia.indiatimes.com/2009-12-15/india/28101607_1_solar-energy-renewable-energy-solar-waterBalasubramanyam, V. N., & Mahambare, V. (2003). FDI in India. TransnationalCorporations , 12 (2).Brouthers, K. D., & Hennart, J. F. (2007). Boundaries of the Firm: Insights FromInternational Entry Mode Research. Journal of Management , 33 (395).Chen, S.-T., Kuo, H.-I., & Chen, C.-C. (2007). The relationship between GDP and electricityconsumption in 10 Asian Countries. Energy Policy (35).Dechezlepretre, A., Glachant, M., & Meniere, Y. (2009). Technology transfer by CDMprojects: A comparison of Brazil, China, India and Mexico. Energy Policy (37), 703 - 711.Dobrajska, M. (2010). Designing firm boundaries. A case study of a wind turbinemanifacturer. "Opening Up Innovation: Strategy, Organization and Technology". ImperialCollege London Business School.Dunning, J. (1993). Multinational enterprises and the global economy. Workingam: Addison-Wesley.Ghemawat, P. (2001). Distance Still Matters: The Hard Reality of Global Expansion.Harvard Business Review .Global Wind Energy Council. (2010). Global Wind Report. Global Wind Energy Council.Global Wind Energy Council. (2011). Indian Wind Energy Outlook. Global Wind EnergyCouncil.Hill, C. L., Hwang, P., & W.Chan. (1990). An eclectic theory of the choice of internationalentry mode. Strategic Management Journal , 11 (2), 117–128.
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