IT Firms in India - Essay Example

Rapid industrialization has changed the way firms operate and there have been many service firms entering foreign markets. The mode of entry remains a critical issue as the entry mode choice affects performance and longevity. The IT sector has been experiencing a boom and by 2008 it is expected that nearly 80% global investors will locate their offices overseas. India seems to be the most popular choice but some firms have closed down after entering. At the same time many have become wholly owned subsidiaries after entering as joint venture. Thus a research would help to determine the right mode of entry by the IT firms in India. The research is proposed to be based mainly on literature review supported by interviews of the CEOs that have invested abroad. Their experiences and performance would be beneficial to test the hypothesis. Ethical concerns will be addressed during the research process. Statement of research question Rapid industrialization and globalization have led to firms expanding their services in foreign countries. The service firms are entering the foreign markets and the most critical issue in international marketing strategy remains the choice of entry mode. The choice of market entry mode according to Zhao and Decker (2004) has an impact on international operations and is considered important in international marketing. It is one of the most critical decisions for the MNCs and it affects future decisions and performance in foreign markets. The initial entry mode choice significantly affects the performance and longevity of the firm ((Li 1995; Root 1994 cited by Ekeledo & Sivakumar, 1998). Rationale for research Nearly 80 percent of the global investors plan to locate their corporate offices overseas by 2008. The corporate investors are looking at offshoring opportunities more aggressively across all major functions. Kearney (2005) contends that the IT sector will see the highest levels of offshoring activity with 67% global investors expecting to offshore these functions. Business processes like R&D, HR and accounting offshoring would amount to about 41 percent (Kearney, 2005). These business models will include captive and joint venture, both of which result in FDI. Since there are concerns over quality control and the intellectual-property protection, it is expected that most of the offshoring would be through captive business models (or wholly owned subsidiaries) or joint ventures. Most of the R&D offshoring will be through FDI. Kearney further states that global investors prefer to rely on third-party outsourcing contracts and other non-FDI operating models. A large number of theoretical and empirical studies are available on the subject but have mostly been studied in case of mature economies. The foreign companies face new challenges in developing economies and these challenges according to Eapen and Hennart (2002) range from bundling together the local assets and finding the right contacts to knowing the rules of the game. It is hence important to understand the different types of investors and the entry mode. India has made tremendous progress in skill-intensive industries. Since India is considered an attractive destination for investment in the IT sector, it is essential to determine the right choice of entry. A lot of research has been conducted but there exists diverse opinions and hence a gap in the right understanding. Despite opening of the economic policies and liberalization, despite having the necessary infrastructure, why are MNCs apprehensive about investing in India? Would the choice of entry mode make a difference to its success and performance? India is definitely the preferred destination for investment in the IT sector but the right business model needs to be ascertained. The purpose of this research is to ascertain the experience of the IT firms that have entered India in the 1990s. Their mode of entry and their performance would give an insight as to what should be the right strategy to enter India in view of the reforms in the country. Selecting the right mode of entry the first time is important because there are no second chances. Wrong choices lead to lost market potential and loss of important committed resources such as management time and money (Rajan & Pangarkar, 2000). Based on the above rationale the following objectives of the research have been formulated: a. The external and internal factors that influence the choice of mode of entry by foreign firms in developing nations. b. The factors that influence the FDI in developing countries. c. The impact that foreign firms have experienced after entering India. d. The impact if the mode of entry affects performance over a period of time. e. The strategy that foreign IT firms should adopt for entering India. The expected implications of the research project for organizations This research aims to compare the various modes of entry used by the IT firms in the past and the impact on the business after entering India. The research would then help to determine if the mode of entry is justified, or whether the choice of entry needs to be altered. Preliminary Literature Review Literature review helps to examine existing data and provides direction for the research proves. It saves time and helps to synthesize and analyze relevant published work. Since a large amount of data is available, the literature pertaining to India as an attractive destination for IT would be considered. Thereafter, literature pertaining to India’s macro-environment and the reforms that have induced FDI will be reviewed. The FDI in developing countries would be discussed along with the modes of entry that existing firms have been employing would be highlighted. This would also bring to light the impact on the foreign firms after entering India. According to the revised NASSCOM-McKinsey 2002 report, by 2008 the Indian software and service industry would employ more than 4 million people, account for 7 percent of Indias GDP and 30 percent of Indias foreign exchange inflows (NASSCOM, 2006). Despite the depressed economic conditions and slow down in the rate of growth, the potential for growth is tremendous. The compound annual growth rate (CAGR) between 2002 and 2008 is expected to be 34% while this industry is also expected to contribute to 20 percent of incremental GDP growth. According to a market research firm, IDC India, India’s ICT (information and communication technology) market grew 31% in 2006. It is expected that the market will continue to grow at a compound annual growth rate of 18% for the next five years to become a US$100 billion industry by 2011 (AICT, 2007). India will continue to be a choice for foreign investment as it has a huge mass of untapped potential customers. India has achieved familiarity and experience with offshoring and increased the breadth of service lines. The literature demonstrates that the Indian software industry is now a direct competitor of the US and the UK firms. India has moved up the value chain in its services offerings, technology, manpower and flexibility. India’s macro-environment has undergone a tremendous change. The Indian government is reforming the Foreign Investment Promotion Board and has established the Indian Investment Commission which would act as the communicator between the investor and the bureaucracy. India has also raised the FDI caps in petroleum, banking, aviation, telecom and media sectors. However, the political situation in the country is unstable with no party having clear majority, there is coalition government. This affects the reform process. India requires $150 billion worth of investments to upgrade the weak infrastructure (Kearney, 2005). The government is also considering eliminating FDI restrictions across a broad range of sectors like airports, gas, oil and natural resources. Bureaucracy, perceived corruption and poor infrastructure continue to be the barriers in attracting FDI to India. In October 2005, the Indian government had raised foreign ownership levels to 79 percent from 49 percent which gave a boost to India’s booming IT and software industry (Kearney, 2005). Agarwal & Ramaswami (1992) emphasize that the choice of an entry mode for a target market is influenced by three determinants – ownership advantages of the firm, location advantages of the market and the internalization advantages of integrating transactions within the firm. At the same time, Zhang and Liu (2007) determine that a firm needs to study the cost and return of a particular entry mode. Having a local partner, well connected with local authorities may prove to be beneficial for the investing country especially in countries with a less friendly attitude towards FDI (Smarzynska, 2000). According to Eapen and Hennart, local firm characteristics are also significant determinants of the choice of entry mode. The foreign IT firms hold valuable intellectual property in the form of technology, in which case strategic alliance with foreign firms is an attractive option, according to Oxley (1999) but Smarzynska (2000) contends that the costs involved in drafting and enforcing contracts for the transfer of proprietary know-how to JV as well as the threat of dissipation of knowledge may encourage establishment of wholly owned subsidiaries. Apple Computer Inc. started operations in India in April 2006 as a WOS in the name of Apple Services India Pvt. Ltd (Business Week, 2006) but eventually withdrew from India. Oracle entered India in 1987 through a distributor relationship with a local firm engaged in this industry. In 1993, Oracle established its wholly owned subsidiary in India and is now one of the largest multi-national software employers in India and India is Oracle’s fifth largest market in Asia in terms of revenue (Radhakrishna, 2003). SAP of Germany took nine years to reach the 1000-customer mark in India but just a year to double that (ZDnet, 2007). Cognizant Technologies Solutions started as a joint venture and soon became a 100% subsidiary in India. Thus the literature review suggests that India has tremendous potential as far as the IT sector is concerned. It is also attracting huge amounts of FDI and the macro-environment has undergone change. IT firms hold intellectual property and hence the choice of entry is of great importance. Hypotheses to be tested Since IT firms hold intellectual property, they start as joint venture but after sometime became wholly owned subsidiaries. Do the firms improve upon their performance after entry? The performance of the firms after entry needs to be tested. Data sources and the justification for the choice Secondary data will be collected through literature review as it generates new understanding through reflection or knowledge integration (Feurer & Chaharbaghi, 1995). It saves time and high quality of data is available. Literature review distinguishes what has been done from what is to be done. Literature review helps in the synthesis and analysis of the relevant published work. Longitudinal studies have been conducted as well. The secondary data would be supported by primary data collected through interviews over phone. Interviews of some operations head of the parent firm would be conducted over phone. Because of distances involved, prior appointment through email would be sought. Since all may not respond at least 20 emails would be sent out, anticipating that ten might respond. Interviewing is a mode of inquiry aimed at understanding an experience and meaning that person make of that experience (Seidman, 1998 cited by Eggenberger & Nelms, 2006). The individual in-depth interview allows the interviewer to delve deeply into social and personal matters (DiCicco-Bloom & Crabtree, 2006) and it unveils a person’s emotions, beliefs, problems, experience and actions (Eggenberger & Nelms). Interviews can capture some of the subtle complexities underlying the decision-making process that can be missed by large-scale statistical analyses (Herod, 1993). While 20 questions will be prepared for the interview, open-ended interviews will be conducted as they more spontaneous, offering a two-way interaction not generally permitted by the standardized approach (Herod, 1993). This method ensures objectivity, detachment and hierarchy which are more important than individualized concerns. Research design This research requires primary and secondary research approach and the qualitative method (interpretive or inductive) of research will be used. The qualitative research method would be applied as it has an inherent flexibility because data collection times and methods can change as the research proceeds and the situation evolves. In this case hypothesis will be formed in advance and it has an inherent flexibility because data collection times and methods can change as the research proceeds and the situation evolves. The deductive method would not bring to light the deeper, underlying meanings and explanations of the data collected. Qualitative research involves large amount of unstructured data of which the analysis is tedious and monotonous. The process involves three steps – data reduction, data display and conclusion drawing and verification (Amaratunga et al, 2002) Data reduction is the same as analysis and occurs through out the process of a qualitatively oriented project. Even selection of the literature or the research design forms a part of the data reduction process. Data displays are a major avenue to valid qualitative analysis. Conclusion will be drawn after extensive literature search. As far as possible recent information will be collected through academic journals and articles published in recent newspapers. It is expected that that data analyzed and the outcome would contribute to the existing knowledge and make the decision making process easier for the MNCs that are planning to move into India. It is also likely that the apprehensions nurtured by MNCs regarding barriers like bureaucracy and the political instability do not affect the foreign investment in the IT sector. Methodology to be employed According to Amaratunga, Baldry, Sarshar, and Newton (2002) research methodology is the procedural framework within which the research is conducted. While positivism (quantitative with hypothesis testing), interpretivism (qualitative with hypothesis generalizations) and realism are the different types of research philosophies, each has its own purposes and advantages. Research can involve examining an existing question, examine new information or bring together existing information in a new way. This research will examine how the mode of entry determines the impact of FDI in India in the IT sector. Some previous research has been done but there is no concrete suggestion. There is some data available but some more data collection through interviews/questionnaires would help to strengthen the research process. The literature suggests a theoretical relationship in the way the firms enter India. This can be tested through different means. The stakeholders or the overseas firms that want to enter India have certain issues which influences their decision. Ethical considerations and steps taken to meet potential ethical concerns Data that has been collected is the result of research of others but proper citation and reference would be provided. This data is valuable even though it has been collected for a different purpose but it does allow us to generalize and provide a base for further research. Most of the data available is sectoral and about the country. At the time of the interview, it would be ensured that no personal bias affect the interview. The interviewees would be clearly explained the purpose of the research and only after prior consent the interviews would be conducted. The CEOs or other executives would not be forced to give any information that they may not be willing to give. The interview will be recorded and then transcribed and immediately thereafter the recordings would be destroyed. The names of the persons would also not be mentioned in the research process. Attempts will be made to ensure the reliability and validity of the data collected. References: Agarwal, S., & Ramaswami, S. N., (1992), Choice of foreign market entry mode: Impact of ownership, location and internalization factors, Iowa State University, 22 Nov 2007 AICT (2007), Partnership opportunities abound in India’s high-growth ICT market, 23 Nov 2007 Amaratunga, D., Baldry, D., Sarshar, M., & Newton, R., (2002), Quantitative and Qualitative Research in the built environment: application of mixed research approach, Work Study, Vol. 15 No. 1 2002, pp. 17-31 Business Week (2006), India: Why Apple Walked Away , 23 Nov 2007 DiCicco-Bloom, B., & Crabtree, B. F., (2006), The qualitative research interview, Medical Education 2006; 40: 314–321 doi:10.1111/j.1365-2929.2006.02418.x Eapen, A., & Hennart, J., (2002), ENTERING INDIA: LICENSING OR JOINT VENTURE? 22 Nov 2007 EGGENBERGER S.K. & NELMS T.P. (2007) Family interviews as a method for family research, Journal of Advanced Nursing 58(3), 282–292 doi: 10.1111/j.1365-2648.2007.04238.x Ekeledo, I., & Sivakumar, K., (1998), Foreign Market Entry Mode Choice of Service Firms: A Contingency Perspective, Journal of the Academy of Marketing Science 1998; 26; 274 Feurer, R., & Chaharbaghi, K., (1995), Researching strategy formulation and implementation in dynamic environments, Benchmarking for Quality Management & Technology, Vol. 2 No. 4, 1995, pp. 15-26 Heord, A., (1993), Gender Issues in the Use of Interviewing as a Research Method, Professional Geographer, 45(3) 1993, pages 305-3 17 Kearney, A. T., (2005), FDI Confidence Index, Global Business Policy Council, 23 Nov 2007 NASSCOM (2006), NASSCOM-McKinsey Report Predicts Robust Growth For Indian IT Services and IT Enabled Services Industry, 22 Nov 2007 Oxley, J. E., (1999), Institutional environment and the mechanisms of governance: the impact of intellectual property protection on the structure of inter-firm alliances, Journal of Economic Behavior & Organization Vol. 38 (1999) 283-309 Radhakrishna, T., (2003), Were committed to Indian market: Oracle India MD, 22 Nov 2007 Rajan, K. S., & Pangarkar, N., (2000), Mode of entry choice: an empirical study of Singaporean Multinationals, Asia Pacific Journal of Management, Vol 17, 49-66 Smarzynska, B. K., (2000), Technological Leadership and the Choice of Entry Mode by Foreign Investors, 22 Nov 2007 ZDNet (2007), SAP doubles India clients, reaffirms investment plan, 22 Nov 2007 Zhao, X., & Decker, R., (2004), Choice of Foreign Market Entry Mode, 23 Nov 2007 Read More