International Entry Strategies a Case Study of Tata's Nano in China | Joint Venture | Mergers And Acquisitions

International Entry Strategies: A case study of Tata's Nano in China Abstract This piece of research explores that how

Tata one of leading automobile manufacturer can exploit the market potential for ultra low cost cars in China. The main focus is given to the appropriate mode of entry in China. This study explored five entry modes of exporting, licensing, joint ventures, acquisition and wholly owned subsidiary. Moreover, the scope of this research is also confined to five factors of control, risk, return, integration, resource commitment and dissemination of technology. Since, doing business in China is found to be very difficult so deployment of acquisition and wholly owned subsidiary is rejected for Nano. However, joint venture provides the government support as China stimulates to do so but still risk of dissemination of technology is high along with low investor protection and high taxes. So, it is recommended to enter in China through exporting. Though high import cost and low control are two disadvantages of this method but among alternative this option seems to be more optimal. It is recommended to use indirect exporting due to product relatedness as it will reasonably decrease the risk of low marketing control.

Table of Contents Abstract 1. Introduction: 2. How to Enter: 2.1 Exporting: 2.2 Contractual Agreements: 2.3 Joint Venture: 2.4 Acquisition: 2.5 Greenfield Investment: 3. Comparative Analysis: 3.1 China Environment: 4. Optimal Entry Mode for Nano in China: References:

Exporting and contractual agreements are two main non equity based entry methods while joint ventures. How to Enter: Kumar & Subramanian (1997) segregated modes of entry into two broad categories of equity methods and non equity methods. important thing is that how Tata should enter in Chinese market to capture this growth. Tata is also looking to offer its lowest cost Nano to other markets. However. the further step is to know that how firms should start their detailed operations within that selected market. 2012). So it is suggested to Tata to select Chinese market for its Nano. However. Introduction: Globalization can be attributed to the one of most critical phenomenon of this 21st century as more firms are looking to capture growth of other economies outside their local market (Hitt et al.T Kearney reports indicated that China and India are showing highest market share for ultra low cost cars till 2020 (Mayer & Pleines 2008). This study also tried to investigate the different mode of entry in international markets. Figure 1 provides the view of different modes of entry under two broad categories. In India the cost of Nano is almost $2500. in this research consequences in term of cost and benefits of various entry decisions are tried to address for Tata in China that will provide the basis in selecting optimal entry decision. It is because one entry is made then it is become much complicated to change. A. However. A detailed analysis regarding strategic needs and the internal environment will determine the international market that should be targeted.1. Nonetheless. Asian markets are viewed as most attractive markets for ultra low cost cars. Figure 1: Hierarchal Model of Entry Modes (Kumar & Subramanian 1997) . 2. In 2008 company manufactured a small car ‘Nano’ and claimed that it is the world’s cheapest car. (Andersen 1997) defines the term entry mode in term of institutional deal that will determine that the way to which international transaction is organized and executed that ultimately will have an effect on subsequent decision making. So. However. Tata’s Nano is used as case research in this respect. Subsequent part of this research will briefly explain each entry method proceeding to their comparative analysis that will determine the most appropriate entry mode that Tata should deploy to offer Nano in China. successful expansion is not easy and arise multiple issues such as selection of appropriate market and also how to capture that market (Brouthers & Hennart 2007). It is argued that selection of optimal entry decision is very important as it contain long term implications and affect post entry performances significantly (Canabal & White 2008). The markets that are best fitted with firm’s strategic objectives and its internal environment should be selected in this respect(Carazo & Lumiste 2010). acquisition and Greenfield investment are equity based methods. Tata is an Indian based multinational player who is known for its trucks and buses all over the world.

2. In other word licensing is an obligatory binding between the company and licensee to manufacture and sell the products in selected host market (Luo 1999). 2. That intermediately is responsible for the marketing activities and manages the distribution of final product to end customers in targeted country. equally or majority (Gooderham & Nordhaug 2003). For instance the shareholdings by the company can be minority. this transformation is made through some intermediary that could be from home or host country. A new organization is formed in result of joint venture while equity is shared with one or more partners in host country.5 Greenfield Investment: .4 Acquisition: It is a kind of foreign direct investment where company buy totally or partially shareholdings of some organization from host country. Another way of joint venture is to create strategic partnership and known as strategic alliances.3 Joint Venture: The most common form of equity based entry is the deployment of joint ventures especially in China(Jensen 2010). However. all the partners share common strategic goals. However. It refers to the transferring final or part of the product to selected market (Gooderham & Nordhaug 2003). 2. For instance licensing provides right to use property of the company (name.1 Exporting: The most common and easy form of entry is exporting. Acquiring all shares of targeted company is referred as fully owned acquisition while holding more than half of voting rights is attributed to majority shareholdings (Cheng 2006). 2.2 Contractual Agreements: Despite exporting directly or indirectly through some agent firms can also use contractual agreements such as licensing or franchising (Aganval & Ramaswami 1992). patent or some other property) against some initial fee and/or interval payments. the extent of shared equity may differ. However.2. Selecting middleman from home country to export is known as indirect exporting while direct exporting is referred to exporting through some agent from selected country.

in exporting company transfer the manufactured goods by using some intermediary so the marketing control will be with that middleman. Since. the benefits of high profits are associated with the two options of wholly owned subsidiary and acquisition. So. in case of joint venture both the partners who bring equity share Profits and losses that lead to the moderate risk level. Figure 2: Characteristics of Modes of Entry (Koch 2001) It can be viewed that risk is low in case of exporting and contractual agreement of licensing or franchising. At last Joint venture contains moderate control as both partners share control. Another critical factor that should consider while selecting entry mode is control. 2010). return and integration decision. This method creates a new organization and all the equity is provided by the entering organization(Morschett et al. acquired or newly open subsidiary is fully managed and controlled by parent company so the control will be high in this respect. However. 3. all entry methods are documenting similar results for returns as exporting and contractual agreements contain lower returns while wholly owned subsidiary and acquisition leads to higher profits. to gain high returns high resources are required and vice versa. Figure 2 provides a view of these characteristics for each entry method. He argued that the mode of entry depends on the control risk. In other words high resources are required to open a subsidiary or acquiring new firm in host country while the extent of these resources are minimal in case of exporting and licensing. So. the company still holds operational control. in joint ventures or strategic alliances firms enjoy moderate profitability. Nonetheless. It is because marketing and distribution responsibilities are transferred to intermediately or partner without incurring high resources. Since. However. . The differences of return can be attributed to the profit shared by middleman in case of exporting and licensing while on the other hand whole the profit is enjoyed by the company in case of acquisition and wholly owned subsidiary. While on the other hand entering through contractual agreement results into low control as the partner holds the control over marketing activities and even operational activities to some extent especially in case of franchising. it is general phenomenon that high risk leads to high returns. Similarly. Moreover. Usually firms start from opening a new sales office manage and controlled by parent company while subsequently this local branch make an effort to establish own distribution channel(Gooderham & Nordhaug 2003). to open subsidiary or acquiring shareholdings from host country require high resources those are provided by parent company solely so no risk sharing is there. However. As figure 1 indicates that in exporting and licensing control is moderate and low respectively. resource commitment is also parallel to risk and return.Last entry method is Greenfield investment and also known with the name of wholly owned subsidiary. Comparative Analysis: To explore the cost and benefits of above stated entry methods Koch (2001) provides a useful framework. On the contrary Acquisition and Greenfield investment hold highest risk among selected options. However.

It is because firms can have some control over operations and marketing channel that restrict the dissemination of technology. (1990) also argued to the resource commitment and explore the benefit of low investment required to enter through exporting and licensing. entering organization only hire some intermediary for marketing purposes so the integration with that middleman is almost negligible. However. However. It can be viewed that on average . in licensing some property is shared with partner so it is more probable that the partner exploit the advantages of technology in future. Similar is the case of contractual agreement that is only confined to that agreement between company and agent and no strategic collaboration are made. On the contrary this dissemination of risk is medium in case of joint ventures. low profits and negligible integration are the disadvantages of exporting and licensing. dissemination of risk is lowest in case of acquisition and wholly owned subsidiary as management and control is done by parent company. However. Trading across border is also difficult especially to import as time required to import is 24 days and cost $615 per container on average. It can be viewed that starting a new business is the difficult thing in China as the country is placed at 151st place. the country is only performing well in term of enforcing contracts as the country is placed at 19thplace. Similarly. Since. Exporting and Licensing contain high risk of transferring technology as intermediary is involved. Figure 2 shows that dissemination of risk is also important and varies across different entry modes. getting the construction permit is the most difficult thing in China and ranked at 181st place. Tax rate is also considerable thing in this respect. Since. Nonetheless.1 China Environment: With population of more than 1344 million and $4930 GNI per capita China has shown great potential for Ultra Low Cost Cars. risk and low required investment are benefit points of exporting and contractual agreement while low control. Hill et al. So. It is because long term strategic goals are not same. Figure 2: Entry Mode Characteristics (Hill et al. Figure 3 demonstrates the doing business environment for 2013 in China. Licensing and Joint venture has high and medium risk of transformation of technology. resources and dissemination of risk within each category. (1990) further discussed modes of entry with respect to three factors of control. in case of joint ventures and especially in strategic alliances entering company integrates low with alliance and this integration is moderated and highest in acquisition and wholly owned subsidiary respectively. While to open wholly owned or to acquire high resource are required to execute the transaction. Figure 3 demonstrates that doing business in China is difficult as the country is ranked at 91st place. 1990) 3. Hill et al. high profits along with high control and high integration are the advantages of joint venture and Greenfield investment.At last Koch (2001) also considered integration in selecting mode of entry. So. Figure 2 explores the extent of control. resource commitment and dissemination of risk.

time required to import in China is also high. So. this product relatedness makes it appropriate to use indirect exporting. (Hensler 2012) found that acquisition and Greenfield investments are not appropriate when the host country risk is high. high resources are required to open new subsidiary and getting credit is one of alternatives that is difficult to attain in Chain. Tata’s motive to enter in China is capturing new market so Tata should seek other options before selecting indirect exporting. So. it is not suggested to Tata to enter in Chinese market through acquisition or opening a wholly owned subsidiary. Since. However. Such as in case of Tata who is already dealing with trucks and busses all over the world. China is not performing well in term of investor protection index that make it risky option to start own subsidiary. Optimal Entry Mode for Nano in China: On the basis of above results it can be concluded that opening a wholly owned subsidiary in China is not a viable option for Tata’s Nano as doing business is difficult especially in term of starting a new business. Another disadvantage of exporting is the low control for the organization looking for new markets. So. Though through acquisition problems regarding starting new business and construction permit can be solved but still this option cannot mitigate the potential problems from other areas like tax payments. the option of exporting is comparatively viable as it is difficult to enter in Chinese market through Greenfield investment or acquisition. In short it can be concluded that doing business in China is difficult in China. payment of taxes. Moreover. At last the option of joint venture or strategic alliance can also be a viable option in this respect. Since. dealing with construction permits. resolving insolvency and importing in China. Moreover.corporate pays 63% of their profits as tax payment. However. the country risk with respect to direct investment is risky. investor protection and resolving insolvency. The government of Chine stimulates to select joint ventures or creating strategic . getting credit is also difficult in China that makes it difficult to finance externally. if getting market control is not critical along with resource constraint options then entering in China through indirect exporting is appropriate option. This argument can be more significant in case of indirect exporting especially when the product is related and same channel could be use to export in targeted country. Nonetheless. the cost of import is high in China that makes this option more costly and can affect the competitive advantages of cost differentiation. Figure 3: Doing Business in China 2013 (DoingBusiness 2013) 4.

Though Tat can gain support from Chinese government but still other parts of doing business are showing weak results. Moreover. Tata should use its current distribution channel from India to export in China. However. Since investors are not protected well so the chance of dissemination of technology is also high that is the primary competitive advantage of Tata’s Nano. So. still investor protection and solvency resolution are not that much appropriate for Tata. one of the benefit of joint venture in China can be attributed to the government support.alliances. So. In short advantages of potential government support are associated with the entry option of joint ventures and strategic alliances while investor protection and high tax payments are shortcomings of this option. . Moreover. it is suggested to Tata to use exporting to capture the market potential of China in ultra low cost cars. However. China is also very good in enforcing contracts. Tata’s Nano strength is its low cost that the company achieved from its efficient supplier management and it is difficult to median that level in China that could affect its cost and competitive advantage.

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