International business the internationalization of quixote into the emerging economy of india
1. University of Sussex:
Department of Business and Management
International Business
“The Internationalization of Quixote A/S into the
Emerging Economy of India”
2. 2
EXECUTIVE SUMMARY
The rate of global investments for renewable energy is increasing. To help facilitate and
promote such investments, Governments from industrialised and emerging economies are
changing their policies.
Quixote A/S is a Danish wind turbine producer, who is witnessing low growth rates in the home
market. The growth rates in certain emerging economies, on the other hand, have largely
exceeded their own.
The following report proposes an internationalization option for Quixote A/S, and highlights
India to be a positive prospect. The subsequent sections will discuss the current industry
situation, provide the rationale behind internationalization, and consequently highlight why
India 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 and
long term
Refer to page 6 for a full PESTEL analysis
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As a result, Quixote A/S should internationalize through an acquisition of a minor wind turbine
manufacturer, as well as establish new factories for manufacturing and create specific R&D
plants to not only help Quixote to adapt to the local environment, but also to exploit location
specific knowledge.
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TABLE OF CONTENTS
Section Page Number
EXECUTIVE SUMMARY .......................................................................................................2
1. INTRODUCTION .................................................................................................................5
2. INDUSTRY SITUATION.....................................................................................................5
3. RATIONALE FOR INTERNATIONALIZATION AND MARKET CHOICE...................6
4. INDIA: ANALYSIS OF THE MARKET..............................................................................7
4.1. PESTEL Analysis............................................................................................................7
4.1.1. Political Environment...............................................................................................7
4.1.2. Economic Environment............................................................................................8
4.1.3. Social Environment ..................................................................................................8
4.1.4. Technological Environment .....................................................................................8
4.1.5 Environmental Factors...............................................................................................9
4.1.6. Legal Environment ...................................................................................................9
4.2. Porter’s National Diamond..............................................................................................9
4.3. Market Competition ......................................................................................................10
4.4. India as a location for FDI.............................................................................................10
5. CHOICE OF ENTRY MODE .............................................................................................11
6. CONCLUSION....................................................................................................................12
BIBLIOGRAPHY....................................................................................................................13
5. 5
1. INTRODUCTION
The following report will discuss different strategic options presented to Danish wind turbine
producer Quixote A/S, and will provide arguments for the internationalization into an emerging
economy. Using journals, articles and books, the subsequent sections will explore the
opportunities of entering an emerging market, and argues which market to subsequently target
and why. After having highlighted the current renewable energy industry situation, as well as
specifying the rationale behind internationalization, the report focuses on India as an attractive
FDI location. As a result, the analysis of the Indian market will provide the justification behind
the preferable entry modes and investment strategies that are addressed.
2. INDUSTRY SITUATION
Wind energy, and renewable energy in general, are emerging as key economic topics where
global investment is rapidly increasing (Global Wind Energy Council, 2010). An important
driver for this growth is credited to the current macroeconomic development, which is putting
a high pressure on the reserves of fossil fuels available on the market, increasing the prices and
raising concerns over the global climate (Sen, 2008).
Governments of both industrialized and emerging economies are implementing policies to
promote 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 opportunities
of clean energy (United Nations Environment Programme, 2009). These opportunities appear
to be particularly attractive in the case of emerging economies. The ongoing process of
industrialization and the growing population of these countries require a sustainable and
efficient method of power generation to meet the growing energy needs (Sadorsky, 2009) of
the future.
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3. RATIONALE FOR INTERNATIONALIZATION AND MARKET CHOICE
Quixote A/S is a wind turbines producer headquartered in Denmark, and operates successfully
in its home market. This market, considered in terms of capacity installed, appears to be
relatively stable (Lewis & Wiser, 2007) but exhibits a slow growth rate that is largely exceeded
by 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, is
an 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 an
emerging market is through FDI. Firstly, Quixote A/S will be able to take advantage of the
numerous policies that the governments of emerging countries are adopting to support the
development of a local wind power industry (Lewis & Wiser, 2007).
Secondly, assuming that the success of Quixote A/S in its home market can be partially
attributed to competitive advantages embedded in the firm, and accumulated during years of
activity in the form of a “tacit knowledge” (Kogut & Zander, 1993), the resource-based theory
suggests that an equity-based entry mode would allow the company to better exploit these
advantages (Brouthers & Hennart, 2007). According to the transaction costs theory
(Williamson, 1985; Brouthers & Hennart, 2007), a control-based entry mode is preferable over
a market-based one, considering the wind turbine industry is evolving toward high levels of
assets specificity (Dobrajska, 2010).
Moreover, and according to Dunning (1993), a company choosing to internationalize through
FDI can pursue several objectives in addition to tapping the host market (market seeking
investment). In fact, depending on the company’s motivation to invest abroad, three other types
of FDI can be identified: resource-seeking1
; efficiency-seeking2
; and strategic asset seeking3
(Dunning, 1993). As a result, taking FDI objectives into consideration, the following section
will argue that India appears to be an attractive candidate for this internationalization.
1
Resource seeking is the seeking of natural resources
2
Efficiency seeking attempts to rationalize the production by transferring parts of the value chain abroad
3
Strategic asset seeking is the seeking of existing assets (Dunning, 1993)
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4. INDIA: ANALYSIS OF THE MARKET
This 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 drivers
that 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 internationalization
trajectory of Quixote A/S.
4.1. PESTEL Analysis
4.1.1. Political Environment
In 2003, the Indian government, following a trend common to several other emerging
economies (Lewis & Wiser, 2007), started to support both local and foreign investment in
renewable energy technologies. Several key financial incentives for wind power development
have been implemented since (REEP, 2009).
From 2003, companies operating in this sector have the possibility to claim accelerated
depreciation up to 80% of the project cost for the first year of operation and a tax exemption
on 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 accelerated
depreciation are mutually exclusive (Global Wind Energy Council, 2011).
These measures of the Indian government are complemented by additional incentives
originating from the regional authorities of the countries. In fact the majority of the 25 State
Electricity Regulatory Commissions of the country have issued feed-in tariffs for wind power
producers in 2011 (REEP, 2009).
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4.1.2. Economic Environment
India is the fifth ranked country in the world for wind power generation, representing the
second 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 manufacturing
location for wind turbines in Asia, with a large presence of foreign MNES operating in this
sector (Global Wind Energy Council, 2011).
The GDP in the country is experiencing rapid growth, and forecasts indicate that this trend will
continue (The World Bank, 2011). Research indicates that this growth will result in a
proportional increase in the national electricity consumption (Chen, Kuo, & Chen, 2007). This
factor, combined with the continuous increase of the price of fossil fuel, will create new
opportunities for producers of renewable energy (Perrot & Filippov, 2010).
4.1.3. Social Environment
A 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 indicates
that India is facing a strong increase in power demand due to a rapid industrialization process
and the development of the power grid connectivity (RNCOS Industry Research Solutions,
2008). Moreover, the increasing population is also fuelling the power requirement of this
country (World Bank, 2008).
India presents a low cost workforce, characterized by high levels of education especially in the
case of engineering graduates, and a good knowledge of the English language (Kamath, 2011).
4.1.4. Technological Environment
FDI in India’s wind power sector is usually accompanied with a low rate of technology transfer
frequency (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 industry
than the average of emerging economies (Dechezlepretre, Glachant, & Meniere, 2009).
In addition, India hosts several advanced technology centres reputed for high quality
engineering research, such as the Indian Institute of Technology in the Chennai region, which
is currently collaborating in a joint initiative with a large wind turbine manufacturer (Hindu
Business Line, 2012)
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4.1.5 Environmental Factors
According to a study published by Berkley Lab based on an assessment of wind intensity, land
availability and soil characteristics, it appears that wind energy can play a substantial role in
India’s energy mix both in the short and in the long term (Phadke, Bharvirkar, & Khangura,
2011).
4.1.6. Legal Environment
The Indian industrial regulatory system requires at least 51% domestic equity ownership in
almost every industry (Balasubramanyam & Mahambare, 2003). However, in 2009, the Indian
government liberalized investments in the renewable energy sector, allowing 100% FDI from
foreign countries (Abdullah, 2009)
4.2. Porter’s National Diamond
Taking into consideration the key factors from the PESTEL analysis, Porter’s national diamond
applied to India can depict the fundamental advantages, strengths, and weaknesses of the
economy, and thus support the internationalizing proposition.
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Figure 4.2.1. Porter’s National Diamond for India
4.3. Market Competition
The Indian market for wind turbines is currently controlled by four large manufacturers, which
in turn make up 85% of the industry (Global Wind Energy Council, 2011). The presence of
large competitors in the country represents a challenge for Quixote A/S. However it also
suggests the existence of a network of suppliers and manufacturing bases suitable to support
the 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 large
operational margins for potential new entrants (Mabel & Fernandez, 2008).
4.4. India as a location for FDI
Findings from the previous sections support the notion that India is a suitable location for the
internationalization of Quixote A/S. Collectively, the country presents a growing market for
Factor (Input)
Condition
Firm Strategy,
Structure &
Rivalry
Related
Supporting
Industries
Demand
Conditions
Technology centres
More advanced wind technology
than average emerging economy
Refer to section 4.3
Location
Low cost workforce with
high levels of education
Abundance of natural
resources (wind)
Advanced technology
centres
High consumer demand
New government policies
attracting renewable energy
Increasing population and
need for sustainability
Refer to section 4.3.
Rivalry pushes Quixote to focus on
their technological advantage
11. 11
wind energy, a supportive policy environment, and the necessary natural resources (wind) that
are 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 location
for efficiency–seeking investments. In making these investments, Quixote A/S should consider
to transfer several elements of the value chain overseas. In fact, due to high levels of education
and the presence of important technology centres already involved in wind energy-related
project, India appears to be a suitable region for the creation of both manufacturing and R&D
plants (Kristinsson & Rao, 2005).
With regard to the presence of large competitors in the country, forecasts on the growth of
energy 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 MODE
Drawing from the findings of the previous two sections, the following will try to identify the
most 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 wholly
owned subsidiaries would be preferable over the creation of an equity joint venture. In fact, as
the wind turbine industry is a technology-intensive sector (Dobrajska, 2010), this choice of
entry 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 be
mitigated by choosing a joint venture with a local partner: a higher risk and a higher liability
of foreignness (Johansons & Vahlne, 2009). However, research indicates that the latter
problems 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 acquire
important assets (i.e. knowledge and technology) to balance the lack of experience in the
market (Johansons & Vahlne, 2009). Moreover, an acquisition appears to be the most rapid
12. 12
way 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 initially
establish a manufacturing plant in the Indian market. This type of investment would confer
several 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, the
company could reduce transportation costs and the production could be adjusted more quickly
in response to market changes (Ghemawat, 2001). In addition, the establishment of a
manufacturing hub in India could be used at a later stage of the internationalization process of
Quixote 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 of
R&D investment in India. Firstly, a home-base exploiting R&D plant should be implemented
to 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 with
specific home-base augmenting R&D plants, the local knowledge base could be absorbed and
channeled through the entire network of Quixote A/S (Kuemmerle, 1998).
6. CONCLUSION
Global investment into renewable energy is increasing, and government policies are changing
to help facilitate this. Quixote A/S has been advised to participate in FDI in an emerging
economy as their market growth rate largely exceeds that of their home market. As India is
following the trend of supporting local and foreign renewable energy ventures, an equity-based
FDI approach could create competitive advantages for the firm. In light of the Indian industry
analysis and important factors influencing market choice, Quixote A/S are advised to
internationalize into this emerging economy.
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