International Business in a Developing Economy:
Food Service SME Expansion in India
By: Anthony Visciotti
Advisor: Dr. Michelle Westermann-Behaylo
Confidentiality: Parallel Version
Date of Submission: August 16, 2016
Table of Contents
Table of Contents……….2
Executive Summary……….3
Section I – Introduction………..……4-10 Section A: Company Background………4-6 Section B: Current Business Model……….……….6-7 Section C: Founder Considerations………..7-8 Section D: Research Question……….8
Section E: Indian Market………..8-9 Section F: Methodology……….………9-10 Section II – Literature Review………..10-31 Section A: International Business – Overarching Literature………11-13 Section B International Business – Chosen Decision-Making Frameworks…………31-21 Section C: International Business – Additional Theory and Literature………21-26 Section D: India-Specific Theory……….26-31 Section III – Literature Analysis and Application………32-45 Section A: Interviews………...32-33 Section B: Selected Decision-Making Frameworks……….33-45 Section IV – Managerial Recommendations………45-51 Section V – Limitations and Conclusion………..51-53 Section A: Limitations of Research………...52
Sections B: Conclusion……….52-53 Appendices………...54-58 Appendix A………55 Appendix B………56 Appendix C………57 Appendix D………58 Works Cited………..59-61
Executive Summary
Tasty Macarons and Cookies (Tasty) is a privately-held company based in the United States. It operates more than two dozen directly owned and franchised retail locations nationally. These locations sell its flagship product, the macaron, as well as other pastries and drinks.
As the company has grown, so have the ambitions of its founders. They seek continued revenue growth, as well as the ability to integrate their Indian-American heritage into their business. Their desire has led to the research of this paper, which studies the plausibility of expansion into the Indian market for Tasty, as well as entry mode and quality control considerations.
India provides a strong market for Tasty in many ways. Consumers there are open to foreign brands, with increasing consumption expected to continue in the coming years. This is particularly true for food. The country has a diverse food history, meaning that it is open to accepting foreign products, such as a French macaron. It also quickly expanding economically.
Several issues must be overcome to enter the Indian market too. While there is a large middle class, it is just a small portion of the overall population, so it must be targeted carefully. There are also significant differences between business practices in the U.S. and India that it must overcome. Strong personal networks, like the founder’s family in India, will be critical to this. The firm must also reshape its offerings to protect its recipes and match customer preferences.
The paper advises Tasty to pursue expansion in India. The firm should choose a non-equity mode of entry to limit the resources it must commit to the project, and therefore risk. Specifically, it should find franchisees within the country. This will also help overcome some of the
unfamiliarity with local business practices, since it can partner with local entrepreneurs.
Products offered should reflect Indian tastes for authentic, quality cuisine. This can be accomplished by providing traditional French pastries, in addition to the macaron, and
implementing the strong quality control measures discussed later in this paper. It is also advised to do considerable research, in addition to this report, prior to and during its operations in the country. This will allow the firm to recognize and deal with problems quickly.
Section I - Introduction
Businesses are started for many reasons. Some entrepreneurs are pursuing economic
opportunities, while others are pursuing an interest or dream. These reasons do not remain static, they often change as the business grows and develops. This change is what Tasty Macarons and Cookies1 (“Tasty”) is experiencing firsthand. The founding investors seek to grow their business, while incorporating their heritage as Indian-Americans through expansion in India. Whether this is possible, and the entry mode that would make it most successful, will be explored in this paper.
Section A: Company Background
Tasty was founded when four private investors saw the potential for growth in the booming market for macarons in the United States (US) (Passariello, 2010). A macaron is a French pastry that can be described as, “has an almond, sugar and egg whites-based shell. The shells have a light, crunchy texture on the outside and are slightly chewy on the inside. These shells are held together by a filling, typically made from a ganache butter-cream, meringue or jam.” (Mr. Macaron). The firm has been very successful selling these, allowing it to expand to more than two dozen stores across the United States since its inception in 2012.
Originally, Tasty started as a pop-up shop at events in New York City. This allowed for them to test their concept without the significant investment that comes with owning a permanent location. Their pop-up shop offered professionally baked, high-quality, macarons in various colors and flavors, such as Nutella and raspberry. Customers could buy an individual cookie or take home boxes in varying sizes. Their branding for the events gave an upscale feel, with the boxes looking like one from a designer boutique instead of a bakery, and their displays having a crisp design that played off the multicolored nature of the macarons.
Still today, the firm’s brand very much matches its signature product, the macaron. The brand is colorful and warm, utilizing pastel colors that match the types of colors seen in the French
pastry. There is an upscale feel to it, without the pretentiousness of “luxury”, also much like the cookies themselves. It is warm and inviting, hoping to put a smile on customers faces with good food and good people. Most importantly, Tasty prides itself on offering a delicious, quality product to consumers.
These pop-up shops were very successful, with macarons often selling out, and convinced the original investors to open physical locations in New York City, and eventually surrounding states. As will be discussed later, the form of these physical locations has changed from kiosks to restaurant-style locations over time. They copied the branding and product offerings from their pop-up shops and began selling individual cookies for approximately US$ 3. They also offered boxes of cookies in varying sizes and prices, keeping the designer look and feel of the packaging.
As will be discussed later, the firm has expanded its offerings and store sizes dramatically. It purchased the bakery in New York City that was producing its goods, allowing it greater control over recipes, more control over production itself and lower production costs. This increased control of recipes and production has allowed it to test new products, leading to the expanded line of pastries it now offers from croissants to brownies. To compliment this, it has also introduced coffee and other drinks to its offerings.
Tasty has also expanded the types of stores it operates. The firm began with kiosk locations, which are permanent stands that sell their products in high-traffic areas such as malls and train terminals. In addition to these stores, it now operates restaurant-style locations where customers can sit and enjoy their macarons with a cup of coffee, or complete some work. While there is a different feel to both locations, they both incorporate the brand consistently.
The firm’s strengths include consistent high-end branding, convenience of its locations in the high-traffic areas previously discussed, good-quality pastries and strong customer service. Its initial success is thought to be due to the high-traffic areas that the kiosks were placed in, which allowed for high visibility, so they have continued to put stores in these types of areas. Also, even though Tasty exudes a higher-end brand and the prices of its pastries are somewhat
expensive, it remains an affordable luxury because customers can purchase just a single macaron or pastry, meaning the higher price still falls within many budgets.
Section B: Current Business Model
Tasty is a privately-held company that operates a hybrid business model combining direct ownership of stores with franchises. As mentioned, it began by opening kiosks in high-traffic areas such as major transit stations and shopping malls. All the original stores were directly owned. Financing for this was provided by direct investment from the founders.
As the company grew, it expanded its operations in multiple ways. The purchase of the bakery producing their goods, as well as the increased product offerings which include new pastries and drink selections, were meant as drivers of growth and profitability, as well as to make the brand more appealing to customers and potential franchisees. Tasty also began catering and online sales to grow sales and expand the brand.
The firm’s traffic is still driven primarily by kiosks, with them accounting for more than 60% of sales, but the larger stores with seating are an increasing portion of its business. This means Tasty competes with other baked-goods providers, as well as increasingly competing with other companies in the food-service market that allow for in-house consumption of food, specifically with regards to coffee. Customers can use the space in larger locations for completing work, taking a break, or having a meeting, as they would in a Starbucks or other coffee chains, for example.
Observing the different types of locations, the difference in environment is pronounced. The kiosks are highly transient, with customers stopping for a quick snack or to inquire about catering. The larger stores allow for the brand to be experienced more fully, from product offerings and service, to the atmosphere and design of the interiors.
Tasty has moved aggressively towards franchising as its means for expansion and a majority of stores are now owned by franchisees. The firm allows for franchises of both its full-size and
kiosk stores. Franchise fees are low, with only US$ 17,500 required for franchise and training fees for a kiosk location and US$ 30,000 for the same fees for full-size shops. Monthly sales for the kiosks and full-size stores averaged US$ 27,900 and US$ 47,500 respectively in 2014. A macaron costs US$ 0.85 to produce and sells for approximately US$ 3, having an overall profit margin of approximately US$ 1.
Section C: Founder Considerations
While Tasty’s success has brought the normal questions about continued revenue growth, it has also started to make the founders, three of whom are Indian-American, reflect on their personal visions for the company. Interviews with these individuals revealed that they have long desired to incorporate their heritage into their brand. Their ties to India include family who live there that they visit regularly, who will be discussed later. They also seek strong revenue growth and profit to enhance the value of their firm for a possible sale in several years, as well as to satisfy the other investors.
How to accomplish these goals together was debated extensively. Discussions on the topic included introducing Indian-inspired pastries into their current selection in the United States. This was decided against because it conflicts with current branding, taste preferences in the US and was not seen as a large-scale driver of growth.
The other option explored was bringing the brand to India instead. Tasty could be introduced, either with macarons as the flagship product if the market is suitable, or with another product more acceptable replacing it. With the founders’ access to the network of family they still have living in the country, and their understanding of culture due to their heritage, there is a belief that this is a better avenue to pursue. The expansion could satisfy the the desire for revenue growth, while also fulfilling the founder’s desire to mix their company with their heritage.
There are many considerations when entering the Indian market and, as will be discussed later in my interview with the founders. The founders would like a firmer understanding of whether this is a plausible strategy to pursue, and if so, how. In addition, they have concerns regarding how to
ensure the quality of their product in a foreign market. They have built a brand around delicious, high-quality products they are proud of and want to protect it during the expansion. If this means implementing certain control mechanisms or adapting their recipes to the new market, they are willing to do so. Strict quality control measures have been implemented in their U.S operation already. Being able to implement these is a main reason for purchasing their bakery facilities.
Section D: Research Question
Understanding the complexity of international expansion, especially in a market as fragmented as India, Tasty decided to research its entry to the market. Specifically, is expanding its business into India a plausible option or will the risks outweigh the benefits? This should be researched with special attention given to equity outlays required and quality management.
Equity outlays and quality do not tell the whole story though. Each market has its own tastes and cultural norms. This means many other questions arise that must be looked at in conjunction with the overall research question. What are the taste preferences of Indian consumers? Are these consumers open to outside brands? Will Tasty be able to keep its current recipes or have to change them? Will the store designs be able to be transferred to the Indian market?
These types of questions will need to be looked at when determining whether to enter the Indian market. If entering the market is advised, the paper will then look at what the correct entry mode will be and how to ensure quality. Overall, the report will focus on the necessary research for a multinational food-service firm to enter the Indian market and the best practices to do so.
Section E: Indian Market
On the surface, India seems like an ideal market for an affordable luxury such as a macaron, which cost approximately US$ 3 each. With GDP growth at 7.6% in 2015 (World Bank), a growing middle class of approximately 24 million people (Salve, 2015), double-digit growth in fast-food sales (Singh, 2007), and an openness to foreign foods (Nandy, 2004), there seems to be a sizable, expanding, segment to market to. Goldman Sachs has also noted that many sectors in
India can expect to see an increase in profits but, “one profit pool may grow faster than them all: restaurants” (Bahree, 2016).
Should Tasty decide to expand its franchising operations, India also provides a good market for doing so. According to a report by the U.S. Department of Commerce, “Franchising as a concept has been prevalent in India for a long time. Shifting consumer trends, including growing
preferences for branded products; global exposure and use of international brands is driving growth in franchising.” (U.S. Department of Commerce, 2016, p. 1). The report also states that it expects the franchising industry to grow to US$ 51 billion in 2017 and that Indian entrepreneurs are receptive to American brands. This means there may be a large market for Tasty franchises.
That said, India is not a perfect market. The noted 24 million people who are part of the middle class are part of a population of more than one billion, making them a minority (World Bank, 2016). The unequal distribution of wealth in various regions, and high rates of poverty (World Bank, 2016), means that finding the correct location to offer Tasty goods will require research and precision. This adds a layer of complexity to the already complicated task of international expansion. Additionally, while India is a more tolerant society regarding outside foods, there are a number of social constraints that must still be researched and adhered to that will be discussed.
Section F: Methodology
This paper will utilize interviews with Tasty founders, academic research and India-specific research to make its determinations. Each is important because it explains a different side of the issue. To understand the needs of the company, it is important to spend time with the founders and be involved in the operations. When their needs are understood, literature can be looked at to determine what is already known about the areas the firm seeks to understand better and how this can be applied to the current situation.
Academic literature will come from a variety of fields including international business, food culture, branding and quality control. Frameworks and theories will be combined to form the underpinnings of any recommendations given. In addition to this literature, secondary resources
will be utilized to determine current trends in India. This includes wage statistics and
consumption trends. Together, the understanding of the firm, literature and secondary research can be applied to make recommendations regarding how to proceed with the issues facing Tasty, which will be the last section of this report.
Section II – Literature Review
A variety of academic frameworks and literature can be looked at to assist Tasty with its decision of whether to enter the Indian market and how to do so successfully. This literature comes from a variety of fields but broadly falls into the categories of international business, Indian food and culture, and quality control. The literature will tie into the needs of Tasty regarding expansion.
Understanding all of these areas will be critical to making an informed decision about whether to enter the Indian market and how. As a for-profit firm, Tasty should follow established
international business frameworks and literature that give foresight on issues to come, enabling them to mitigate risks through planning and explore all options. An understanding of
international business practices alone is not sufficient though. A general overview of the market they wish to enter, in this case India, is also critical, which is why literature relating to its food and culture will be examined.
International Business India-Specific Literature Tasty’s Needs
Section A: International Business Overarching Literature – Liability of Foreignness The most important piece of literature to help understand the issues facing any firm entering a foreign market is that by Sethi and Guisinger (2002) which discusses the Liability of
Foreignness. Foreign doesn’t just refer to the idea that a firm is from another country, it also refers to a lack of knowledge about a foreign market and how that can affect doing business there, or increase transaction costs. To understand the issues and considerations that Tasty must take into account, we first must understand what this foreignness entails and ways to overcome it.
The Liability of Foreignness looks at the costs associated with doing business abroad as a multinational company. Sethi and Guisinger (2002) describe it best as, “the costs of doing
business abroad, has been broadly defined in literature as additional costs that a firm operating in a market overseas incurs, which a local firm would not.” This idea can be further elaborated on as, “costs may arise from at least four, not necessarily independent, sources: (1) spatial distance (travel, transportation and coordination costs), (2) unfamiliarity with local environment, (3) discrimination faced by foreign firms and (4) restrictions from the home country.” (Guisinger, 2002, p. 226). Each of these areas will be discussed in relation to the CAGE Framework (Ghemawat, 2001).
Using Liability of Foreignness theory, a firm can determine major success factors to overcome its unfamiliarity with a market. A major piece of this is being able to read the environment that the firm is entering and connect learnings from this to strategy formulation and implementation. Reading can be understood as studying and understanding an environment (Guisinger, 2002). The author, Guisinger, argues that this skill can be so powerful it can actually offset any structural advantage that the local firm has if this ability to learn and process information becomes engrained in the company culture of the foreign firm because learning is so fundamental to the growth of any organization (Guisinger, 2002).
Whether the firm does this learning as a passive receptor or proactive acquirer is also critical. Proactive firms that actively seek information and try to use it to mitigate risks often have a
strategic advantage because this skill allows them to anticipate upcoming changes better than their competitors. Scenario building, where a firm looks to create a vision of what may be ahead is an important piece of this because it helps to envision the changes in a rounded, fully-realized way (Guisinger, 2002).
We can also look to Petersen and Pedersen (2002) for a guide on coping with the liability of foreignness. They view the three major headwinds faced by companies as, “exchange risk of operating businesses in foreign countries, local authorities’ discrimination against foreign companies, and unfamiliarity with local business conditions.” (Pedersen, 2002, p. 340).
(Pedersen, 2002) Concept Model of Liability of Foreignness
In many ways the authors concur with Sethi and Guisinger (2002) that learning, and specifically active learning, is critical. They go further though by creating the above model to help those involved understand the external forces and common pitfalls of companies. They note that the ability to learn about foreign markets is not the same as management prioritizing the effort to do so (Pedersen, 2002). This can take the form of pre-entry learning and/or post-entry learning, or learnings before and after entering a market.
Ideally the firm will engage in learning prior to its entrance, as well as while it is in operation. That said, simply being in operation in a country is not sufficient for learning because there may
not be sufficient activity or managerial support for this process to take place. In fact, firms with low-learning engagements were found to have lower-levels of understanding even after a longer entry time than those who did continuous learning, specifically pre-entry (Pedersen, 2002).
Petersen and Pedersen (2002) also note that firms must decide between global standardization of products and adapting them to local markets. The adaptation can go beyond products to
management style and business ethics. This decision itself is many times made by corporate policy but should be made based on pre-entry learnings about an individual market.
Together, these theories are critical because they show that while there is a lack of knowledge, or liability of foreignness, that can cause excess costs for multinational firms, it is not a lost cause. Viewing this theory through the literature in this section, we can see how reading an environment and continuous learning can help overcome unfamiliarity with a market, make an informed decision and understand the institutional challenges to come.
Section B: International Business – Chosen Decision-Making Frameworks
It is important to have a structure when making decisions. The frameworks in this section will be used as the main guides for analysis, with which the rest of the literature is connected, to make decisions about Tasty’s possible expansion. The literature in this section was chosen because it represents pillars of international business literature that provide relevant information for this project.
Using the frameworks below, we can get a better understanding of the number and type of obstacles faced. With this information, a determination of whether to enter the market at all can be made. If the decision is made to enter the market, the frameworks also provide clues on the best way to do so.
Cage Distance Framework
The CAGE Distance Framework (Ghemawat, 2001) will be one of the most powerful tools that Tasty can use to assist it with understanding and planning for the obstacles associated with its
liability of foreignness as it decides whether to enter the Indian market. It describes the various types of “distances” or differences that can occur between a firm’s home country and a foreign market.
(Ghemawat, 2001) Cage Distance Framework
The framework breaks down the idea of “distance” in the areas of Cultural, Administrative, Geographic and Economic. Distance can be thought of as a difference between home and host country environments that can cause a lack of understanding or friction for a firm in a new host country (Ghemawat, 2001). Each of these areas are applicable to the expansion of Tasty in India. The severity of each will be discussed later in this report.
Cultural distance is defined as, “A country's cultural attributes determine how people interact with one another and with companies and institutions. Differences in religious beliefs, race, social norms, and language are all capable of creating distance between two countries.” (Ghemawat, 2001, p. 140). This type of distance can manifest itself in many ways. Examples include types of baked goods offered based on tastes, the language used in operations depending on the region, communication procedures with staff and the foreign entity, and how to respect traditions which are still strong in India and so on.
them.” (Ghemawat, 2001, p. 142). These associations can include colonial ties, monetary or political unions, trade agreement, political instability and institutional weakness. While the presence or absence of any of these traits does not necessarily preclude any country from consideration, they may make operations more difficult.
The idea of Geographic Distance, which is also critical in this case, is defined as, “the farther you are from a country, the harder it will be to conduct business in that country. But geographic distance is not simply a matter of how far away the country is in miles or kilometers. Other attributes that must be considered include the physical size of the country, average within-country distances to borders, access to waterways and the ocean, and topography” (Ghemawat, 2001, pp. 143-144). It is important to note the point made by Ghemawat that it is not just distance from the home country. In the case of India, physical size of the country is important, for example.
Lastly, Economic Distance is defined as, “The wealth or income of consumers is the most important economic attribute that creates distance between countries, and it has a marked effect on the levels of trade and the types of partners a country trades with.” (Ghemawat, 2001, p. 145). Issues with infrastructure and natural resources can take many unexpected forms, especially when coming from a developed to a developing country like India. The water may not be safe to drinks, roads not accessible during heavy rains, inability to access ports if the country is
landlocked, and so on. By understanding these issues prior to entry, a firm can work to mitigate the risks associated with them.
Due to these issues, there is usually a bias for companies to do business in their home regions. Sethi (2009) discusses this saying that CAGE Distance, “explains how cultural, administrative, geographical and economic distances increase transactions costs, thus promoting a home-region bias” (Sethi, 2009, p. 357). This means, it can simply be easier to do business in your home region because of reduced transaction costs, so companies choose to do so. For example, a firm is already familiar with the administrative environment in its home country and, ideally, has a structure in place to deal with this. With a new market, there are increased costs to build this structure to adapt to administrative demands, making the new market less attractive.
This is especially true for the food service industry. When Sethi studied mergers and acquisitions between firms in developing and industrialized countries, he found this stating, “M&As in the agriculture and food products sector showed the highest propensity for regional/bi-regional concentration since CAGE distance (Ghemawat, 2001) proximity is especially important for this sector.” (Sethi, 2009, p. 361). This makes sense because food tastes and customs are highly regionalized and the distances between countries may be longer.
Interestingly, Indian firms are more willing to engage in transactions with larger cultural distance such as doing business with a U.S. firm like Tasty, especially when compared to other emerging BRIC (Brazil, Russia, India, China) economies. The author notes this stating, “investments by Indian firms are more widespread than other emerging BRIC economies and span both
developed and developing countries” (Sethi, 2009, p. 361). This is not to say that there are fewer cultural distances between India and other countries. It just demonstrates that Indian firms are more willing to work to overcome these distances to work with foreign partners.
Understanding this is critical, especially for a firm like Tasty that is deciding whether to enter the market. If it will need local partners or suppliers, an understanding of the cultural willingness of the host country to work together to overcome the distance faced in its transactions is important. If there was a strong cultural distaste for doing business with foreign firms, overcoming this distance may be even harder. Willingness to engage in activities where distance is present means there may be more supports and flexibility to overcome this compared to other countries.
The Hierarchical Model of Choice of Entry Modes
Entry modes, or the investment vehicle that a company uses for foreign direct investment (FDI) in a market, come with unique advantages and disadvantages. There are many different types of entry modes, including the greenfield, joint venture and acquisition ones that will be discussed later (Meyer, 2009). A greenfield entry mode is when a company decides to enter a market on its own, while a joint venture is when it enters as a partner with another firm and an acquisition is when it purchases an exiting firm.
Each entry mode has its own benefits and risks. For instance, an acquisition may give greater control but requires significant capital investment. Deciding on the entry mode for a firm to enter a foreign country is specific to the firm’s needs and includes many considerations, such as need for control, need to protect proprietary information and current understanding of the market, among others (Meyer, 2009).
The Hierarchical Model of Choice of Entry Modes (Tse, 2000) helps to analyze the benefits and risks associated with various types of entry modes. Specifically, it breaks down the entry modes into Non-Equity and Equity modes, with Export and Contractual Agreements being part of the former and Equity Joint Ventures and Wholly Owned Subsidiary as choices under the latter. For example, franchising is a form of non-equity mode of entry because it relies on contracts and licensing to enter a market.
(Tse, 2000) The Hierarchical Model of Choice of Entry Modes
Equity and Non-equity modes are split up because the resources required to pursue them are significantly different. The author explains this saying, “Equity modes require a major resource commitment in the overseas location. It calls for an actual investment to set up an independent operation. More significantly, it needs an on-going direct management of the establishment, and a constant interaction with various local parties.” (Tse, 2000, pp. 538-539).
That said, equity modes can allow for more direct control over operations, sharing of information and communication. Though these are all also possible through non-equity modes, the direct ownership requires more daily involvement and coordination with a firm. For example, a firm
can export (non-equity) its macarons but may not have control over knowledge sharing about the product between distributors and retailers as it would if it had an ownership stake (equity) in the means of distribution in the company.
Many factors go into deciding whether to pursue an equity or non-equity entry mode. For instance, host country risk must be examined for things such as political stability and control risks (Tse, 2000). A country that has undergone recent economic liberalization such as India is a higher ownership risk because there is no guarantee the government will keep the new
allowances for higher-levels of foreign ownership and FDI. For a smaller, privately-owned company, even partial loss of ownership could be devastating.
Within each type of entry mode, there are sub-modes that provide a variety of benefits or risks for a firm. For a firm with a smaller presence, or who requires the least amount of control, it may simply export its goods to a foreign market for sale. Conversely, entering into a contractual agreement provides more control for the multinational enterprise but still stops short of a direct equity stake.
Joint ventures require investment in combination with a partner. The stake of ownership can be decided in accordance with the needs of the company and/or for compliance with local laws. This is a particularly popular method for countries where FDI is limited by the government. A joint venture also allows for the inclusion of a local partner who may have a better understanding of the local culture, market, law and business practices. This can reduce the distance previously described in the CAGE Framework.
For more seasoned companies in a market, or those who feel that they are able to overcome their liability of foreignness more easily, a wholly-owned subsidiary is an option where no local partnership includes an equity stake. This allows for maximum control but also increase risks that the firm will not have the local support necessary to successfully carry out it business.
Institutional Framework – Institution-Based View
Multinational firms, much like individuals, interact with the institutions within society. These institutions take many forms, both formal and informal. The Institutional Frameworks, from an Institution-Based View (Peng, 2002), helps to understand the difference between the types of institutions and the affect this can have on businesses. This framework also provides guidance on strategic decisions that firms can make to interact competently with these institutions and make decisions so they can work efficiently within them.
(Peng, 2002) Institutions, Organizations and Strategic Choices
Broadly, institutions are, “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” (Peng, 2002, p. 252). They are the way in which society keeps order and functions on an everyday basis. The author breaks these down into two major categories: formal and informal.
Formal institutions are those which tend to be official, such as government, courts, regulation, religion, associations, etc. These institutions are clearly defined and visible. That said, they are not always strong. The author, Peng (2002) discusses the weak formal institutions in emerging markets in Asia. He states, “While emerging economies in Asia are hardly uniform, their formal institutions tend to fall short to varying degrees in providing support for low transaction-cost business operations in three critical areas: (1) a credible legal framework, (2) a stable political structure, and (3) functioning strategic factor markets” (Peng, 2002, p. 257).
This is caused by issues such as corruption, changing legal structures, ineffective courts and societal unrest. A lack of formal structure can make doing business more difficult in a country, but not impossible. Companies in this region survive, and in many cases thrive, precisely because of their informal structures. Peng discusses this stating, “Throughout Asia, because of the weaknesses of formal institutions, informal constraints rise to play a larger role in regulating economic exchanges” (Peng, 2002, p. 257).
Informal structures are the way society acts due to social norms. Peng (2002) discusses them broadly in three categories as interpersonal relations, external connections and the reputation of conglomerates. Though they are “informal” they are of just as important as formal institutions.
For instance, in Asia interpersonal relations are extremely important between executives because they enable people to find business opportunities, make deals and uphold commitments, in the face of a lack of a strong legal structure or business associations. Japan is the most prominent example of this with its Keirestsu networks that have a close association between suppliers and manufacturers due to loyalty (Peng, 2002). Long-term investment by suppliers, which can
include manufacturers moving plants closer to these suppliers, is made based on the commitment and trust between companies that they will purchase/provide goods on an ongoing basis.
Understanding this type of interpersonal network, and cultivating it yourself or having a local partner, is critical for success in the region. Without it, a company may not even be able to meet its basic supply needs.
Interpersonal connections can also be external connections when they reach outside a firm. That said, external connections can refer to important relationships with those in positions of power, especially government officials. It is not uncommon for officials to sit on the board of a company or gifts to be exchanged, especially in countries with weaker institutions (Peng, 2002).
Without a formal system to interact with the government, and broad regulatory uncertainty, it is critical to maintain these connections both to understand changes in the regulatory environment and advocate for the needs of your firm (Peng, 2002). These connections can be harder for multinational enterprises (MNEs) to cultivate without a partner, especially smaller firms. There
can also be discomfort with the gifts exchanged with officials by foreign firms, as the practice is considered bribery and banned for firms operating in countries like the United States.
The last, reputation, also grows from the lack of formal institutions. With weak consumer protections, and sometimes deceptive business practices, consumers look to trusted brands for quality products. This means that it is important for firms to cultivate trust with the public, which may be hard for newer brands, especially those on the internet where scams have proliferated (Peng, 2002). For smaller companies, this can make penetrating the market significantly more difficult.
Section C: International Business – Additional Theory and Literature While the decision-making frameworks in the preceding section can be used to provide the backbone for research, it is imperative to look at academic literature and theory from the international business field for additional learnings on how to apply these frameworks. This section will connect the theory to frameworks, so they can be put into practical use. Together, they can help provide a rounded view on how to overcome issues facing MNEs.
Entry Modes
As we see from The Hierarchical Model of Choice of Entry Modes, and concerns about distance, entry modes are a critical consideration for any firm, especially one looking towards a
developing nation. Fortunately, we can look to literature that has determined what conditions would lead a firm to choose a specific mode. This section will explore this literature.
Myer, et al. (2009), discuss the importance of entry modes stating, “Alternative modes of entry— greenfield, acquisition, and joint venture (JV)—allow firms to overcome different kinds of market inefficiencies related to both characteristics of the resources and to the institutional context” (Meyer, 2009, p. 61). Greenfield entry refers to a company that has provided all of its own operations. A joint venture is a firm that enters a market jointly with another, usually
All are equity modes of entry though, so it is important to keep in mind that non-equity modes are also available.
Meyer’s (2009) research focuses heavily on developing economies as it seeks to determine the effect of weak institutions on entry-mode decisions. In general, they argue that the stronger the formal institutions, the less likely a firm is to require company-specific resources and therefore they are less likely to pursue a joint venture because of the complexity of coordination. That said, if there are more intangible needs, the firm may still choose a joint venture over the other two options to find resources not readily available in the market. When determining an entry mode, it is important to understand this concept because each option provides a different level of local resources, with joint venture being the highest and greenfield being the lowest (Meyer, 2009).
It should be noted that the coordination required for a joint venture can sometimes be too problematic to overcome. Describing issues with partnerships in developing countries, Thompson (2012) states, “usually few, if any, local business leaders have the expertise to provide the finance, media, information technology, and other services required. That’s one reason why governments and enterprises in these countries increasingly seek to form joint ventures with top U.S. and European organizations” (Thompson, 2012, p. 23).
He provides a basic checklist (see appendix A) for firms to make a preliminary decision regarding project feasibility while speaking with a possible partner. While it was created for healthcare issues, its concepts are broadly applicable. These concepts include looking at the potential partner’s willingness and ability to contribute the right resources, setting up
performance metrics and quality control, and creating a plan to transfer responsibilities to local representatives.
It is important to also look at non-equity modes of entry as well. Brouthers and Nokos (2004) examined what would make a medium-sized firm (SME) choose an equity or non-equity mode of entry. Recent research has found that entry mode and SME performance are positively related (Nakos, 2004). They tend to perform differently from large multinational enterprises because,
“their limited resources may lead them to very different international strategic choices in comparison to larger firms” (Nakos, 2004, p. 229).
In his findings, Nakos concluded that, “SMEs making greater asset-specific investments tended to prefer equity modes of entry, while SMEs making less asset-specific investments tended to prefer non-equity modes” (Nakos, 2004, p. 242). Asset specificity refers to the requirement for an asset to be used for a specific purpose so it does not lose value. If the technology is stolen or copied, it would have a very detrimental effect on the company, so protection is paramount. In the case of a baked-goods company, this would refer to its recipes. It therefore makes sense that an equity-mode of entry, which allows for greater control, would be preferred. Internal structures can be put in place but are often very costly, which drains precious resources from SME’s due to their size.
To reduce risk and exposure to issues, when SMEs are, “entering countries characterized by high environmental uncertainty [they] tended to prefer non-equity modes of entry” (Nakos, 2004, p. 241). This can include institutional weakness and significant distance, as described in the prior decision-making frameworks. The limited resources of SMEs mean that losses due to failure or uncertainty caused by these environments would be especially painful, explaining the pattern.
Together, this literature helps to understand how to make determinations using The Hierarchal Model of Choice of Entry Mode to determine entry mode. While the model itself provides guidance, this literature provides additional insights into why companies act the way they do and how to take advantage of the benefits, or at minimum understand the risks, of each method.
Determinants of Foreign Direct Investment (FDI) and Risks
Where to direct FDI should be largely correlated to the economic programs and policies (or lack thereof) of the countries under consideration. We know from Dunning that, “the locational strategies firms actually choose are highly contextual and to vary according to a variety of industry-specific characteristics, the motives for FDI and the functions being performed by MNE’s subsidiaries” (Dunning, 2004, p. 288). Unstable or unfavorable government policy can
create high macro-political risks, such as those discussed later in this section by Herbert (2009), for the firm entering the government.
While Dunning’s (2004) work broadly discusses changes in governments policies regarding commerce, it also makes a number of important points about the reasons that a company would choose a certain location over another. The author argues that a firm should look at the resources offered by both the government and society to see what is most beneficial. The paper also
provides a number of possible entry-modes based on firm-specific needs (see appendix B) and acknowledges that there may be other motives, which in addition to profit could be firm history or values.
The article advises that while those entering foreign markets should continue to build their internal competencies, they must not be afraid to use the resources of the host country to
maximize efficiency. This is even when those resources are less mobile. By this, it means using the resources available without providing an excess of centralized, internal ones (Dunning, 2004).
While this may seem like common sense, it is an important point because control and centralization are often seen as key considerations when determining entry mode. That said, there are crucial questions that must be asked. Does the country offer a firm-specific advantage that it can use over what it has now? Has the government provided a structure that allows for success, or at least limit the burden? Are the institutions possibly too strong, stifling growth?
These macro-political risks should not overshadow the micro-political risks though. When studying the expansion of a medium-sized business, it may seem arbitrary to focus on nuances such as micro-political risks. Macro-political risks, such as general trade law and ownership risk, are usually much larger topics of discussion. While they are important, it is particularly critical for a smaller firm to focus on the micro-political risks because they can have such a devastating effect.
These risks are generally thought to effect a single firm, or a smaller group of firms. The difference between macro- and micro- political risks are defined as, “Micro political risk is similar to macro political risk in that it, too, emanates from internal and external as well as economic, societal, and governmental forces. The two types of risks are different in that specific aspects of the firm either increase or decrease its political risk exposure. Micro political risk is thus important to the international firm because of its higher level of relevance and specificity. (Herbert, 2009, pp. 127-128).
(Herbert, 2009) Micro vs. Macro Political Risk
There is a myriad of these risks that can affect a firm, including government-related matters, but also the extent to which the firm is dependent on the market, inclusion of local ownership, public opinion and cultural distance. Specifically, it goes beyond just the government-related matters and forces the firm to look at the risks internally and from its more immediate surroundings (Herbert, 2009).
This is a part of the previously-described “reading” process. It also touches on the idea of distance and the formal and informal structures of a country. These include internal and external risks, as well as firm-specific risks. External risks are those outside of the host country, while internal risks are those within, and firm-specific risks are those from within the firm or its operations (Herbert, 2009).
An example of an internal risk is that outside firms are seen as intruders by locals, especially in developing countries, and their operations can be hindered or blocked. An external risk can be cultural distance between with the home and host countries, while a firm-specific risk would be whether it is diversified enough. Understanding these risks can help to mitigate distance and assist with entry-mode decisions.
In a market like India, which is in the midst of liberalization, it is important to look at both macro- and micro-political risks. These can have a significant impact on a firm’s operation. As has been discussed, these risks take many forms, both internal and external, and reading an environment to understand them is critical.
Section D: India-Specific Theory Food Culture
The previous theory has formed the understanding that it is critical to understand multiple aspects of the environment a firm is seeking to enter. Culture can affect everything from food and dress to business practices. When entering these markets there are a number of
considerations, such as whether a product needs to be adapted to local culture or standardized globally. Here we look at the food culture of India to see what food-service firms might face when they arrive.
There is a strong cultural link to food in India but that does not mean it is a monolithic or static cuisine. Nandy (2004) expands on this saying, “as far as food is concerned, India can claim to be, by far, the most diverse society in the world. Not merely that: Indians have borrowed heavily, unashamedly and openly from virtually every corner of the globe. The story of Indian food is often the story of the blatantly exogenous becoming prototypically authentic.” (Nandy, 2004, p. 11).
While there is an openness to a variety of international cuisines, authenticity remains an issue. Specifically, whether a food has been compromised from its original version for mass-market or
profit. This is viewed negatively and explains some of the disconnect experienced by those in the country between the idea of “fast food” and traditional food. Fast foods that are inauthentic are not believed to be fast food because they are so detached from their roots that they have become their own food grouping (Nandy, 2004).
The author explains this phenomenon saying, “No connoisseur of Italian food expects to see pizza in the menu of a respectable Italian restaurant, exactly as no one expects to be served hamburgers when invited to dinner in an American home.” (Nandy, 2004, p. 13). Ironically, this separate grouping grouping of these types of food have made them into a middle- and upper-middle class treat, instead of being looked down upon by society generally. Instead, easy access street vendors are more closely associated with the idea of “fast food”.
Consuming authentic foods, “serves as a cultural marker of status, taste, and cultivation” (Nandy, 2004, p. 17). Even restaurants that are considered high-end in other countries have not been as successful in India because of this issue of authenticity, with fusion foods, which are largely considered upscale in other countries, shunned (Nandy, 2004).
That is not to say that the “fast food” industry, under the more western definition of, “the sale of food and drinks for immediate consumption either on the premises or in designated eating areas shared with other foodservice operators, or for consumption elsewhere” (Singh, 2007, p. 183), is not doing well. Last decade, it was said to be growing by nearly 40 percent a year (Singh, 2007). As the economy has liberalized, consumers have begun to urbanize and Western influence became more prominent.
Recent years have seen the acceptance of a variety of ways food can be prepared as well. Previously, “Indian consumers have preferred fresh and unprocessed food over processed and packaged food; however, the recent changes in consumption patterns, particularly in middle and high income groups, show ample opportunity for processed food segments in the country.” (Ekanem, 2009, p. 44). This has led to high growth for the sector, approximately 10 percent a year, with its foods broadly defined to include meat and fish, to milk and confectionary goods. In
the post-liberalization era, confectionary goods have had some of the strongest growth (Ekanem, 2009).
This means that there is opportunity in the sector for a wide array of food businesses but they must ensure authenticity of the food they are trying to sell, or at minimum have it categorized into the seemingly accepted “other” with pizza and burgers. With such explosive growth in fast food, the firm must also ask itself what it wants to be – especially if it straddles multiple food categories. Will it focus on takeaway? A formal sit-down experience? While the literature can provide guidance, only a firm can decide how to position itself based on its goals.
Foreign Food Brands in India
Understanding the receptiveness to foreign food brands is also critical for this research. If a country is hostile to outside brands, it may make entrance the market harder. Having an understanding of this openness will help when deciding whether entry to India is plausible for Tasty.
American food brands are often met with a friendly reception in India. A report by the U.S. Department of Commerce notes, specifically regarding franchises which it estimates will generate US$ 51 billion in the country by 2017, that there is, “Increasing consumption, willingness to spend, growing preference for branded products, global exposure and use of international brands” (U.S. Department of Commerce, 2016) in India. It also notes that food is a top prospect for franchises in the country.
The information by the U.S. Department of State is confirmed by research from Prasad (2010) that points out food retailing, “is the most promising area to set up retail business for domestic as well foreign companies in India.” (Prasad, 2010, p. 69.). It seems that the openness to foreign foods and flavors discussed earlier is genuine and has led to has pushed the foreign food industry to expand. While Indian consumers are open to foreign food brands, Prasad (2010) also provides some specifics regarding how customers like to enjoy them. The author notes that customers like a, “see-touch-feel-select concept” (Prasad, 2010, p. 82) and enjoy customized shopping
experiences. For a retailer such as Tasty, this can allude to the way pastries are displayed and the shopping process, perhaps including customized pastry ordering.
Indian Business Culture
In addition to understanding the marketplace that multinational firms operate in, it is also important to understand the cultural structures they operate in. Like many Asian countries, India’s business world relies on a network of individuals and personal trust. This is because people, “feel [being] able to rely on impersonal institutionalized procedures when making business commitments is a crucial factor in the establishment of collaborative relationships within and between firms. Where such procedures are weak or judged unreliable and
particularistic connections become especially important in organizing exchange relationships.” (Harriss, 2003, p. 63).
This is basically reiterating what has been stated previously in this paper. The weak institutions of developing nations require a trusted network for businesses to overcome this obstacle. Harriss (2003) gives examples such as not having an enforcement mechanism when payment isn’t received for goods and services. Many businesses are family-owned and can therefore create contacts within the community that can be trusted to pay their bill. The caste system also still plays a role in creating some social networks, as does reputation.
The research notes that in highly-regulated industries, such as pharmaceutical manufacturing, there is significantly less reliance on trust and much more adherence to regulations and contracts due to compliance monitoring. This seems to support the idea that when there are strong
institutional frameworks, the preferred method to conduct business is through these. Tasty will need to have an understanding of the types of institutions it is operating within to make decisions regarding how it conducts business to cope with differing institutions between the United States and India.
The lack of trust due to exploitative business practices was most pronounced in the low-priced, lightly regulated, highly-competitive markets. In these markets there are no formal structures to
fall back on and because of low margins and high amounts of competition, “opportunism is a way of life” (Harriss, 2003, p. 63). With so much competition for few discount resources, entrepreneurs are forced to work with a wider array of firms – regardless of reputation or connections.
Coupled with weak formal institutions, this leads to dishonest business practices. Businesses in this type of market don’t care about trust because they simply don’t have to, at least in the short-term. It is therefore important for any firm entering the market to determine whether there is high risk for deception by vendors and contractors, whether their industry happens to have stronger formal institutions and whether there is an opportunity to form strong informal institutions for themselves.
Learnings from this include the assumption that personal networks play an important part in Indian business due to weak institutions is correct. That said, unlike other countries where these networks create strong informal institutions, there are still areas of business in India where opportunism overrides trust. This means that for a firm, it is important to understand both the culture of business in the country, as well as in its specific industry.
Quality Control
As we saw from Harriss (2003), business practices in India can vary from industry to industry. Personal networks can be used to find good suppliers, but this alone may not be enough to ensure quality. If Tasty chooses a non-equity mode of entry, outsourced production of its food will be likely, as it may be with an equity mode as well. Cultural norms regarding quality and how it is dealt with must therefore be looked at. A main concern for Tasty, as stated above, is maintaining the quality of its product, making this research vital.
The importance of quality has only begun realized across India recently. Prior to market
liberalization, little attention was paid to the quality of goods and services. Since this time, it has been acknowledged that, “The business units in India are ever increasingly forced to achieve
world-class manufacturing capabilities in order to compete and, in many cases, to survive in the market.” (Kamalanabhan, 1999, p. 2201).
That said, quality is important for the urban consumer in India, with them placing it above the aspirational nature of a brand, unlike other growing Asian countries. This is described by Forbes stating, “India’s Urban Mass will trade up into brands that offers the most incremental value, but may not readily jump to aspirational brands. In purchasing a car, for example, an Indian
consumer’s first criteria is the brand’s reputation for fuel efficiency” (Bahree, 2016).
To ensure the quality that Indian consumers are looking for, theory regarding quality control processes can be looked at. Kamalanabhan, et al. (1999) provide an eight-step guide to Total Quality Management (TQM) tailored to the Indian market through their research (see appendix C). Total Quality Management is defined as “an integrative management philosophy aimed at continuously improving the quality of products and processes to achieve customer satisfaction.” (Kamalanabhan, 1999, p. 2201). As seen in the appendix, the focus areas of this guide are: divisional top management leadership for quality, role of the quality department, training, product design, supplier quality management, process management, quality data and reporting, and employee relations (Kamalanabhan, 1999).
By looking at quality through this version of TQM, it allows for companies to plan in advance so they can control issues before they happen and continually improve processes. For example, regarding supplier quality management, the literature advises to focus ordering decisions on quality instead of price. We know that low-cost, competitive markets in in India are where the most problems with supplier quality come into play, supporting this plank of the guide.
For an outsider, this guidance can also provide a snapshot into the distance between home and host country quality issues. TQM differs in many countries, so pinpointing areas and advice that the authors have given will help to understand the specific problems in the Indian market. Since the areas that the authors touch on are so varied, from executive leadership to training, it may also serve a cross-functional purpose by alerting the firm to problem areas outside of quality itself.
Section III – Literature Analysis and Application
This section will seek to take the theoretical frameworks from this paper and apply them to the situation at Tasty. There are two questions before us. First, is it feasible for Tasty to enter the Indian market based on equity costs and quality? Second, what entry mode should they choose if they decide to do so? Since so many theories have been discussed, the analysis will be
segmented by the major frameworks and interviews, with theory used to support conclusions.
Section A: Interviews
Interviews were conducted with two of the founders of Tasty to help better understand their current business and desires for foreign expansion. From both interviews, information received was relatively similar. The firm has a strong desire to continue growing its US operations, preferably through franchising due to the reduced capital required from headquarters to open a franchised location. It would also like to find new avenues for growth due to declining foot traffic in shopping malls in the US, where many of their kiosk locations are. This growth
combined with maintenance of their brand quality is critical because a sale is being considered in approximately five years.
The founders spoken with are Indian-Americans who are somewhat frequent visitors to India, maintain regular contact with family there and have a strong appreciation for its cultural norms. Their family lives in the city of Mumbai and run a wholesaling business. This means the family has a network of suppliers and business associates that may be beneficial to Tasty. The family also has a firsthand understanding of the business environment in that region of India and is willing to assist with expansion.
Since Tasty is in a successful place, with stable and sufficient revenues, both interviewees would like to use it as a vehicle to connect their heritage with their current lives through expansion in India. In addition to connecting heritage, they also see this as a possible means of revenue growth and brand enhancement. The major considerations for the decision to expand are capital investment (equity) and the maintenance of product quality.
They both spoke of a willingness to adapt product offerings and, to some extent, image of the company to the market. Also, time for implementation was surprisingly not seen as a huge constraint because they already have available resources in the country (i.e. family) that can assist with the day-to-day setup of the project. Time only becomes an issue when it is a significant cost to the firm.
Since not all the founders share the same heritage, the foreign investment would have to be a profit-seeking one. That said, they have been given more leeway to pursue foreign expansion in the first place due to a majority of the founders having a connection to India. Though they have not made exact estimates, both interviewees believed that India would be a strong market to enter for sales and said they understand the massive undertaking of expansion but believed the effort to be worth it.
During the interviews, which were a two-way format, requests for assistance with determining entry mode were the most prominent. The restrictions on food imports and ownership risks ranked highest for concerns, especially because none of the founders are Indian citizens. Entry mode is also important from a practical standpoint because macarons and baked goods, as well as their batters, are perishable goods. If they were required to export these goods, it wouldn’t be feasible. While there is an excitement regarding expansion in India, they expressed there must be a reasonable chance for success in order for them to move forward.
Section B: Selected Decision-Making Frameworks
There were three main frameworks that were used to guide the rest of the research for this paper. They were the CAGE Framework, The Hierarchical Model of Choice of Entry Modes and the Institutional Framework. Each will be discussed separately and in relation to the relevant theories that also appear in this paper.
CAGE Framework
The CAGE Framework (Ghemawat, 2001) broadly discusses the idea of distance in the areas of Cultural Distance, Administrative Distance, Geographic Distance and Economic Distance. This
framework identifies major challenges faced by multinational firms to help them prepare for business in a host country. Other literature within this paper that touch on areas within this framework will be utilized to create a fuller picture of the possible issues for Tasty under this framework.
The research and theories contained within this paper broadly support the idea that Tasty will experience significant Cultural Distance when entering the Indian market. In this section, these differences will be analyzed to determine if, and how, they can be overcome. This will be done with special attention to Tasty’s business model and needs.
Tasty will face Cultural Distance when entering the country on a number of fronts. To start, it is a part of the food-service industry. While the Indian market has diverse food offerings, there are still constraints such as authenticity that must be understood and addressed (Ekanem, 2009), (Nandy, 2004), (Singh, 2007). This conflicts with their home U.S. market which allows for a freer flowing cuisine, such as fusion foods.
Understanding this distance, and the cultural basis for these constraints, will help them determine the correct product offerings for the market. The firm had expressed an openness to changing its menu to incorporate more Indian flavors. While it is good that there is a willingness to change and adapt, it may actually be better to entrench themselves in the French cuisine that the Macarons stem from, and change the menu to reflect more French flavors instead. This could add the appearance of consistency and authenticity in their offerings and may distinguish them in a market already filled with traditional Indian flavors.
Determining which food-service type it will introduce itself to the market as, and the cultural expectations associated with it, will also be critical to ensuring the cultural appropriateness of their offerings. For instance, in the United States mobile food vendors, such as food trucks, can ask the same rate for a lunch as a fast-casual dining establishment. Conversely, in India mobile food vendors are expected to be relatively cheap compared to even McDonalds. Tasty operates both its kiosk-based locations, as well as its full-size locations. Which store type it uses to enter the country will set the tone for the brand and can influence issues such as pricing, food
We know from the literature that due to weak institutions, consumers are often skeptical of new brands. Creating a strong and consistent brand upon entry will be critical to overcoming this skepticism for consumers when first coming into contact with Tasty. Accomplishing this requires cultural leaning to understand the expectations for different sectors of their food industry and how to meet them to build trust with new customers. Research should be conducted to find which regions have high global awareness, education and income. These are characteristics may make consumers more open to a higher-end, international product.
Regardless of the type of business that is being run, general business practices and cultures vary widely between the US and India, also creating Cultural Distance. The United States has very strong formal institutions which businesses rely on. As we know from the literature, India utilizes smaller networks for many industries because formal institutions are weaker (Harriss, 2003). Since the Tasty founders have family with business connections in the country, they should incorporate this understanding of the importance of networks and use their family for guidance.
Determining how to safeguard investment in India, as well as find suppliers, contractors and employees if no network is present will be a consideration for Tasty. If current connections through relatives in the country can be leveraged, this can help to mitigate some risk.
Specifically, Tasty’s founders can use their family network to find relevant trusted partners or suppliers, or the family can recommend trusted advisors if they themselves cannot assist with this.
Differences in cultural norms relating to quality will also be an issue, considering it is one of Tasty’s biggest concerns. We know that the idea of quality is something introduced after the economic liberalization began and that it is still being developed (Kamalanabhan, 1999). The firm will have to determine via research quality issues relating to the food-services industry in India and work to mitigate those. These can take a variety of forms, from supplier issues to human resource deficiencies.
There are frameworks available for overcoming this, including the TQM guide for India (Kamalanabhan, 1999) but simply utilizing this guide is not enough. There must be an
the guide, or any other framework, can be tailored to the needs of the company.
These are just the Cultural Distances that are specifically covered within this paper. There are undoubtedly more that will arise, as outlined in the framework. Their presence should be top of mind for the company when making decisions.
Administrative Distance
Administrative Distance will also be another issue faced by Tasty on a number of fronts when entering this market. There are few ties between the United States and India that would reduce this distance. Currently, no free trade agreements or monetary unions connect the United States and India, which would be the firm’s home and host countries respectively, nor are there any colonial ties. In fact, India increased restrictions on importing foods to the country as recently as this year (USDA Foreign Agricultural Service, 2016). It did so by further tightening the customs testing process and licensing procedures.
In addition to previous regulations, food importers must now register with the Directorate General of Foreign Trade and possess a valid import-export code, in addition to the FBO license already required. Food items with a shelf-life of less than seven days, which could include baked goods imported by Tasty, would also now have to undergo sampling and wait for a no-objection certificate from the Customs Authority (USDA Foreign Agricultural Service, 2016). These steps significantly increase distance and complexity of importing Tasty goods into the country.
That said, the country has moved to reduce some of the administrative burdens caused by lack of free trade agreements. The recent economic liberalization of the market now allows for 100 percent ownership through foreign direct investment for food products, as long as they are “manufactured and/or produced in India” (PTI, 2016). This creates an opportunity for Tasty because they now have the option of a wholly-owned subsidiary, but this also limits them because their products would have to be produced in India instead of being imported.
Institutional weakness, another cause of Administrative Distance, is another issue that persists in India. Harris (2003) discusses how weak formal institutions have shaped the society to rely on
