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Master thesis
Inge Janse
April 2013
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Multinationals tapping into the Bottom of the Pyramid:
‘Doing well and doing good?!’
Qualitative research into the impact of MNC involvement on entrepreneurial activity in India
by
Inge Janse
University of Groningen Faculty of Economics and Business
Master BA, Small Business & Entrepreneurship
2 ABSTRACT
Purpose – The main purpose of this thesis is to research the impact that foreign
multinationals (MNCs) have on entrepreneurial activity, when Bottom of the Pyramid (BOP) markets are entered. A case study has been conducted of American giant Walmart that recently entered emerging India.
Design/methodology/approach – A literature study has been done to determine the status
quo, which lead to a profound conceptual model. Subsequently, a practical contribution is made by means of in-depth interviews. These findings are discussed in the context of the literature.
Findings – Despite the inevitable forced shut down for some local entrepreneurs, the net
outcome on entrepreneurship and social development is positive due to raised opportunities that come along with foreign direct investment. Quality of products and services will be raised and better entrepreneurs are created.
Originality/value – This thesis contributes by combining all relevant BOP literature in one
conceptual model, and by giving the BOP a voice. Where most articles focus on opportunities and challenges for MNCs, this thesis focuses on the impact for the entrepreneurs at the heart of the BOP.
Keywords - BOP, base of the pyramid, bottom of the pyramid, entrepreneurial activity,
3 CONTENT
ABSTRACT ...2
1. INTRODUCTION ...5
2. LITERATURE REVIEW PROCESS ...6
3. LITERATURE REVIEW ...7
3.1 Prahalad vs. Karnani ...7
3.2 Multinationals ...9
3.3 Doing well and doing good ... 10
3.4 Market-specific products & services ... 12
3.5 Local government/ NGOs/ Informal economy ... 13
3. 6 Partnerships MNCs and entrepreneurs ... 15
3.7 BOP Consumers ... 16
3.8 Local entrepreneurs/ BOP producers ... 17
3.9 Entrepreneurial activity... 18
3.10 Economic growth ... 19
3.11 Innovation ... 20
3.12 Buying power ... 21
3.13 Incentives for consumption ... 22
3.13.1 Microcredit ... 23
3.13.2 Community ... 23
3.14 Barriers to consumption ... 24
3.14.1 Affordability of luxury goods ... 25
3.14.2 Costs of serving the poor ... 25
3.14.3 Terrorism/ extremism ... 26 3.14.4 Distribution access ... 26 3.14.5 Consumption behavior ... 27 3.14.6 Corruption ... 28 3.15 Social transformation ... 29 4. CONCEPTUAL MODEL... 31 5. OPERATIONALIZATION ... 32
5.1 Impact of Foreign Direct Investment ... 32
5.2 Walmart entering Indian retail ... 34
5.3 MNC and local entrepreneurs ... 35
4 7. METHOD ... 36 7.1 Research approach ... 36 7.2 Participants ... 37 7.3 Data collection ... 37 7.4 Data-analysis ... 37
7.5 Challenges of doing research in a developing country ... 38
8. FINDINGS ... 39
8.1 Findings group A: experts in the field ... 39
8.1.1 Indian entrepreneurs in retails ... 40
8.1.2 Testing the propositions ... 41
8.1.3 The Walmart case ... 44
8.2 Findings group B: local entrepreneurs ... 45
8.2.1 Entrance of MNCs ... 45
8.2.2 The Walmart Case ... 46
8.2.3 Partnerships with MNCs ... 46
9. DISCUSSION ... 46
10. LIMITATIONS AND FUTURE RESEARCH ... 51
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1. INTRODUCTION
The Bottom of the Pyramid proposition has gained great attention in academic literature. C.K. Prahalad (2002) created awareness by suggesting that a whole range of opportunities lies within low-income markets. Despite the limited income of four billion people that live at the bottom of the consumer pyramid, they should be considered consumers. In fact, even though they have as little as $1 or $2 dollar a day to spent, they represent the largest untapped market. Prahalad awakened many managers of large multinationals to take the leap, but management scholars researching the relations between business and poverty are still limited (Bruton, 2010).
While Prahalad succeeded in convincing many business leaders, an opposing branch in academic literature is skeptic. Karnani (2007a, 2007b) refutes Prahalad’s ideas by arguing that the costs of serving the poor are tremendous and make it uninteresting for MNCs to engage in such investments. Both movements in literature focus on the same topic, but draw different conclusions. Considering this topic has been widely discussed for over a decade now, it is remarkable that consensus is still lacking. What is also notable is the little amount of empirical data that has been collected to back up academic writing. Most data consists of case studies, even the data Prahalad uses in his books and articles.
The purpose of this thesis is to map all relevant BOP literature and describe the status quo. Many articles write about one specific topic related to the BOP (e.g. microcredit, NGO’s, innovation), but a complete overview of all topics and their interrelations was still missing. This paper puts all loose parts together in one framework and subsequently in a conceptual model. That way, insight is gained in the relations. Academic writing is used to distinguish and discuss all variables. When all variables of the conceptual model have been discussed, focus is created. Considering the complexity and wide range of the model, not all variables are used in the practical part of this thesis. The ‘entrepreneurial part’ of the model is highlighted.
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2. LITERATURE REVIEW PROCESS
The first part of this thesis contains a review regarding Bottom of the Pyramid literature. In order to get a clear overview of the status quo, all relevant material has been collected and put together. To cover a wide range and broad view of the topic, the Web of Knowledge has served as tool to map journals worldwide. The Web of Knowledge is a database that covers a wide range of articles (more than e.g. EBSCO) and offers statistic tools that can be used to analyze them. The literature search that has been done prior to the review was already conducted by dr. C.K. Streb (docent at the Rijksuniversiteit Groningen at the time) in June 2010. The literature search was repeated exactly the same way for this master thesis in June 2012. Three general search terms have been used: ‘Bottom of the Pyramid’, ‘Base of the Pyramid’, a synonym that sometimes is used (London, 2007; Web et al., 2009) and ‘BOP’, abbreviation of the term. In table 1 (below) the unrefined results of both literature searches are given. These results include various fields of research, and therefore the results are filtered on ‘Business and Economics’. When the results of 2010 and 2012 are put together, this respectively leaves 132, 235 and 149 articles that might be relevant. In order to check for overlap and redundancy, all articles had to be checked manually. The manual check was designed to search for qualitative articles that really put emphasize on the BOP models and their usefulness. The result of this manual check is summarized in Table 2 (appendix A). In total 47 articles are considered relevant material when the current situation of the BOP is to be discussed. The point of view of these articles varies from authors that agree with the proposition suggested by Prahalad to articles written by authors that argue opposite. This variance in literature helps to create an interesting discussion. It should be noted though, that 5 of these articles were not included in the theoretical framework. These articles, marked with (*) in the table handle topics that were not repeatedly discussed in the other articles.
Unrefined results first literature search (June 2010) After refinement ‘Business and Economics’ (June 2010) Unrefined results second literature search (June 2012) After refinement ‘Business and Economics’ (June 2012) Bottom of the Pyramid 370 37 503 95 Base of the pyramid 962 30 8.371 205 BOP 2.460 49 4.603 100
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3. LITERATURE REVIEW
After reading all relevant articles that were selected, various topics caught attention due to the fact that they kept on turning up in the literature. The topics that are frequently mentioned have been put together in a conceptual model (page 31). It became clear that the BOP subject is very extensive and complex. Many variables influence the model some way or another. An attempt has been made to make an organized and structured model that is both complete and understandable.
The overall picture is required in order to gain understanding of the model, the relationships between the variables and their coherence. All variables will be discussed in this literature review, but the entrepreneurial part will be the main issue of this thesis. Although is it clear that MNCs claim that they have the incentive to do good and not only to do well, there is hardly any, if no empirical evidence to support this claim. It is interesting to research if these foreign MNCs establishments in developing countries affect the entrepreneurial activity in those countries. The practical application of the “Doing Well & Doing Good” proposition is a topic that has been widely discussed, but has had no extensive academic research among management scholars (Bruton, 2010). This thesis will shed light on that particular issue and makes an attempt to back up the literature with much needed data. Also the difficulties and challenges of doing research in a developing country will be discussed.
3.1 Prahalad vs. Karnani
The theories of Prahalad and Karnani will be discussed in this paragraph. These two authors represent different literary streams. Prahalad describes the Bottom of the Pyramid as an untapped potential where a fortune can be made when the right strategies are maintained. Karnani describes quite the opposite. He underpins the concept and states that MNCs could get financially harmed when they engage in BOP practices. Because of the contradiction between the theories of these two authors, their statements are confronted in the following section.
8 2010), he makes a convincing argument for MNCs to take a great leap and do business at the Bottom of the Pyramid.
His idea goes against many of the assumptions he claims that most MNCs make: that it is not profitable to do business at the BOP due to high cost structure, that the products and services they make are not payable for the low income segment, and that only developed markets value innovation and are willing to pay for new technology. Those assumptions suggest that governments and nongovernmental organizations in these developing countries should take account for the low-income segment (Pitta, D.A., Guesalaga, R. and Marshall, P., 2008). However, Prahalad disagrees and goes against these assumptions. When doing business with the Tier 4 market (Figure 1), four key elements are summarized that should be taken into account (Prahalad & Hart, 2002):
1. Creating buying power: providing access to credit and increasing the potential income of the poor is essential in eradicating poverty;
2. Shaping aspirations: sustainable product innovation and the education of consumers of the low-income segment will help to adjust expectations;
3. Improving access: better distribution and communication systems can help the poor to get out of isolation and help development;
4. Tailoring local solutions: not global products for all segments, but targeted products adjusted to the bottom of the pyramid, bottom-up innovation and local solutions.
Figure 1: schematic overview of the world’s population differentiated in four tiers (Prahalad & Hart, 2002, p. 4)
Prahalad has managed to convince a considerable amount of managers of MNCs to act upon his proposition. However, Karnani would give those managers a different advice. The title of one of his articles ‘Mirage at the Bottom of the Pyramid’ (Karnani, 2007b) indicates that. Karnani disagrees on several points and underpins it with the following arguments:
9 2. The costs of serving the poor are too high: BOP consumers are geographically dispersed and heterogeneous, therefore economies of scale are not possible for MNCs; 3. The individual transactions represent a low amount of money: the people at the BOP
only have $1 or $2 dollar to spend each day, so luxury goods are not affordable;
4. BOP consumers are very price sensitive: 80% of the income of the poor goes to food, clothing and fuel. Therefore hardly any money is left for other products;
5. The poor should be seen as producers (potential entrepreneurs) instead of consumers: that way they are not exploited and they are able to improve their economic situation by increasing their income level.
Karnani concludes: “Certainly the best way for private firms to help eradicate poverty is to invest in upgrading the skills and productivity of the poor and to help create more employment opportunities for them” (Karnani, 2007b, p. 109).
Karnani and Prahalad both have reasonable arguments presented in their articles, but no right or wrong can be appointed. Having summarized their point of views, this will serve as input for a lively discussion concerning the BOP subject.
Analyzed literature:
Karnani, A. 2007a
Karnani, A 2007b
Pitta, D.A., Guesalaga, R. , & Marshall, P. 2008
3.2 Multinationals
An important question is highlighted by Prahalad & Hart (2002): ‘Why are multinationals so important in creating innovation at BOP markets?’ Although MNCs have the financial resources and benefits of scale and scope, small/local organizations are much more responsive to developments in the market. The role of local entrepreneurs is significant and entrepreneurship should be encouraged. However, involvement of MNCs is necessary due to the following reasons:
1. They have the resources to create a commercial infrastructure;
10 Prahalad & Hammond (2002, p. 49) state the following: “It is clear that prosperity can come to the poorest regions only through the direct and sustained involvement of multinational companies”. These authors claim that big companies should solve big problems and that nothing is more urgent than countering poverty. If MNCs are willing to involve in BOP matters, poverty can be addressed. Their success can be linked to the soft infrastructure they can offer BOP markets in order to make them more effective (Khanna & Palepu, 2006).
Several MNCs are already involved in BOP markets and others will also be involved when they discover the opportunities at the Bottom of the Pyramid. The following paragraph will illustrate why MNCs consider reduction of poverty an issue that is related to doing business.
Analyzed literature:
Khanna, T. & Palepu, K.G. 2006 Prahalad, C.K. & Hart, S.L. 2002 Prahalad, C.K. & Hammond, A. 2002
3.3 Doing well and doing good
Not only opportunities for profit making are a reason for multinationals to address the poor, but also the possibility to help them get out of poverty seems to drive MNCs to do business with the four billion people at the bottom (Prahalad, 2010). Their goal is dualistic: they want to do well, and also do good. The combination of those two lead to the Bottom of the Pyramid proposition. To do so, Western business models cannot simply be copied. The bottom of the pyramid should be globally integrated on managerial level and should not be considered as “developing” (Hahn, 2008; Choi, Kim, & Kim, 2010). Traditional views of economic development and business strategy will not hold when markets with such potential are entered (London & Hart, 2004). Business models should be adapted and focus should no longer be on high margins, but on volume (Prahalad & Hart, 2002).
11 welfare. Therefore markets in developing countries need to be constrained. Where governments might not have the power to obstruct these MNCs from maintaining ‘unfair’ business that lead to negative consequences in public welfare, corporate social responsibility may be the best hope. Garette & Karnani (2010) argue that examples of profitable businesses that simultaneously help public welfare are very limited, but examples of profit making MNCs that exploit the poor on large scale are much more easy to find. A distinction has to be made between charities and businesses that really have a social goal next to maintaining wealth. To combine corporate social responsibility and to maintain a profitable business is a major challenge. Kuriyan, Ray, & Toyama (2008) also discuss the challenge that lies within determining whether or not this “social development” is being served.
Making profit is important, but business also contributes to society through innovation and growth firms (Ahstrom, 2010). A good firm not only brings profit, but also innovation that lead to economic growth, employment and important changes in the everyday life of people (Baumol, 2004). The connection between business and poverty alleviation mainly lies within the proposition of mutual value creation. To sum, business strategies to alleviate poverty can only exist when MNCs will also generate economic returns (London, 2010).
Many business leaders have anticipated on the BOP proposition that was put forward by Prahalad, but research on business in institutional settings where poverty is dominant is still very limited (Bruton, 2010). The real incentives for MNCs to the opportunity of serving the poor, remain unclear. Is it doing well and doing good like the proposition claims, or is it mainly doing well? Pitta et al. (2008) discuss the contrast between Prahalad and Karnani and come to conclude that no clear picture of the opportunities at the bottom of the pyramid can be given. Research is still needed to get a clearer view of how these opportunities can help both multinational companies and the poor.
Analyzed literature :
Ahstrom, D. 2010
Baumol, W.J. 2004
Choi, C.J., Kim, S.W., & Kim, J.B. 2010 Garrette, B. & Karnani, A. 2010
Hahn, R. 2009
London, T. 2010
London, T. & Hart, S.L. 2004
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Karnani, A. 2007
Kuriyan, R., Ray, I., & Toyama, K. 2--8
Prahalad, C.K. 2011
Prahalad, C.K. & Hart, S.L. 2002 Pitta, D.A., Guesalaga, R., & Marshall, P. 2008
3.4 Market-specific products & services
It is clear that with the current cost structure, the BOP markets cannot be served, because they would not be able to afford our products. The poor might not have use for the products that are sold in developed countries, but if its functionality is formed over, they can (Prahalad & Hart, 2002). Take for example the need for sanitation. The need is there, but detergents are not affordable in formats that we offer. “To convert the BOP into a consumer market, we have to create the capacity to consume” (Prahalad, 2011, p.40). To create capacity to consume, affordable packages, sold per unit, are the solution according to Prahalad (2011). Where people in developed countries can afford to hold stocks for convenience, people with $1 or $2 dollar to spent daily, cannot. Each day they have to make the decision what they can buy with the little income they have. Shampoo is a good example of this. Since the poor cannot afford large bottles of shampoo, usage of single-serve packaging has tremendously increased. Three principles can be maintained when business models, products and services are adapted: (1) affordability: single serve packages without reducing quality, (2) access: products and services must be distributed geographically, (3) availability: distribution efficiency is important, because the poor do not postpone their buys or save money to buy later. When MNCs adopt their business models to serve the BOP markets, they have to be aware of the variability in cash flows of BOP consumers (Prahalad, 2011). Weidner, Rosa, & Viswanthan (2010) suggest that MNCs need to be adaptive and flexible in order to respond to changes within the local markets in order to succeed.
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Analyzed literature :
Prahalad, C.K. 2011
Prahalad, C.K. & Hart, S.L. 2002 Weidner, K.L., Rosa, J.A., & Vishwanthan,
M.
2010
3.5 Local government/ NGOs/ Informal economy
Partnerships between multinationals and non-governmental organizations have been widely discussed in academic writing (Brugman & Prahalad, 2007; Chesbrough, H., Ahern, S., Finn, M., & Guerraz, S., 2006; Perez-Aleman & Sandilands, 2008). Most academic agree that alliances between these parties are useful due to their common interest: both want to create innovative businesses in order to help the bottom of the pyramid (Brugman & Prahalad, 2007). Partnerships with NGOs can positively influence the entrepreneurial process due to a high degree of socialized knowledge, social embeddedness within multiple informal networks and the experience in dealing with diverse stakeholder groups (Webb, J.W., Tihanyi, L., Ireland, R.D., & Sirmon, D.G., 2010).
The advantage NGOs have over private sector companies is not only related to their understanding of the environment, but also the lack of time constraint they have. While for-profit organizations often want to see a for-profitable result in a short period of time, NGOs can afford to take their time implementing new business models in order to create sustainable economic development. The difference with for-profit organizations is that NGOs leave the great majority of profits for small local entrepreneurs to create a sustainable economic ecosystem (Chesbrough et al., 2006).
14 but how can the small, local entrepreneurs be included? They have to interact with the poorer and smaller companies and implement them in global supply chains to really create sustainability (Perez-Aleman & Sandilands, 2008).
When partnerships between multiple players like MNCs, government, NGOs, local entrepreneurs, etc. are discussed, one big player is omitted. Next to the formal entities that are grounded on legal contracts, a large informal economy exists where only social relationships are grounded. “A significant amount of activity takes place in the informal economy, suggesting its theoretical and practical importance” (Webb et al., 2009, p. 493). The informal economy accounts for approximately 40 percent of gross domestic product in developing countries (Schneider, 2002). This large, hidden, informal economy exists because it is not possible for these entrepreneurs to enter the formal economy due to the high costs involved. Considering the size of this ‘extralegal’ economy, it cannot be overlooked when doing business at the base of the pyramid. Bridging between the informal and formal economy is necessary to understand the existing social infrastructure (London & Hart, 2004). Considering that the size of this informal economy is hard measure and boundaries are vague, there is hardly any empirical evidence to be found in theory. How the entrepreneurial process works in the informal economy is still hard to define, however it is clear that these entrepreneurs should be taken into account when MNC-NGO alliances are approaching producers at BOP markets (Webb et al., 2009).
Analyzed literature :
Brugmann, J. & Prahalad, C.K. 2007 Chesbrough, H., Ahern, S., Finn, M., &
Guerraz, S.
2006
London, T. & Hart, S.L. 2004 Perez-Aleman, P. & Sandilands, M. 2008
Schneider, F. 2002
Webb, J.W., Kistruck, G.M., Ireland, R.D., & Ketchen, D.J.
2010
Webb, J.W., Tihanyi, L., Ireland, R.D., & Sirmon, D.G.
15 3. 6 Partnerships MNCs and entrepreneurs
In order to be able to pursuit opportunities in serving the world’s poor, business models need to be adapted. However, not only internal changes within the company are required, also external changes have to be taken into account. A less highlighted aspect is the partnering up with local entrepreneurs. Prahalad & Hammond (2002) emphasize that “empowering local entrepreneurs is key”. Although MNCs may have the scale and cost advantages, managers of MNCs cannot beat the advantages of local entrepreneurs. Often foreign managers are relied on too much, while local managers have access to local knowledge and local social capital. These local managers do not only have operational value, but also institutional value. Physic distance between local managers and MNC leaders need to be overcome in order to create responsible leadership (Berger, Choi, & Kim, 2011). Partnerships with companies that are already established in the market can be effective in creating both physical and social infrastructure (Prahalad & Hammond, 2002). MNCs are only one of the actors involved in serving the Bottom of the Pyramid. As became clear in the previous paragraph, MNCs have to partner up with non-governmental organizations (NGO’s), local government and communities in order to be really effective.
Prahalad & Hammond (2002) state that MNCs are catalyst in pursuing the BOP opportunity due to their resources, global knowledge and their capacity to unite all actors and transfer knowledge (Prahalad & Hart, 2002). On the contrary, Pitta et al. (2008) describe that MNCs have the weakness of being too large, too rigid and too far from the customer to be effective. A bottom up approach (Karnani, 2007b) is therefore suggested. These two starting points show that more research is needed to find out under which circumstances large, foreign multinationals should be the ones to lead the BOP incentive (Pitta et al., 2008).
When doing business at the Bottom of the Pyramid, it is important to keep in mind that BOP networks work differently than those at the Top of the Pyramid. BOP networks are more direct and informal and multiple domains of interaction among network members are common. These networks are harder to predict due to their unstable character (Rivera-Santos & Rufin, 2010).
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Analyzed literature :
Berger, R., Choi, C.J., & Kim, J.B. 2011
Karnani, A. 2007b
London, T. & Hart, S.L. 2004 Pitta, D.A., Guesalaga, R., & Marshall, P. 2008 Prahalad, C.K. & Hart, S.L. 2002 Prahalad, C.K. & Hammond, A. 2002 Rivera-Santos, M. & Rufin, C. 2010
3.7 BOP Consumers
In BOP literature, little distinction is made between consumers and producers at the base of the pyramid. Prahalad often refers to the poor as potential “consumers”, where Karnani (2007b) argues that the poor should be seen as “producers”. Some clarification of these two terms is required. Prahalad & Hart (2002) mention that the focus should be on “the billions of aspiring poor who are joining the market economy for the first time”. They talk about doing business “with” the poor. Adapting products, services and business models is required to serve these four billion less fortunate people. On the contrary, Karnani (2007b) prefers to view the poor as producers. He argues that the best way to help to alleviate poverty is to raise income of the poor. Increasing income and therewith buying power, will be discussed later on in this theoretical framework.
Consumption can be categorized in many different levels. Each level of the pyramid consumes, but all in a different manner. It seems logical that poor people cannot consume luxury products, because they simply cannot afford it. Although consumers at the bottom of the pyramid may have little income, this does not mean that they do not have self-fulfilling needs. It is argued (Karnani, 2007a; Karnani, 2007b) that despite this need, the poor do not benefit from consuming luxury goods. They might want to buy it, but they cannot afford it. Also it can lead to misuse, like for example alcohol abuse. However, research (Subrahmanyan & Gomez-Arias, 2008) shows that although survival and safety needs are critical, self-esteem and self-fulfillment needs lead to greater opportunities and profits. So if there is a need, why not adapt and make market-specific products and services to meet demand?
17 entrepreneur and the other way around. It should be noted that the main focus of this thesis will lie on the BOP entrepreneur.
Analyzed literature :
Karnani, A. 2007a
Karnani, A. 2007b
Prahalad, C.K. & Hart, S.L. 2002 Subrahmanyan, S. & Gomez-Arias J.T. 2008
3.8 Local entrepreneurs/ BOP producers
Local entrepreneurs are reckoned to be key when new, unsaturated markets are tapped. Still the effect of entrepreneurial activity in developing countries is somewhat underexposed in BOP literature. In order to describe the role of entrepreneurship in the social transformation that is mentioned by Prahalad (2010), some additional literature was used.
There is no consensus in academic writing in defining “entrepreneurship”. Therefore a commonly used definition will be maintained in this thesis: ”Entrepreneurship is an activity that involves the discovery, evaluation and exploitation of opportunities to introduce new goods and services, ways of organizing, markets, processes, and raw materials through organizing efforts that previously had not existed.” (Venkataraman, 1997; Shane & Venkataraman, 2000)
18 describes that information is free available for everybody, but only alert entrepreneurs are able to use this information in innovative ways, using their unique set of knowledge. Both Kirzner and Schumpeter describe entrepreneurship as a conflux of passing opportunities and alert individuals, acting in a situation of economic disequilibrium. Most entrepreneurship in developing countries seems to be Kirznerian, due to the level of alertness and responsiveness that is required and desire of these entrepreneurs to move to a global norm and push towards an equilibrium. In some cases however Schumpeterian entrepreneurship also occurs. Although, entrepreneurship that leads to entire new technologies is very rare (Hill & Mudambi, 2010).
Analyzed literature :
Acs, Z. & Virgill, N. 2010 Audretsch, D.B. & Thurik, A.R. 1998 Hill, T.L. & Mudambi, R. 2010
Kirzner 1973
Prahalad, C.K. 2011
Schumpeter 1934
Shane, S. & Venkataraman, S. 2000
Venkataraman, S. 1997
3.9 Entrepreneurial activity
19 used as proxy for entrepreneurial activity. Koveos & Zhang (2012) indicate with their analysis that economic performance is related to (potential) entrepreneurial activity.
“India, a country of billion plus people with tremendous cultural, linguistics and religious diversity, has tried to modernize its society and transform its economy within the framework of a functioning democracy” (Rai, 2008, p. 214). Entrepreneurship has gained a more significant role in the development of India in the 21th century. It is expected that entrepreneurship has the function of a catalyst for economic development in the rapidly changing business environment of India.
Analyzed literature :
Koveos, P. & Zhang, Y. 2012
Rai, S.K. 2008
Whickham, P.A. 2000
3.10 Economic growth
Economic growth is an important mechanism in helping to improve people’s living conditions. Over the long run it even is more important than the foreign aid or macro-economic management tools. History shows that macro-economic growth has led to fast declines in poverty in countries like China and India. Hundreds of millions of people already moved from poverty to the middle class (Ahlstrom, 2010). Economic growth can only occur when innovation takes place. “Disruptive innovations create significant new growth in industries as they enable the less skilled and less affluent to use products previously used only by wealthier people and organizations” (Ahlstrom, 2010, p.21).
Various views of entrepreneurship are discussed in academic literature. However, they all have the same starting point: entrepreneurship is important for economic development. When resources are allocated effectively by alert entrepreneurs, and new firms and new jobs are created, higher economic growth is likely. “As in developed economies, entrepreneurship also has the potential to be the engine of economic growth through its impact on technology and innovation and the allocation and mobilization of the factors of production.” (Acs & Virgill, 2010, p.58)
Analyzed literature :
Acs, Z. & Virgill, N. 2010
20 3.11 Innovation
Innovation in developing countries is not the same as innovation in developed countries. Several distinctions have to be made. Anderson and Markides (2007) suggest that in developing countries the following issues are key: finding new customer groups, creating new products and creating new business models or new ways to create competitive advantage. Innovators have to adapt their products and services to be able to serve the lowest-income customers that often receive their income daily, instead of once a moth. Products have to meet the needs of the poor not only in price, but also in (cultural) acceptance. Marketing in developing countries also differs due to limited distribution channels. When issues of affordability, acceptability, availability and awareness are addressed, strategic innovation at the bottom of the pyramid can take place (Anderson & Markides, 2007).
Several authors discuss disruptive technology as suitable innovation method. Disruptive innovation, a theory introduced by Schumpeter (1934), suggests that companies should not look for growth in mainstream markets if they want to have great growth potential. The potential lies within low-income markets where people’s basic needs are unmet (Hart & Christensen, 2002). Companies can put much effort in trying to create competitive advantage in developed markets that are already saturated, but they can also choose to compete against non-consumption in developing countries. Zhou, J., Tong, Y., & Li, J. (2011) also describe disruptive innovation as appropriate strategy to serve the people at the base of the pyramid. The poor can benefit from new technologies, while companies have the possibility to disrupt a whole industry. Potential is tremendous at the base of pyramid, because developing countries are ideal target markets for disruptive innovation, due to their unmet demands.
Designing innovations in order to meet the demand of the masses at the base of the pyramid, is challenging because business models of developed countries cannot simply be copied. In order to succeed, companies should adapt to the characteristics and environment of BOP consumers. “Product innovation that meets the affordability and acceptability criteria of masses at the BoP may have the potential for profitability of a disruptive innovation” ( Ray & Ray, 2011, p. 217).
21 leadership and vision, (2) modular designs to meet user demands of affordability, functionality, and operability through architectural innovation, (3) exploitation of the local knowledge base and the creation of local innovation clusters”.
Analyzed literature :
Anderson, J. & Markides, C. 2007 Hart, S.L. & Christensen, C.M. 2002 Ray, P.K. & Ray, S. 2010 Ray, S. & Ray, P.K. 2011
Schumpeter, J.A. 1934
Zhou, J., Tong, Y., & Li, J. 2011
3.12 Buying power
Prahalad & Hart (2002) discuss the creation of buying power and focus on access to credit. They point out that increasing income of the poor is essential to help them to get out of poverty and commercial credit is referred to as a solution. Majority of the poor is involved in the informal economy and has no collateral. The extension of microcredit is put forward as their best, maybe even only option. Providing the poor with credit presumably can help them to get out of poverty (Prahalad & Hart, 2002).
On the contrary, some argue that the problem actually lies within the affordability of products and cannot be solved by extending expensive loans and getting them into debt. Karnani (2007b) argues that the poor have limited buying power, because they spent all of their money on daily consumer products. Getting the poor to consume more, will not solve the problem of being poor. They actually want to consume more, but they cannot afford it. To increase buying power of the people at the base of the pyramid, their income has to be raised or the products they buy should be of lower quality in order to lower product prices. When people only have $1 or $2 dollar a day, they can barely afford basic needs, let alone luxury items (Karnani, 2007b).
22 & Hammond, 2002). Doing business with the poor is not restricted due to their lack of buying power, but due to other barriers like limited distribution access. The influence of distribution access and other entry barriers will be discussed later on in this theoretical framework.
Not only basic needs are served, also luxury items can be purchased with aggregate buying power. Where access to bulk discount stores is non-existent, people at the base of the pyramid pay a much higher price per product or service. Opportunities are observed in selling quality goods at affordable prices, while still maintaining attractive margins (Martinez & Carbonell, 2007).
Tools can be used to measure buying power. For example, the buying power index (BPI), a tool that has been used for more than 30 years. This index measures the relative buying power of consumers in different geographic areas (Guesalaga & Marshall, 2008). In their research, Guesalaga and Marshall (2008) show that buying power at the Bottom of the Pyramid can also be measured and distributions of BOP expenditures can be calculated. It gives a clearer picture of how income is spent on different product categories at the Bottom of the Pyramid. Still, it is hard to collect empirical data on how income is spent in different tiers and also regional disparities can pose significant barriers in consumption behavior.
The question remains how generating entrepreneurs and local consumers can lead to increase of buying power? It is hard to get a complete picture of the impact of BOP ventures, because stimulating entrepreneurship at the bottom of the pyramid not only raises income of the entrepreneur, but also has a bigger impact. London (2009) referred to three dimensions that will be effected by a BOP venture: economic situation, capabilities, and relationships. Not only local buyers, but also local sellers and local communities are being impacted.
Analyzed literature :
Guesalaga R. & Marshall, P. 2008
Karnani, A. 2007b
Martinez, J.L. & Carbonell, M. 2007 Prahalad, C.K. & Hart, S.L. 2002
3.13 Incentives for consumption
23 3.13.1 Microcredit
Opinions on the usefulness of microcredit differ. Some plead for small loans that enable people with a low income to be entrepreneur and some refer to it as unnecessary debt. Success cases are known of the Grameen Bank, pioneer in the field, that inspired around 25 million micro lenders in developing and developed countries (Prahalad & Hart, 2002). Where banks normally ask for a security of pledge, no collateral is needed when micro lending is concerned. Prahalad (2004, 2010) often mentions microcredit as a solution in increasing buying power of BOP people. Karnani (2007b) however, opposes that the poor only get deeper into debt due to unsuccessful entrepreneurs that have to pay very high interest rates. Not every person that has access to a loan, is per definition a good entrepreneur. Many micro firms failed to help a considerable amount of people due the fact that they do not have access to commercial funds and the high costs of controlling all these little loans that are dispersed geographically (Akula, 2008). In his article, Akula (2008) describes several issues that are important to succeed in micro finance. As founder of SKS Microfinance in India he opposes three principles that can help MNCs or NGOs to make a profitable business at the bottom of the pyramid: (1) maintain a profit-oriented approach; an investment in the poor can bring both profit to them and to the investor, (2) use standardized processes, products and training, (3) make use of technology to reduce costs and minimize failure.
It is thought in general that these micro financing programs can help entrepreneurs start up a businesses and that in return job creation takes place. Logically increase of income and increase of consumption are the result (Pitta et al., 2008).
Analyzed literature :
Akula, V. 2008
Karnani, A. 2007b
Pitta, D.A., Guesalaga, R., & Marshall, P. 2008
3.13.2 Community
24 community that starts producing products. The dilemma however remains if one chooses for its own needs or is willing to think in the interest of a community (Pitta et al., 2008).
Peredo & Chrisman (2006) take it further by suggesting the Community Based Entreprise (CBE). This unconventional form of entrepreneurship, he argues, can form a promising strategy in alleviating poverty. The CBE is based on the community interest instead of the individual one and considers common good as key in the creation of new ventures. “In CBE, the community’s cultural identity, embodied in its cooperative traditions, can be a driving force, impelling social, economic, and environmental initiatives concurrently” (Peredo & Chrisman, 2006, p.323).
Analyzed literature :
Peredo, A.M. & Chrisman, J.J. 2006 Pitta, D.A., Guesalaga, R., & Marshall, P. 2008 Prahalad, C.K. & Hammond, A. 2002
3.14 Barriers to consumption
Prahalad’s proposition of “Doing Well and Doing good” sounds appealing to many companies. However, having the goal to establishing sustainability and improving a company’s financial situation at the same time, seems to be a challenging task. Although the BOP theory has gained much attention, few companies have succeeded in implementing it (Olsen & Boxenbaum, 2009). Where most literature focuses on external barriers that might prevent implementation of BOP-theory, Olsen & Boxenbaum (2009) focus on internal organization barriers. Often managers fail to achieve to bring corporate sustainability into practice, and it is not implemented into day-to-day activities. It lacks implementation strategy, even when companies with a strong track record in corporate responsibility are considered. To be successful, managers should engage in sustainability practices in order to adopt theory into practice. When internal barriers are overcome, external barriers are not to be forgotten. Companies need to make sure products are well received by the consumers and products are adopted despite the barriers of poverty (Nakata & Weidner, 2012). Several barriers to consumption are discussed in the following section.
Analyzed literature :
25
3.14.1 Affordability of luxury goods
Like discussed, Karnani’s (2007b) argument builds on the fact that the poor actually have the need to consume more, but they cannot afford it. They may want to buy good quality products, but their limited income makes them unable to. Where Prahalad (2010) mentions adapting the way products are packaged as a solution for affordability, Karnani (2007b) states that smaller packages at lower profit margins are a fallacy. The poor buy small packaged products because of the inability to save money and the convenience that it brings them. Big bottles of shampoo or big packages of cigarettes are simply not affordable, therefore little packages and single cigarettes are preferred. Although this way of marketing products can help to manage the cash flow of the poor and help in their convenience, ‘affordability’ is not increased. Affordability is only increased when the price per product is reduced.
Analyzed literature :
Karnani, A. 2007b
Prahalad, C.K. 2010
3.14.2 Costs of serving the poor
One of the main concerns with regard to serving the poor is that the costs of serving the poor are very high due to the geographical dispersion of the market (Karnani’s, 2007b). Exploiting economies of scale is hard when costs of distribution are very high. A weak infrastructure (transportation, communication, media and legal) drives up costs of doing business with the poor even more. Seelos & Mair (2007) agree and discuss the hurdles that hinder making investments at the Bottom of the Pyramid. They question Prahalad’s argument that a huge profit opportunity is for grabs. If that is indeed the case, and millions can be made that easily, why have companies not picked up this opportunity on large scale? Truth is that business models have to be fundamentally changed to serve the poor and simultaneously create profits. This is a major (insecure) investment.
Analyzed literature :
Karnani, A. 2007b
26 3.14.3 Terrorism/ extremism
Although little is known about what motivates entrepreneurs in developing countries to become an entrepreneur, it is clear that extreme adversity positively influences entrepreneurial activity. This paradoxical observation is explained in the literature (Azevedo, 2005). It is argued that entrepreneurs are incubated when a situation of disruption takes place. In terroristic environments, people need to have coping skills to deal with the situation and stay optimistic. It has to be noted that entrepreneurs have a higher “adversity quotient” than non-entrepreneurs, which enables them to see more opportunities. The main argument holds that entrepreneurs are more likely to respond and take action in situations of unexpected distress. These conditions can help entrepreneurs to approach things differently and respond to transitional opportunities. Setbacks and personal distress can help to increase self-knowledge and create a higher level of functioning. Hoping for a better future can be the basis for engaging in entrepreneurial activity. Individuals are more willing to take risks when disruption is taking place. “The most straightforward explanation for the paradox of enterprise resilience in the face of adversity is that returns to entrepreneurial activities are commensurate with risk” (Azevedo, 2005).
A footnote has to be made here. Branzai & Adblenour (2010) discuss these arguments in their article. Their research shows that escalation of terrorism has the opposite effect. Escalation paralyses and therefore discourages entrepreneurship. Only a few are willing to take the risk, but most people are setback and find more secure ways to support for their families. Reduction in terrorism however, is most likely to encourage entrepreneurial activity. Terroristic environments create the least economic motivation (Branzai & Adblenour, 2010). Hall, J., Matos, S., Sheehan, L., Silvestre, B. (2012) argue that entrepreneurship often is seen as panacea for inclusive growth in BOP countries, but negative outcomes are often left out. Crime and social exclusion are often forgotten or simply not mentioned.
Analyzed literature :
Azevedo, J.P. 2005
Branzai O. and Abdelnour S. 2010 Hall, J., Matos, S., Sheehan, L., Silvestre, B. 2012
3.14.4 Distribution access
27 divergent. Distribution is conceived as ‘the provision of availability’ and channels of distribution are the routes to reach consumers. Problems diverge from information availability to physical availability of products. Physical barriers are related to bad roads, limited local demand and high costs of transportation. Not only can this be seen as a problem for farmers who want to distribute their products, but also for children who want to attend school for example. Another obstacle associated with inadequate infrastructure is the lack of information. No informed choices can be made without the necessary information about buying and selling goods and accessing services. Also lack of knowhow, skills and illiteracy are a result of limited distribution access. “The market access disadvantages suffered by the rural poor are rooted in many factors, which affect the flow of goods and services both in and out of rural areas, and adversely affect the rural population’s income and quality of life.” (Vachani & Smith, 2008, p. 53). It is clear how this barrier can negatively affect the BOP process.
Analyzed literature :
Prahalad, C.K. & Hammond, A. 2002 Vachani, S. & Smith, N.C. 2008
3.14.5 Consumption behavior
It is a given fact that people consume in some manner, regardless of what their income level is. What can also be acknowledged is that people have higher-order needs, even when there is a lack of material goods. Even when people logically cannot afford luxury products, they are consumed (Subrahmanyan & Gomez-Arias, 2008). Some argue that this behavior is created by manipulation of consumers. The poor might want to consume luxury products, but they cannot afford them (Karnani, 2007b). The poor consume more than only their basic needs. Take for example the increase in use of communication and technology. “The need to communicate, improve social bonds, get more knowledge and self-esteem are important too” (Subrahmanyan & Gomez-Arias, 2008, p. 408). These low-income households often try to compensate their lack of status in society with consumption on socially visible products. This compensatory consumption theory might explain why BOP consumers buy luxury products instead of nutritional products or education for their children (Subrahmanyan & Gomez-Arias, 2008).
28 social costs. Alcohol abuse exacerbates poverty. Another example of ethical responsibility is the use of whitening cream at the Bottom of the Pyramid. Karnani (2007a) devotes an article to it by doing a case study on ‘Fair and Lovely’ whitening cream. He discusses the moral issue of companies not only selling whitening creams, but the proposition it makes to women that they get empowered when using it. Companies have the right to sell whitening creams to BOP women, but promising empowerment and eradication of poverty is morally problematic. Overall these various consumption patterns have the ability to increase the level of poverty.
Analyzed literature :
Karnani, A. 2007a
Karnani, A. 2007b
Subrahmanyan, S. & Gomez-Arias J.T. 2008
3.14.6 Corruption
Companies assume that several barriers to commerce make it impossible for them to do business with BOP markets. Corruption, a phenomenon that is common in developing countries, is one of them (Prahalad & Hammond, 2002). Prahalad states that corruption can be reduced when private-sector competition is free and transparent. However, Landrum (2007) points out that corruption can hinder development. Most BOP countries do not realize what the costs of corruption are and how this impacts the development of private-sector and the alleviation of poverty. There is a comprehensive informal sector that is unable to grow, because these informal entrepreneurs cannot attract capital. Therefore they remain small, local and inefficient. The costs of doing business with the informal BOP sector can only be reduced when governments deal with issues of access and transparency and recognize the changes that need to be made in regulations and laws (Prahalad, 2011). The size and influence of corruption is hard to measure, but it is clear that it is intertwined.
Analyzed literature :
Prahalad, C.K. 2011
Landrum, N.E. 2007
29 3.15 Social transformation
It is hard for MNCs and NGOs to measure the effects of their investments at the Bottom of the Pyramid. Often their success is measured at the amount of money they have invested, the amount of products that are sold and distributed, etc. These are mainly quantitative measures. Hardly any qualitative measuring is being done to judge about the influence their actions had. Therefore it is hard to get an impression of the impact of MNC involvement at the BOP. London (2009) describes in his articles several cases of entrepreneurs that run successful businesses and therewith not only have an increased income, but also improvements in their social environment. He developed a framework to help BOP entrepreneurs assess the impact of their businesses. Several dimensions are important when the effect of a venture is being measured: economic situation, capabilities and relationships (London, 2009).
Different motivations are subject to doing business with BOP markets. Elaydi & Harrison (2010) compare two strategies in their research: “market extension” and “strategic intent”. Their research attempts to investigate the effects of a chosen business strategy on long-term poverty alleviation. Market extension is defined as tapping into new markets and creating new customers and increasing usage of the product by extending a product category. Strategic intent focuses on long-term effects and possible outcomes. In the case of market extension short term goals concerning size or scale of the firm are drivers, whereas strategic intent results in best efforts to engage in real poverty alleviation. MNCs with a market extension strategy mainly focus on increase in sales and revenue, a short term effect. This has little to do with poverty alleviation and may even lead to exploiting the BOP consumers. Companies that have a strategic intent think of the long-term effects and possibilities of their actions. Engagement with the community is common and those firms help to grow and transform subsistence markets (Elaydi & Harrison, 2010).
30 for BOP consumers in participating into the global market will eventually lead to social and economic transformation.
“Social transformation is about the number of people who believe that they can aspire to a middle class lifestyle. It is the growing evidence of the opportunity, role models, and real signals of change that allow people to change their aspirations” (Prahalad, 2011, p. 136). Prahalad argues that when this development takes place, which already started, the pyramid can be morphed into a diamond with (Figure 2).
Figure 2: Prahalad, C.K. (2011), pp. 136)
Analyzed literature :
Elaydi, R. & Harrison. C. 2010
London, T. 2009
31
4. CONCEPTUAL MODEL
Barriers to consumption Affordability of luxury goods Distribution access Costs of serving the poor Terrorism/ extremism Corruption Consumption behaviour Economic growth Innovation Local government NGOs/ aid agencies
Informal sector
Incentives for consumption Community Microcredit Buying power BOP Consumers Changing business models Social transformation Multinationals Local entrepreneurs & BOP producers Building
partnerships
Entrepreneurial activity
32
5.
OPERATIONALIZATION
The conceptual model like presented in chapter 4 is quite comprehensive and helps to capture the full scope of BOP research that has been conducted. All relevant BOP topics are covered and an attempt is made to explain the various concepts and their interrelations, based on the literature. While all concepts of the model are discussed in one or more academic publications, none of the articles has succeeded in combing all concepts. Describing the interrelations of the concepts and combining them in a profound model, can therefore be considered a contribution to existing BOP literature.
Although the complexity of the BOP theory becomes clear by the conceptual model that is presented, the scope is too big for this master thesis. Therefore not all concepts will be covered in the practical section of this thesis. The entrepreneurial part of the model is the most interesting for this thesis, so the focus has been made on BOP entrepreneurs instead of BOP consumers. A more focused conceptual model is given in Figure 3.
Figure 3: Focused conceptual model
Now that focus has been made, the research question of this thesis can be formulated:
‘What impact do multinationals have on entrepreneurial activity in BOP
markets and what is their impact on social development?’
In order to go deeper into this, operationalization should take place. This thesis will put emphasize on the Indian retail sector. A lot of developments are currently taken place in this sector and one case example specifically caught attention: Walmart. In order to gain some more insight and understanding in Indian retail and the foreign MNCs that invest in emerging economies, some additional literature will be discussed in the subsequent part.
5.1 Impact of Foreign Direct Investment
In order to create greater market liberalization, the Indian government decided to open up the retail market for Foreign Direct Investment (FDI). This decision attempts to give the Indian
Social transformation Multinationals Local entrepreneurs Building partnerships Entrepreneu-rial activity
33 Economy its much needed boost. Considering the governments limited ability to intervene in the currency market, it is seen as a possibility to stabilize the Rupee, India’s currency. 1
Although this sounds appealing, there is a quite some risk involved. Foreign investors are allowed to own 51% of a single-brand retail company, and even 100% of a cash-and-carry-chain. The latter one only allows a company to sell business-to-business to other retailers. It is feared that the entry of these foreign multinationals could hurt the local entrepreneurs. This group is a large stakeholder, because in India almost 33 million people are employed in so called Kirana’s, or corner shops.2
If the fear of shopkeepers that they have to close down their business is justified, is hard to determine. So far, many multi-brand retailers have failed to implement a successful and effective business strategy. They often fail in creating a competitive advantage by either cost advantages or by providing superior service. Even in cases where they did manage to implement a suitable strategy, local stores still had overhand. One of the main reasons for customers to buy at the Kirana’s, is the possibility to buy on credit. Lower income groups in India cannot get a credit card due to the difficulties for credit card companies to trace defaulted customers. Local creditors often know the customers in person and have a trust based relationship. Therefore groceries can be bought on credit. Another advantage the Kirana’s have over the big multi-brand stores, is the possibility for a customer to phone the nearest corner shop and let them deliver small orders at their own doorsteps. This service is frequently used and does not cost the customer anything extra. The low costs of unskilled labor in India make this kind of service possible. While multi-brand stores for groceries might work in developed countries, the situation is different in India. (Prabhu & Mishra, 2009). “Door delivery at no extra cost by smaller stores for groceries and from roadside vendors for fruits and vegetables are a viable alternative for customers visiting retail stores for these purchases. The grocery sections of large multi-brand retailers are therefore likely to be less profitable and may have to be supported by superior margins from other products” (Prabhu & Mishra, 2009, pp. 66).
It seems that multi-brand stores are mainly desired by the urban Indian middle class that look for a suitable solution to combine their shopping with leisure. On the contrary, urban females who are more time constrained, and senior citizens prefer single brand stores. Different formats appeal to different mindsets. When the relatively new existence of single brand stores is considered, the perception of Indian customers might possibly still be formed.
1
www.asia-monitor.com, assessed January 17th, 2012
2
34 It should be noted that multi-brand stores are mainly mass-driven, while single brand options are highly class-oriented (Basu, Sengupta and Guin, 2012).
While some see the opening up to foreign direct investment as a precursor to liberalization, others find this thought too optimistic. They expect the reform to have less impact on the retail sector and the Indian economy, because the foreign companies that enter the Indian retail sector are regulated by strict conditions. These foreigners are obligated to buy 30% of their products from small, local farmers and producers. This condition makes the economic effect of the reform relatively limited.3
The decision of the Indian government to open up the retail market for foreign investment has several consequences. At the one hand, consumers benefit from it due to the lowering of costs. They will pay less for more quality. At the other hand, a decent in amount of employment is feared and entrepreneurs are affected by the changes in retail. Overall it seems that it will lead to new economic opportunities. “Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing” (Siddhartha, 2012, pp.29).
The impact of FDI on the retail sector will be substantial, because this is the largest private sector in India. The retail sector accounts about 10-11 % of India’s GDP and the amount of retail outlets is estimated on 15 million with a value of 180 billion. “India today represents the most compelling investment opportunity for mass merchants and food retailers looking to expand overseas” (Siddhartha, 2012, pp. 30).
5.2 Walmart entering Indian retail
In order to investigate the research question, a specific sector and branch have been chosen. By doing a case study, focus can easily be made and a concrete answer can be formulated to this question. This study will zoom in on Walmart, an American multinational in retail. This MNC is situated worldwide and has put foot on Indian ground by partnering up with conglomerate Bharthi. This joint venture was established in 2007, but Walmart announced recently that it wants to expand in the coming years. With the Indian borders opening up for foreign direct investment (FDI), the option for this cash-and-carry facility has increased tremendously4.
The process of India opening up its retail sector has been slow. In 2006 a beginning has been made when foreign single-brand companies where allowed up to 51% ownership. Since then the retail sector has gained more and more FDI (Chari & Raghavan, 2011).
3
http://www.eiu.com/ (The Economist Intelligence Unit), assessed January 17th, 2013
4
35 The decision of the Indian government to reform to open up their retail sector that has been made on the 14th of September 2012, has been received with a lot of protest. Strikes and protests of shopkeepers who are afraid to lose their jobs have been dominating the news. It is feared that MNCs like Walmart will destroy the local small businesses. Despite of many protests, some say the Indian economy will actually benefit by this reform (Singh, 2012). It is clear that the impact of the entry of large retail chains is mixed. While small retailers and farmers have genuine concerns, the consumers will benefit. The lowering of prices and the improved distribution and warehouse technologies are major beneficiary for the Indian economy on the whole. Chari & Raghavan (2011) believe that opening up to foreign MNCs may be a catalyst to growth and development of the Indian retail industry.
Whether it is ‘good’ or ‘bad’, the decision has been made and the entering of MNCs cannot be stopped. The discussion is still very lively at time of writing and the impact is irreversible.
5.3 MNC and local entrepreneurs
In BOP literature the empowerment of local entrepreneurs is considered critical for MNCs entering BOP markets. The importance of partnering up with locals has already been highlighted in the literature review. Knowledge, recourses and legitimacy can be seen as main drivers for MNCs to collaborate with local companies.
Regardless of BOP literature, partnerships between MNCs and SMEs are debated often. Audretsch & Thurik (2001) highlight the transformation from a managed economy, where stability, long-term relationships and continuity are central, to an entrepreneurial economy, where flexibility, change and turbulent environment are central. In the managed economy, where scale and scope dominate, small firms are approached negatively because of the less efficient use of resources due to small size. The contrary is opposed by Peters (1992), who claims that ‘big ain’t what it used to be’. Is big better than small? The answer is that it is best to be both simultaneously. It seems that size is not a determinant for the level of competitive advantage.
To create a competitive advantage, an MNC should have to capacity to identify, extract and diffuse knowledge resources within the organization. Mobilizing knowledge is often seen as trade-off between the overall view of an MNC and the local knowledge possessed by national companies (Asakawa & Lehrer, 2003).
36 and knowledge of the local entrepreneurs are much needed ingredients for success. MNCs entering BOP markets therefore have to acknowledge the role of local entrepreneurs and find a way to collaborate with them.
6.
PROPOSITIONS
Now that a literature study has been done and operationalization of a more focused conceptual model has taken place, some propositions can be formulated. The focused conceptual model that was given in chapter 5 will form the basis. The relations between the concepts are described as positive or negative. This logically results from the literature that has been studied. The following propositions are to be tested by doing qualitative data research, by means of several interviews.
1. Local entrepreneurs are positively influenced by the entrance of MNCs in BOP markets when partnerships are established;
2. Entrepreneurial activity on the whole is negatively affected by the entrance of MNCs in BOP markets;
3. Entrepreneurial activity positively influences the social transformation;
4. The overall effect of MNCs entering BOP markets on social transformation is positive.
Figure 4: focused conceptual model including propositions
7.
METHOD
7.1 Research approach
Prior research has not been focused on the overall picture and the interrelatedness of the various subjects. This thesis attempts to gain more insight by conducting in-depth interviews at the heart of the Bottom of the Pyramid: India. The founder of the BOP theory, C.K. Prahalad was born and raised in India, and many of the case examples he uses find their origin
Social transformation Multinationals Local entrepreneurs Building partnerships Entrepreneu-rial activity
The BOP process
P1 P2
