Internationalization Process of Business Groups: Illustrations from India

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Internationalization Process of Business Groups:

Illustrations from India

Master Thesis

Dual Masters Award Advanced International Business and Management Newcastle University Business School and University of Groningen

Fabienne Sereina Fricker

Supervision:

Professor Klaus Schöfer (Newcastle University Business School) Henk Ritsema (University of Groningen)

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LIST OF TABLES

Table 1: Changing pattern of Indian FDI outflows ... 16

Table 2: Overview of the literature on the internationalization process ... 23

Table 3: Overview of case studies ... 29

Table 4: Geographic internationalization path ... 39

Table 5: Type of host country ... 42

Table 6: Top three internationally most relevant industries ... 43

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LIST OF FIGURES

Figure 1: Classification of the internationalization aspects along the two key themes ... 17

Figure 2: Conceptual model ... 25

Figure 3: Geographic scope ... 35

Figure 4: Regional internationalization ... 36

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ABSTRACT

The purpose of this thesis is to shed more light on the internationalization process of Indian business groups, as it is an under-‐researched topic. Previous research was mainly concerned with the expansion strategies of individual companies from advanced economies and, more rarely, from emerging economies. Hence, this study investigates how business groups internationalize by addressing two key themes, namely degree of internationalization and internationalization pattern. In order to explore the internationalization process of Indian business groups a qualitative research methodology, a case study research, was conducted. The findings showed that both international scope and speed were distinct across the business groups. They entered advanced as well as emerging economies, though in a different reach. Both types of host countries seemed to offer their own advantages. Furthermore, accelerated speed was observed only recently.

Additionally, the internationalization pattern was not identical across the business groups. It was not possible to identify one dominant internationalization strategy as the business groups engaged in various internationalization paths. Moreover, the majority did also not strictly follow the distance pattern. In order to give possible explanations for the internationalization process of Indian business groups, various aspects were taken into account. This concerned both macro-‐ and micro-‐level and included psychic distance, market characteristics, catch-‐up strategies, firm-‐specific resources and the role of individuals as well as institutions. In addition, liberalization, trade agreements and access to technologies seemed to be drivers of the internationalization process as well.

Key words: internationalization process, business groups, emerging economies, pattern, degree of internationalization, internationalization path, India

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ABBREVIATIONS

BG Business Group

CMIE Centre for Monitoring Indian Economy EE Emerging Economy

EE MNC Emerging Economy Multinational Company

EMIRG Emerging Market Internationalization Research Group FDI Foreign Direct Investment

ISAS Institute of South Asian Studies MNC Multinational Company

UK United Kingdom

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1. INTRODUCTION

This chapter contains an introduction to the context of the thesis. Firstly, background information about the subject will be provided in section 1.1. This is followed by the rational for the research area and therefore for writing this thesis. Thereafter, the main research question and sub-‐questions are presented in section 1.3 and 1.4 respectively. The research objectives are highlighted in section 1.5. Finally, the chapter ends with the structure of this thesis in section 1.6.

1.1 Background

Due to falling protectionist barriers, multinational companies from advanced economies (MNCs1) are expanding into emerging economies (EEs) around the world (Dawar and Frost, 1999). However, not only MNCs are on the rise on an international level. In the last years, a rapid growth in the literature on emerging economy multinational companies (EE MNCs) could be observed (Becker-‐Ritterspach and Bruche, 2012). Various journals have even devoted special issues on this topic, for example the Journal of International Business Studies (20072_{)
and
the
Journal
of
International
Management
(2010}3_{).
Furthermore,
EE}

MNCs are increasingly entering the global stage. Companies from the BRICS countries – Brazil, Russia, India, China and South Africa – have become significant players (Mathews, 2002, 2006) and have therefore an impact on the landscape of international business (Cao, 2012). Among others Haier, Beko-‐Arcelik and Cemex have shown an unexpected rise to prominence and became internationally more involved (Guillen and Garcia-‐Canal, 2009; Li, 2007; Yaprak and Karademir, 2010).

Due to the importance of EEs (UNCTAD, 2012), a focus on those economies is likely to contribute to the field of international business strategy (Hoskisson et al., 2000; Meyer and Peng, 2005). Legitimacy for this field has been established (Xu and Meyer, 2012). Within the international business strategy literature, the internationalization process of companies can and has been examined. Studies have shown that in order to establish and sustain a competitive advantage, the ability to take opportunities from foreign markets is increasingly

1_{The
term
MNCs
is
referring
to
MNCs
only
from
advanced
countries.} 2_{Volume
38,
Issue
4.}

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important (Hymer, 1976; Zaheer, 1995; Sapienza et al., 2006). Among other things key aspects such as accelerated internationalization, psychic distance, and the role of individual decision-‐makers as well as institutions in the internationalization process were defined. A wide range of explanatory approaches exists in the literature on internationalization.

1.2 Rational for research area

However, research on internationalization has especially focused on companies from advanced countries (Liu, Xiao and Huang, 2008). Only recently the internationalization process of companies from EEs has received a new drive. According to Jormanainen and Koveshnikov (2012) this topic is a highly contemporary and fast evolving phenomenon. Due to the fact that the research-‐focus was traditionally lying on companies from advanced countries, companies from EEs and their internationalization process is widely under-‐ researched (Khanna and Palepu, 2006; Wright et al., 2005; Xu and Meyer, 2012). This is especially the case for the internationalization process of business groups (BGs) as it is still a young research topic (Tan and Meyer, 2010; Yaprak and Karademir, 2010). Such a fact is particularly surprising due to their significance and prominent role in EEs (Khanna and Rivkin, 2001). Large BGs such as Group Carso in Mexico or the Tata Group in India are dominant in the competitive landscape (Purkayastha, Manolova and Edelman, 2012) and key players in the world economy (Guillen, 2000). Studies on BGs represent a worthwhile topic for research, offering many intriguing questions scholars can address (Khanna and Yafeh, 2007), including their internationalization processes (Yiu et al., 2007).

1.3 Research question

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Furthermore, studies have underlined important differences between BGs from different countries.

Due to the growing economic impact and the recently classification as a mid-‐range emerging economy4_{,
India
provides
an
interesting
context,
both
empirically
and
theoretically}

(Hoskisson et al., 2013). Choosing India, one of the key countries in the world economy (UNCTAD, 2012), it offers the opportunity to examine some of the most famous examples of BGs (Gaur and Kumar, 2009) and the dominant organizational form in the country’s business environment (Sarkar, 2010). Additionally, as underlined in the elementary study by Hazari (1966), the BG itself rather than the individual BG companies is the unit of decision-‐making in India. Thus, decisions regarding the internationalization process are likely to be on the BG-‐ level, supporting an investigation on this level. Moreover, previous studies use typically BG companies as unit of analysis, thereby providing a partial picture and making a comparison between BGs difficult (Cainelli and Iacobucci, 2011; Tan and Meyer, 2010). Hence, there is a need to understand how Indian BGs are internationalizing by looking at the BG-‐level. Therefore, this thesis will contribute to research and practice fields by providing an answer to the following main research question:

How do Indian business groups internationalize?

1.4 Sub-‐questions

The following sub-‐questions will be addressed to examine characteristics of the internationalization process of Indian BGs. A focus is placed on two key themes, namely degree of internationalization and internationalization pattern. The sub-‐questions provide a valuable starting point for examining some important characteristics in the internationalization literature.

Degree of internationalization

The degree of internationalization can best be represented by using international scope and speed (e.g. Acedo and Jones, 2007; Autio, Sapienza and Almeida, 2000; Fernhaber et al., 2008).

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The magnitude of foreign markets as well as the speed of expansions is investigated. Addressing the degree of internationalization sheds light on how the internationalization process of Indian BGs has evolved and how far it has already developed, as it is unknown to the current date. Consequently, the following sub-‐question gives insights concerning the reach and development of the internationalization process:

What is the scope and speed of the internationalization process of Indian BGs?

Internationalization pattern

International market selection (e.g. Root, 1994; Sakarya, Eckman and Hyllegard, 2007) is a strategic decision but also a problem of choice. Due to initial or further expansion, the choice of a wide range of possible foreign markets as well as industries needs to be made (Brouthers and Hennar, 2007; Papadopoulos and Martin, 2011). Furthermore, BGs are highly diversified which stresses the importance of many different industries (Khanna and Palepu, 1997). Consequently, geographic pattern and industry pattern are useful determinants for examining the BGs’ expansion strategies and represent two important components of the internationalization pattern:

What does the geographic pattern look like and how important are those foreign countries in the internationalization process of Indian BGs?

What does the industry pattern look like and how important are those industries in the internationalization process of Indian BGs?

1.5 Research objectives

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which seems adequate and allows for a more complete picture. As it will be seen, the academic relevance is given on more than only one level. This fact is underlined by a lately held research workshop on internationalization of Indian and Chinese BGs. It was organized by the Institute of South Asian Studies (ISAS) from the National University of Singapore and the Emerging Market Internationalization Research Group (EMIRG) from the University of Sydney. The workshop was held on the 5th and 6th of December 2013 in Singapore.

Apart from addressing the academics as an audience, research on BGs is also valuable from professional perspectives. As BGs are increasingly gaining more global prominence, the topic is timely for managers. It can also help in giving practical guidance and implications. International executives of Indian BGs as well as from MNCs, who might enter a business relationship with them, can benefit by understanding the internationalization process of Indian BGs. According to Jormanainen and Koveshnikov (2012) studies in this field are relevant and of interest for business practitioners and society in large in both emerging and advanced economies.

1.6 Structure of the thesis

The study is set out in a structured format. The literature review in chapter 2 takes an in-‐ depth look into the literature on EEs, BGs and the internationalization process. This chapter critically reviews the current state of knowledge and introduces the conceptual model. In chapter 3 the research methodology is outlined, including research strategy, sampling, data collection and analysis, and limitations. Thereafter, the data analysis and findings will be presented in chapter 4. The results will then be critically discussed and compared across the cases in chapter 5. Finally, chapter 6 presents conclusions, limitations, recommendations for

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2. LITERATURE REVIEW

The aim of this chapter is to provide the theoretical background for this study. In order to answer the research question current academic research about EEs, BGs and the internationalization process is examined. The theoretical framework is thereby funnel-‐ shaped. This means that the framework starts with the broad topic of EEs, progresses then to BGs until reaching the internationalization process, the centrepiece of this thesis.

Firstly, a brief introduction of the characteristics and relevance of EEs will be presented in section 2.1. The focus is thereby placed on the definition, market failures, home economic environment and global importance of EEs. The selected topics shall familiarize the reader with EEs and improve the understanding of BGs’ operations in the national and international business environment.

Secondly, a review of BGs is incorporated in section 2.2. BGs exist in numerous countries, thus this section contains an examination of BGs around the world. Furthermore, the conceptualization of BGs is investigated because different perspectives on BGs are present. Due to this lack of a clear-‐cut definition the main perspectives are identified and discussed. Additionally, the section on BGs explores Indian BGs to embrace the underlying thesis. This is done to introduce the key players of this study. By doing so the understanding of their characteristics as well as behaviours in the internationalization process shall be enhanced.

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Finally, section 2.5 provides the conclusion of the literature review as well as the conceptual model. This model is used to structure the research and guides the thesis to answer the research question. Overall, the literature helps to build a solid theoretical basis for the upcoming research. Relying on previous findings on the internationalization process enables the author to give possible explanations 5 _{on
the
findings
in
this
thesis.
The}

internationalization process of Indian BGs is discussed with the help of the identified aspects. This is the basis, which enables the author to actually carry out a discussion of the findings.

2.1 Emerging economies

2.1.1 Characteristics

EEs show unique characteristics if compared with one another. A commonly accepted definition of an EE does not exist. However, there are two recurring elements that underline multiple definitions. Firstly, the economic development follows a fast pace. Secondly, government policies that promote economic liberalization and stability of a free-‐market system (Arnold and Quelch, 1998; Hoskisson et al., 2000; Hoskisson et al., 2013). Overall, EEs show enormous growth potential and can be characterized as low to moderate income economies (Meyer, 2004; Ramamurti and Singh, 2009a). They are attractive for MNCs from advanced countries due to the fact that their home markets become increasingly saturated. Especially the bottom of the pyramid markets provide opportunities due to a disproportionately huge base of prospective consumers. However, those markets are also loosely connected to the global economy (London and Hart, 2004; Prahalad and Hammond, 2002; Prahalad and Hart, 2002; Xu and Meyer, 2012).

In an EE three main sources of market failures can be identified: Information problems, inefficient judicial systems and misguided regulations. Whereas companies in advanced countries are able to count on different outside institutions, their counterparts in EEs sometimes need to perform basic functions themselves. Less sophisticated market-‐ supporting institutions and therefore institutional voids are often prevalent, leading to such market failures (Meyer, 2004; Khanna and Palepu, 1997).

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2.1.2 Relevance

It has been underlined by the World Investment Report 2013 (UNCTAD, 2013) that EEs are still growing in importance. For the first time ever -‐ in 2012 -‐ EEs absorbed more foreign direct investment (FDI) than advanced countries, explaining 52 per cent of global FDI flows. Moreover, multinational companies from EEs and in particular from India are responsible for a record level of FDI inflows to least developed countries6_{(UNCTAD,
2013).
Furthermore,
it}

has been claimed that the twenty-‐first century belongs to the EEs (e.g. Wilson and Purushothaman, 2003; Agtmael, 2007), highlighting their importance in the world economy. Hence, a focus on EEs is likely to advance and contribute to the field of international business strategy (Hoskisson et al., 2000; Meyer and Peng, 2005). Ignoring EEs will get harder for academics, practitioners and policy makers in any part of the world, especially with regards to India. This country has entered the top ten economies as measured by GDP in 2010 and remains in this ranking up to 2013 (CNN, 2013). India is a booming economy and positions itself among the global leaders in information, nuclear and rocket technologies. Furthermore, one of the world’s largest labour force with managerial, scientific, technical and entrepreneurial capabilities can be found in India (Khandwalla, 2002; Ramamurti, 2009b), giving the country a competitive edge and a strong basis to build upon future growth. Additionally, India became a World Trade Organization (WTO) member in 1995 (WTO, 2013).

2.2 Business groups

2.2.1 Business groups around the world

BGs take a persuasive, if not dominant position, in many economies. Among others Brazil, Chile, France, India, Italy, Japan, South Korea and Sweden can be named as economies where BGs exist (Granovetter, 1995; Khanna and Yafeh 2007; Smangs, 2006; Yiu et al., 2007). Although BGs appear even in advanced countries, they are particularly known in the context of EEs (Khanna and Yafeh, 2007). They are found in virtually all EEs (Cainelli and Iacobucci,

6_{Least
developed
countries
include:
Afghanistan,
Angola,
Bangladesh,
Benin,
Bhutan,
Burkina
Faso,
Burundi,}

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2011; Jones and Khanna, 2006) and their prominent role is a striking feature in most EEs (Khanna and Rivkin, 2001). Although BGs are omnipresent in EEs, this organizational form is still poorly comprehended (Khanna, 2000) and the literature has failed to accredit the momentousness of BGs, leading to an under-‐researched topic that needs to be further explored (Smangs, 2006).

A common set of features identical to all BGs in different countries cannot be identified (Cuervo-‐Cazurra, 2006; Mazumdar, 2008; Yiu et al., 2007). Moreover, no conception states accurately the number of companies that is required to form a BG (Mazumdar, 2008). BGs around the world show distinct characteristics. Whereas some are highly diversified others are more focused on a certain industry (Khanna and Yafeh, 2007). Studies on BG diversification from EEs show an ambiguous picture whether it creates or destroys value. On the one hand, some scholars proposes that BGs in emerging markets can add value via their diversified rather than focused strategies (Abegaz, 2005; Khanna and Palepu, 2000a, 2000b). On the other hand, other studies question those findings, reach the opposite conclusion (Ferris, Kim and Kitsabunnarat, 2003; Kali and Sarkar, 2005), or show that BGs have been significantly engaged in refocusing activities (Hoskisson et al., 2005).

Not only the structure differs among various BGs, but also ownership and control. In some BGs a vertical control is prevailing whereas others are strongly linked on a horizontal level via cross shareholdings. With regards to the relationship between BGs and the government important differences exist as well. In some countries (e.g. South Korea, Indonesia) BGs enjoy a close connection to the government. However, in other countries (e.g. Chile, China) the relationship between the two players seems to be more turbulent and not always helpful for the BG (Khanna and Yafeh, 2007).

2.2.2 Conceptualization

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2007). Nevertheless, three main perspectives – sociological, economic and institutional -‐ can be identified and will therefore be explained in this section.

Sociological perspective

Granovetter (1995) is referring to BGs as ‘’collections of cooperating firms’’ (p. 94), meaning that individual firms are in coordinated relations to each other. BGs are seen as a network of firms bound together through formal (e.g. equity) as well as informal ties (e.g. family, interlocking directorships). Those ties can be distinguished along multiple lines such as political, ethnic, geographical, religious and kinship. The sociological literature focuses on the non-‐ownership ties and emphasises solidarity norms in BGs. The social structure along the different lines might contribute to the evolution and functioning of BGs (Granovetter 1995; Khanna and Yafeh, 2007; Sarkar, 2010). Although Granovetter (1995) is an often-‐cited scholar with regards to BGs, he has also been criticized (e.g. Smangs, 2006) for his famous article:

‘’Thus, while criticizing the ways in which previous observers have dealt with business groups by primarily asking ‘why’ questions, and arguing for a more sociologically-‐informed approach based on the asking of ‘how’ questions, Granovetter more or less left aside the question of what BGs are’’ (Smangs, 2006, p. 890).

The sociological definition is rather broad, which can create challenges because it does not name a clear-‐cut definition of BGs. Moreover, this organizational form is not noticeably distinguishable from other types of firm networks. A focus is placed on the numerous relationships that tie the BG companies together. However, all companies enter various social and economic, informal and formal relationships with other companies. Conducting business leads to these relationship as a regular outcome and consequently results in a firm network. Nevertheless, it must be differentiated from a BG (Cuervo-‐Cazurra, 2006).

Economic perspective

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BGs companies are connected via equity cross-‐ownership (Khanna, 2000, Cuervo-‐Cazurra, 2006). BGs are seen as diversified structures with legally independent companies. Nevertheless, those companies are under common administrative and financial control which lies often within a family (Chang and Hong, 2002; Fisman and Khanna, 2004; Ghemawat and Khanna, 1998). Family ownership is in many economics-‐based definitions named as another important key feature of BGs. However, this is not commonly accepted among all scholars. Several studies have cast doubt on the economic perspective. Khanna and Rivkin (2006) challenge this longstanding conventional wisdom by showing in their study of Chilean BGs that family bonds are not a defining characteristics of BGs. Furthermore, interlocking directorates, lending and trade ties seem to be relevant in explaining group membership as well (Keister, 2009), thereby not underlining the relevance of equity interlocks as a key characteristic of the economic perspective.

Institutional perspective

BGs are present due to the absence or deficiencies of institutions that enable an efficient market system. This includes high level of political instability and institutional uncertainty (Cainelli and Iacobucci, 2011) as well as markets for capital, labour, information and products that are either entirely absent, underdeveloped or imperfect. In order to avoid institutional voids and retain a well-‐functioning market system those voids need to be filled (Khanna and Palepu, 1997; Mazumdar, 2008). As a diversified hybrid organization BGs are combining and conducting the functions of companies and markets (Leff, 1978; Khanna and Palepu, 2000a; Kim et al., 2004), thereby carrying out welfare-‐enhancing activities by replacing missing institutions (Khanna, 2000). A BG is defined as a ‘’multicompany firm’’ (Leff, 1978, p. 663) and therefore to be a more or less integrated organizational form, which differs from Granovetter’s (1995) sociological conception of cooperating firms. Moreover, whereas Granovetter (1995) puts emphasis on the independence of the BG companies, Leff (1978) discusses the dependence of the BG companies on a central actor.

The institutional perspective7_{on
the
existence
of
BGs
in
EEs
originates
from
the
instance}

that institutions are weak there and only well-‐functioning in advanced countries (Khanna

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and Palepu, 1997). However, Mazumdar (2008) criticizes the conception of BGs as efficiency enhancing responses to institutional voids. He calls it a historical and static approach, which pays little attention to changes in the institutional context or of the BGs themselves. Additionally, the institutional perspective is challenged by the existence of BGs in advanced countries where they do not need to fill institutional voids. Furthermore, the importance of BGs in EEs remains high despite recent market developments (Carney, 2008; Mazumdar, 2008). On the other hand, scholars claim that even in liberalized environments BG companies may still be in a superior position compared to stand-‐alone companies. They have internal labour and capital markets, implicit trust-‐based contracting and a BG-‐ reputation that can be leveraged (Maurer and Sharma, 2001; Khanna and Yafeh, 2007).

To conclude this section on the different perspectives of BGs, it is worth mentioning that the vague conceptualization of BGs might pose threats to research. Such an ambiguity can impact empirical results since much research often relies on the classification into affiliated and non-‐affiliated (e.g. independent) companies in standard datasets. However, scholars do not take into account that the classification can be fairly arbitrary by simply using such datasets (Mazumdar, 2011). Furthermore, Yiu et al. (2007) criticised that the definition of a BG is vastly dependent on the context in which a BG is operating and on a researcher’s preference. Therefore a comparison of different studies on BGs is problematic. With regards to the Indian context, primarily the sociological and institutional perspectives are used. This will be addressed in the next section about Indian BGs.

2.2.3 Business groups in India

BGs have been a crucial part of the Indian economy for a long time. Their evolution has taken place despite substantial changes in the institutional environment. In that respect two major eras can be identified: The period up to the liberalization in 1991 (e.g. extensive government regulations) and the post-‐1991 period (e.g. liberalization and globalization). In the pre-‐liberalization period a system called licence raj was present. This meant that the economic activity was tightly regulated and favoured businesses were granted licences by politicians and bureaucrats (Sarkar, 2010; Subramanian, 2013).

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Despite the noteworthy changes in the institutional environment, BGs have proven to be a prevailing and resistant organizational structure (Sarkar, 2010). Historically, only a couple of the large Indian BGs had a disproportionate share of the total BG assets. However, studies have shown mixed results regarding the persistence of the identity of the top BGs. As elucidated in the study by Khanna and Palepu (2005) such persistence is lacking, meaning that over time not the same BGs were present in the ranking of the top BGs. On the other hand, Sarkar’s (2010) research could not confirm those findings. Her study showed a significant persistence of the identity of BGs over time (Sarkar, 2010).8

Although BGs in India show inter-‐country differences (Mazumdar, 2008), the persistence of concentrated family ownership is a key feature in India (Khanna and Palepu, 2005) and is the norm rather than the exception. The family is the main source of capital to stimulate businesses (Sarkar, 2010). Many BGs are founded by entrepreneurial family members (Yiu et. al, 2007). Regarding the three main conceptualizations of BGs, predominantly the sociological and institutional perspectives are named in the Indian context. Ethnic and kinship bonding have played a crucial role for Indian BGs in East Africa (Granovetter, 1994, 1995), thereby underlining the sociological perspective. As also highlighted by Sarkar (2010) Indian BGs can be adequately understood with the sociological approach, yet they serve the purpose of filling institutional voids. So far not even the liberalization and its greater market orientation have weakened the position of Indian BGs as a hybrid form between market and firm (Sarkar, 2010), substituting for the underdeveloped institutions in India (Khanna and Palepu, 2005).

An elementary study by Hazari (1966) examined the corporate sector in India. He defined the BG rather than the individual BG companies as the unit of decision-‐making (Hazari, 1966). The conception of Indian BGs as one business company with a central controlling authority over multiple companies is representative. Other shareholders have usually a passive role (Mazumdar, 2008). Moreover, Indian BGs show typically a high degree of vertical (Hazari, 1966; Patibandla, 2006) and horizontal diversification (Khanna and Rivkin,

8_{This
could
also
be
due
to
the
different
sample
setting
as
the
time
window
was
narrower
in
the
study
by
Sarkar}

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2001; Sarkar, 2010). As elucidated by Li, Ramaswamy and Pécherot Petitt (2006) both vertical and horizontal strategies are responses to market failures.

2.3 Internationalization process of business groups

Research on the internationalization process has especially focused on companies from advanced countries. Not only the internationalization strategies of MNCs can be interesting, but also the internationalization process of EE MNCs and BGs. A study by Jormanainen and Koveshnikov (2012) examined publications on the internationalization process of EE MNCs in top management journals. The study period ranged from 2000 – 2010, indicating an increasing scholarly attention, especially from 2007 onward, which can be seen as rather late (Jormanainen and Koveshnikov, 2012). Consequently, the internationalization process of companies and BGs from EEs is still under-‐researched (Liu, Xiao and Huang, 2008; Khanna and Palepu, 2006; Wright et al., 2005; Xu and Meyer, 2012). Numerous scholars (e.g. Tan and Meyer, 2010; Yiu et al., 2007) stated that especially the internationalization process of BGs is a young research topic and deserves to be investigated. Scholars have only recently started to examine the internationalization process of EE MNCs, but rarely the one of BGs. This is particularly surprising due to the significance and dominance of BGs in EEs, but also in the world economy (Guillen, 2000; Khanna and Rivkin, 2001; Purkayastha, Manolova and Edelman, 2012). Although research has examined other aspects of BGs, it has not adequately investigated the internationalization processes and patterns (Athreye and Kapur, 2009; Liu, Xiao and Huang, 2008; Yaprak and Karademir, 2010). A study on the internationalization process of BGs in advanced countries is not available at all9_{.
However,
this
is
not
surprising}

as a clear framework for understanding BGs, even within EEs, seems difficult to define (Yiu et al., 2007). To embrace this study, the next section explores the internationalization process in the Indian context, including Indian companies and BGs. The reason to include Indian companies is that the internationalization process has been particularly examined on the level of the firm.

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Internationalization process in the Indian context

It has been shown in the context of India that changes in institutions on a societal, political and legal level have impacted the strategies of domestic companies when competing out of their home country (Peng, Wang and Jiang, 2008). The internationalization process of Indian companies was directed to Southeast Asia where a cultural affinity for Indian products was present. Other countries with this affinity are located in the Middle East and in parts of Africa (Ramamurti and Singh, 2009b). Furthermore, the expansion strategies of Indian BGs and companies have their roots in the post-‐reform period where many regulations and restraining policies regarding FDI were put in place. Limited capacities in India nurtured the strategy of venturing abroad in order to grow. Some BGs such as Tata Group and Aditya Birla Group have been actively engaged in FDI outflows before the reforms were implemented. Consequently, they were able to leverage their experiences in the post-‐reform period. Those experiences can include the integration of different management teams, communication skills across borders and time zones, and existing distribution and marketing capabilities (Chittor and Ray, 2007; Khanna, 2007; Pradhan, 2007a, 2007b; Sarkar, 2010).

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Indian BGs were involved in some of the major cross-‐border acquisitions, which attracted a lot of media attention. They usually took place in the 2000s and led among others to an association with a global brand or access to better technologies (Kedia, Mukherjee and Lahiri, 2006; Ramamurt and Singh, 2009b). Aditya Birla Group completed its acquisition of Novelis, a Canadian rolled-‐aluminium10 producer, through its BG company Hindalco. According to Subramanian (2013) this acquisition promoted the BG to the world’s largest rolled aluminium producer. The aim was to become an international payer. This acquisition is an example of an upstream producer buying a top downstream player in advanced economies (Ramamurti and Singh, 2009b; Sarkar 2010). Furthermore, Tata Group acquired Anglo-‐Dutch steelmaker Corus Group in 2007. This catapulted the steel BG company, namely Tata Steel, among the world’s top five steel companies. Tata Group gained also international visibility (Ramamurti and Singh, 2009b). According to the former chairman Ratan Tata, the driving force behind the acquisition was “the complementary strengths in technology, efficiency, product mix and geographical spread’’ (Suroor, 2006, front page).

Table 1: Changing pattern of Indian FDI outflows

(Sources: Madhok and Keyhani, 2012; Morris, 1990; Nayyar 2008; Pradhan, 2005; Pradhan, 2007b; Ramamurti and Singh, 2009a; Saikia, 2012; Sun et al., 2012).

10_{Rolled
aluminium
is
a
thin
aluminium
used
for
beverages
cans.}

Before 1990 After 2000 Motivation • Market-‐seeking

• Exploitation

• Resource and capability seeking (e.g. technology, management expertise, brand names)

• Exploration

• Entrepreneurial spirit and global aspirations

Home market

• Unsupportive home market conditions for growth and

profitability • Before economic

liberalization

• High growth home markets • Intense competitive rivalry

• Liberalized and market-‐driven economic environment

• More degree of freedom and routes to internationalization Entry mode • Joint ventures • Minority investments • Cross-‐border acquisitions • Majority or full control

Target • Other EEs with ethnic community presence

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Table 1 shall serve as an overview and summary of the key elements in Indian FDI outflows before and after the liberalization. Overall, only some literature can be found on the internationalization process of the Indian BGs. Indian FDI outflows have been examined more on the firm-‐level. Consequently, Table 1 presents information on the Indian FDI outflows of individual companies and BGs. It highlights a change in the pattern over time. Different opportunities and constraints are resulting in both periods, whereas the magnitude has highly increased after 2000.

2.4 Aspects in the internationalization process

The internationalization process can be influenced by various aspects. Drawing on the literature on internationalization of BGs, EE MNCs and MNCs, several aspects are identified to address the research issue of this thesis.

Figure 1: Classification of the internationalization aspects along the two key themes

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As Figure 1 displays those aspects are in line with both key themes of this study (i.e. degree of internationalization and internationalization pattern) and can be classified along them. This lays the basis for the discussion of the internationalization process of Indian BGs in Chapter 5. While some aspects can be clearly assigned to one theme, others are part of both themes. This means that those aspects can be used to explain both the degree of internationalization as well as the internationalization pattern.

2.4.1 Degree of internationalization Internationalization across regions

Rugman and Verbeke (2009) examined the phenomenon of regional versus global internationalization. As the companies did not have a presence in all broad triad regions (i.e. Asia, European Union and North America) the authors found a tendency towards regional internationalization as opposed to globalization (Rugman and Verbeke, 2009). Regional internationalization may be a realistic initial route offering a base for learning before going more global (Hoskisson et al., 2013). Furthermore, the lack of a global presence might be due to interregional cultural, institutional and economic and geographic distance (Verbeke and Kano, 2013). On the other hand, Erdilek (2008) underlined the importance of global operations in different regions. An increase in geographical risk diversification can improve the international competitiveness. It might also reduce the risky dependence on an economically unstable home country (Erdilek, 2008). For example India has shown to offer great opportunities and an increasing demand, but the political and economic environment is still different and not running that smoothly as in advanced economies (Hoskisson et al., 2013; Khanna and Palepu, 2005; Wright et al., 2005).

Accelerated internationalization

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companies is believed to have its seeds in the ideas and knowledge of entrepreneurs. A closer inspection of the born-‐global phenomenon points to a born-‐regional phenomenon with a presence in home regions as opposed to an equal presence in the broad triad regions. Accelerated internationalization has been observed in advanced as well as emerging economies (Guillen and Garcia-‐Canal, 2009; Madsen and Servais, 1997; Verbeke and Kano, 2013).

2.4.2 Internationalization pattern

Incremental internationalization and psychic distance

The Uppsala model defines internationalization as a process of experiential learning and incremental commitments, and thereby distinguishes four successive steps in the international expansion route. This route is not only gradual in terms of successive stages of rising commitment but also regarding the entry into foreign markets and its familiarity (Johanson and Weidersheim-‐Paul, 1975; Johanson and Vahlne, 1977)11.

The Uppsala model is related to the concept of psychic distance. Psychic distance refers to ‘’the sum of factors preventing the flow of information from and to the market. Examples are differences in language, education, business practices, culture, and industrial development’’ (Johanson and Vahlne, 1977, p. 24). These factors create a challenge in understanding foreign markets. Therefore, the initial entry into a foreign market is frequently conducted by choosing a host country that is familiar and close in terms of psychic distance to the home market. Companies can expand to psychically close countries first, because it appears to be less risky. Thereafter subsequent entries take place in markets with greater psychic distance (Johanson and Wiedersheim-‐Paul, 1975; Johanson and Vahlne, 2009). Hence, psychic distance plays a fundamental role in strategic decisions across borders. The choice regarding the location of the host country is determined by the proximity in cultural and geographic terms between the home and host country. Psychic distance often reflects geographical distance (Erdilek, 2008; Pandian and Sim 2002).

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Internationalization Process of Business Groups: Illustrations from India