International Business
Question: Based on a case of foreign direct investment (FDI) by your choice (which can be an actual FDI case implemented already or a potential FDI still in the process of decision-making), you need to critically apply theories of international business for analysing the rationale and challenges of the FDI decision.
Topic: FDI by Tesla in India
Introduction
Foreign Direct Investment, commonly alluded as FDI, refers to the direct investment that any foreign company makes in another country, by the act of buying shares of a company or by extending existing business in the remote nation through establishment of its wholly owned subsidiaries (World’s Largest Collection of Essays! Published by Experts, n.d.). It is basically setting up production or distribution facilities in a foreign country to have an absolute or competitive advantage. For instance: BMW manufacturing plant in Chennai, India helps the German firm to avoid 60% of its import tax (Hoang, 2007).
FDI is altogether different from portfolio investment in which an investor merely purchases equities of foreign-based companies whereas FDI highlights an effective control over the decision making of a foreign business (Investopedia, n.d.). FDI can be of three types i.e. Horizontal, a firm establishing same business in a foreign country; Vertical, when a company acquires one of the related business either in production or distribution of the product; Conglomerate, when a firm sets up a whole new business in a foreign country usually through a joint venture (Investopedia, n.d.).
To a great extent, the financial improvement in India over the recent decade majorly rests on FDI which highlights the open economy of India indicating high growth and development prospects (Business.mapsofindia.com, 2015). After critical examination of the Indian market, Tesla, American automaker decided to manufacture and set up its headquarter in Chennai, which is the fourth largest state of India as well as home state for all the major car manufacturers due to SEZs established by government. Therefore, the purpose of the essay is to critically review the FDI in the form of green-field investment by Tesla in India.
Analysis
Where the FDI has been or will be conducted, why?
India’s economic policy reforms have played a critical role in the performance of the Indian economy (Bajpai and Sachs, 2000). In addition to this, it has made the economy open making it more competitive through indication of growth prospects which has attracted many foreign investors to invest in India. During recent years, the government of India has taken many steps to ensure that level of foreign investment increases consistently. For instance, establishment of Special economic zones (SEZs), reduction in corporation tax, 100% FDI (wholly owned subsidiaries) without any minimum investment and so forth.
India has turned out to be one of the biggest beneficiaries of foreign direct investment because of the changes taken by the government, the economic survey 2016-2017 (The Economic Times, 2017). Also, net FDI inflows, grew from 1.7 per cent of GDP in FY’2016 to 3.2 per cent of GDP in the second quarter of FY’2017 (The Economic Times, 2017). This clearly explicit that foreign investors are attracted towards Indian economy to make investment so that they can have either an absolute advantage or a competitive advantage.
There have been several reasons why foreign companies are looking forwards to make investment in India. Some of the major reasons can be classified as they wanted to have an absolute advantage in terms of cost of production. For instance, lower wages and tax exemptions. Also, initiatives taken up by government like Make-In India, Invest India, Start-up India, E-biz mission mode project have been proved beneficial for companies to work in India (The Economic Times, 2017).
Due to the Automotive Mission Plan (AMP) 2006-2016, lower trade barriers and rapidly growing GDP, India will prove to be a lucrative automotive market (Anon, 2006).
As, Tesla is seeking global presence and want to expand its horizons, setting up a manufacturing plant in India will prove to be beneficial for the company as it can have a first-hand advantage of lower cost of production and transportation to other Asian markets.
The decision to set up manufacturing plant in India would undoubtedly be a good investment as India is one of the fastest growing economies. However, they have been working on their infrastructure for automobile manufacturing through their automotive mission plan (AMP). In addition to this, India is centrally located which will benefit Tesla in terms of lower cost of transportation when supplying vehicles mainly to the Asian market followed by European and African markets and making India its headquarters for the respective markets (Bergmann et al., n.d.).
Why the case firm should or will engage in the FDI?
The significant intention of any firm investing resources in foreign countries is to have an additional favourable position whether it is in terms of trade, cost, specialization and so forth. The critical advantages that Tesla should consider are low labour cost which would help them extend their production conceivable outcomes. In addition to this, Chennai, has manufacturing plants of all the major car manufacturers like BMW, Ford, Hyundai, Nissan etc. It will encourage Tesla to continue dealing with variables like quality control, research and development so that it can remain competitive. Lastly, the legitimate structure in India for foreign investments is exceptionally defensive as they have un-one-sided process for any issues that may emerge (Nguyen et al., n.d.).
In a report published in 2010, India labour rate were US $2.68 per hour whereas in US labours are paid at a rate of US $27 in automotive industry, so this would help Tesla to reduce their labour cost by approximately 87% and would give them immediate cost benefits (Bergmann et al., n.d.). Though the hourly rates for Tesla employees would be higher than the average automotive labour due to high prerequisite of expertise and information. Moreover, a report documented by Tesla, the expected number of manufacturing department employees for India headquarters would be approximately 70 as their manufacturing plant would be smaller in India as compared to the one in US which would further reduce their labour cost (Quote.morningstar.com, 2010).
India, host a high number of skilled and taught graduates. This provides Tesla, an opportunity to select their workforce from an extensive pool of candidates who can further be trained to work in manufacturing department or the administrative department. As the labour cost in India is fundamentally lower than in US the overall cost of production will decay and in addition the fixed administrative cost will likewise go down which will end up being valuable for the company in the long run as they will have the capacity to augment their benefits by limiting their cost.
Tesla will gain benefits from the factor endowments that Chennai has. Porter’s diamond uncovers that if you are working in a zone where similar industries are working then it will result in high cost savings as well as better productivity (Quickmba.com, n.d.). Moreover, the intensity of rivalry between firms would help Tesla to stay competitive by constant innovation. Also, an extensive pool of graduates will be available to choose employees from having varied skills. India, has a growing economy and demand for automobile will allow Tesla to stay tuned with the trends going on in the market for electric vehicles and would help them to capture as much market as possible.
The legal framework in India is very transparent which would ensure that the investment done by Tesla is protected and all the unnecessary paper work can be avoided as Tesla is planning to set up its manufacturing plant in Chennai which falls under the Mahindra City area for special economic zone (SEZ). In addition to this, FDI of 100% is allowed (Anon, 2006) and incentives like 100% tax exemption for first five years and the 50% tax exemption for the next 10 years is given on investments done in these SEZs (Anon, 2008).
What have been or can be the challenges of the FDI?
India, is a developing country and there can be some challenges which can be encountered while conducting foreign direct investment (FDI). Firstly, the infrastructure and poverty is the biggest dis-advantage when thinking to make an investment in the country as it significantly decreases the target market on an average. Secondly, power, road, rail and port infrastructure are poorly maintained which can increase companies cost of production. For instance, power cut is a common problem in India. “An organization can expect about 17 power blackouts every month, against one every month in Malaysia and less than five in China (Bloodgood, 2007). To overcome this, many companies maintain their own power supplies which increase their cost of production. Also, the transportation network in India is not properly maintained which can be seen by the congested roads which could hinder Tesla’s ability to efficiently transport their vehicles and get on time supplies.
Bureaucracy and corruption are the two major issues which can be faced by any company thinking to invest in India which ultimately results in high cost of running the business, altering the allocation of resources and wastage of valuable time (Bergmann et al., n.d.). Many of the foreign businesses have also reported that the average time taken by Indian government for any approval can unnecessarily drag for long periods for no credible reason (Anon, 2007).
Lastly, the work culture in India can be challenging task for Tesla because India’s work culture is entirely different from what the work culture is in US. The Indian way of work and life is intermixed which can be the greatest implication for Tesla. There are many relations like companionship which are exceedingly esteemed in India and would not be found in US. This group dynamics influences the administration style. For instance, most of the companies have an authoritarian style of working. So, even if senior executive takes any wrong decision or take undue advantage of his power, the employees listen without any contention as they don’t have a say in the decision-making process (Bergmann et al., n.d.). In addition to this, appointing a senior manager either from US or from India can be a noteworthy issue for the CEO to handle as a local manager would have knowledge about the market and work culture but may not be able to adapt the companies working style whereas a manager from US can involve in work related conflicts with the employees.
Conclusion
Hence after detailed analysis of the above-mentioned subject it can be concluded that Tesla should invest in India as it gives the company an absolute advantage in terms of cost which will result in lower cost of production and transportation of its vehicles to Asian followed by European and African markets. Moreover, the average return on foreign investment is good in India as portrayed by the increasing FDI inflows in recent years. Additionally, India automotive mission plan 2006-2016 would be prove to be beneficial for Tesla as continuous improvements will be done in terms of both infrastructure and transportation.
Also, the tax exemptions given by the government of India would attract Tesla to invest in India as it gives them an added advantage of moving to India. In addition to this, labour rate is significantly lower in India as compared to US which decreases their manufacturing costs as well as administration cost resulting high profits in long run. Although, there are some factors which should be considered beforehand but at the same time the advantages setting up a manufacturing plant and headquarters in India outweighs the dis-advantages.
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