Developed market firms are increasingly interested in expanding to India given the growing interest and potential of this market. International marketing alliances are becoming popular as vehicles of growth strategy for developed market firms to enter India. For example, last year Walmart struck a deal with Flipkart and invested $16 billion in the Indian e-commerce firm to tap into the fast growing market in India. Similarly, a couple of months ago, 7 Eleven formed a partnership with Future Group to bring its stores to India.
So, why are firms from developed markets increasingly interested in expanding to India? Our interviews with Indian managers who were involved in alliances with developed market firms suggest there are several factors that are influencing such deals.
New middle-class consumption
The rise of new middle-class consumers in India has created a huge potential for premiumisation. These consumers express an increasing level of confidence in attaining life aspirations as their income levels steadily increase. Sometimes, they tend to overindulge by spending more on aspirational expenditures than household expenses. International marketing alliances can help developed market firms quickly access the distribution networks built by Indian firms and tap into the new middle-class consumer segment in this market.
Need for affordable solutions
A majority of the Indian consumers live in rural markets and these can be very profitable if businesses can innovate ways to make their products affordable and accessible. Companies spanning these markets are coming with innovative and affordable goods and services that are drastically cheaper than their equivalents in the developed markets. Firms from India have been steadily forming international marketing alliances to design affordable offerings specifically for the rural markets. For example, Kaynes Technology, an Indian electronics design and manufacturing services company, partnered with Unique Broadband Systems (UBS), a Canadian telecommunication services company, to deliver affordable healthcare services in rural areas of India.
The aspiration to move up the value ladder
Over the years, Indian firms have been quite successful in creating value to customers by providing outsourcing services. India is already dominant in the information technology (IT) and IT-enabled services outsourcing industry. However, Indian firms are now globally expanding and expeditiously becoming global competitors in developed markets through international expansion and acquisition. Indian firms are aspiring to move up the value ladder by investing in building their capabilities through innovation and new product development.
Ease of doing business in India
According to the latest ease of doing business rankings, India is ranked 77th in ease of doing business by moving up by 30 places. This indicates that the regulative environment in India is highly conducive for the creation and continuation of new alliances. In addition, the “Make in India” initiative has liberalised the foreign direct investment (FDI) policy for 25 sectors. This has led to the formation of important alliances such as Tata Boeing Aerospace, an alliance between The Boeing Company and Tata Advanced Systems.
When compared to developed market firms, Indian firms are in the earlier stage of their life cycles. Market penetration levels for several goods and services are significantly lower for Indian firms. For example, 7 Eleven has the potential to gain early mover advantage in the 24-hour store format in India since Indian consumers are increasingly patronising modern retail models as compared to traditional retail models. This may be because of the increasing global exposure and penetration of social media. The low market penetration across industries in India offers an early-mover advantage for firms, making the Indian market very conducive for new alliance creation.
Restrictions on imports
India has designed laws and regulations governing the importance of specific materials. For example, the Indian government has restricted the import of plants and plant materials to ensure agricultural sustainability, food safety, and environmental protection. Moreover, one of the main focus areas of the Indian Ministry of Defence is to reduce the dependency on import of defence equipment in order to encourage the indigenisation and manufacture of defence equipment in India. Due to these reasons, Indian firms are increasingly forming alliances with foreign firms.
Firms from developed markets that are planning to expand to India can focus on forming alliances with Indian firms and leverage the unique opportunities for expansion. India is one of the most attractive markets given the massive population and the new middle-class consumption. Besides tier 1 cities, there are over 40 -50 cities and a few hundred towns that are part of the rising middle-class consumption story. In addition, the untapped rural markets provide an excellent business opportunity for foreign firms. The low market penetration levels across Indian industries also offer early-mover advantage to foreign firms. By forming alliances with Indian firms, foreign companies can get access to a strong distribution network and local resources to customise offerings suitable for the Indian market.
Views are personal.
The author is assistant professor of marketing at the Indian School of Business.