How MNEs use Digital Platform to enter Emerging Markets: The Case of India

How MNEs use Digital Platform to enter Emerging Markets: The Case of India

Introduction

The swift explosion of Internet has given birth to the digital platform which has brought revolution in the world today. It has transformed the way of doing business and has provided growth and opportunities for global organisations. People sitting at different geographical locations around the world can communicate with each other. With the progression of technology, the nature of business transactions has changed in emerging markets. Emerging markets have huge perspectives for the digital platform.

Emerging markets (EMs) is defined as an economy that has the comparative pace of economic development, government system of economic liberalisation and steadiness of free-market structure Arnold and Quelch (1998). As stated by Hoskisson, Eden, Lau, and Wright (2000) that emerging economies are countries with low-income and fast-growing targeting economic liberalisation as the driver of growth. There has been an increase in investments which are backed by high returns subject to enlarged risk in emerging markets. Emerging markets are more volatile, and experience quick growth opportunities compared to developed markets (DMs).

Information Technology has been redesigning the business globally. Firms have recognized the power of the internet as a digital platform in this networked world. Internet has boosted the aptitude of firms to reach its customers in innovative ways. Firms are taking different e-commerce creativities to invest in mounting online market. The revolution brought by the internet has driven the growth engine of e-commerce and organizations has taken an advantage of the opportunities to use the internet and the world wide web (www) commercially. There is a need for the growth of the internet in emerging markets by improving their information technology to match the developed markets. While many MNEs are restructuring their business strategies to strive magnificently in e-commerce in emerging markets. MNEs face abundant challenges and drawback while functioning in foreign markets. For instance, in emerging markets, MNEs face stringent regulations by the government in foreign markets as compared to developed markets.

As defined by Alyoubi (2015) e-commerce involves the use of the digital platform to sell, buy, transfer or exchange products and services. Broadly e-commerce means directing electronic transactions for exchanging goods and services between consumers and firms, and firms and trading partners. Kumar and Khosla (2017) have said that e-commerce can be between B2C (Business to Consumer), B2B (Business to Business), C2C (Consumer to Consumer), and B2G (Business to Government).

This paper focuses on how MNEs use the digital platform to enter emerging markets and try to evaluate the case of India. The purpose of this research would be to study the barriers to entry in emerging markets and then studying these in context to India. International Business theories are also being reviewed in the literature.

Literature Review

Traditional Barriers to Entry

Institutional barriers affect entry strategy of MNEs in emerging markets such as location and mode. The legislative context and institutions are vital for MNEs in emerging markets. Institutions constitute the ownership advantage (O)-location advantage (L)-internationalization incentives (I) OLI paradigm. In emerging markets have large informal structure and decentralised where policies and institutional perspectives vary from location to location. Meyer and Nguyen (2005) has stated in his research that institutions are most significant while selecting the entry mode in foreign countries which effects the movement of resources and competencies however formal institutions namely legislative framework and informal institutions namely implementation of law practices, outline the transaction cost in emerging markets which effects the MNEs preference for internationalization. It can be analysed that institutional environment frames the decision making of entry mode. Informal institutions have a lesser amount of transparency and consequently are ambiguous as compared to formal institutions. In emerging markets networking is the building block on which transactions are usually grounded on the relationship and informal networks. In emerging markets institutional framework are variable and keeps on changing as the local and national governments authorities vary and both are inter-reliant. Thus, MNEs experience a composite institutional environment which is continuously growing and more volatile.

E-commerce companies reap the benefits of customized offerings and it helps them to retain customers focus. Agarwal and Wu (2015) has tried to relate institutional theory with e-commerce growth and defines institutional voids as missing or underdeveloped formal institutions in emerging markets. He states that e-commerce growth prospects depend on formal and informal infrastructure in emerging markets. In spite of so many obstacles in the institutional environment, location advantages (L) and O-advantage based on core culture and external environment of emerging markets serve as a driver for innovation and transfer of knowledge.

Li Sun (2009) argues that MNEs choose to opt those markets where there are fewer barriers in language, culture, technology and economic and slowly gain experience to overcome the hurdle the liability of foreignness and moves up the value curve. Emerging markets usually are known to produce low-end products at low cost whilst MNEs in developing markets produce high end standardised new products at best prices. Thus, emerging markets are more pressurised to meet the customer expectations and it becomes an uphill challenge of internationalization. Li Sun (2009) also illustrates MNEs managers can use the Uppsala process model to move up the value curve strategy by familiarizing technology and marketing complications. Peng, Wang, and Jiang (2008) as mentioned in his paper that liability of foreignness and antidumping laws as most important entry barriers.

Control is a significant consideration in entry mode choice to be considered by MNEs. Choice of entry mode means MNEs primary preference while entering emerging markets which is based on the amount of investment made in equity. Entry modes can be classified as equity market entry such as joint ventures and wholly-owned subsidiary (e.g.., Acquisition and Greenfield) and non-equity entries such as licensing and exporting. Joint venture is usually formed by two partners having mutual understanding and it becomes a learning process for them by transferring knowledge in the business whilst Greenfield are viewed as new projects of creating a business which have positive spillovers which act as a competitive advantage and enhances their efficiency. Whereas in Acquisition new owner may change the business relationship with suppliers. Tihanyi, Griffith, and Russell (2005) have stated in his paper that cultural distances effects the managers decision making while forming MNEs strategy and higher the cultural distance in developed and emerging markets, the level of equity possession is also higher while choosing to enter emerging markets. It can be analysed that in emerging markets with greater culture differences MNEs needs to have greater control to lessen their transactional cost which consequently increases the effectiveness of MNEs in their operations. MNEs initially prefer joint venture to the wholly-owned subsidiary as a mode of entry in emerging markets as it reduces their risk in diverse cultural markets. However Meyer (2004) also states the entry strategies of MNEs impact the knowledge transfer and use FDI to have access to research and development (R&D) competence.,

Barriers to Entry in Emerging Markets

There are numerous barriers that act as an obstacle for adoption of e-commerce in emerging markets. There are several reasons which stop e-commerce growth in emerging economies, see figure 1 for a framework of barriers hindering e-commerce barriers in emerging markets. These barriers widely vary from country to country. As cited by Kshetri (2007) E-commerce barriers can be categorized into three types: Economic Barriers, Socio-political Barriers, and Cognitive Barriers. Economic and Socio-political barriers focus on environmental features while cognitive constitutes association and different behaviours.

Figure 1: Framework of Barriers Hindering E-commerce in Emerging Markets

Source: (Kshetri, 2007, p. 445)

Figure 2: Factors impacting the diffusion of e-commerce in Emerging Markets

Source: (Kshetri, 2007, p. 446)

Economic Barriers

Emerging markets have following economic barriers:

1. Access to Technology.
2. Network Infrastructure.
3. Economic Condition.
4. Unavailability of ICT Skills.
5. Education System.
6. Underdeveloped Financial System.
7. Logistics.

Access to Technology- It relates to access to Computer equipment and Internet. In emerging markets there is still a low level of computer penetration as the cost of computers is too high for people living in rural areas especially middle-income population. For instance, a common person can’t afford the high cost of computer equipment and without a computer they neither have internet connectivity. Lawrence and Tar (2010) state that lack of computer connectivity with internet becomes a major hurdle of individual’s involvement in e-commerce and emphasis that internet infrastructure needs to be urbanized in emerging markets for active participation of individuals in e-commerce.

Network Infrastructure- In emerging markets internet connections are not trustworthy due to poor telecommunication networks. Most of the emerging economies are not backed by network infrastructure and therefore the e-commerce becomes a weakness. The successful growth of e-commerce depends on technological infrastructure. Telecommunication infrastructure is not well connected between urban and rural areas. There is a need to upgrade the telecommunication bandwidths in many areas. (Kshetri, 2007) has explained that lower bandwidth of network means it takes longer time for transfer of data which marks as challenging while using the internet. The broadband market is very slow and costly and in emerging markets, it needs to be developed effectively to accelerate the information and communication technology (ICT) growth (Lawrence & Tar, 2010).

Economic Condition- Economic condition is the widely recognised as a major deterrent for e-commerce adoption in emerging markets. The indicators of the economic condition are the gross domestic product (GDP) and per capita income of a country (Lawrence & Tar, 2010). Due to less purchasing power of people in emerging markets, they have the unfavourable economic condition which means people will be less engaged in e-commerce. Inequality in income distribution in rural areas is the root cause why large population cannot afford internet. Internet connectivity is very common in the urban population as compared to rural population who don’t have computers even and speaks less about the internet.

Unavailability of ICT Infrastructure- Lack of ICT infrastructure can be fostering the development of e-commerce in emerging markets. Customers and businesses may hesitate due to the lack of legal acceptability of electronic transactions.(Dempsey, 2003) has mentioned in his research that to facilitate e-commerce it is mandatory electronic documents and electronics signature laws should have legal bindings and enforceable.

Education System- Education system in emerging markets acts as a barrier for e-commerce adoption due to lack of IT education in formal education structure. Mostly in emerging markets, computer education is not executed in the school curriculum. Hence there it has become obligatory to introduce computer education formally in schools to train and educate people to use internet and e-commerce. Computer savvy population have larger potential to relish and contribute in e-commerce.

Underdeveloped Financial System- The digital payment system is the driver of growth for e-commerce. In emerging markets, institutional environment serves as a building block for facilitating transactions electronically. It makes possible payment through the availability of trustworthy payment channels namely, credit card, debit card, or through internet banking. The efficient payment infrastructure acts as a fuel to kick start the development of e-commerce. (Lawrence & Tar, 2010) states that credible electronic payment framework is vital for encouraging e-commerce in emerging markets. Concisely, it can be analysed that establishment of trustworthy and safe payment infrastructure is a focus in emerging markets which avoids scams and illegitimate activities.

In emerging economies there is a practice of less use of credit card and banking system does not sustenance the clearing system. Only a small percentage of people have a credit card, but they hesitate to use them online for making payments to e-commerce due to the threat of being cheated. The loss of theft has to be borne by credit card holder in case of fraud. Financial institutions in emerging markets do not have privacy and security in payment mechanism.

Logistics- Lack of logistical network is another barrier for distribution and delivery system in emerging markets which serves as a deterrent for both consumer and supplier to conduct e-commerce. E-commerce bank on logistics infrastructure for its growth prospects. It is obligatory for MNEs internationalizing in e-commerce to have appropriate distribution channels to deliver goods and services to customers. Inefficient courier system, postal services and lack of transport connectivity are the initial hurdles to the e-commerce development in emerging markets. There is a great potential for private sector courier companies to invest in new technology and deliver efficient infrastructure. The most significant mantra for e-commerce is speedy delivery. MNEs entering e-commerce can differentiate themselves by overnight delivery, just-in-time processing, 24/7 operations to use these strategies in their economic activities to meet customer demand (Lawrence & Tar, 2010).

Socio-political Barriers

Socio-political barriers are associated with formal and informal institutions in emerging markets and can be classified as follows:

1. Transactional Trust.
2. Limitation on personal Contact.
3. Socialization effect of e-commerce.
4. Lack of Government Regulations.

Transactional Trust- Confidence and faith are crucial challenges for the secure electronic transaction. The basic assumption of trust is essential in e-commerce. The physical location of customers from its suppliers is the basic distant characteristic where the absence of personal contact becomes a barrier e-commerce adoption in emerging markets. The customers doubt whether the ordered product would be delivered or not if payment is made in advance. Hence, lack of transactional trust among two parties which are geographically distinct by location and technology is a major issue which are barriers for e-commerce operations. The customers are not really sure about the quality of the product while purchasing goods online and insecure to make payments and arrival of products at their doorsteps. In emerging markets, these barriers can be overcome by family association and number of repeat transactions between the seller and the buyer. Due to the absence of legal institutions in emerging markets, where customers are not willing to share their financial information for example credit card number online because of lack of reimbursement mechanism it becomes difficult for e-commerce firms to enhance their growth.(Lawrence & Tar, 2010) said that legal uncertainties related to delivery and guarantee are barriers to e-commerce.

Limitation on personal Contact- In emerging markets, shopping is assumed as leisure activity where people interact and bargain with sellers to buy goods and services. The cultural and social atmosphere such as interpersonal relationship, long-term connections with sellers, face-to-face communications are the factors which hinder e-commerce adoption. The constraint of personal contact in e-commerce reflects that people prefer direct contact with their vendors to convey their needs and build confidence, especially in the developmental phase.

Socialization effect on e-commerce- Emerging markets has a trend of shopping as a social place which involves communication between merchant and client. A strong individual relationship and long-term bonding between sellers and buyers are the barriers to e-commerce adoption. In emerging markets, there is a practice of buying goods from small retailers in local markets (Kshetri, 2007).

Lack of Government Regulations- Lawrence and Tar (2010) has clarified that in emerging markets government initiatives are the indicators for e-commerce adoption. Emerging markets do not have ICT guidelines for internet usage. ICT means information and communication technologies such as Internet, Intranet, and ERP to accelerate the web services.(Dempsey, 2003) also, describes that the existence of banking regulations does effect e-commerce as credit card redressing mechanism to restrict frauds. The government has to ensure implementation of ICT policies and deregulate telecommunication system and encourage internet connections (Lawrence & Tar, 2010).

Cognitive Barriers

Cognitive barriers are factors related to psychological plans of individual and organizational perspectives in common masses. These barriers are more crucial in emerging markets than other barriers.

1. Inadequate Awareness.
2. Lack of knowledge and skills of e-commerce.
3. Language Constraints.
4. Lack of confidence in service provider.

Inadequate Awareness- The lack of awareness among customers of e-commerce advantages and are deprived of the benefits of e-commerce. In emerging markets, people still follow the traditional model of shopping from a social place by exercising face-to-face interactions with vendors. The digital platform is still not into practice in emerging economies.

Lack of knowledge and skills of e-commerce- Emerging markets have a vast number of people which don’t have access to PC and internet in this fast-growing technological era. The average person in rural location does not have the purchasing power to bear internet cost due to low-income livelihood.

Language Constraints- Language is recognized as a barrier to access information on internet and engagement in e-commerce. In emerging markets, large portion of the population is still illiterate and unschooled people cannot access the internet as they do not possess the skills essential to read and understand the information available on the web(Lawrence & Tar, 2010). Concisely, a maximum number of people are unaware of the benefits they can reap out by use of the digital platform and improve their living standards. English is a primary language in developed markets and acts as a gateway to information and knowledge transfer to emerging markets.

Lack of confidence in service provider- MNEs entering in e-commerce in emerging markets are considered as a liability of foreignness and local customers lack confidence on foreign entities in terms of quality, delivery, and security of transactions. MNEs should focus on building trust among customers to encourage e-commerce adoption in this digitized world.

Digital Platform as a possible Solution

E-commerce revolution has spread from developed economies to emerging economies such as BRICS namely Brazil, Russia, India, and China. Alyoubi (2015) presents e-commerce as a comprehensive strategy and ideal prospect for emerging economies which improves their economic and social development. He also highlights the success factors and impact of e-commerce technologies for EMs and discusses the numerous barriers that hinder the growth of e-commerce.

Case Study

Indian Market

E-commerce has become a buzzword in the Indian market and has become an essential part of day-to-day operations. The evolution of e-commerce in India in the mid-1990s and the reason for its slow growth were limited availability of the internet, lack of awareness, and weak online payment system (Mishra & Kotkar, 2015). E-commerce growth accelerated in the mid-2000s when online services were introduced in travelling industry and currently everything is sold online (Mishra & Kotkar, 2015).

Figure 3: Evolution of E-commerce in India

Source: (Bhattacharya & Mishra, 2015, p. 48)

Barriers to Entry to India

• Internet Penetration- Limited internet access and network infrastructure are barriers to e-commerce growth in India.(Bhattacharya & Mishra, 2015) has described in his research that only 13percent of the population was connected to the internet by the year 2013 and it is still an issue. Indian economy has frequent power cut issues which hinder in internet connectivity of people.
• Inadequate Infrastructure – Infrastructure shortcomings are a major nuisance in India. The Indian government has become liberal in their policies to encourage foreign direct investment (FDI) in the economy. Narinder Modi, current Prime Minister of India has introduced digital India plan recently. There is a vast area of development required to connect small towns and village to metro cities for E-commerce companies. (Bhattacharya & Mishra, 2015) states that India needs investment worth $3 trillion for infrastructure development and inviting foreign investors candidly.
• Problem of Postal Addresses- Postal services in India are not trustworthy and private courier companies charge lumpsum amount for delivering goods and services. The Pin Code distribution in India is not appropriate as it becomes difficult for postmen to deliver to more than 10000 people in per square km (Bhattacharya & Mishra, 2015).
• Payment Gateways- Another obstacle to e-commerce in India is payment gateway. The absence of legislative regime people still doesn’t prefer making payments online due to insecurity and fraudulent.
• Impact of Competition- With widespread acceptance of digital platform in India large number of MNEs are entering Indian E-commerce companies which have aroused tough competition for domestic e-commerce companies. For instance, Amazon being an international player has entered Indian market and has brought competitive revolution in Indian giants namely, Flipkart, Snapdeal, Jabong etc. Flipkart has acquired and merged Myntra another e-commerce company and new entrants are facing the massive challenge to compete in profitability aspects.
• Cash on Delivery (COD) as a preferred mode of payment- Indian consumers prefer cash on delivery as a payment method which leads to accumulation of cost and effects their profitability. E-commerce sales are directly linked with cash on delivery facility and in some cases, it results in losses as well and is riskier to handle cash inflows. The transaction cost involved in cash on delivery add on the cost burden associated with the value chain for the e-commerce companies.
• Stock Return Policies- Indian customer do not buy products online due to the constraint of return policies of e-commerce companies. Customers are suspicious about the quality of the product and therefore may wish to return the product if not satisfied that leads to the cost incurred in reverse logistics which is a barrier for e-commerce (Eppright & Hawkins, 2009).
• Entry of MNEs in E-commerce Industry- Many MNEs such as Amazon, Alibaba, eBay have ample resources, expertise in knowledge, and are highly technologically advanced in compared to domestic e-commerce companies in emerging markets. These MNEs have started entering Indian e-commerce industry which has brought small Indian start-up firms in misfortune.

Digital Platform Use in

E-commerce has extensive opportunities in emerging markets like India. With the development of education system in India, a large pool of professionally trained software developers in the economy has increased enormously. MNEs entering India is escalating and e-commerce growth is reaching its zenith. (Chatterjee & Ghosal, 2014) has stated numerous factors such as busy lifestyles, increased demand for broadband connectivity, the rise in living standard and availability of wide range of products at reduced prices have resulted in e-commerce growth in India. MNEs like Amazon India has already entered emerging markets of India due to its growth potential. MNEs like Alibaba are fostering to enter Indian e-commerce market in the near future.

Discussion

The research contributes to the knowledge of MNEs strategies while entering emerging markets in terms of theoretical perspective. The institutional perspective of strategic management in International business influences the MNEs entry strategies in emerging markets. This research has studied the formal and informal institutions prevalent in emerging markets. MNEs in emerging markets need to address the institutional voids in order to gain innovation and gain advantages. MNEs can internationalisation by effectively managing the institutional voids present in emerging markets.

This study offers an understanding of the role of MNEs in the emerging markets internationalization process. In emerging markets, MNEs have weak technological resources as compared to developed markets. IB and MNEs literature on entry mode is another important strategy.

Digital platform and technologies are reshaping the traditional shopping prospects globally. In current hyper-modest era consumers wants the prompt delivery of products and this becomes an uphill task for e-commerce to gain stability and security in this fast-growing world.

Internet is still not accessible uniformly in emerging markets and most emerging markets lack supportive policies for infrastructure development that promotes internet usage. In spite of so many barriers in emerging markets related to economic, socio-political and cognitive factors, E-commerce can still be a powerful tool in emerging markets if these issues are resolved and government takes considerable actions to remove these barriers.

E-commerce has a potential to act as a bridge for reducing the disparities between developed markets and emerging markets. It is mandatory for emerging markets to implement national strategies and heavy investments in telecommunication infrastructure, enforcement of regulatory laws for e-commerce development. India has a great potential as MNEs have made heavy investment in India. With the introduction of 3G and 4G technologies in Indian telecom industry, Internet penetration would be increased to a large extent. After being IT service provider India would now be considered as Internet economy in the forth coming years. Currently, Indian industry is facing numerous challenges as discussed above which needs to be addressed by the government by formulating the proper framework of laws. In long run e-commerce industry in India would give rise to next MNEs like Amazon, Alibaba in the country itself.

The main findings of this study offer that one principal barrier to e-shoppers is the trust and security hurdles. Focus on these factors would lead to a boom of E-commerce in India. The government has essential role in the growth and development of e-commerce by following rigorous policies namely, intellectual property rights, privacy of data, fortification from frauds

Future research can be conducted to address the factors which are responsible for victory and failure of e-commerce in emerging markets. It will be interesting to research the development of innovation in e-commerce.

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