The Foreign Direct Investment Undertaken by Tesco in India - Case Study Example

Tesco in India Contents Contents 2 Background 3 Impact of cultural difference on International Joint Ventures (IJV) 3 Tesco in India 4 Cultural Difference of India and United Kingdom 5 Future of Tesco 7 Background Tesco Plc is a multinational food retailing company based in United Kingdom. In terms of profit, it is the second largest food retailer of the world with an estimated net income of £124.0 million in 2013 (Tesco Plc, 2014a). The store was opened in 1929 in London and within thirty years, Tesco Plc had become the most popular grocery store in United Kingdom. Over time, the company had expanded in terms of product portfolio, which now includes both food and non-food items (Tesco Plc, 2014b). The non-food items range from books, clothing and electrical items to financial and telecommunication services. The international expansion of the company started in 1994 and presently accounts for half of the retail business. The purpose of this paper is to analyse the foreign direct investment (FDI) undertaken by Tesco in India in order to open retail stores in light of cultural differences between the nations. The company plans to invest $110 million dollars through a partnership with India’s Tata group. This decision will be particularly important for the Indian economy as the government had expressed the desire to bring in FDI in the retail sector. The government had passed a legislature regarding FDI in 2012, but has not been successful in inviting applications (BBC News, 2013). So, investment made by Tesco can be crucial for providing the much needed boost to the retail sector of Indian economy. Impact of cultural difference on International Joint Ventures (IJV) The opinion among researchers is divided regarding the impact of cultural differences on success of IJVs. One group is of the opinion that higher cultural difference between nations can lead to poor performance of IJV, while the others are of the view that cultural differences may help an organization to learn more innovative practices. The existing literature shows that there is a dearth of studies regarding the empirical verification of IJVs in relation to cultural difference. The study conducted by Nippa, Beechler and Klossek (2006) had accessed qualitative aspect of the relationship between the variables. Their study had shown that relation between cultural difference between the nations and performance of IJV are ambiguous to some extent, but culture surely has a significant role to play (Nippa, Beechler and Klossek, 2006). The study of Reus and Rottig (2009) was the first work focusing on the quantitative relationship between the two. Their study had shown that differences in the cultural aspects between nations and corporate structure are likely to have adverse impacts on performance of IJVs (Reus and Rottig, 2009). Cultural compatibility between partners refers to the concept of cultural closeness. This implies closeness of organizational culture between the partners. Researchers distinguish the term “cultural proximity” and “cultural closeness”. Cultural difference measures dissimilarities in the practices of management, process of decision making and learning capabilities between partners (Huxham and Vangen, 2013). As each organization has its separate culture, compatibility between them is essential; otherwise, the joint venture is unlikely to work. In case of international joint venture, apart from differences in the corporate culture, differences in culture between nations are also important (Killing, 2012). Hofstede (1980) had identified that the concept of cultural difference in management literature arises from three dimensions. The first one is political and legal differences. This also includes differences in labour and employer’s system of association. The second is sociological differences, in terms of people, between nations and the final difference is in terms of the psychology of customers between countries (Hofstede, 1980). Tesco in India It has been reported that Tesco wants to enter the Indian market through a joint venture with India’s Tata group. The rationale for choosing joint venture arises from three major heads, namely internal uses, competitive uses and strategic uses. The first one relates to sharing of cost and reduction of risks associated with international joint ventures. It also helps the firm to deal with any financial debt by using resources of the partner as well as in sharing of innovative managerial practices (The Economist, 2012). The competitive uses refer to political favour and ease of accessing global markets with the help of joint ventures. Finally, the strategic uses concerns exploitation of new synergies and technology transfer between the partners (Obitz, 2008). The fundamental benefits arising from joint venture is rapid rise in sales of the firm in the short run. Also, as joint ventures are flexible in nature, companies have higher autonomy in exiting the business and their commitment in business compared to other modes of entry is less (Porter, 1991). Though joint ventures promise advantages to firms from multiple aspects, yet it also imposes externalities to participating firms. Setting up a joint venture may bring certain challenges to the partners because of differences in culture, lifestyle, language and ethnicity (Peng, 2008). A research conducted by Pothukuchi, et al. (2002) pointed out that in case of India; most of the problems in international joint ventures arise from the context of differences in organizational culture between the partners, rather than those concerning national culture. In terms of organizational culture, difference between the open and the close culture has been found to affect performance of IJV negatively (Pothukuchi, et. al., 2002). Hence, Tesco has to take into consideration the differences between organizational culture of Tata and Tesco. A study conducted by Damanpour, et al. (2010) on Indian firms involved in IJV had found that after formation of joint venture, interaction process among the partners is a determining factor in successful management of joint ventures. This involves communication and cooperation between the partners and conflict resolution through effective interaction between them (Damanpour, et. al., 2010). In a research conducted by Elashmawi (1998), it had been observed that in case of IJV with Asian firms, most failures arise because of inability of the foreign firms to manage the cultural difference between culturally diverse employee groups. In this regard, one of the biggest tasks of Tesco will be effective management of the teams of its diverse employees, after commencement of operations (Elashmawi, 1998). Cultural Difference of India and United Kingdom Hofsetede’s model of cultural dimensions has five parameters, namely power difference, uncertainty avoidance, individualism, masculinity, pragmatism and indulgence. In terms of power distance, it has been observed that Indians believe more in socialism as opposed to capitalism. So, Indians accept disparity in power and wealth (Brett, 2007). This can prove to be beneficial for Tesco as employees would be obedient to their managers. In terms of individualism, U.K. appears more individualistic, whereas India is group oriented. In terms of masculinity index, it is seen that both India and U.K. have male dominated societies in general, which makes this aspect compatible. In terms of uncertainty avoidance index, India scores higher than U.K. This implies that Indians are guided more by strict rules and regulation and religious and emotional beliefs (Taylor and Bain, 2005). This can pose to be a problem for Tesco if emotional needs of the employees are not fulfilled. India is still a country that is heavily dominated by caste system, despite being multicultural and multilingual. The social groups in the country vary widely due to differences in caste and social status of the people. This implies that management of employees requires sensitive approach by the managers. Based on the scores of cultural difference between the nations, it can also be confirmed that India is a country with a long-term orientation. This can prove to be a major benefit for entering the Indian market (Tarakeshwar, Stanton and Pargament, 2003). The diagram below summarizes differences in the culture scope of the two countries, which can prove to be an apt guide for Tesco in directing its investment venture in India. Figure 1: Cultural comparison of U.K. and India (Source: The Hofstede Centre, 2014) India is one of the countries in East Asia, which provides major potential for foreign retailers to set up their business. However, mere size of the Indian retail sector alone cannot guarantee success for foreign retailers because adaptation to local culture as well as taste and preferences of the country is a prerequisite for attaining prosperity. An article published in The Economist suggested that for foreign retailers to be successful, it is important that local managers are provided with sufficient autonomy (The Economist, 2012). In this regard, it can be said that Tesco can learn from the experience of Big Bazar, which is a very successful retailer in the Indian market. Big Bazar had to modify its store ambience particularly in order to suit the shopping pattern of Indian customers. It was seen that Big Bazar did not use the concept of narrow alleys suited for customers to move with individual carts during the process of shopping. They had instead introduced the system of cluster in stores, which creates a chaotic environment in shopping centres as people are more accustomed to the same. Such instances are not exclusive to India. The experience of Carrefour, another major German retailer operating on a global basis, had shown that the retailer had to adapt its strategies particularly to the Chinese culture in order to attain a competitive advantage (The Economist, 2012). The problems faced by Tesco in international joint ventures are not a new phenomenon. It was observed that entry of the organization into the Chinese market was also through a joint venture. Yet, Tesco had major difficulties in conducting the business there. The differences in corporate culture and national culture between the countries could be attributed for this difficulty. The company owns 20% of the joint venture stake with its partner, China Resources Enterprise. Nonetheless, due to differences in the management culture and other national aspects, functioning of Tesco in China encountered severe consequences (Tesco Plc, 2011). The differences in the management culture, in terms of higher controls and closed nature of Chinese organizations, could be accounted as one of the major problem of Tesco in China. This means that similar problems can be faced by Tesco in India if it fails to establish a proper relationship with the partner, Tata. This implies that autonomy of the local managers will be important for coordinating business operations. Tesco had also faced obstacles in managing its Japanese joint ventures. Though cultural dimension may not be the only reason that caused failure, yet it can be regarded as one of the major contributing factors (Pendrous, 2013). Though Tesco had its share of difficulties yet there are instances from where it can be argued that the issue of cultural difference in joint venture has been dealt efficiently by the company. For instance, IJV between Tesco and Lotus has indicated that product relatedness was an important aspect, which had facilitated survival of the joint venture (Smith, 2010). The knowledge about local products that Tesco had gathered from its local partner had rendered the joint venture successful. Future of Tesco From the ongoing analysis, it appears that culture is likely to play an important part in success of Tesco in India. The compatibility of its partner, Tata, along with differences in nature of business between the two nations will be two major determinants, which will bring about success of the joint venture of Tesco in India. Major differences in organizational culture will probably have adverse impacts on outcome of the venture, if both the parties are unable to adapt their policies accordingly. The national culture and differences in the buying pattern of consumers render knowledge about the existing markets crucial. The local expertise of Tata can enable Tesco to acquire required knowledge regarding the markets. This will in turn be helpful in determining outcome of the joint venture. Finally, it can be said that effective communication and cooperation between the partners will prove beneficial in resolving conflicts between them, if any. Reference List BBC News, 2013. Tescos $110m India expansion given go-ahead. [online] Available at: [Accessed 5 May 2014]. Brett, J. M., 2007. 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