Value chain analysis for flipkart

QUESTIONS

1. With reference to the academic literature and using various units of analysis (global, national, industry) of external environmental factors, suggest the most important external issues driving the acquisition of Flipkart by Walmart. (600 words, excluding appendix)

(20 marks)

2. Conduct internal analysis utilising relevant academic literature and discuss the areas of expected internal benefits and synergies for both companies. (600 words, excluding appendix)

(20 marks)

3. With reference to the academic literature, explain the risks associated with this choice of acquisition. Discuss the potential managerial challenges in terms of post-acquisition integration. (600 words, excluding appendix)

(20 marks)

4. Drawing upon academic literature and theory, critically discuss the possible effects, both positive and negative, of the acquisition on the domestic retail market in India. (600 words, excluding appendix)

(20 marks)

I require the information for Q1 & Q2 in appendix only (Do not need paragraph answers) with references, preferably in table format.

Q1 Appendix:

PESTLE of US, India & Global

Porter's Five Forces Analysis on Industry

SW(OT) of Flipkart

SW(OT) of Walmart

Q2 Appendix

(SW) of Flipkart

(SW) of Walmart

Adapted Value Chain Analysis of Walmart

Adapted Value Chain Analysis of Flipkart

VRIN of Walmart

VRIN of Flipkart

Q3

Bolt on Product, Bolt on technology (Refer to lecture 6A notes)

Post - Acquisition Intgeration: Human & Task integration (Refer to lecture 6B notes)

Post - Acquisition Styles: All 5 styles (Refer to lecture 6B notes)

Q4

FDI spillover effect: Productivity, Backward & forward linkages (Refer to 8A Lecture notes)

Other policy implication

Modern Slavery (Refer to Lecture 8B notes)

Lecture 8a: Responsible and Ethical IB practices (FDI spill-overs)

Dr Ziad Elsahn

1

To examine the impact of MNEs on host countries’ development

To understand the effect of FDI on host countries’ development.

To examine the factors that moderate the impact of FDI on host countries.

What are we doing here today?

This lecture is related to Q4 in your assessment. It will equip you with the theories and concepts necessary for analysing the impact of Walmart’s acquisition of Flipkart on the Indian economy.

How is this lecture related to your assessment?

Phantom investment calls for an exorcism

Phantom FDI accounts for 40% of global stock of FDI (around $15tn according to IMF research).

Phantom FDI involves “the purchase of shell companies known as special purpose entities which can be used for intra-company financing or to hold intellectual property and other assets. This “phantom FDI” plays no real economic role in the countries where it resides but allows its owners to reduce their tax liabilities by moving profits to jurisdictions with lower levels of corporate tax.”

What’s in the News

The double Irish with a Dutch sandwish

Source: Tax avoidance: The Irish inversion

The Google case

Google shifted $23bn to tax haven Bermuda in 2017, filing shows

Image via BusinessWeek

What’s in the News?

Season of discontent: protests flare around the world

Inside the protests rocking nations around the globe

Protests rage around the world – but what comes next ?

Protests around the world explained

In northern Chile, protesters in Anfogasta regroup in a plaza Monday evening after police tear gassed their march [Sandra Cuffe/Al Jazeera]

Neoliberal policies and the rise of FDI

Why do we often see strong reactions in certain countries against MNEs’ FDI?

Can we answer the question of whether FDI is useful or detrimental to host countries?

Do MNEs increase welfare by economizing on transaction costs and transferring technology? Or do they decrease welfare by removing competition?

Answers to these questions are shaped by ideologies and context!

It also depends on how we think of MNEs, why they exist, and the function they serve

Why do MNEs exist? Two Views

A market-power interpretation (Hymer, 1960)

Market-power interpretation of FDI “focuses on the MNE’s ability to capture value from consumers and strengthen market dominance across national borders” (Clougherty et al., 2017, p. 343)

What does that mean:

1- Structural market imperfections (industrial) leads to some firms possessing specific ownership advantages, which is required for firms’ internationalization.

2- Internationalization through FDI leads to further imperfections that allow MNEs to generate greater profits by exploiting their monopolistic advantages in foreign markets.

3- This will increase industry concentration, reduce competition, decrease allocative efficiency, and reduce consumer welfare.

Policy Implication according to this view: MNEs need to be regulated!

An efficiency interpretation (Buckley and Casson, 1976)

The efficiency interpretation “rests on the MNE’s ability to efficiently organize transactions (Buckley and Casson, 1976; Rugman, 1981), safeguard contractual hazards (Hennart, 2007), spur innovation (Hennart, 1982), and create/share organizational know-how (Kogut and Zander, 1993)” (Clougherty et al., 2017)

What does that mean:

1- MNEs arise to reduce transaction costs arising from natural market imperfections, particularly in the intermediate- goods market.

2- MNEs arise due to their superiority in transferring (internally) tacit-knowledge and capabilities (Kogut and Zander, 1992).

3- Therefore MNE lead to positive welfare implications through effective dissemination of innovations across borders, reduction of transactional inefficiencies, and creation of new values.

Policy implication according to this view: Governments should strive to attract MNEs!

Which view is correct? Both! Buckley and Casson (2009) argue that “more realistic conclusion would be for market-power and efficiency effects to coexist and manifest at different strengths under different contexts” (Clougherty et al., 2017, p. 342). Therefore understanding the context is very important!

Context matters! The level of host country’s development

Developed Countries (DC) MNEs investing in developed Countries vs DC MNEs investing in Emerging Countries (ECs)

Central role for political institutions in DC in ensuring economic transactions involve efficiency effects.

National institutions are responsible for curbing anti-competitive investments. (e.g. Google in Europe)

Power balance between host governments and MNEs

But, problems Location tournaments and race to the bottom, etc..

However DCs are in a better position because:

1- Strong market-supporting institutions: IP protection, transparency, competition policies.

2- DCs already posses technology and therefore are in a more powerful position compared to emerging markets

Emerging Markets MNEs investing in Emerging countries

Non-traditional ownership advantages (non-market advantages) by EM-MNEs (e.g. Political Know-how)

- These advantages can allow access to resources that would otherwise be unavailable to DC MNEs.

- EM MNEs often transfer labour intensive technologies, which are more suitable to local conditions in EM.

Why is this useful?

Because less tacit and complex technology can be more useful to EMs due to lack of absorptive capacity necessary to benefit from the advanced technology that DC MNEs transfer.

- Bargaining power of EM-MNE will be lower vis-à-vis EM host governments, because they do not possess the advanced capabilities and technologies which DC MNEs have.

Emerging Markets MNEs investing in Developed countries

The rise of emerging markets MNEs.

Strategic asset seeking motives behind FDI

Example: Tata group acquisition of Jaguar Land Rover in the UK.

Prioritizing learning which leads to productivity upgrading and enhanced efficiency.

“Arçelik – a Turkish white-goods manufacturer – acquired several European companies with advanced technologies and solid brands, and then enhanced its competitiveness by combining these assets with its low-cost manufacturing in Turkey and access to growing Middle Eastern markets (Bonaglia et al., 2007)” (Clougherty et al., 2017, p. 350)

Source: Clougherty et al., 2017

Political opposition to emerging market MNEs may be “short-sighted”, from a consumer welfare perspective.

But what about labour productivity, and other forms of spill overs.

Social effect on workers?

Also what are the specific mechanism through which efficiency-effects or market-power effects manifest in the host market.

Policy implications

Why are many countries actively trying to attract FDI?

By 2001, UNCTAD reported that there was more than 160 national and more than 250 subnational Investment promotion agencies (IPAs).

Reasons include:

Capital formation, employment, exports and technology.

But most importantly is the potential of acquiring modern technology and know-how (product, process, management and marketing skills).

These benefits take the form of externalities and can be categorized into “productivity spill overs” and “market access spill overs”

FDI Spill-overs

Productivity spillovers are “…when the entry or presence of MNC affiliates lead to productivity or efficiency benefits in the host country’s local firms, and the MNCs’ are not able to internalise the full value of these benefits” (Blomstrom and Kokko 1998, p.3)

In rapidly changing industries, MNEs ownership advantages will most likely be related to new products and processes.

In mature industries, MNEs ownership advantages will most likely be related to management and marketing sills.

These productivity spill-overs are Important because:

1- Technologies used by MNEs are not always available through the market (as a result of internalisation)

2- Direct contact with users facilitate technology diffusion

3- MNEs ability to enter markets with high entry barriers and high concentration as compared to domestic firms. This can increase the level of competition.

4- Enable domestic companies to access international markets in which MNEs are active.

Productivity spillovers

Technological complementarities between MNC and host country firm

Local entrepreneurship

Strength of IP protection in host country

Competition in host country markets

Size and wealth of host country

Technical centres of excellence in host country

Technical competence of host country firms

Government policies (e.g. local content regulations)

Variables that moderate the extent of FDI spill-overs

If IP and technology are a source of ownership advanatges and to protect them MNEs transfer these advantages internally across borders through FDI….then how do host countries benefit other than through direct effects?

Paradox!

MNEs entry creates linkages with local firms.

Spill-overs can take place when local firms learn from MNEs superior knowledge. Linkages can take two forms:

1- Backward Linkages:

Domestic suppliers provided with training, skills, technical assistance by MNEs, and encouraged (or forced) to improve to meet MNEs quality standards.

Local inputs.

What are the conditions under which local firms may not benefit?

2- Forwards Linkages:

- Less evidence for forward linkages benefits but mostly through tranbsfering sales and technical information skills to retailers and distributors.

Indirect effects on host countries

Training of local employees.

R & D by MNEs subisdiaries.

Local firms copy and imitate MNEs technology (dependent also on local IP laws)

Demonstration effects.

Effects on competition.

Other Spill-overs mechanism

Formal institutions (discussed in last week) play a big role in moderating the effect of FDI on local economies:

1- Technology transfer requirements.

2- Entry mode requirements

3- Trade policies

4- IP protection laws

Policy implications

Main advantage: Technology transfer

But there are costs: dependence and subordination; stifling of competition, transfer pricing and tax evasion.

What are the costs of FDI for developing countries

Divergent opinions on globalisation

Pro-globalisation institutions such as the World Bank and IMF argue that it has the potential to reduce poverty.

Critics (Klein 2000; Stiglitz, 2002; Weissman 2003,) argue that it increased marginalisation and inequality, and led to a race to the bottom scenario.

In reality, in order to attract FDI, governments offer:

Tax breaks

Lax regulation

Willingness to crash labour unrest and unions.

Incentives.

Minimum wage.

Environmental degradation.

A wider discussion

FDI by MNEs can have both positive through spillovers but also negative impacts, the effects are dependent upon:

FDI motive

Host country’s industry structure.

Institutions, both formal and informal, in host country.

Level of host country’s development.

So the question is do benefits outweigh the costs?

Conclusions

We will discuss a related topic, a dark aspect of IB: Modern Slavery.

Next Lecture