This report outlines the crucial external environmental factors which affect foreign expansion of Joule UK in India. It includes analysis of critical environmental factors and their impact on internationalisation process, entry mode evaluation, and recommendations.
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Section1 1.Introduction: The SME manufacturing enterprise selected for this report is Joule UK which produces housing heating solution devices for consumers such as radiators and thermal heating system. The country selected for expansion of Joule UK is India. This report outlines the crucial external environmental factors which affect foreign expansion of Joule UK in India. 1.1.Company Overview: The motto of Joule UK is “Manufacturing Excellence” and was established in the year 2008 (Joule, 2022). Currently the firm is headquartered in Castleford West Yorkshire with 97 employees and revenue of 16,027,678 GBP (ZoomInfo, 2022). 1.2.Justification: The decisionfor international expansionof Joule UK is justifiedbecausethe UK economy has been facing downward spiral because of COVID-19. UK economy shrank by 0.1% in March of 2022 with economists estimating further decline (Wearden, 2022). Joule UK needs to lower the threat of economic decline and expand to a developing Asian economy such as India to get global recognition and higher revenue. This justifies the decision for international expansion for Joule UK into South Asian country India. 1.3.Justification by using Push and Pull factors for expansion of Joule UK in India: 1.3.1.Push Factors: Economic downturn: United Kingdom is facing economic downturn because of the pandemic and Brexit. The UK is also facing inflation and the trade openness in United Kingdom has fallen significantly in comparison to advanced economies of the world (Inman, 2022). High Competition: 1
There are regional and international brands in UK offering home heating solutions.SomeexamplesareWorcesterBosch,Ideal,Vaillant,Baxi, Viessmann, Intergas, Ravenheat, Glow-Worm, Main, Potterton, Alpha, ATAG and Ferroli. 1.3.2.Pull Factors: High Consumer Demand: Consumers in India who reside in snowy parts of the country with long winters such as Himachal Pradesh and other parts of Northern region face harsh winters with temperatures ranging from -2 degree Celsius and 14 degree Celsius.Itisconsumerrequirementtogetbettersolutionforimproving heating in the harmful winter conditions. Macroeconomic stability: Government investment in making infrastructural reforms and the decision to enable 100% FDI has made India economically stable. The large population witheconomicstabilityisadvantageousfactorforinternationalbusiness looking to grow on a global scale. 2
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Section 2 2.1.Analysisofcriticalenvironmentalfactorsandtheirimpacton internationalisation process The macro environment of a country holds prime importance when taking decisions regarding internationalization of a company to that country (Treviño and Doh, 2021). 2.1.1. Factor 1: Advancing Economy The primary factor of India external environment which affects success of Joule UK is the economic growth of India. The resilient recovery of India from the COVID-19 pandemic has showcased its promising future in the global economic environment unlike many other developing and developed nations who were not able to deal with the pandemic as easily. India is a developing economy with the 2021 GDP of 2.48 trillion GBP. The growth percentageofthecountryintheyear2021is8.9%whichshowcasesthehuge economic potential. India is a suitable country for expansion of Joule UK because it also has higher economic GDP percentage than UK for the year 2021 which is only at 7.4% (The World Bank, 2022). The advantageous economic condition as well as its ability to recover from global healthcare crises display the profit potential resent in the country. This factor will have positive influence on success of the manufacturer in India because Joule UK will have a stable economic environment to operate in unlike UK which is experiencing economic downfall. Despite this the overall consequence of this factor for Joule UK is positive because it creates suitable conditions for profit generation for the respective organization. 2.1.2. Factor 2: Legal challenges The legal environment of a country consists of its taxation system, legal processes, regulations and requirements which affects the ease with which a company can operate and gain success in the country (Rezazadeh, Valizadeh and Damirchi, 2019.). The corporate tax rateof Indiais at present of 25.7% (Business Standard, 2022). In 3
comparison to UK, which has the corporate tax rate of 19%, Joule UK will face challenges in adjusting to the taxation system and taxation rates in the country. It will also have a negative impact of the profitability and efficiency of the company after expanding to India as adjusting to complicated taxation system requires time and paying high taxes reduces profit. It has also been identified that the complicated taxation system of India acts as a breeding ground for tax dodgers and increasing corruption. In addition to this, another factor which adds to the legal challenges for Joule UK is the lack of progressive taxation system and digital tax payment option in India. Much of the country is new to digital technologies and even the corporate world has not quickly shifted towards digital transformation in India (Khan and Al Amin, 2021). In this case, the comparatively poor digital literacy of India introduces legal troubles for Joule UK as thecompanywillhavetocomplywithlegalrequirementsbyusingphysical documentation mostly. While working in India , Joule UK will face difficulties in complying with new and complicated legislature without the help of digital technology. On the other hand, there is positive impact of following the complicated legal procedures and regulations that the respective company will be able to avoid any fraudulent cases in the country. However, Joule UK needs to ensure that it has created a strong legal team for its international expansion in India or the legal challenges present in the country will directly lower the quality of daily business activities and hinder profit potential of the company. 2.1.3. Factor 3: Drastically different culture The organizational culture of a company needs to adjust to the country culture in order to ensure that they build successful outlets in the country (Maldonado and et. al., 2021). The cultural environment of UK is more egalitarian while the cultural environment of Indiaeasilyacceptshierarchicalstructures.Inadditiontothisthe,thefactorof indulgence is also drastically different in United Kingdom and India. Restraint, cynicism and pessimism are characteristics of low indulgence culture of India while UK ha comparatively higher indulgence culture which focuses on ratification of one’s desire. 4
Here the lower level of indulgence may also dictate employee behaviour and consumer buying behaviour in India. This creates a challenge for Joule UK who has been primarily operating out of UK and does not have much experience in dealing with costumers, business environment and employees from eastern cultures.There have been many examples of companies inthe past whohave failed in international markets and suffered loss because of lack of cultural modification of the company with the local cultureoftheforeigncountry(Oyemomiandet.al.,2019).Thisincreasesthe importance of Joule UK to ensure that the company makes cultural adjustments to support employees and adjust its brand image to attract consumers in that specific region. 5
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Section 3 3.1. Entry Mode Evaluation 3.1.1.Export: This entry mode option involves exporting the products to a different country and distribute domestically made product in foreign region (Testa, Slaton and Karpova, 2022). In case of the external environment situation in India, Joule UK will have the advantage of lowering risk posed by culturally difference workforce. The respective firm will face the disadvantage of further complicating legal challenges as it will have to deal with UK laws, international export laws and Import laws in India.Further justification behind selecting this entry mode for Joule UK is that there have been uninterrupted flow of trade and commerce between UK and India. The value of UK exports to India for electrical products and electrical equipment equals to 348.38 million GBPaccording to the United Nations COMTRADE database on international trade (Trading Economics, 2022). In context of trade barriers, UK and India have agreed to sign free trade agreementwhichcoversareasincludingdefence,cybersecurity,technology, communication, R&D and healthcare so that UK can dependency on trade with EU and China (Chadha, 2022). This FTA can be beneficial to Joule UK and allow the company to easily export its products in India. The exchange rate for UK and India is1Indian Rupeeequals 0.010Pound sterling. This means that Joule UK will not be able to get high profits by exporting to India. Despite this disadvantage the entry mode for exporting products to India is beneficial because of new FTA, lower threats than other options and easier entry into the Indian market. 3.1.2. Production: Thisoptioninvolvesopeningamanufacturingplantintheforeigncountryfor internationalization(Utama and et. al., 2018). After examining the external environment of India, the advantage of this option for Joule UK is that it will enable the company to benefit from the economic growth in India.In this entry mode he low exchange rate for UK pound and Indian Rupee is advantageous for Joule UK because the company will 6
be able to purchase requirements for setting up production such as technological infrastructure, staff and raw material at lower cost. In addition to this technological growth of India is another advantageous factor justifying using production for entry of in this entry mode he low exchange rate for UK pound and Indian Rupee is advantageous for Joule UK in India.By 2022, R&D expenditure is targeted to reach at least 2% of the country’s GDP. The engineering R&D and product development market in India is forecast to post a CAGR of 12% to reach 51 billion GBP by 2025, from 25 billion GBP in 2019. In South Asia, India is the only country to be represented on the Bloomberg Innovation Index, 2021 at 50thplace (India Brand Equity Foundation, 2022).The disadvantage is that cultural differences might affect creation of strong workforce in India.Another disadvantage of starting production in India is lack of raw material availability. Supply chain disruptions cross country have increased cost of raw material leading to challenging price cost margins of businesses (Business Line, 2021). 3.1.3. FDI: This involves investing in an enterprise in foreign country to get controlling ownership. The advantage of this internationalization route is that it will reduce risk associated with starting new enterprise (Chen and Liu, 2021). It is reliable route for expanding to India for , Joule UK because it will enable the company to eliminate the cultural differences by investing in already skilled and focused workforce so that the focus can be directed to building quality products. The discussion in section 2 shows that UK is experiencing economicdownfallwhileIndiaisexperiencingeconomicgrowth.Theeconomic difference between two countries along with economic environment changes makes the exchange rates for pound and Indian Rupee are unstable. The currency exchange instability makes FDI risky.The option of foreign direct investment of Joule UK in India will also be positively affected because of the advancing economy in the country as the firm will have access to suitable infrastructure to build high quality home heating devices for Indian consumers. The possible negative impact of growing India economy on FDI expansion route for Joule UK is that the company is that it can increase cost of internationalexpansionasthevalueforIndiancurrencyhasimprovedafterthe pandemic. After the rise of COVID-19 pandemic in India, the value of Indian Rupee 7
increased by 10% in May of 2021 against the dollar. This showcases the strength of its currency (Mazumdar, 2021). 8
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Section 4 4.1. Recommendations: The most suitable entry route for It is reliable route for expanding to India for, Joule UK is exporting. This is because, it will help the company provide consumers in India who have are among the higher income class and welcome innovative solution with digital technology wide range of innovative products. On the other hand, it is also suitable because it does not require high costs and does not have high risks of failure because it will help the company find the suitable consumer base for their products in a developing economy like India. This is a justified recommendation because it also linked with the strengths and weaknesses of Joule UK. The respective company will be able to avoid its weakness of low resources and high expenditure of starting new manufacturing plant through direct exporting. On the other hand, it will be able to exploit the strength of expertise and innovation by delivering high quality products to consumers in India. The critical factor analysis also supports this recommendation because the firm will be able to avoid the complicated legal factors associated with directly setting- up manufacturing plant in India while exploit the economic factor of growing economy easily. 4.2. Strengths and Weaknesses of SME StrengthsWeaknesses Innovation:Thecompanyoffers innovative solution for heating households whichhelpsitcreateadistinguish themselves among competitors. Expertise: The company has expertise in providinguniquesolutionstoheating problems because of its presence in the UK industry for more than a decade. HighCosts:Startingamanufacturing plant in foreign country for heating solution productswhicharedependenton automation and variety of other technology forachievinghighqualityrequireshigh expenditure. Low resources: The company does not havetheappropriateresourcesto complete global expansion and maintain 9
starting period with few sales to set up recognized brand in a foreign country. 10
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