Market entry barriers for German small and medium-sized companies in India

Index of contents

B List of abbreviations

C List of figures

1. Introduction
1.1. Problem description and objectives
1.2. Scope of work

2. Terminologies
2.1. Definition of small and medium-sized companies
2.2. Market entry barriers
2.2.1. Definition of market entry barriers
2.2.2. Classification of market entry barriers

3. Analysis of the market environment
3.1. Economic conditions
3.1.1. Economic reforms since 1991 and India’s actual economic
structure
3.1.2. Foreign Direct Investment (FDI) and German-Indian
relationship
3.2. Political and legal conditions
3.3. Socio-cultural conditions

4. Methodologies
4.1. Quantitative and qualitative research methods
4.2. Methods of collecting data
4.3. Question types
4.4. Designing and dispatching of the questionnaire
4.5. Practical implementation of interviews
4.6. Data analysis and quality criteria

5. Market entry barriers in India
5.1. Tariff barriers
5.1.1. Tariff barriers for foreign investors in India
5.1.2. Tariff barriers for German small and medium-sized companies
5.2. Non-tariff barriers
5.2.1. Impediments resulting from India’s high bureaucracy
5.2.2. Import regulations and permitted economic sectors for FDI’s
5.2.3. Impediments resulting from the Indian law
5.2.4. Non-tariff barriers for German small and medium-sized companies
5.3. Market-related barriers
5.3.1. Impediments resulting from India’s infrastructure in relation of transport, communication and estate
5.3.2. Impediments resulting from water and electricity supply
5.3.3. Impediments concerning the Indian labour market
5.3.4. Impediments resulting from climatic and environmental conditions
5.3.5. Impediments resulting from corruption
5.3.6. India’s worldwide reputation and Germany’s image in India
5.3.7. Market-related barriers for German small and medium-sized companies
5.4. Company-related barriers
5.4.1. Impediments concerning the personnel recruitment and human resource management
5.4.2. Impediments resulting from the collaboration with other companies and from the quality of customers
5.4.3. Impediments concerning the marketing mix
5.4.4. Company-related barriers for German small and medium-sized companies
5.5. Recommendations, success factors and key challenges German for small and medium-sized companies in India

6. Conclusion
6.1. Target achievement
6.2. Prospects

D Appendix

E Bibliography

F Declaration in lieu of oath

List of abbreviations

illustration not visible in this excerpt

List of figure

Figure 1) Classification of market entry barriers

Market entry barriers for German small and medium-sized companies in India

1. Introduction

Freedom of the press and a reliable democracy, the demographic development with a youth and consumer-oriented middle class, increasing investments in education and infrastructure, an effective finance market with comparable low rates of non-performing loans as well as a dependable legal system are the foundation of India’s economic revival within the last years and will ensure that this dynamic will continue. Therefore the foreign trade between Germany and India increased within the last years and German companies started their business in India. Entering new markets harbour different risks whereupon small and medium-sized companies are facing additional issues of less financial and human resources, absent experience abroad, the ignorance of the respective national language and costs for the international market development.

The expenditure of time for building up new businesses is often underestimated by German companies. In conjunction with the market entry, the requirements for sales, multitude bureaucratic pitfalls and the inexperience of employees are frequently misjudged. Therefore many companies indicate that two up to three years should be scheduled until a company is marketable. Initially, the profitability is hindered by high investments for infrastructure, human resources, transport, logistic and sales.^[1] Companies operating in India should have enough power of endurance in regard of establishing business relationships and of being successful in the Indian market as frequently higher than expected expenses have to be spent in the first years.^[2]

Within the literature market entry barriers are described whereupon analyzes for small and medium-sized companies have not been conducted. The most important market entry barriers for large concerns are the insufficient infrastructure, the high bureaucracy, the forbidden corruption, the antiquated caste system, the confusing import regulations, high tariffs and taxes, the insufficient skilled labour force as well as the Indian mentality and diversity. Within this bachelor thesis these impediments are analyzed to identify if they also affect small and medium-sized companies.

1.1. Problem description and objectives

The identification, analysis and evaluation of market entry barriers for German small and medium-sized companies in India are the objective of this bachelor thesis and will be develop within six chapters. Moreover, recommendations to minimize or overcome those barriers are provided.

Small and medium-sized companies are increasingly confronted with new issues, but also with chances due to the persistent internationalisation of the markets. New markets are not only entered to guarantee existing competitive advantages and to expand. Furthermore, companies can benefit from substantial incomes and synergy effects.

Entering new markets harbour different risks whereupon the market environment such as customers, products, competitors as well as fiscal and legal conditions needs to be analysed. In comparison to large concerns, small and medium-sized companies are facing issues of less financial and human resources, absent experience abroad, the ignorance of the respective national language and costs for the international market development. On the other hand, small and medium-sized companies are using individual manufacturing processes or design niche products to compete in international markets.

India is characterized by its huge complexity of different races, languages, caste and religions as well as of its ancient cultural and social history. Detailed knowledge about the Indian culture and market is required to increase the success when entering the Indian market. The provided overview of those conditions is necessary to understand the characteristics of the Indian market and to consider this knowledge in daily business operations.

The topic “market entry” is covered in numerous reference books and studies about the market entry in India can also be found. These studies are discussing the market entry of big companies such as of Siemens AG and Robert Bosch GmbH in India, but issues of small and medium-sized companies are neglected. This academic void is closed by this bachelor thesis with the help of the implementation of questionnaires and interviews. Based on these primary sources, market entry barriers for German small and medium-sized companies in India are identified as well as analyzed and recommendations to reduce or even overcome them are presented.

1.2. Scope of work

The first chapter is dedicated to the problem description, objectives and the scope of work.

In the second chapter the terms small and medium-sized companies as well as market entry barriers are defined. As no general accepted definition for both terms exists, both will be specified for this bachelor thesis. In addition, different forms of market entry barriers are categorized.

The third chapter analyzes the Indian market and its environment to provide a basis to understand the sources of existing market entry barriers.

Chapter four informs about information related to the choice of taking questionnaires, the structure as well as the interpretation of them. On this basis, interviews were conducted and analyzed to validate the information provided in the questionnaire. The presented findings are the basis for the evaluation of market entry barriers and offer recommendations to minimize or overcome them.

Within the first chapters the theoretical and informational basis for the main chapter is presented. Systematically, existing market entry barriers for German small and medium-sized companies in India are identified in the fifth chapter. Initially, impediments for large concern are named and explained according to the literature. Subsequently, the relevant market entry barriers for German small and medium-sized companies are described. This evaluation is based on results of the questionnaires and the conducted interviews. Concluding, the impediments for large concerns and small and medium-sized companies are compared. Additionally, suggestions to minimize or overcome market entry barriers as well as the key success factors and challenges are presented.

The results are compromised in the conclusion whereupon target achievements and prospects complete this bachelor thesis.

2. Terminologies

The relevant terminologies “small and medium-sized companies” and “market entry barriers” are defined in this chapter. A standardized definition for both terms does not exist thus the underlying comprehension of them will be specified for this bachelor thesis in this chapter. Additionally, a classification of market entry barriers is presented.

2.1. Definition of small and medium-sized companies

Günter Verheugen, Member of the European Commission stated that “Micro, small and medium-sized enterprises (SMEs) are the engine of the European economy”.^[3] In 2005, 23 million small and medium-sized companies offer about 75 million jobs and represent 99 per cent of all companies in Europe.^[4] In Germany, 99.3 per cent of the companies are small and medium-sized enterprises in 2009.^[5] As various data about the number of German small and medium-sized companies in India exist and different sources have been compared, this amount is stated to be about 2,000.^[6]

Companies can be characterized with the help of the firm’s size (quantitative definition) or with the help of soft facts (qualitative definition).

The quantitative definition categorizes companies on the basis of the firm’s size whereupon quantitative parameters such as annual work unit and annual turnover are often used. Due to the fact that diverse institutions and economic regions take different magnitudes as a basis, the European Commission published a standardized definition^[7] in 2003 which took effect on 1st January 2005 in countries of the European Union. According to this definition micro, small and medium-sized enterprises employ fewer than 250 persons and have an annual turnover of less than Euro 50 million, and / or an annual balance sheet total less than Euro 43 million.^[8]

Another widely used definition is given by the IfM Bonn, a research institute, determining small and medium-sized companies as enterprises with not more than 500 employees and an annual turnover of not more than Euro 50 million.^[9]

On the other hand, small and medium-sized companies are also defined with the help of qualitative criteria. Important qualitative aspects characterizing small and medium-sized enterprises are the huge impact of the entrepreneur on the company, entrepreneur’s personal contacts to its clients and distributors, concentration on individual customer requirements, flat organizational hierarchy levels, high flexibility, the company is not a subsidiary of a consolidated company and the company is less diversified.

The critical issue of qualitative approaches is the practical application as the mentioned data are hard to ascertain, especially for inquiries or even for a whole economic region.^[10]

In this bachelor thesis the term “small and medium-sized enterprise” is determined as companies with less than 500 employees. The annual turnover is not considered due to the lack of information provided in the filled in and sent back questionnaires. The qualitative definition is not practical as detailed required information were not given by the respondents.

2.2. Market entry barriers

The entry into new markets is complicated because of different impediments which need to be analysed. High barriers protect established market actors and exacerbate that returns will be shared with new entrants.^[11] An applied rule is that the higher the market entry barriers in a market, the lower the potential competitive constraints thus the likelihood of entering markets by new competitors decreases. From a macroeconomic view, the efficiency of competition is influenced by market entry barriers.^[12] For example, a well-established company can be more competitive due to its economies of scale or stable customer relationships. New entrants have to spend more resources to advertise their products and might sell their products for lower prices to attract new customers thus gaining fewer profits.^[13] On the other hand, from a corporate-policy perspective, market entry barriers can be connected to particular business strategies. Companies can pursue strategies to overcome, reduce or build barriers to entry. The existence and intensity of market entry barriers are important decision criterion for the international market and location selection.^[14]

2.2.1. Definition of market entry barriers

The discussion of how to determine the term “market entry barriers” started years ago and a general excepted definition is still not found.^[15]

The concept of “market entry barriers” hearkens back to Joe Bain in 1956 with the definition “advantages of established sellers in an industry over potential entrant sellers”.^[16] On this basis, numerous definitions were developed and can be found in the economic literature.

The definition is simplified with the slit of the term into its components “market entry” and “market barriers”. In this bachelor thesis, market entry is understood as the first engagement of a company in a foreign market. Market barriers are all factors that deter a company to entry a market (market entry barriers) or to exit from an existing market (market exit barriers). Building on that, market entry barriers are defined as the entirety of all requirements that needs to be fulfilled for a successful entry into a new market in this bachelor thesis.^[17]

As this is a wide-ranging definition, the following part is dedicated to a classification of market entry barriers into tariff, non-tariff, market-related and company-related barriers. In the fifth chapter, these impediments are analysed as well as proofed if and to which extend they have an impact on German small and medium-sized companies in India.

2.2.2. Classification of market entry barriers

Market entry barriers in the host country can emerge from legal restrictions, political risks, social and ideological reasons, lack of suitable business partners as well as from environmental conditions such as climate and insufficient infrastructure.^[18]

In this bachelor thesis, a classification of barriers was created to provide an overview of potential impediments. With the help of this classification, market entry barriers are distinguished between tariff, non-tariff, market-related and company-related entry barriers.

Classification of market entry barriers

illustration not visible in this excerpt

Figure 1) Source: Own representation

Tariff and non-tariff barriers are understood as institutional, protectionist impediments defending the domestic economy or specific economic sectors.^[19]

In this bachelor thesis, tariff barriers result from all issues in relation of the payment of taxes, custom duties and charges. Non-tariff barriers can arise from embargos, import quotas, self-restrictions and administrative trade barriers in the form of bureaucratic prescriptions and formalities. In this bachelor thesis, non-tariff barriers are defined as all impediments arising from legal, non-financial regulations.

Behavioural market entry barriers are connected with the decision-maker in a company and can follow from deficient international experience, insufficient knowledge of foreign languages as well as from cultural and mental distances to the foreign country.^[20]

In this bachelor thesis market-related barriers are determined as all non-governmental constraints resulting from conditions which are unswayable by an individual company for example infrastructure and environment.

Company-related barriers are caused by interior structures of a company whereupon basic knowledge about the host country or about market conditions such as the competitive environment and customer needs are often ignored.^[21]

All non-governmental impediments which are influenceable by an individual company or which affect the daily business of a company, are understood as company-related barriers in this bachelor thesis.

3. Analysis of the market environment

In this part an overview of the Indian market environment is provided as these conditions are essential to understand the sources of market entry barriers arising for German companies operating in India. This objective is reached by dividing this section into economic, political and legal as well as into socio-cultural conditions.

3.1. Economic conditions

Despite of the Indian advancement in international top classes in sectors such as information technology, pharmacy, research in astronautics and biotechnology as well as its positive economic growth in the past years, India remains an emerging country. Presently, India is leading the world in low-cost and efficient electronic commerce services. The IT sector is the fastest growing branch, even in times of economic uncertainty.^[22] Therefore India is a favoured country for outsourcing of call centres, labour intensive data synchronisation and further services as well as for Business Process Outsourcing.^[23]

India’s objective is to become an international recognized manufacturing and export platform as well as a sourcing centre for international operating companies.^[24]

3.1.1. Economic reforms since 1991 and India’s actual economic structure

After gaining their independency in 1947, India’s economy was characterized by governmental intervention and isolation from international trade activities by the enforcement of high tariffs and quantitative restrictions.^[25] After several years of closed economy, foreign exchange shortages and inefficient production resulting in high budget deficits and increased inflation, India was confronted by a macroeconomic crisis.^[26] As a consequence, India applied to the International Monetary Found (IMF) for credits and began to internationalize its economy by the implementation of extensive reforms as well as by the reduction of restrictions in 1991.^[27] The crucial points of the reforms were related to industry, trade, foreign direct investments and technology.^[28]

For the internationalization of markets the then in force licenses for goods have been mostly abolished, tariffs have been reduced from up to 400 per cent to on average 28 per cent in 2004, foreign direct investments have been permitted in many industries, embargos on imports have been shortened, state-owned monopolies in telecommunication, aviation and petrochemistry have been broken and the Indian rupee has been devalued.^[29]

In spite of the economic reforms in 1991 India remains a controlled economy ranking on place 123 of 156 states on an international scale about the economic freedom of the Heritage Foundation & Wall Street Journals. The index is based on ten categories including trade policy, tax burden, state intervention, monetary policy, capital flows and foreign direct investments, banking industry, salaries and prices, property rights, degree of intervention and shadow economy. India’s position in this ranking is reached because of the high trade restrictions, corruption, high tax burdens, high bureaucracy and governmental limitations.^[30]

Nevertheless, India benefited from the economic reforms from 1991 onwards and high real GDP growth rates have been generated with an annually average of around 7 per cent in the period from 1997 to 2007.^[31]

Until 1991, small and medium-sized companies did not compete with other companies worldwide. After the implementation of reforms, small and medium-sized companies were no longer protected by trade barriers and faced intensive competition thus they needed to improve their efficiencies and innovativeness.^[32]

[...]

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^[1] Cf.: Germany Trade and Invest (2010), p. 16 et seq..

^[2] Cf.: Rodewald, A. (2007), p. 79.

^[3] See: European Commission (2005), p. 3.

^[4] Cf.: European Commission (2005), p. 5.

^[5] Cf.: Federal Offices (2009), s.p..

^[6] Cf.: Weidlich, T. et al. (2011), p. 32.

^[7] Cf.: Höhner, B. (2007), p. 18.

^[8] Cf.: European Commission (2005), p. 2 et seqq..

^[9] Cf.: IfB Bonn (2011), s.p..

^[10] Cf.: Höhner, B. (2007), p. 20 et seqq..

^[11] Cf.: Freiling, J. / Reckenfelderbäumer, M. (2010), p. 162.

^[12] Cf.: Büter, C. (2010), p. 69.

^[13] Cf.: Hitt, M. A. et al. (2010), p. 192.

^[14] Cf.: Büter, C. (2010), p. 69.

^[15] Cf.: OECD (2007a), p. 1.

^[16] See: Bain, J. S. (1956), p. 3.

^[17] Cf.: Berndt, R. et al. (2010), p. 108.

^[18] Cf.: Dülfer, E. (1999), p. 111.

^[19] Cf.: Eschlbeck, D. (2006), p. 583.

^[20] Cf.: Büter, C. (2010), p. 70 et seqq..

^[21] Cf.: Eschlbeck, D. (2006), p. 583.

^[22] Cf.: Todd, P. R. / Javalgi, R. G. (2007), p. 174.

^[23] Cf.: Weidlich, T. et al. (2011), p. 79.

^[24] Cf.: DE International (2011), p. 3.

^[25] Cf.: Todd, P. R. / Javalgi, R. G. (2007), p. 174.

^[26] Cf.: Agarwal, M. (2009), p. 1 et seqq..

^[27] Cf.: Wiskot, G. (2009), p. 222.

^[28] Cf.: Wamser, J. (2005), p. 41.

^[29] Cf.: Pilny, K. (2006), p. 39.

^[30] Cf.: The Heritage Foundation (2012), p. 225 et seq..

^[31] Cf.: OECD (2011), p. 192.

^[32] Cf.: Todd, P. R. / Javalgi, R. G. (2007), p. 174.