Foreign Direct Investment (FDI) Case Study Answer

Introduction
Foreign Direct Investment (FDI) is the outside financing for the growth of the original company in the other countries the development is supported by procuring the operations of the host country or introducing the subsidiary company in the host nation (Vyas, 2015). The globalization has assisted the developing countries by emphasizing on the track of FDI for the amplification of trade and its businesses globally. Walmart is a pathfinder retailer headquartered in Arkansas, USA, considering its legacy in 1962 (Bhandari, 2017). Walmart has the original figures of the 4.516 units fulfilling worldwide (Bhandari, 2017). Flipkart is one of the leading e-commerce enterprises running in India and achieving a wide market slice because of its quick services and convenient delivery mechanism (Flipkart, 2019). It sold over a range of 80 million products across the globe (Flipkart, 2019). The essay aims to critically analyze the Foreign Direct Investment drifts rushing to India and convey the case study of Walmart and Flipkart in these critical evaluations. This essay employs appropriate economic theory, cores and broader findings to develop these perceptive reviews. The essay has presented some framework of the Indian economy and associated economic and strategic theory. The essay will now converge in the particular case of Walmart in connection to the Flipkart.
Globalization is defined as the integration of countrys economy with the world (Chadchanamp Shankar, 2018). The integration of Indian economy with the regional blocks such as BRICS has led to promote the globalization and attract the companies from worldwide to invest in India (Chadchanamp Shankar, 2018).
After the policy reform of 1991, the LPG policies in India have attracted the FDI directly to the country. The policy reform was one of the major reasons for the increment in the GDP growth of Indian economy (Fortune, 2018). Before the policy reform of 1991, India was working as a closed economy and restrict the entries of the multinational companies (Fortune,2018). The restriction was hampering the growth rate and standard of living of the Indian economy (Fortune, 2018). According to the latest ranking, Indian economy is reorganized as one of the fastest growing economy of the world that constitutes the third rank in the growing economy (Fortune, 2018).
Comparative advantage theory states the ability of an economy to produce goods and services at a lower cost than that of the competitors (Oppong, 2018). The two important factors associated with the comparative advantage theory are trade and equilibrium production (Toando et al., 2016). But Ruffin tried to reconstruct the Ricardos discovery of the law of comparative advantage (Gehrka, 2015). Walmart has acquired Flipkart in order to take advantage of comparatively (Oppong, 2018). The comparative advantage of Walmart comprises of the brand name, the pricing strategy as well as the customer service (Oppong, 2018). Due to the acquisition the local suppliers were forced to clean up the supply chains as the Walmart was dominating the market (Gielens et al., 2018).
India and the FDI trends
India is one of the most attractive local markets for the investment in the world, because of its growth rate and size (Prasanto, 2018). In 1991, Indias administration submitted a set of economic reformations that originated the economy on a path of slow and steady liberalization (UNCTAD, 2012). These business reformations have supported India to develop its relative advantage. FDI is defined as the investment made by the other countries into the local business of the home country (Study, 2019). There endure two ways for foreign direct investment in the Indian company (Vyas, 2015). The first one is the motorized route and the following ensures the administration route for the investment in India (Vyas, 2015). The motorized route does not bind the international investors for the procedural endorsement of the administration or the origin bank of India i.e. Reserve Bank of India (Vyas, 2015). The other companies who have invested in India are Axis bank that is running successfully in India and is reorganized as the third largest private sector bank (Neogi et al, 2012). Mauritius comprises of the largest share of investing in India (Richet el al, 2014). It consists of the highest share in the total FDI of India (Richet el al, 2014).
India is one of the worlds greatest democratic countries and attains seconds as the compactness and populated country across the globe (Bhandari, 2017). The high population has a notable impression on the nominal GDP of India and is the pioneer reason for being ranked 148 in the world (Bhandari, 2017). The lay-off rate in India was approximately 8 in the year 2013 (Bhandari, 2017). The population of India comprises of the dominance number of youth population under the age bracket of 15 to 35. This is an important advantage for the Indian economy that lead the economy towards the growth (Goyal amp Goyal, 2016). Walmart find India as a platform of investing in, for the reason that most of the youths prefer internet for the day to day transactions (Prasanth ampJyothsna, 2018).
The foreign investors of India composed of the classified sector of retailing in India (Gupta and Sahay, 2015). The renowned retailers in this category are Landmark Group, Tata Trent, RPG Group, Lifestyle Retail, Aditya Birla More, Spencers Retail, Bharti Retail (Gupta and Sahay, 2015). The disorganized retailing sectors are one of the reasons for the strong competition arose in the organized sector of retailing (Gupta and Sahay, 2015). The disorganized sector holds the low cost of operations and labor, that affords a competitive edge to the disorganized retailing over the organized retailing sectors in India (Gupta and Sahay, 2015).
The foreign direct investment (FDI) in India was three hundred ten million dollars in the year 2013 and India was ranked as number 20 in comparison with the FDI endured across the globe (Bhandari, 2017). The trade deficit was approximated to 91.47 billion in 2012 and India attained at number 190 in the corresponding year (Bhandari, 2017). After the declination of rank, the government of India introduces the policies of FDI and permits the purchases of financial assets in the Indian companies (Vyas, 2015). The government promote the direct route for foreign institutional investors (Vyas, 2015). The revised policies of 2013 have permitted commodity exchange and power exchange by automatic route (Dezan Shira and Associates, 2019). The government have also permit FDI and FII to invest in insurance sector, telecommunication sector and courier services by automatic route (Dezan Shira and Associates, 2019).
The motivation for the acquisition could be the diversification of products and further expansion to earn more profit (Olaitan and David, 2017). One of the examples for the acquisition could be Krafts acquisition of the Cadbury in 2010 (Olaitan and David, 2017). The acquisition could be done in order to achieve the goal of international growth (Olaitan and David, 2017). The example for the same is Belgium Brewing Company acquires Budweiser for 52 billion to expand the boundaries in USA (Olaitan and David, 2017). Another reason for the acquisition could be business expansion in the same area. The example for the same is the acquisition of Wachavo by Fargo in 2008 in order to expand the boundaries of business (Olaitan and David, 2017).
After the acquisition, the retail business in India has grown by 1200 that comprises of 200 by 2026 (MBA Universe, 2019). The value of Average wages has risen by 2 annually the application of internet is growing at an increasing trend (MBA Universe, 2019). Although in India, Flipkart is a pioneer player in the e-commerce followed by Amazon and Pay TM, being an attractive competitor the Walmart has acquired the Flipkart (MBA Universe, 2019).
Selling the business to the competitors is like a double edge sword (International Business, 2019). The significant reason is that theyre typically ready to settle in more for imperative acquisition and when it attains to selling a business, money parleys (International Business, 2019). Competing CEOs with high egos can also perceive it alluring to stoke the company growth and reduce the competition by gobbling-up a rival (International Business, 2019). There are many risks associated with the acquisition that comprises of financial risk, resource risk, administrative risk and general risk (International Business, 2019). The drawback of the unhealthy competition is the disturbing working culture and unfriendly staff with the rivalry staff (International Business, 2019). The loss of control due to the acquisition by the competitor also acts as the unhealthy proceedings of the acquisition (International Business, 2019).
There should be a fine line in the double edge sword to mitigate the risk of unhealthy competition due to the acquisition (International Business, 2019). The moves should be cautious while considering the competitors as a business buyer (International Business, 2019). The international expansion of Walmart has lead to the successful acquisition of the territories across the globe but the pioneer retailer faced the negative impact of acquisition in South Korea and Germany that head to the closure of some Walmart stores globally (International Business, 2019).
Walmart has acquired the 70 stakes of Flipkart that is for nearly 15 billion (Ranipeta, 2018). This acquisition has affected the local trade bodies, sellers and association by opposing the deal of predatory pricing (Ranipeta, 2018). With the effect of the acquisition, the trades in India have demanded government scrutiny of merger (Ranipeta, 2018). The Indian platform of e-commerce provides a marketplace to the Flipkart that would not directly influence the sale price of the goods and services (Ranipeta, 2018). The marketplace restricts Walmart to use ownership over the inventory, however, it has been claimed that Walmart is holding the inventory of 90 goods sold (Ranipeta, 2018).
India allows total flexibility in the foreign direct investment in the area or e-commerce (ET Retail, 2019). This could be the major reason for Walmart being attracted to the Flipkart acquisition (ET Retail, 2019). Foreign investors are allowed to invest 50 of the total investment in the Indian infrastructure (ET Retail, 2019). India prohibited foreign direct investment regarding the external audit procedure (Invest India, 2019). According to the latest amendments in the FDI policy of India, foreign investors that are investing in the Indian companies should only engage in the capital investment (Invest India, 2019). The investors that are not entering from the automatic route to India are liable to assist the security clearance with the FEMA as per the given guidelines (Invest India, 2019). The laws directing the FDI in India is composed of the central government with the interference of state government for determining the location of wholesale or local business retailers (Bhandari, 2017). The other stipulation covers foreign investment in India is the large population that requires being a minimum of 1 million concerning the FDI investment (Bhandari, 2017).
The e-commerce business for foreign investors is bound to do the Business to Business dealing in the single-brand storehouses of the retailing sector (Gupta and Sahay, 2015). Further, the tax administration of India is the utmost concerning portion for the foreign investors pointing to the various allowances of tax for the distinct states (Gupta and Sahay, 2015). The diverged tax rates commence to various margins to the corresponding products over the different states (Gupta and Sahay, 2015). The government of India has also allowed 100 investment flexibility in the construction development of the relevant business (Invest India, 2019).
The government has announced the updated policies regarding the FDI restrictions with respect to the Flipkart (The Economic Times, 2018). The government has announced the policies on 26 December to compensate for the fear of reaching navigate image on the India customers as well as US investments (The Economic Times, 2018).
The secretary of the south and Central Asia does not allow the e-commerce companies to analyze the policies for alliance (The Economic Times, 2018). The new regulations such as quick delivery system offered by the e-Retailers have to be appropriate to all merchants on their principles (The Economic Times, 2018). The government warned and restricted the businessperson that sells more than 25 of its products through an e-commerce platform (The Economic Times, 2018). E-commerce firms will be prohibited from selling products of relevant parties on the record, of which it holds a say (The Economic Times, 2018).
There are various pros related to the effect of acquisition like reasonable prices, variety, collateral benefits, Research and development, economic growth, efficiency in the supply chain and employment opportunities.
With the e-commerce titans clashing for the top position, product variety and localization will produce more diversity and produce a distinct product basket at the reasonable prices this shall serve the Indian customers (MBA Universe, 2019).The Indian e-commerce business term was wiping up as funding declined following by the liquidity concerns due to the amendments in Demonetization and GST regulations (MBA Universe, 2019) Walmarts entry insistence ushers green funds and revitalize the e-commerce system as more international firms and enterprise entrepreneurs enter India (MBA Universe, 2019).
Walmart would expand across the globe that will heighten the output germination and progress in employment opportunities (MBA Universe, 2019). With actual business viewpoints, it will be an incentive for commercial growth (MBA Universe, 2019). The settlement will be ruled in order to tax revenue gains that shall add to internal wealth receipts (MBA Universe, 2019).
With further investment continuing in Indian economy notably in the retail sector, the capacity utilization will develop (MBA Universe, 2019). Output and richness growth can generate new employment opportunities for both skilled as well as unskilled labor (MBA Universe, 2019).
International theory of production implies that the inclination of a foreign production depends on the specific tendencies of its home country compared with resource entanglements and the benefits of residing in another country (Oppong, 2018). Walmart has acquired the Flipkart in order to enlarge the business boundaries and to win the competition in the area of e-commerce. India is said to be an attractive country for the direct investment (Oppong, 2018).
According to the theory of market imperfection, the decision taken by the firm to do the direct investment is described as the strategy to acquire the capabilities and resources shared by the rivalry firm. Walmart has acquired the E-commerce company named Flipkart in order to initiate the market entry in India to exploit the resources of the country (Oppong, 2018) According to the internalization theory of foreign direct investment the firm aims at enlarging the direct operations by controlling the activities of the intermediate market (Oppong, 2018). Walmart has acquired Flipkart in order to control the e-commerce market in India by acquiring one of the biggest companies of e-commerce (Oppong, 2018). Though this move of Walmart has affected the Indian economy positively the local e-commerce retailers of India had suffered the competitive edge (Oppong, 2018).
Due to the significance associated with the Foreign Direct Investment (FDI) and its roles toward the global unification the foreign direct investment cannot be neglected (Oppong, 2018). Several theories have been assisted to define the discernment and flow of foreign capital beyond borders (Oppong, 2018). The competitive advantage can be achieved with the help of major tools such as SWOT analysis, Value Chain Analysis and the resource-based view of the company. SWOT Analysis of Walmart highlighted the Strength that can be used to win the competition in the local market of the Indian economy.
A strategy canvas relates opponents as per their performance to ascertain the degree of differentiation. The strategy Canvas of Walmart is the brand value that can also be worthy for the acquisition of Flipkart. The Use of Red ocean strategy by Walmart in acquiring the Flipkart shows the intention of achieving a competitive advantage in the developing country like India.
Conclusion
The essay concludes the role of foreign direct investment and the effect of the acquisition on the Indian economy. The acquisition was fruitful for the Indian economy and helps to grow the economy at the higher rates as well as the achievement of collateral benefits, Improvement in the Research and development of E-commerce market and the efficiency in the supply chain. The impact of acquisition has also given employment opportunities to the youths of India. Though the acquisition affected the competitors like Amazon and Pay Tm into the deep and leads to the rise in unhealthy competition. The given theories of FDI have also highlighted the importance of exploiting the comparative advantage of Walmart.
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