0115 966 7955 Today's Opening Times 10:00 - 20:00 (BST)
Place an Order
Instant price

Struggling with your work?

Get it right the first time & learn smarter today

Place an Order
Banner ad for Viper plagiarism checker

Challenges and Opportunities for FDI in IT Market

Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Wed, 13 Sep 2017

Executive summary

As a leading international IT firm, Accenture faces massive challenges and opportunities from the rise of IT Emerging-Market Multinationals (IT EMMs) based in developing economies, particularly from India, which have made quite a headway in recent years due to favourable economic and market conditions both locally and globally. The expansions and acquisitions by IT EMMs is largely driven by the potential for access to new markets, innovation, inputs etc. and the growing economic power of developing countries. In this way, an industry that used to be in the hands of American or European companies, has now moved to India.

This report analyses the costs and benefits that drive EMMs to internationalise, and examines the impact that the rise of IT EMMs will have on Accenture. Indian IT EMMs are the primary focus of this report as they pose the biggest challenge to the Dublin based firm.

Introduction

In the past, FDI conventionally flowed from advanced economies to emerging markets, but this trend is changing quickly (Cost, 2014). Previously, high valued-added activities such as designing high-tech components, marketing & distribution methods were based in Advanced-Economies with assembly in Emerging-Economies, but companies from developing countries are increasingly becoming important global players by investing or acquiring businesses worldwide thereby representing a shift in economic power (The Economist, 2008; Sauvant, 2009). Such is the case of Indian MNC’s which have predominantly focused their acquisitions on high-tech, knowledge-intensive industries such as information technology services (Sauvant, Maschek and McAllister, 2009; Cost, 2014).

Accenture (Appendix A), a leading IT consulting firm based in Dublin, Ireland, faces both potential risks and opportunities from such companies with the biggest threat coming from rising Indian IT firms such as Wipro, Infosys and Tata Consultancy Services (TCS) that have led to the development of a massive technology outsourcing industry (Accenture Annual Report 2016). In addition to other Indian software firms, these emerging-market giants have come into the limelight of the global IT industry by engaging in several prominent foreign acquisitions (Khanna and Palepu, 2006; Sauvant, Maschek and McAllister, 2009). This report looks at the drivers and benefits that motivate IT EMMS to engage in FDI, the challenges they face in establishing their global activities, and the implications that the rise of these companies have for Accenture.

FDI Drivers and Enablers for IT EMMs

Today, IT EMMs are choosing to internationalize (Appendix B) largely due to factors which include the liberalization of home markets (Singh, 2012), rapid developments in transport, communication and information technologies that enable a systematic coordination of international operations of parent firms and their foreign affiliates to easily produce, transfer and offer services, products and production processes across several countries (Sauvant, 2009; Accenture Policy & Corporate Affairs, 2008). Foreign operations provide access to large and diverse talent pools to set up global work teams where different departments can collaborate throughout the company, and simplify employee mobilization to different locations and roles to share cultural and technical experiences across the organization. Additionally, the difficulties of operating in emerging markets make IT EMM managers more adaptable and resilient to face the global markets. FDI also enables IT EMMs to pool their technologies from different markets to provide depth and focus on resolving a single strategic issue.

In India, for instance, the lack of interest from private sector companies to adopt IT for improvement and productivity, domestic market saturation with dried up growth opportunities, and the offshoring trend by advanced-economy MNCs to reduce costs motivated Indian IT firms to look outward. Since IT firm’s also offer products and services of a niche category, a successful oversees expansion can lead to global leadership status in the sector.

Despite huge populations and rapid economic growth, aggregate consumption spending is still low in Indian markets, thereby causing ambitious IT firms to leverage newly liberalized Indian regulations to make substantial foreign acquisitions (Accenture Policy & Corporate Affairs, 2008). Access to foreign markets opens up a new range of resources, capital and suppliers for IT EMMs that can result in significant expansion opportunities and provides protection from obstacles at home such as adverse economic shifts, government regulations and supply issues (Khanna and Palepu, 2006). A broad customer base spreads company risks and provides a balanced portfolio in both advanced and developing economies (Khanna and Palepu, 2006).

Shifting some R&D capabilities overseas allows IT EMMs to access established innovation centres, and absorb knowledge which can be consolidated with their managerial skills, and finances to constantly innovate and maximize growth. For instance, Tata Group, the parent company of TCS, cooperates with leading international research centres in Europe and the UK to expand and refine its operations (Accenture Policy & Corporate Affairs, 2008; Tata Annual report, 2016).

Having strong technological capabilities does not provide enough competitive strength by themselves. Forming worldwide strategic alliances with established industry players is important to gain practical market and technical capabilities, successfully introduce new products and services to different markets, and advance internal developments. New and unknown EMMs can quickly gain trust in the market and consequently win large IT orders. Vigorous internationalization, and acquisitions also offer closer proximity to customers to better understand their needs and preferences, tailor software products and services accordingly, and help avoid trade barriers such as tariffs and quotas that make exports less competitive (Accenture Policy & Corporate Affairs, 2008).

Indian IT EMMs, for instance, benefit from several cost advantages at home such as inexpensive finance from local state banks, abundance of cheap talent such as engineers and technical graduates, and minimal government regulations (The Economist, 20008; Sauvant, Maschek and McAllister, 2009). Additionally, support from the local government includes tax exempted technological parks that provide IT EMMs with direct telecommunication access to customers worldwide. This positively impacts their international competitiveness, increases profits and enables them to move up the value-chain by offering solutions to niche segments (Tschang 2001). Also, some IT EMMS like TCS and Wipro are family-owned or controlled which allows for instant decision making regarding important matters.

FDI Challenges for IT EMMs

Entering new markets poses several challenges such as being subject to control by large states and regional trade blocs, lack of host country market-knowledge, weak management talent and competing in a world economy with established industry leaders like Accenture. A massive investment in complex technology infrastructures and experienced human resources to manage regional and global operations, and the ability to deal with their associated challenges and risks is also required. Failure to do so can result in substantial losses (Sauvant, 2009). Foreign operations can also become distant from the head office, complicating management and control, and slowing the decision process.

Even though firms like TCS, Infosys, and Wipro are well established at home, they are still largely unknown compared to Accenture and IBM in international markets, making it harder for them win major deals. Attracting management talent in advanced-economies is another key issue as EMMs find it difficult to offer compensation packages that are on par with Accenture.

Survival in foreign markets depends on the global economic scenario and GDP growth of advanced economies which provide a major share of revenues. High-profile clients rely on international economic conditions. A weak outlook can limit their spending and weaken growth for IT EMMs. There is also a higher risk from adverse currency movements. For instance, in FY16, the rupee depreciated against most major currencies due to lower growth prospects, and an overall negative economic environment in the developed nations (Mendonca, 2015). Unfavourable tariff agreements between the home and host countries can result in higher costs for IT EMMs which may be passed on to consumers, thereby reducing their attractiveness and lowering sales revenues. A further challenge is the constant evolution of the client’s business models resulting from new disruptive digital technologies. This demands substantial resources to keep up with the change and leads to intense competition from an increasing number of small niche players entering the market, in addition to pure consulting-focused companies.

Recent restrictive regulations and protectionist steps in key international markets have made it more difficult for IT EMMs, which employ most of their staff outside their home countries, to mobilize their skilled professionals. For instance, the U.S has increased the visa fees for H-1B and L1 categories that are used by IT EMMs to hire cheap technical staff from emerging markets. The U.K has also accepted proposals for amending Tier 2 visa category rules (Dalmia,2013).

Moreover, the growing complexity of global IT regulatory compliance have increased regulatory costs and added pressure to the industry as a whole. These include industry specific regulations such as customer protection laws and rigorous data protection & privacy laws that require protecting personally identifiable information (PII) and sensitive personal data and information (SPDI) from access by unauthorized individuals, and place strict restrictions on any cross-border transmission of such personal data. Violation of these laws can result in liabilities and penalties (Shanker, 2011).

In today’s digital and connected world, cyber security issues have become more complicated, and therefore, increased exposure to threats and potential cyber-attacks that can result in reputational, legal and financial losses. Due to the rapidly evolving nature and complexity of these attacks, it is difficult for IT EMMs with limited resources and capabilities to defend themselves.

An assessment of the Positive and Negative Implications for Accenture

OFDI from emerging markets can strengthen the economic performance of Accenture’s home base. A positive economic outlook and GDP growth will boost Accenture’s sales and chances of future growth. In addition, joining forces with IT EMMs can provide new and cheap sources of useful technology, capital, skills, access to markets and low-cost development centres for its R&D operations and the ability to develop rapidly in areas that draws on these companies’ strengths such as traditional IT services of application development, infrastructure management, and business process outsourcing (BPO) (Sauvant, 2009; Bresnahan and Richards, 1998).

As 47% of Accenture’s revenue comes from outsourcing, partnering with IT EMMs enables Accenture to benefit from their local know-how, strengthen its presence in developing countries where demand for IT services has been rising and recruit a high number of low-cost, specialized talent. For instance, Accenture now employs nearly 1.5 lakh employees in India which give the Company cost advantages to take on key emerging-market competitors (Sinha, 2015). Partnerships also eliminate competition and give the Company competitive advantage over its advance-economy competitors. These factors in turn will enable Accenture to capitalize its prior relationships in advanced-economies, brand presence and reputation for quality to deal with western clients in the region, and match other local rivals for small and big offshoring projects.

The constant disruption of the IT industry requires Accenture to consistently keep pace. Revenues gained from partnering with IT EMMs can be used to innovate and invest in other areas such as the Company’s emerging, highly-demanded, high-margin digital service business, which includes analytics, content management, social media and cloud services; and can serve as a cushion should future demand and margins for traditional IT services fall (Mendonca, 2015).

Nevertheless, Accenture’s large outsourcing business puts it in direct competition with Indian outsourcers (Sen, 2014, Accenture Annual Report 2016). By lowering dependence on low-cost commoditized businesses and expanding worldwide operations, leading emerging-market IT firms now focus on specialized and lucrative tasks and compete aggressively for more high-margin consulting deals thereby increasing their share of the global outsourcing market. Instead of cooperating, some foreign IT EMMs may react competitively. This will lead to intense industry competition and disruption, loss of large outsourcing deals as clients prefer flexibility offered by EMMs, difficulty to hold on to large traditional outsourcing contracts all of which can impact Accenture’s customer retention rate.

EMM rivals may also attempt to incorporate features of Accenture’s products and services as their own and steal local partnerships all over the world. To fend off strong competition, the Company will have to innovate rapidly in unfamiliar domains and possibly get rid of its low-end commoditized businesses to focus on high-margin technologies such as cloud computing (Bresnahan and Richards, 1998; Sauvant, 2009). Recent moves by some Indian companies to tap the global capital and talent markets have also further intensified the competition for talent recruitment. (Khanna and Palepu, 2006). IT EMMS may even poach talent from Accenture making it difficult for them to retain employees, and adversely affecting their operations (Accenture Annual Report 2016).

Rapid home-market growth has given IT EMMs the capacity and financial resources to make foreign investments and compete with Accenture. For instance, a boost in the Indian education system because of heavy government spending on elite institutions such as the Indian Institute of Technology and other engineering colleges provide an abundance of critical low cost-talent to Indian IT firms. This enables them to save costs, produce cheaper, high-quality IT services, and build sales organisations around the world. These cost savings can then be passed on to both local and international clients making them more attractive.

IT EMMS also make it harder for Accenture to operate in emerging markets by exploiting local market-knowledge about talent and capital. For instance, the inconsistent quality and scarcity of local IT talent in India makes it difficult for Accenture to recruit talent in the country. Local specialization gives Indian firms a competitive advantage in luring suitable talent. Poor physical infrastructure in emerging markets and local regulations which are more favourable towards local MNCs pose an additional challenge.

Wipro and TCS have gained more annual incremental revenues and profits than Accenture in India and are catching up globally. Furthermore, these EMMs have lower sales, general and administrative(SGA) expenses than Accenture, which pays higher salaries. This allows them to charge lower hourly consulting fees at both home and abroad, which decreases Accenture’s chances to win large bids in India, and may force the Company to drop prices in certain markets under pressure from clients, leading to a cannibalisation of its onshore business. Indian IT companies are also expanding and competing with Accenture in other emerging markets such as China. This expands their access to low-cost coders and programmers to deliver software solutions and services for applications to clients in advanced economies (Sen, 2014). Combined, these factors increase the cost gap between Accenture and Indian IT firms, and impacts their bottom lines in a way that makes Accenture less attractive to investors and clients.

Increased foreign ownership of UK and European companies and IT vendors is changing industry structures(Appendix C; Singh, 2012). Acquisitions of small consulting firms in advanced economies have allowed IT EMMs to consolidate several companies under one brand or vertically integrate to provide high-end turnkey hardware and software services making them attractive to buyers who prefer a single provider for integrated technology services (Khanna and Palepu, 2006, Accenture Annul report 2016). This has implications for Accenture as it will have to deal with new competitors with greater scale and R&D facilities in key markets. Acquisitions also make it easier for IT EMMs to cover more areas and compete with Accenture globally for large deals by offering lower prices and more choices for customers (Kleinman, 2007; Singh, 2012).

Lastly, several Indian IT firms have expertise in basic programming such as writing glitch-free software for old mainframe systems, a programming niche service where global firms like Accenture lag behind due to their move to more cutting-edge web-based technologies(Mendonca, 2015).

Conclusion

The rise of IT EMMs poses numerous threats and offers several opportunities for Accenture. The threats primarily include intensified competition for clients and talent globally while the opportunities represent new sources of capital, technology, skills and access to markets for Accenture to advance its development. The rise of IT EMMs also means that Accenture will have to assess all the associated potential costs and benefits, revaluate its position in the future and try to leverage this trend in the best way possible. Massive FDI investments by IT EMMs and their expanding presence in European markets means that Accenture will be hugely impacted in both the short and long run.

Appendices

Appendix A

Background to Accenture Plc

Accenture Plc is Fortune Global 500 management consulting and professional services company, based in Dublin, Ireland since 2009 listed on the NYSE. Headed by CEO Pierre Nanterme, the company provides services in areas of strategy, consulting, digital, technology and operations under the divisions of Accenture Strategy, Accenture Consulting, Accenture Digital, Accenture Technology and Accenture Operations. These services are exported to clients all over the world primarily to clients which include several Fortune Global 100 and Fortune global 500 companies (Accenture Annual Report 2016).

With operations in more than 200 cities and 120 countries and worldwide reported revenues of $32.9 billion as of 2016, Accenture employs more than 394,000 employees worldwide. As of 2016, the Company employs approximately 130,000 in India, 48,000 in the US and 50,000 in the Philippines. These countries provide Accenture main source of inputs in the form of key HR talent which include programmers, coders, etc. (Accenture Annual Report, 2016).  As of 2016, Accenture’s assets were worth around US$20.6 billion and its market capitalization was approximately US $71.6 billion (Forbes.com, 2017)

Appendix B

Recent Liberalization Moves in Emerging-Markets

Large scale liberalization moves in emerging markets stripped away the protectionist policies that insulated key domestic industry players from foreign competition. Advanced economy MNCs from North America, Europe, etc. started setting up operations in these countries, thereby causing domestic firms to lose market share, and threaten their local dominance (Sauvant, Maschek and McAllister, 2009). To survive and compensate for the loss of market share at home, these IT firms restructured their businesses to expand globally by building world-class companies and adopting best practices from advanced economies (Khanna and Palepu, 2006; Singh, 2012).

Appendix C

The case of IT EMM acquisitions by Indian IT Multintionals

Wipro is considering acquiring Equinti, a UK based business process outsourcing company with major clients such as shell, M&S, HSBC, etc. This will give Wipro larger access to FTSE-100 clients which make up the bulk of Accenture’s clients, a large UK workforce which would enable the IT firm to win more deals in the country and consequently poach Accenture’s deals (Mendonca, 2015; Sky News, 2015). Additionally, Wipro’s acquisitions of Appirio, a US based global cloud services company with offices and thousands of employees in San Francisco, Dublin and London, to enhance its digital focus, poses a significant threat to Accenture’s digital business (Wipro.com, 2016).

TCS has also boosted its UK and European operations by acquiring the UK based pension outsourcing businesses, the Pearl Group and France based IT services firms ALTI to help drive long term growth. The acquisition of ALTI increases competition for Accenture in France which is the third largest IT services market in Europe by giving TCS access to its employees in several key European countries, expertise in enterprise solutions, assurance and CRM solutions, and blue-chip French and European clients in banking, luxury, manufacturing and utilities sectors. By acquiring the Pearl group, TCS will set up a company in the UK that will absorb 950 of Pearl Group’s 1,100 workers (Rao and Chatterjee, 2005). Over the last couple of years, the Indian IT firm has significantly strengthened its position in the region through intense local hiring and investments and these acquisitions strengthen TCS’s IT support and computer programming for non-core business functions such as payroll processing, tracking employee records, data analysis and give the Indian IT firm access to their global supply chains (Tcs.com, 2013).

Tata Consultancy Services (TCS)    

Tata Consultancy Services Limited is an IT, consulting and business solutions MNC based in Mumbai, India. It is part of the Tata group and publicly traded on Indian stock exchanges with an approximate employee headcount of 378,497 and assets worth US $ 13.76 billion (TCS annual Report, 2016).

Wipro

Wipro is an IT services company headquartered in Bengaluru, India and publicly traded on Indian stock exchanges and the NYSE.  Headed by Azim Premji, the company has total assets worth around US$ 10.94 billion as of 2016 and a worldwide employee headcount of approximately 173,863 (Wipro Annual Report, 2016).

Infosys

Like TCS and Wipro, Infosys is also another leading Indian MNC providing outsourcing, IT and business consulting services. Based in Bengaluru, India, the company is headed by Vishal Sikka, has assets worth around US$11.38 billion, and a worldwide employee headcount of approximately 199,829. It is publicly traded on Indian stock exchanges and the NYSE.


To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:


More from UK Essays