Global Fashion Giant And Foreign Direct

Introduction

Zara is a large international fashion company, belonging to Inditex, which poses as one of world’s largest fashion retailers. The company’s headquarters is in Spain, precisely in a La Coruna City. Zara deals in cloth retailing, and has its operations in 96 countries, across the globe, with 2200 stores. Spain is Zara’s biggest market, having 563 stores. Zara distributes apparels, by offering a variety of choices, from women, men, as well as children collection. It also launched a line, which deals in cosmetics, household products, as well as perfumes (Roll, 2018). Dunning’s eclectic framework refers to theory, which provides a 3-tiered framework that a company follows when it intends to determine whether is it of significant to engage in Foreign Direct Investment (FDI). This framework contains a 3-factor framework, namely the Ownership advantages (O), Location advantages (L), and Internalization advantages (I) (Dunning and Lundan, 2008). FDI refers to an investment by a company from a country in a business, which it controls and is based in another country. For example, when Zara decided to open a retail business in India, then it was noted to have engaged in FDI (World Trade Organisation, 2015).

The Indian market is known to be a target to various Multinational Enterprises (MNE), and it is also known to be lucrative for various operations, even those that concern the fashion retail. In this regard, India poses a strategic market for Zara, and the motivation for FDI into the Indian market was due to the market seeking motive, as well as resource seeking motive (World Trade Organisation, 2015). Based on the market-seeking motive, Zara purposed to capture India’s untapped customer base, especially whose demand were not catered for by other fashion brands. Significantly, the Indian economy depicts evolution characteristics, owing to increasing disposable income, GDP, as well as liberal policies, which consequently makes it a market with a huge potential. Regarding the resource-seeking motive, Zara purposed to produce various apparel goods, which were exclusive, and not exported to the Indian market. India also has cheap labor, reasonably good prices, as well as high quality of a variety of raw materials for production (Anitha, 2012). Zara is a centralized exporter as it centrally controls all the steps it uses in the supply chain, whilst designing, manufacturing, and also distributing its products. The company uses a value-added activity, whereby it retails its apparels in India, with an aim of generating profit. Moreover, the company’s subsidiary role is to design, manufacture, and distribute its products, and it has set-up its stores in host countries, to be able to distribute its products within a few days (Forsgren, 2017).

Overall, this paper purposes to analyse the FDI strategy of Zara in India, based on Dunning's Eceletic Paradigm. The outline of the paper will be as follows: First, it will provide the theoretical underpinnings of Dunning’s paradigm, by analyzing the ownership advantages of Zara in India, followed by the location advantages of Zara in India and finally the Internalization advantages of Zara in India. Thereafter, this paper provides the ethical issues, and finally, a conclusion, which summarizes the content of the paper.

According to Dunning (2009), he points out that the specific advantages of O refer to various resources, as well as capabilities, which a company possesses in its home country. In this regard, a country would only engage in FDI if it benefits and exploits similar advantages, when in a foreign country as well. Notably, the O specific advantages include those that relate to possession, as well as exploitation of the company’s monopoly power, those that relate to the possession of scarce, unique, as well as sustainable capabilities, and finally, those that relate to the company’s core competencies, such as managerial skills, and technical expertise (Hymer, 1978). This section will provide three significant examples of ownership advantages of Zara in India.

Firstly, it is noted that Zara had recently reported a significant rise of 10% in its profits, aided by its expansion in Asian countries such as India, as well as online sale. Over the years, the company has been having increased sales, thus increasing its revenues (Anitha, 2012).

Generally, in Asian countries, Zara has the fastest growing market, having 36% of the apparel market share. Having this good market share over its competitors implies that Zara will have increased sales in India, as it is noted to be Zara’s best-selling market. Over the last nine months, Zara’s revenues have increased by 1%, whereas its net income has decreased by 28%. The increased revenue indicates that the company has been having an increased demand for its products, owing to favorable market conditions (The Economist, 2018). This is as presented in the figure below:

Owing to the fact that the financial statement indicates that it has always had increased revenue, Zara’s idea to engage in FDI in India was a significant strategic choice for the performance of the company. In addition, the rarity of Zara is seen in how it diversifies its products by collecting significant information regarding its consumers. In this regard, the MNE sends scouts to go to the streets and see what people wear, and thereafter, store managers consider their customer’s tastes, and later they report to the feedback to the headquarters (Dunning and Lundan, 2008). Owing to the fact that product designs are created out of instant feedback, and are tailored in accordance with different region references, the company has been able to acquire a monopolistic advantage as they cater for what people want, unlike its competitors. Zara designs new styles and distributes them to their stores whilst they are still trending. Overall, this has enabled the company to acquire monopolistic advantages even in India (Roll, 2018).

Secondly, it is evident that some of the above-mentioned Firm-Specific Advantages (FSAs) are rare to Zara, others are imitable, whilst others are exploitable by Zara. For instance, Zara is rare as it has acquired a monopolistic advantage over its competitors in terms of its market share, as it experiences a higher sales as compared to its competitors such as H&M (The economic times, 2018).

However, for the fact that Zara uses the strategy of diversification of its product designs, it is evident that its competitors such as H&M can imitate the strategy and use it for their advantage. H&M had started selling better deals to its consumers, with a wide variety of products for sale. This was imitated from Zara’s strategy innovative strategy of producing trendy products to customers. However, still it cannot out-do Zara. It can also be noted that H&M can exploit the opportunity of advertising, as it is noted that Zara does not advertise its products as much as its competitors do. Its competitors like H&M have taken this to their advantage (The Economist, 2018).

Thirdly, it is evident that Zara’s organisational culture has often looked into customer insights. As such, they are able to innovate their products and compete. However, it could prove difficult trying to gain the right customer insights, constantly over time, and also at the right time. It is notable that a significant secret for Zara’s success is that the company believes in its culture of customer insight, and as such, it trains and also empowers its employees in various stores, as well as managers to be highly sensitive towards the needs, as well as wants of customers (The Economist, 2018). This is noted to be a rare factor, which is of value. It also evident that Zara company focuses on entrepreneurship as it enforces new products, new methods of production, new markets, as well as new organisational forms. The wealth of the company is increased through continuous entrepreneurship, and this is noted in all its operations including India. Overall, Zara has acquired a value of good reputation over the years as consumers regard it as one of their favorite shopping destinations. Moreover, owing to its good reputation, other companies such as H&M, Sears, and Mango brands are rushing into emulating its strategies. Owing to good reputation, Zara’s presence in India is a good strategy for the company (The Guardian, 2018).

Dunning point of view is that location advantages include 3 components, such as the availability of resources, which a company can use in the location that it is sited; the immobile benefits, which include special tax incentives, and also subsidiaries that a host country provides; and finally, the promised markets that a host country has (Dunning, 1978).

The following are the economic, political, regulatory, and cultural factors that made Zara to engage in FDI in India. Firstly, regarding the economic factors, it is evident that India is economically stable, and it is economically growing. This has been realized through forceful recital of the country’s manufacturing industry, based on end-user expenditure, as well as the government. India has been having a fluctuating inflation rate. However, recently, the rate is low, as it recorded a 5.79 inflation rate in 2016 (Inflation, 2016). Overall, India’s economic allure has enabled it to compel investors, owing to low manufacturing advantage costs.

Secondly, on political factors, it is evident that India’s political structure is stable. Owing to the fact that FDI enhances the growth of India’s economy, the government has brought down import duties, in order to attract more foreign investors. Presently, the Indian government has brought forth measures, including the national technology up-gradation fund, as well as differential schemes of taxation that discriminate large units (Gehmawat, 2001). Regarding the legal factors, the legal environment plays a significant role in India’s textile industry. There is the introduction of laws that relate to industrial licensing, foreign exchange regulations, as well as industrial disputes. India has opportunities worth grabbing in its export market. The regulatory policies aid in enhancing infrastructures of various apparel parks as well as specialized textile parks (The Guardian, 2018). Finally, the removal of the quota regime in 2005, based on World Trade Organisation provided an opportunity for many, and this included the government. Regarding cultural factors, it is worth noting that most Indians prefer wearing their traditional clothes, and they are concerned with color, thus implying that clothing manufacturing companies have to adhere to their cultural wants and needs (North, 1992; cited in Gehawat, 2001).

Whilst considering India’s market size, it is evident that India’s clothing, as well as footwear industry, had a market size of approximately 68 billion, and it is expected to shoot to 78 billion come 2026, with a compound annual growth rate of 10%. On the other hand, the textile industry has a present market size of 108 billion dollars (Forsgren, 2017) The country is experiencing a population growth rate of 1.2% and employment in the fashion industry is at 60 million. Zara has a close relationship with its suppliers in India, owing to the fact that the company has a strong IT system, which connects Zara with its suppliers, as well as designers, thereby ensuring that their JIT system is sufficient. Finally, the demand for Zara products in India is high, and for this reason, Zara decided to open more stores in the countries, to cater for all the needs of its customers. This is an imitable factor, which its competitors can adopt. It is evident that the demand is notably high amongst the youth, as well as upper-middle-class people. The main cause of lower demand amongst other people is due to the pricing factor, as Zara’s products are regarded as relatively expensive (The Guardian, 2018).

Moreover, the cost of production for Zara product is relatively cheap, owing to the cheap and readily available products in India. The company has also acquired a competitive advantage, as it produced quality and trendy products over its competitors such as H&M. Moreover, it has a rare factor of innovating goods according to their customer’s feedback, thus allowing it purposes to meet all the demands of its customers, enabling it to become a monopolistic organisation (UNCTAD, 2015). The Indian market is also attractive, as it is noted that other consumers do not meet the needs of the consumers, and people are willing to buy products that are designed in accordance with their preferences. It is also evident that Zara uses value factors of using significant knowledge, as well as expertise in designing its new products and services, and it is always ready to learn from other developed companies such as H&M (Verbeke, 2013). Finally, the company uses an efficient JIT production system, which ensures that goods are produced in just a few days and distributed to various stores, and there is also an IT run system, which enables the company to connect easily with its supply chain.

Internalization advantages (I) purposely explain the reason why companies opt to engage in FDI, instead of buying or selling their intermediate products using a different way. It is evident that internalization provides a dominant explanation. Dunning (1978) points out that the multinational enterprises would realize more profit if they exploit their O advantage, as well as L advantages, when the process of internalization, especially if they have an existing market imperfection.

Regarding the international experience, it is evident that India poses as a significant market for Zara. The major challenge in the Indian market is concerned with the preferences, as well as fashion trends for customers (Buckley & Casson, 1976). However, Zara applies a significant rare factor of combining both local and international apparel lines, whilst respecting cultural aspects, and offering international fashionable apparels for customers with the western orientation. The Indian market has a population of 1.2 billion people. In order to reach this population, Zara used print ads, as well as video advertisements to reach specific target groups: teenagers. In India, color plays a vital role. In this regard, there is a high demand for strong, as well as open colours that symbolize life despite the existing trends of the assortments of Zara where the main colours are black and white (The Telegraph, 2018). Moreover, Indians still prefer wearing traditional clothes, and the market is not affected by changes in seasons, owing to the fact that most parts of India do not experience a cold season. In curbing this situation, India adopts its developed strategy of communicating to customers through shop windows, Zara has been able to maintain its stand on changing its product offers twice a week and also improving on the communication between the company’s designers in Spain and the store manager in India (Anitha, 2012). This is noted to be an imitable factor.

Based on avoiding tariffs, it is evident that since May 2014, the Indian prime minister had sort to make India open for trade, with an aim of improving its economic growth whilst focusing on engaging deeper with the global economy. In this regard, India has always wanted to woo foreign investment. The prime minister took significant measures towards attracting foreign investors and improving India’s business environment and as such, he purposed to make India an attractive location for FDI by avoiding tariffs that could be imposed on MNE (Williamson, 1983). Moreover, the norms of the FDI are relaxed, and plans have been made for a system of single window clearance. This initiative enabled Zara to engage more in FDI in India by opening more outlets in the country.

Finally, regarding search and negotiation cost, it is worth noting that India has cheap labour, reasonably good prices, as well as high quality of a variety of raw materials for production (Johanson & Vahlne, 1977). Moreover, these resources are easily available for Zara in India, thus implying that the search cost is significantly reduced. The high rate of unemployment in India creates an opportunity for cheap labour for Zara. Additionally, on experimental learning, it is notable that Zara often uses experimental learning in developing new innovative products, which attract its customers. This is VRIO’s value factor. At the same time, the company purposes to learn from other developed companies in India such as H&M. this has enabled the company to compete favourably with its competitors in India, as H&M also learns new strategies from it (Rugman, 2008).

Ethical Issues

Based on internal aspects, it is evident that Zara is concerned with the employees' welfare, and working conditions in India. This is evident as indicated in the company website that it provides regular wages to employees, and the working hours and not exceeded. These are noted in accordance with the company workers’ reviews in India. Moreover, the company observes what the employees can do best, and also purpose to find out what they are interested in learning, or rather, how they would love their career to unfold (Peng, 2014). Moreover, they share significant information with employees, listen and act upon their ideas. This indicates that Zara is concerned with the welfare of its employees and it purposes to provide them with the best, thereby, indicating that the company is ethically responsible and meets the expectations of the employees (Peng & Meyer, 2011). Notably, this a value factor of VRIO. In turn, the employees give in their best, to enhance the performance of the company and this can be noted in constantly improved performance of Zara in India.

According to Chapman (2018), he recorded that based on external issues, Zara was found purchasing from highly-polluting factories, in Asia, thus devastating the health of people in India. Notably, there was a toxic run-off from the viscose manufacture, which was supposedly an environmentally friendly fibre and was used in making clothes. This fibre is noted to be contaminating various water supplies, yet it is linked to increased cancer risks. Owing to the fact that viscose is plant-based, it is often promoted as consumers’ ethical choice (McLean et al., 2016). However, it produces a chemically intensive process, which is not fit for people’s health. This then indicates that Zara is not ethically responsible in its engagement in FDI in India, as it fails to recognise the essence of Corporate Social Responsibility. Although the company website indicates that all Zara’s activities aim at respecting the environment, this is disputable, based on the current happenings in India, as complaints have been made on neglect of the environment. The company should purpose on engaging in more sustainable production, which ensures that the consumers are highly protected from the company’s operations (Johnson et al., 2017).

Conclusion

Overall, the above analysis indicates that the issue of FDI has brought forth significant influence in terms of the development of emerging economies such as India. The need, importance, as well as impacts of FDI, has attracted the attention of various MNEs, thus creating an intense competition, in order to attract foreign capital. Notably, the inflows of Zara’s FDI has aided in the establishment of new economic powers in India, and for this reason, the Indian government purposed to remove the tariffs of FDI, in order to attract more foreign investors. Zara has been able to have improved performance, as well as achieve success in India, owing to the fact that it handles the cultural aspects of the country, despite being a fashion-oriented company. This has enabled it to have a competitive edge over its competitors. In this regard, Zara can learn that an expansion of its activities yield more sales, profits, as well as revenue, which then implies that it can focus on expanding its operations in more countries across the globe. The company has to maintain its ethical practice of catering for the welfare of employees, and also providing better working conditions, in order for it to maintain its reputation. However, it should work on the negative ethical practice, which affects the health of its customers. Overall, it is notable that Zara’s engagement in FDI is of significance for the company, and also India.

References

• Anitha, R. (2012). Foreign Direct Investment And Economic Growth In India. IRJC International Journal of Marketing, Financial Services & Management Research, 1(8).
• Buckley, P. J., & Casson, M. C. 1976. The future of the multinational enterprise. London: Macmillan.
• Chapman. (2018). H&M, Zara, M&S and others found buying from highly polluting factories in Asia. Retrieved [online] from [accessed on 17th Jan, 2019]
• Dunning, J. H. (2009). Location and the multinational enterprise: John Dunning's thoughts on receiving the Journal of International Business Studies 2008 Decade Award. Journal of International Business Studies, 40(1), 20-34.
• Dunning, J., and Lundan, S. (2008). Multinational enterprises and the global economy (2nd ed.). Cheltenham: Edward Edgar Publishing Ltd.
• Forsgren, M. (2017). Theories of the multinational firm: A multidimensional creature in the global economy. Edward Elgar Publishing.
• Gehmawat, P. (2001). Distance Still Matters. The Hard Reality of Global Expansion, Harvard business review 79(8):137-40, 142-7, 162.
• Hymer, S. H. (1978). International operations of national firms. MIT press.
• Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1): 23–32
• Johnson, G., Whittington, R., Scholes, K., Angwin, D., Regner, P. (2017). Exploring strategy: text and cases. London: Pearson Education/Prentice Hall.
• McLean, W., Olsen, K., Moomaw, R., & Applegate, M. (2016). Economics and Contemporary Issues. Content Technologies.
• North, D. C. (1992). Institutions and Economic Theory. The American Economist, Vol. 36 (1). 3
• Peng, M. (2014). Global Strategic Management (3rd edition), CENGAGE Learning.
• Peng. M., Meyer, K. (2011). International Business. Cengage Learning EMEA.
• Roll, M. (2018). The Secret of Zara’s Success: A Culture of Customer Co-creation. Retrieved [online] from [accessed on 18th Jan, 2019].
• Rugman, A.M. (2008). The Oxford Handbook of International Business, (2nd eds.) New York: Oxford University Press.
• The economic times. (2018). Zara posts 73% surge in India net for FY18. Retrieved [online] from
• Verbeke, A. (2013). International Business Strategy (2nd edition), Cambridge University, Press, NY. Williamson, O.E. (1983). Markets and hierarchies. New York: Free Press. World Trade Organisation. (2015). Aid for Trade, Foreign Direct Investment and Export Upgrading in Recipient Countries. Retrieved [online] from

Continue your journey with our comprehensive guide to Global Fashion Branding Communications.