Development of Indian automobile clusters : Role of Japanese FDI (foreign direct investment)

Abstract:

Development of Indian automobile clusters: Role of Japanese FDI (foreign direct investment)

1. Research backgrounds and objectives

The liberalization of government policies with regard to FDI (Foreign Direct Investment) in the Indian automobile industry has resulted in the rapid growth of this industrial sector post 1993. With its fast growing economy, major global players in the automobile industry have been attracted to India.
In the course of FDI participation, Japanese FDI has been a major player. Maruti Suzuki is one of the first projects in automobile industry with Japanese investment which started in 1983. This joint venture between the Indian government and Suzuki Motor corporation played an important role not only in the expansion of Indian auto market (D’Costa, 1995), but also in the concentration of the auto industry in Delhi region (Okada and Siddharthan , 2007 ) also known as “National capital region”. Suzuki invested in the development of automobile component makers as well.
In the present day, not only Suzuki but other Japanese automakers are also active in the Indian market and contributing to its development and expansion. In addition to Japanese assemblers many Japanese component makers are also active in the market of India. Companies like Bridgestone Corporation, Denso Corporation are involved in entrepreneurial ventures in India.
Industrial clusters are recognized as playing a significant role in both regional economic development and growth of transnational corporations(Porter, 1998). In recent times, therefore, clusters have grown to be an object of aspiration for many regions wanting to advance their knowledge and technology (e.g. Silicon Valley, Route 128- Boston and Cambridge).
The cluster hypothesis in its economic sense is based on the work of Alfred Marshall (1920), who explained the development of industrial complexes by the existence of positive externalities within agglomerations of interrelated firms and industries. However, in modern era, this concept is popularized by Michael Porter. (1990)
Cluster is a broad phenomenon which has been connected with many other fields of economics. FDI (foreign direct investment) is one of them. Research on this connection between these two (Gugler & Brunner, 2007) has shown that FDI and cluster are inter-related, both having effect on each other.
Talking about FDI’s effect on cluster, FDI helps the expansion and development of clusters in a host country (Propris & Driffield, 2005).
However, empirical literature on agglomeration and clusters in developing countries is still limited, despite the growing recognition of their importance for their regional and national economic development. Studies on the role of FDI in creation of automotive clusters in developing countries like India are scarce.
In this scenario, my thesis will try to fill the gap in the literature on the role of FDI in automobile industry clusterization in India. The purpose of my study is to look into development of auto cluster and how it is related to the foreign investment participation. As Japan being a major foreign investor in Indian automobile industry, my primary focus will be on Japanese auto makers.
The objective of this research is to understand the process of development of the automotive clusters in India, specifically looking at the case studies of Suzuki, the leading MNE (multi- national enterprise) in the National Capital Region (NCR) auto cluster.
One of the effects of clusterization is the creation of competitive advantage through innovation and productivity (Porter, 1990). My thesis will try to find if there is creation of such positive effect in Indian auto clusters by Japanese FDI.

1. Research questions

According to preliminary research and secondary data, there is a complexity between actors and the process of clusterization, which influences the development of the automotive industry in India. Though Japanese FDI has played an important role in agglomeration of automobile industry in India, it is not the only element. Importance of policy of the government of India; already existing auto component suppliers cannot be denied. This complexity is also due to the nature of the automotive industry’s global-1ocal integrated production system.
To what extent those actors can contribute to the Indian automotive cluster and how the interplay between them in the process of clusterization comes about still remains unclear.
After preliminary research, these questions have been raised for further study and broader understanding of the development of Indian automobile cluster:

1 How has the global-local network in the automotive industry impacted on the automotive cluster in India?
2 How have the Japanese automakers been involved in agglomeration of the Indian automotive cluster through keiretsu specific benefits and suppliers?
3 Using the case study of Suzuki as MNE in the automotive industry, how have they contributed to the productivity and innovative capability of the Indian automotive cluster? How has Japanese automaker adapted to Indian market necessity?

2. Hypothesis

With the help of initial research I have built a hypothesis: technology, funds and managerial practices brought by Japanese FDI have helped the automobile industry in India to improve its productivity, innovative capability and human resource development.
Sub hypotheses:

1. Local players like government, suppliers have also played their part in the clusterization of automobile industry in India.
2. Japanese FDI has additional positive impact in the automobile industry because of keiretsu specific benefits.
3. Advanced technology along with funds brought by Suzuki in India has helped in the improvement of productivity and human resource development.
4. Suzuki started supplier development program in India which has resulted in enhanced capability of automotive supplier industry in India.
3. Methodology

In order to answer the research questions, I will use an explanatory case study method, with the purpose of analyzing and reporting the wider picture of the Indian automotive cluster studies.
Explanatory case study is chosen as it allows concentrating on a specific instance, that is, the Indian automotive cluster, in an attempt to identify detailed interactive processes.
Detailed case study will be used in order to a) examine interactions of Japanese FDI with local players (e.g. suppliers, universities, research institutes) and b) assess the output of such interactions in terms of innovation and capability development.
As the requirement, the study relies on qualitative method to analyze innovative capability acquisition, human resource development and productivity in automobile cluster in National capital region. It also analyzes relation of Japanese FDI with it.
In my research, gathering relevant data from the specified documents and compiling databases are needed in order to analyze the material and arrive at a more complete understanding. Secondary data as well as primary data will be collected and used to test the hypothesis.
In the first stage of the work, data from different international organizations and secondary data from researches have been used to build the picture of Indian automobile industry. In the second stage, primary data will be collected by conducting interviews and questionnaire survey with employees and relevant representatives from different institutions.
Qualitative data analysis will be used taking in account both secondhand and primary data and linking it with research question.
Computer-Assisted Qualitative Data Analysis program will be used to analyze data and test hypotheses. And also multivariate linear regression will be used to test hypotheses because this method is extensively used in data analysis with data having dependent and independent variables.

References:

D’Costa, A.P. (1995). The restructuring of the Indian automobile industry: Indian state and Japanese capital. World Development, 23(3), 485-502.
Gugler P. & Brunner S. (2007). FDI effects on national competitiveness: A cluster approach. International Atlantic Economic Society.
Marshall, A. (1920). Principles of Economics. London: Macmillan.
Okada, A. & Siddharthan, N.S. (2007). Industrial clusters in India: Evidence from automobile clusters in Chennai and the National capital region. IDE Discussion
Paper. No. 103.
Porter, M.E. (1990). The competitive advantages of nations. Harvard Business Review,
73-93.
Propis, L.D. & Driffield, N. (2005). The importance of clusters for spillovers from
foreign direct investment and technology sourcing. Cambridge Journal of Economics, 1 of 16.