Disclaimer: People, this is published only as a guideline as to how to tackle assignments in this area. Hope you'll stop by taking an idea and won't plagiarize. After-all it's your studies that'll be affected by how much effort you put in.
1) Analyse the environmental challenges an MNE faces when it decides to invest in a particular country.
The decision of an MNE to invest in a particular country is highly dependent upon the findings of the environmental scan which is undertaken in advance. The findings of the environmental scan can assist the company in considering various decisions such as the mode of entry, the financial or other resources it needs to allocate towards the expansion and most importantly the decisions in relation to standardization or adaptation of the tactical aspects such as the product, pricing, distribution, promotions and HR policies. Therefore having a prior understanding of the environment is vital for an MNE in reducing the level of risk whether be political, financial, competitive or natural, it may be exposed to in the new market which may decide the success or failure of the investment. The identifiable macro environmental challenges an MNE might face can be identified by using a PESTEL analysis as below.
Political
The political environment can be identified as posing the main challenges to MNEs investing abroad. The government regulations regarding freedom for foreign investment may be the initial challenge to be coped with. For example, an investor undertaking FDIs in China may still need to have a domestic partner in order to gain approval for investment. (http://www.chinaeconomicreview.com/dailybriefing/2010_04_14/State_Council_releases_new_regulations_on_FDI.html) This may require foreign investors to find compatible partners locally and face risks of externalities such as spillover effects.
In addition, the political environment may create uncertainties relating to security of investment due to threats of nationalization or breach of contract by the local authorities. Example of such breach of contracts is the implementation of minimum local content act in Nigeria which regulates the composition of workforce in oil companies operating in the country (http://www.businessdayonline.com/NG/index.php?option=com_content&view=article&id=10547:the-new-nigerian-oil-and-gas-industry-content-development-act-a-game-changer&catid=133:legal-indignity&Itemid=557). Other regulations may relate to repatriation of profits to home countries, the effects of non-compliance of which will create threats in the form of discriminatory action such as higher taxes or trade barriers.
The political risk is an additional consideration for investors. Risks to the stability of the government either in the form of war or shift of political power to parties with different ideologies may provide added threats to MNEs operating in the country. In addition, the freedom of competition may vary from country to country with differing interventionist policies of governments. This may be examined by MNEs through the use of economic freedom index.
Therefore consideration of political environment is vital in security of investments and developing healthy relationships with the government.
Legal
The legal environment may be an important consideration of the investment. Identifying laws relating to working conditions and rights of employees may be helpful in forming the HR policies of MNEs. For example the UK labour laws relating to Minimum wages, maternity leave and holiday pay may have implications on costs of operations and therefore need to be considered in forming HR policies (http://www.hrmguide.co.uk/hrm/steele/).
Other laws may directly affect the ability of MNEs to standardize their marketing mix. Laws such as minimum local content rules and packaging standards such as nutritional guides will need to be considered in determining the product mix. The ability of MNEs to use global advertising strategy may be hindered by laws such as advertising to children, exposure of women in advertising and amount of sexual content allowed in promotions (http://asa.org.uk/Regulation-Explained.aspx). Other regulations relating to protection of suppliers or against unfair competitive practices may determine the pricing decisions of an MNE.
In addition MNEs will need to look into intellectual property rights in order to protect their products or processes from being unlawfully imitated by local operators.
Social & Cultural
The diversity of cultures in each country may pose a challenge to MNEs when making investment decisions. Factors such as cultural distance of the society from those of the home country may demand marketing mix adaptation by MNEs when taking decisions relating to branding and promotions. This may be made more complicated by factors relating to language barriers and literacy levels which may decide the extent to which emotional or rational elements may be used in promotions and the response they may generate (Fox & Amichai, 2001)
In considering HR policies, social considerations such as level of human development, as represented by human development index may be useful. But fundamental differences in cultures as discussed by Hofstede index (Hofstede, 2001) may provide challenges in identifying motivational triggers applicable in the society. For example eastern societies may be more feminist which emphasizes importance of relations with colleagues and enables collectivism which according to Herzberg (1987), may act as a motivator. But this may not be true when considering western societies which are more individualistic and places more importance on materialism.
In addition, it may be a challenge in identifying the response of the society to business ethics and CSR which may to an extent differ on the development of the educational systems in the society (Werhane & Freeman, 1999). And the level of corruption in the country and identifying consumer perceptions relating to bribery may also prove to be a challenge to an MNC.
Economic
The main challenge that can be identified in relation to the economic environment for an MNE is the estimation demand for the product. Although measures such as GDP per capita or GDP adjusted to PPP may provide indications of the disposable income and the affordability of products, they may not consider customer perceptions. The inability of firms to gather qualitative information such as perceptions may therefore demand undertaking of primary research which is costly and time consuming.
In addition, estimating the costs of production may also pose a challenge due to varying labour costs and minimum wage regulations adopted by economies. This may have implications on the pricing of products which may either be made better or worse by taxes or subsidies determined by the regulators.
It may also be a challenge to estimate competitiveness of alternatives using only the price indexes as they only provide a quantitative aspect while ignoring the other bases of competition which may be differentiation, hybrid or focus (Faulkner and Bowman, 1995)
Using of Gini coefficient may be a used as a method of deciding the distribution of products in rural or urban areas but it may be difficult for investors to estimate challenges in logistics and also brand preferences.
Environmental
Another factor which provides challenges to MNEs is the ecological environment of the host country. The impact of investments on the environment may create resistance by host country officials who may impose regulations such as environmental taxes aimed at discouraging hazardous practices. Identifications of environmental protection policies and mechanisms is imperative in deciding production practices in terms of labour or capital intensive operations which involves cost implications. This is especially true in countries such as China where industrialization has resulted in high pollution and regulators are now forced to interfere in practices of firms ranging from production to waste management (http://www.nytimes.com/interactive/2007/08/26/world/asia/choking_on_growth.html). Therefore environmental sustainability of production has become an important aspect to be considered in expansions.
Technological
The challenges in relation to technological environment an MNE might encounter in investing abroad can be identified mainly with infrastructure. The unavailability of infrastructure may affect the ability of the firm to use technology in achieving cost efficiencies and may call for outsourcing of production to other locations. In addition the environmental impact of technology also needs to be considered.
2) In the case, why is it important that MNEs investing in Japan understand the role of Keiretsus? How can these Keiretsus be used by foreign MNEs to their advantage?
As the case suggests, having relationships with Keiretsus is an important requirement for the success of any business in Japan as the cartels have influence in many areas including manufacture, distribution and sales. These cartels have a long history in business within Japan and are thus highly trusted and perceived as a part of their business culture. The resistance of target markets, whether retailers or final consumers, to foreign products can be overcome by using these cartels.
In addition, Keiretsus are important in a country where the retail structure is still dominated by traditional, independent grocers (Statistics from 2008 suggests Japan has 62,000 independent grocers against 15,000 supermarkets) which might result in high costs of distribution if it’s undertaken by the MNE. By collaborating with the Keiretsus, who have the competences and infrastructure to support the operations in distribution and sales, MNEs might be able to gain cost advantages which they cannot develop in the short term.
The inherent weaknesses of Japan in terms of non-availability of space may interfere in MNEs setting up distribution and warehousing facilities close to key target markets. It may be an advantage therefore to establish relations with cartels who own these facilities and can provide cost reductions for MNEs. In addition having relationships with local cartels may also prove to be useful in reducing resistance from governments and other authorities which aim at protecting the local industries.
A significant advantage for MNEs in using Keiretsus comes from the easing of competitive pressures. In a highly competitive environment such as that in Japan, it is important for a firm to have relationships with local firms in order to gain knowledge about the competition as well as about the target markets. Thus by using Keiretsus, the MNEs may be able to gather information to support marketing mix decisions in standardization vs adaptation as well as in new product development where knowledge of local customer needs may be beneficial.
The key advantage of using Keiretsus may come from the ability to penetrate the ‘traditional’ market in Japan where there is resistence to foreign brands. The usage of cartels may reduce this bias and provide access to local dealerships and consumers as they perceive cartels as more trustworthy and ‘local’ in nature. Therefore Keiretsus may be handy in the initial stages of an MNEs investment in Japan in creating sales leads and also in developing a wide distribution chain for their products. With the help of distribution cartels, MNEs can reach hard to reach consumer groups and it also enables the flow of accessories and services which can help in the configuration and coordination of value chain. But at the same time, it may also be important to understand that involvement of Keiretsus may create hazards in terms of dilution of brand values and standards, as the usage of cartels means that MNEs are basically outsourcing their core activities such as servicing and pricing, which has a large impact on customer satisfaction and retention, to the cartels.
3) From the point of view of the foreign MNE, analyse the importance of creating intra-firm relationships with local firms, and how such a strategy help towards the success of the investment it makes.
Importance of intra-firm relationships
In analyzing the importance of creating relationships with a local firm upon entry, it can be said that a local firm is a rich source of information for an MNE. The experience curve effects through operating in the market may provide local firms with knowledge of target markets in terms of their needs, preferences and perceptions, suppliers in terms of their prices, capabilities and value chains coupled with information about competition in terms of their strengths and weaknesses, key customer groups, unique selling propositions, strategy, marketing mixes and positioning. This information may not be available for MNEs at the preliminary stages but are important in deciding the strategy to be adopted. For example, the mobile manufacturer Huawei collaborated with T-Mobile in USA to gather to gather knowledge of US mobile customers before establishing subsidiaries in USA for HTC mobile phones. (Guillén, 2003)
Also by making intra-firm relationships, the MNE can gather knowledge as to what aspects of the marketing mix may be appealing to the customers based on their social and cultural traits, enabling standardization and on deciding which elements to adapt in order to be locally responsive. An example of this is the collaboration of General Motors with Opel to manufacture cars very much adapted to the German market. (Dawson & Kerwin, 2004)
In some instances, the government of a particular country may create barriers for MNEs entering the country. Collaboration with local firms, therefore is important for MNEs to be able to alleviate this protectionism polices of the government and gain access to resources and markets. An example of this is Walmart franchising agreement with Bharthi Enterprises in 2006 as a measure to gaining access to the Indian market. (walmartfacts.com, 2009) This may also benefit in providing tax concessions compared to direct entry.
Making relationships with local firms may also be important in leveraging competencies of both firms in serving customers better and spread both risk and costs. For an MNE, collaborating with a local firm may give access to competences it may be lacking in terms of technology and helps in exploiting locational advantages. This may reduce risks it may be exposed to in competing with local firms and helps in reducing level of investment. It will also be significant in increasing their potential as MNEs use technology capabilities they gather in local operations in developing related operations worldwide. For example Boeing aerospace collaborated with Italy’s Finmeccania in establishing Italian aerospace research centre (CIRA) which later provided navigation systems in developing the 7E7. (Boeing.com, 2002)
Collaborations with local firms may be important in countering competition by merging with key competitors in a specific market, especially in markets which doesn’t have a large enough capacity to support many competitors. This may enable the MNEs to exploit the reputation of the local firm in generating further sales and also collaboratively attack the market shares of the competitors. But some countries have taken measures against such collusions which prevents healthy competition.
Contribution to success of investment
Through the above it is clear that collaborations with local firms is important for MNEs in reducing risks associated with entry to foreign markets. It may result in reduced costs through access to knowledge which may otherwise require high research expenditure and also allow least cost access to physical and competitive resources such as production facilities, technological knowhow, logistics, brands & market knowledge. The generation of sales leads contributes to the success of the investments through expanding of sales which may lead to economies of scale and greater profitability. The overall goals of MNEs regarding geographic expansion and sustainable operations may also be achieved through diversification of risks and enabling multiple revenue streams.
4) Discuss the potential problems that may arise as a result of developing relationships with local firms.
Although collaborations with local firms may have many advantages, they may also carry many pitfalls which lead to failure of investment.
Conflicts
Although both firms may pursuit similar objectives initially, they may evolve to be different over time. This divergence may lead to conflicts within management which may affect the performance of the company and also give rise to questions of control. Settling these issues may result in dissatisfaction of the one of the parties. Therefore conflict resolution needs to be considered and appropriate methods of integrating all aspects of the merger need to be properly devised. The splitting of merger of AOL Time Warner which can be associated with management failure to integrate the companies may be a good example from the corporate world (http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/6774324/AOL-officially-splits-from-Time-warner-after-10-years.html).
In addition, fundamental differences in country culture may also lead to conflicts in the workforce. As the collaboration may result in bringing together staff from different cultural backgrounds, it may lead to clashes in communications, ways of working and also in criteria for performance evaluation. Different aspects of the cultural web (Johnson, 1988) which contributes to the corporate culture may also lead to conflicts in goals and managerial styles. This is a complex issue in managing collaborations and compatibility needs to be evaluated prior to engagement. A good example of this is the Chrysler merger with Mercedes where two companies with distinct cultures and approaches to work came together, resulting in issues from the boardroom to the factory floor. (http://www.businessweek.com/magazine/content/05_33/b3947016_mz001.htm).
Spill-over effects
Spill-overs mainly consist of technology spill-overs, marketing spill-overs and knowledge spill-overs. Although MNEs can be identified as benefiting more from both marketing spill-overs and knowledge spill-overs in the time of operations, the opposite may be true in terms of technology spill-overs. Since many MNEs have superior technologies in terms of manufacturing, distribution and sales they may face risk of them being spread among their competitors overtime as a result of labour turnover. Technology spillover through labour turnover is an issue which was evaluated by German engineering giant Bosch in 2005 while establishing their research centre in Suzhou, China where infringement of property rights are common. (Zhu, 2010)
Although patents and trademarks are means by which this can be alleviated, the MNEs need to have methods in place to identify infringements and take action which may result in additional costs of operations.
Brand value dilution/ Damage to brand integrity
MNEs operating in foreign markets may also face the risk of damage to their brand as a result of collaborations with local partners. Since all results of operations are linked to the brand names, conflicts within the workforce, poor managerial decision making or infringements done by local partners may result in the brand value being adversely affected. This was experienced by Coca Cola in India after it was found that the drink sold in India contains 3 times the accepted limit for pesticide residue which resulted in bans of sale in some states and immediate sales fall of 11% (http://www.business-standard.com/india/news/coke-sales-fall-11pesticide-controversy/159950/). Therefore operations of local partners must continuously be evaluated for integrity and consistency with global strategies of the MNEs.
In addition, failures to identify strategic aims of the other party prior to merging may result in damages to brand image. This may be worse if the firms are pursuing contradictory objectives which leads to clashes. This was the case with Texaco, an oil company which acquired the share of General Motors merger with ECD Ovaonics, a manufacturer of batteries for Hybrid cars aiming at reducing worldwide fuel demand. Texaco which was holding controlling interest was brought to courts for infringing activities of the firm which resulted in damage to images of both companies. (http://www.theenergyroadmap.com/futureblogger/show/1030-stanford-ovshinsky-and-the-future-of-energy-interview-part-1). Nevertheless rebranding Texaco as Chevron and promoting the importance of alternative energy sources has reduced the negative effects on the brand.
Conclusion
The above analysis provides an idea as to the challenges MNEs face in global expansion and provides the benefits and potential pitfalls they might encounter in the endeavors. It has to be noted that the most important aspect of global expansion is maintenance of brand integrity while contributing to sustainable growth of the organisation. From the case studies, it is evident that MNCs may be enticed to enter into relationships with firms established overseas in search of markets, resources and efficiency but they need to consider the compatibility of the other party in terms of shared goals and strategies prior to entering in to collaborative agreements.
Bibliography
1. Advertising Standards Authority UK, 2010. Regulation explained. [ONLINE] Available at: http://asa.org.uk/Regulation-Explained.aspx. [Accessed 16 November 2010].
2. Boeing.com, 2002. Annual Report 2002. [ONLINE] Available at: http://www.boeing.com/annualreports/2002.pdf. [Accessed 16 November 2010].
3. Businessdayonline.com, 2010. The New Nigerian Oil and Gas Industry Content Development Act – A Game Changer. [ONLINE] Available at: http://www.businessdayonline.com/NG/index.php?option=com_content&view=article&id=10547:the-new-nigerian-oil-and-gas-industry-content-development-act-a-game-changer&catid=133:legal-indignity&Itemid=557. [Accessed 16 November 2010].
4. Business-standard.com, 2010. Coke sales fall 11% on pesticide controversy. [ONLINE] Available at: http://www.business-standard.com/india/news/coke-sales-fall-11pesticide-controversy/159950/. [Accessed 16 November 2010].
5. Businessweek.com, 2010. Online Extra: DaimlerChrysler: Divorce, German Style?. [ONLINE] Available at: http://www.businessweek.com/magazine/content/05_33/b3947016_mz001.htm. [Accessed 16 November 2010].
6. China Economic Review, 2010. State Council releases new regulations on FDI - China Economic Review. [ONLINE] Available at: http://www.chinaeconomicreview.com/dailybriefing/2010_04_14/State_Council_releases_new_regulations_on_FDI.html. [Accessed 16 November 2010].
7. Dawson C. and Kerwin K., 2004, ‘Designer Cars’, Business Week, 16 February 2004.
8. Faulkner D., and Bowman C., 1995. The Essence of Competitive Strategy, Prentice Hall
9. Fox S. and Amichai-Hamburger Y., 2001. ‘The power of emotional appeals in promoting organizational change programs’, Academy of Management Executive, vol. 15, no. 4, pp. 84–95.
10. Guillén M.F., 2003. ‘Experience, imitation, and the sequence of foreign entry: wholly owned and joint-venture manufacturing by South Korean firms and business groups’, Journal of International Business Studies, vol. 83, pp.185–198.
11. Herzberg, F., 1987. ‘One more time: How do you motivate employees?’, Harvard Business Review, No: 5.
12. Hofstede G., 2001. Culture’s Consequences, 2nd edition, Sage
13. Hrmguide.co.uk, 2010. UK Employment Law Updates. [ONLINE] Available at: http://www.hrmguide.co.uk/hrm/steele/. [Accessed 16 November 2010].
14. Johnson, G. (1988) "Rethinking Incrementalism", Strategic Management Journal Vol 9 pp.75-91
15. NYTimes.com, 2010. SPECIAL SERIES - China - Pollution - Environment - Economy - Choking on Growth. [ONLINE] Available at: http://www.nytimes.com/interactive/2007/08/26/world/asia/choking_on_growth.html. [Accessed 16 November 2010].
16. Schneider S., and Barsoux J.L., 2003. Managing Across Cultures, 2nd edition, Financial Times/Prentice Hall
17. Telegraph.co.uk, 2010. AOL officially splits from Time warner after 10 years. [ONLINE] Available at: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/6774324/AOL-officially-splits-from-Time-warner-after-10-years.html. [Accessed 16 November 2010].
18. Theenergyroadmap.com, 2010. The Edison of our Age: Stan Ovshinsky and the Future of Energy. [ONLINE] Available at: http://www.theenergyroadmap.com/futureblogger/show/1030-stanford-ovshinsky-and-the-future-of-energy-interview-part-1. [Accessed 16 November 2010].
19. Wallmartfacts.com, 2009. Latest Global Entries. [ONLINE] Available at: http://www.walmartfacts.com. [Accessed 16 November 2010].
20. Werhane P., and Freeman R.E., 1999. ‘Business ethics: the state of the art’, International Journal of Management Research, vol. 1, no. 1, pp.1–16
21. Zhu, Y, 2010. An Analysis on Technology Spillover Effect of Foreign Direct. International Journal of Business and Management, Vol. 5. No:4, 179.
