The Development of International Business in Argentina - Case Study Example

The development of International Business in Argentina Executive Summary Markets of Argentina are flooded with agents, associates and distributors who act as intermediaries for foreign businesses. In spite of unique economic, demographic and cultural diversities compared to other Latin countries, the small scale and supporting industries have well accompanied themselves with the nation’s development in providing the required support functions across sectors to promote international business. The economy has a strong buyer spending and fixed investments. Introduction One of the most diversified and the richest among the Latin countries, Argentina enjoys a varied natural resources that joins together to make the economy industrially more strong. The GDP as estimated in 2008 sector wise accounts to – agriculture with 9.2%, industry 34.1% and the service sector adds 56.7% to the total economy. The population has been immensely educated and highly skilled. About 16.27 million (2008 est.) people in the urban areas account the labor force. (Economy-Overview, 2009) Though once upon a time that accounts almost about 100 years ago, Argentina was regarded as one of the wealthiest countries of the world. But things deteriorated due to crisis in the economy, current account deficits, high rate of inflation, climbing up of external debt and loss of capital. However, GDP defaulted to 7.1% (2008 est.) mainly due to less capacity utilization of industries and labor force. (Economy-Overview, 2009) Porter’s Diamond Model The prosperity of a country depends upon its ability to develop its labor force, maintain healthy interest rates and currency values. It is required that the country gradually adopts measures of innovation and up gradation to create the necessary infrastructure for the development of these variants in order to have a competitive advantage in the global business arena. Variances in the country’s own values, culture, economic infrastructures, companies and industries and its past history as well contribute to its success. But how do companies succeed in International Markets? To it Michael Porter suggested that unique and identical strategies formulated by the companies helped the cause. But when strategies of various companies have their trajectory of end-result on to the same point then there remains little difference between the companies. It is, according to Michael Porter, sheer innovation skills that the companies use to uplift the motive of the business in the broader sense. It is just a new and unique way of doing things. Companies perceive new ideas and bring about innovation skills in product design, production process, marketing and advertising approach and methods to carry out training. One finest example that can be cited is that of Japan. Japanese companies have gained a better competitive advantage in the international market by putting emphasis on size, compactness and minimization of capacity. This according to foreign firms was supposed to be less attractive, as they felt would yield lesser profits. Also companies do restrict themselves to innovations that would bring about competitive advantage for both domestic and international markets. Volvo, Atlas Copco and AGA have succeeded in doing so. (Porter, 1990) Hence, in order to have a global competitive advantage, businesses should have the right strategy set to sell its products globally that would bear its own brand name. It needs to be processed by its distribution channels spread out worldwide. Even the companies can opt to relocate their R&D departments in nations so as to take advantage of lower wages of labor and newer foreign technology. Sustainability of business may also sometimes refer to making own advantages obsolete. It is a strategy followed by most Japanese companies as they feel if the companies do not change their advantages the competitors would do otherwise. Now several questions do creep up so as to ascertain the reasons for the companies of various nations constantly innovate, carry out ruthless improvements, and seek to even better sources of competitive advantage and the ability to overshadow the underlying barriers to success. The answer to these parameters generally lies in the Porter’s four attributes that helps the companies across nations to enabling them to structure themselves for better competition. The four factors of Michael Porter are as follows: a) Factor Conditions, b) Demand Conditions, c) Related and Supporting Industries and d) Firm Strategy, Structure and Rivalry. Factor Conditions with respect to Argentina’s factors of production refer to the skilled labor force and infrastructural facilities that are necessary to provide edge in international business. The overall behaviour of market demand of the various products and services of the companies within the country is referred to as Demand Conditions. The next attribute of Related and Supporting Industries discusses the presence/absence of smaller supporting industries or that on a small scale as supporting the bigger industries and make good competition internationally. Porter’s last attribute of Firm Strategy, Structure and Rivalry discusses about the various means of creation of the firms, organizing activities and managing and also the behavioral pattern of the rivals within the country. (Porter, 1990) The factors of production are the combined forces of labor, land, natural resources, capital and infrastructure. It is therefore relevant that the country would expertise on those factors that it is well bestowed with. Telecommunications, food processing, banking, energy, and mining are the strongest areas of Argentina. The top business sectors like automotive, food and design manufacturing of Argentina forms the backbone of the economy. Over the last couple of years these sectors have come on handy in terms of their international businesses. Also these sectors have proved to be yielding much higher benefits for the emerging export and import markets for Argentina. Moreover, these big businesses emanated to be producing large amount of employment generation within the economy and also giving rise to skilled human resources and stronger scientific bases in the country. The fact that the Argentine businesses have been successful in lighting up their international presence is mainly due to creation of factors. It is evident from various businesses history over the world that successful businesses run and succeed because they are able to produce specialized factors for their production and also gradually updating them to match their needs. The food sector of Argentina is very promising. It is the fifth largest producer of food in the world. In the food sector wheat, corn, sunflower, Soya bean and cattle stock are the main areas of expertise. Other variables that are mostly exported to other countries are fruits and vegetables. These sectors include involvement of huge amount of labor force and have great demand in the local market too. Cultivation techniques followed in these sectors are highly sophisticated and so are the needs of the local buyers that had led the companies to follow regular innovation processes to develop products. In cattle rearing it is positioned at fifth. With 54 million heads of cattle stock and producing 3.1 million tonne of meat per year the nation ranks fourth in the world. Both small and large suppliers’ organize themselves to uplift the distribution network and speed up the process for export functions. Argentina has large plants that are into manufacturing of bio-diesel. It seems to be an impressive feature for the country to position itself in one of the most important bio-fuel producer and exporter. (Amazing Argentina: Sectors that mean business, 2009) The other most important sector that promotes business for the nation is the Information Technology market. This sector has strongly contributed to the success in servicing global demands. The sector estimated a growth of 22%. The sector registered contribution to the total exports of $380 million with 120-150,000 approx. employees working in tandem. The companies have been producing products for the Spanish contents. (Amazing Argentina: Sectors that mean business, 2009) Over the years Argentine businesses have undergone serious expansion in its diverse business sections. It has reached almost at a level of unparalleled position with its main strength in the commodities market. But however in spite of the demanding market scenario, foreign entrepreneurs have somewhat failed to have a clearer view about the local demands and subsequently failed to grasp the opportunities the nation has to offer. Naturally, it is the typical and unique culture of the local market coupled with logistics challenges that pose obstacle for the foreign companies to market their goods. The nation’s most important trade partner, Britain, has been exporting latest technology and other manufacturing resources to Argentina and imports raw commodities from it. The prime commodities of Argentina have been oil and grain. As a matter of fact, the main reason that makes Argentina a global hub for investment opportunities is basically due to its growing commodities market and exceptional economic resilience. Distinctive climatic changes and other environmental issues have pushed several other nations to move towards concentrating upon bio-fuels and Argentina is one of its main founders. (Rois, 2009) Argentina has almost recovered itself well enough from its recessionary period that happened during 1999-2002. Argentine firms have also learnt from this financial crisis the ability to thrive in these conditions and mature thereby. This growth of businesses was strongly motivated by appealing performances from its agriculture, manufacturing, automobiles, construction, distribution and catering and transportation and communications sectors. In the process the GDP growth overall had a good impact with reasonable performance. The nation has maintained a growth rate of 8.5% over the last 5 years and is forecasted to grow at the rate of 1.9% the next year. (Rois, 2009) This was most accompanied by strong external debts, public debts and very good employment generation. The global industrial development in forest and forest based developments has brought new opportunities for the countries of Latin America especially Argentina. Increase in the amount of International trade in forestry products have helped in the launch of diversified products that gives value addition to the nation in terms of technological development, human resource development and has also led to successful mergers and acquisitions. This had attracted investors and professionals both alike. This development has surely benefited the country in making international presence enabling to strengthen the local and regional formation of cluster groups. Argentina has good base of strong labor force that are skilled and educated. The industries too are sophisticated and highly diversified. Due to increase in labor costs local industries have lower profits as compared to the foreign companies bearing low labor costs. There have also been labor problems within the country and the government has been working upon it to minimize union problems. Moreover there are several other issues like interest rates that have posed a hindrance to many smaller firms for acquiring loan in order to restructure their operations. There have been continuous efforts to restructure industrialization to make it more and more competitive over the next decades. Full capacity utilization is one such measure taken by the companies and there have been continuous focus on modernization and side by side expanding the plants in order to meet foreign and domestic demands. Also to meet the foreign demands new technological developments have taken place and moreover the management of the companies has been focusing on the clients’ needs and preferences to form a competitive advantage over their rivals. Small and Medium Enterprises The small and medium industries in Argentina play an active role in attracting the foreign investors to the country. The investors who have been targeting Argentina for a quite sometime found the small industries providing co-operation to support their needs. Moreover, the investors were in the look out for the top Argentinean brands and strong capital, business networking and financial partners with the promising industries to invest. The small and medium industries have formed groups. These groups help the most scintillating entrepreneurs by enabling them to stage up their promising ideas to develop into profiting business ventures. The small and medium enterprises group needs to submit their proposals through a forum that is available at the Argentine American Chamber of Commerce (AACC). On receipt of the proposals the Chamber creates a database which is organized and managed by the official members of Section of Finance and Investment Banking leg of AACC. This information will remain with the members of AACC who are willing to carry on promising financing and businesses ventures with the small and medium enterprises. These small and medium enterprises come for immense help in establishing new businesses. The various companies’ members within the AACC would help in finding out required information and sectoral opportunities and at the same time allow different promising representatives, associates, suppliers and other allies to form business bonding. The top Argentine entrepreneurs have also a free service for aiming those effective private equities which have strong capability of financing and business resources for networking purposes. Moreover, the investors also have to look out for the various businesses of Argentina that were already analyzed and being pointed out for their exceptional performance by the top Argentine Private Non-profit Business Organizations, Business Colleges and Section of Finance and Investment Banking of AACC. (What is the Small and Medium Sized Businesses Group? n.d) Policy for survival of SMEs “Let us act rapidly, or the crisis could turn a catastrophe”, was the message from one of the influential nation’s president, Barrack Obama. These words have serious applications for a nation like Argentina which has already faced the shock. The economy had major internal problems like deceleration in its growth rate to 7.1% (the lowest in last 6 years) based on data made available by National Institute of Statistics and Census; drought affected rural areas losing more than $12 billion coupled with low commodity prices and rise in layoffs with an unemployment rate of 7.3%. The sales of auto, appliances and furniture decreased a great deal which led the government to take serious note on the issues and thereby provide stimulating measures. The government concentrated in the business by enabling the consumers to involve in trade-in letting them to exchange their old refrigerators for the new ones, or by financing activities. Researchers opined that the economy of Argentina is heavily dependent upon international trade. So long there is strong international trade Argentina does perform well. In the process of recession the most affected industry is related to small scale industries. For example: IBL, a logistics provider to agribusiness and industries, are now into retaining of customers and searching of new ones and also take sufficient advantage of the opportunities that were supposed to be left behind by other companies. (Argentina’s Small Companies Face a Challenge for Survival, 2009) Businesses and business centers Argentina has strong industrial base. The major industrial center of Argentina is located at Cordoba while Buenos Aires is also heavily concentrated with food processing industries and consumer durables. Other major industries that are located here are that of textiles, chemicals and petrochemicals. The region also deals in manufacturing of motor vehicles. Cordoba is famous for its metalworking that is meant for production of motor vehicles. Steel producing plants along with oil refineries are located at Rosario. Meat-packing plants, chemical and tanning industries are also deeply concentrated in the region. While zinc-copper smelting plants, flour mills and dairy industry are located in Santa Fe. Sugar refineries, wineries and fruit processing plants are located in San Miguel de Tucuman, Mendoza and Neuquen respectively. (Argentina – Industry, 2009) Argentina’s packing and food-processing industry is regarded as the oldest and also the most significant industry. The initial periods of the later part of 19th century saw increase in the export of meat products. The direct involvement of the Argentine government into these industries was undertaken after the British’s ownership. The development of the textile industry took place by making significant use of wool from sheep. The Chaco province is renowned for its wool and cotton textile mills. The country has the leading construction material industry called Portland cement. San Lorenzo and Rio Parana are the major chemical industries of Argentina producing sulfuric acid, nitric acid, pharmaceuticals and other acids. The government has taken the petrochemical industry seriously and had approved special benefits. (Argentina – Industry, 2009) Impact of businesses globally Affected by the rise in the international prices, Argentine businesses mostly exports incurred profits. Capacity of exports expanded and also there lies high competition in the exchange rates. This exchange rate fluctuations and expanding export base has helped the traditional business sectors to develop. These developments have affected the GDP as exports and imports accounts to almost half of its share. Again, the most important alarming call for the UK is to minimize the CO2 emissions. This has led the UK government to shift their focus on using bio-fuels as the other alternative. Thus this situation has made Argentina to have foreign eyes over it so as to make larger investment opportunities in multiple ventures. The European demand for bio-fuel has accounted to an expectation level of 10 million tones over the next decade. (Rois, 2009) Major Constraints There are several major constraints that are depicted by various analytical firms. One in every two of businesses in Argentina lack sufficient resources to tap long-term benefits. There is shortage or reduced demand globally in various sectors. The businesses of Argentina are constantly facing problems in their long term fund requirement which is considered as having a greater impact on Argentina than any other country in the world. Conclusion Argentine style of business is quite different from the rest of the world. It is mostly based on simple ways to make the right impression for foreign businesses in order to materialize options. According to a Cambridge businessman, Claudio Rois, “Argentinean business tends to be completed through contacts rather than contracts. Establishing relationships based on mutual respect is a fundamental aspect of both the Argentinean culture and business place. If you spend time building relationships before going into business, then you stand a better chance of becoming a trusted business partner”. (Rois, 2009) References 1. Amazing Argentina: Sectors that mean business, 2009. Economic Times Bureau. Retrieved from: http://economictimes.indiatimes.com/News/News-By-Industry/ET-Cetera/Amazing-Argentina-Sectors-that-mean-business/articleshow/4573312.cms (Accessed on August 3, 2009). 2. Argentina – Industry, 2009. Encyclopedia of the Nations. Retrieved from: http://www.nationsencyclopedia.com/Americas/Argentina-INDUSTRY.html (Accessed on August 3, 2009). 3. Argentina’s Small Companies Face a Challenge for Survival, 2009. Innovation and Entrepreneurship. Retrieved from: http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1665&language=english (Accessed on August 3, 2009). 4. Economy-Overview, 2009. Argentina Economy 2009. 2009 CIA Factbook. Retrieved from: http://www.theodora.com/wfbcurrent/argentina/argentina_economy.html (Accessed on August 3, 2009). 5. Porter, M. (1990). The Competitive Advantage of Nations. Harvard Business Review. Retrieved from: http://asesoriainternacional.com/Clases%20URN/The_Competitive_Advantage_of_Nations.pdf (Accessed on August 3, 2009). 6. Rois, C. (2009). Doing Business with Argentina. Business Expansion. Retrieved from: http://www.growthbusiness.co.uk/channels/growth-strategies/business-expansion/1054797/doing-business-with-argentina.thtml (Accessed on August 3, 2009). 7. What is the Small and Medium Sized Businesses Group? (n.d). Section of Finance. Argentine – American Chamber of Commerce. Retrieved from: http://www.argentinechamber.org/finance/business.html (Accessed on August 3, 2009). Read More