Wal-Mart - Challenges and Advantages of Foreign Direct Investment - Assignment Example

? FDI Strategy of the Briefly describe the MNE you selected. Wal-Mart Stores Inc is a famous retail firm in America; it is acknowledged as Wal-Mart. The organization runs chain of large storehouses and big departmental stores. It is now known to be the third largest public firm in the Globe. The headquarters of the business is in Arkansas Bentonville in United States but the company manages operations in many countries in the world generating employment opportunities for more than two million individuals. It is running a thriving business almost in all major countries across the globe and conceivably that is the reason why it is known as the largest conglomerate retailer in the world. Wal-Mart is frequently known as a hypermarket, it works to sale diverse range of commodities and services to the buyers; like from pet shops to cellular phone stores, meat to dairy products. ‘Low price always’ is the catchphrase used by the famous retail organization commonly; it provides goods at the most viable and affordable prices (Stone, 1997). It is likely that majority of the clients of Wal-Mart have no bank accounts and their earnings are less than that of the general average income of the country (Stone, 1997).The company was established in 1962 and helped in serving a healthy contest for all the other small retailers in the economy. Wal-Mart stores are now making substantial amendment in their performances, measures and policies that would help to endorse the use of service animals by customers with disabilities (Lane, 2010). These animals play a chief role to serve independence to people with disabilities. The organization allows animals in their provisions that are well taught; to support people who are physically handicapped (Feed the Future, n.d.). Taking into consideration the world financial disaster the organization has currently changed its catch phrase to ‘Save Money Live Better’ and has efficiently reduced the price of many products sold by them. 2. Analyze the challenges and advantages of FDI for the MNE in the country you selected. The essay explains Wal-Mart’s business attempt in Egypt. The economy of Egypt is a growing economy. In 1990’s the country have received series of financial benefits from the International Monetary Fund (IMF). The nation has received several debt reliefs due to its participation in the Gulf War. All these factors have been responsible for the nation’s considerable macroeconomic performances. From 2000 onwards the country has undertaken strict monetary and fiscal policies. These policies undertaken in the country have helped the nation to be liberal towards free market principles and made it open for prompt foreign investments. It is most advantageous for business firms like Wal-Mart to invest in emerging economies like Egypt. This is because these economies have infinite development potential within them. Investing in Egypt will help the company to dramatically improve its portfolios. On the other hand the political and economic conditions of an emerging economy are highly volatile thus it can give favorable or even unfavorable uncertainties to the foreign investors. Wal-Mart should not hesitate investing in Egypt because of the possibilities of unfavorable uncertainties, as this is common to any foreign investments made either in developed or in a developing economy. The markets of most of these economies are fast growing, thus foreign investors may diversify investments across several market segments. Moreover the Gross Domestic Product (GDP) of Egypt has been $527.6 billion in 2010, $536.9 billion in 2011 and $548.8 billion in 2012, shows a growing trend in the income level of the county (CIA, 2013). Thus if Wal-Mart invests in Egypt it would experience good market demand because along with the rising income level, the purchasing power of the consumers is improving. However there is a strong disadvantage that may arise as a challenge to Wal-Mart while investing in Egypt, the markets of emerging economies often seem to be very pricy. In 2011 it was found that foreign investors started to withdraw their investments from the Middle Eastern Economies because of hike in the price levels of these countries (Martin & Envas, 2011). Thus Wal-Mart’s investments in the economy might also turn out to be unprofitable in Egypt if the average price level of the economy rises significantly. 3. Determine the best way for your MNE to minimize foreign exchange risks. The currency of all the countries is not same, because the value of money is different in different economies (Martin & Envas, 2011). The exchange rate of a country is the price of currency of that country in terms of the price of currency of another country. If the exchange rate of a country increases it simply means that the worth of the currency of that nation in terms of another country has increased, thus it is said that the currency of the former country has evaluated. On the country if the price of currency in a country in terms of another nation decreases then it is said that the country’s currency has devaluated. The exchange rates of the emerging developing economies are lower than the exchange rates of the developed economies like U.S. When Wal-Mart will make foreign investments then it is likely that the company would have to minimize its exchange rate risks. Wal-Mart must adopt the policy of hedging its investments while investing in the emerging economy of Egypt. The company must forecast the possible changes in the exchange rates by using efficient statistical analysis forecasting models (Gagnon, 2011). Wal-Mart may also estimate the currency risks by using various business models like Value at Risk (VaR). The firm must introduce a centralized agency in its treasury that would deal with its practical hedging strategies. The organization may also establish a special committee that would oversee its exchange rate risks. The best way in which Wal-Mart may estimate the upcoming currency risks would be to solve the problem of volatility clustering in the exchange rates of Egypt. Technically dealing with the time series data of changing exchange rate risks would help the company to forecast the future possible exchange rates in Egypt. If the company finds that the exchange rate of Egypt would devaluate in future, then it can easily withdraw or cease its Green Field investments from the nation (Papaioannou, 2006). 4. Determine how your MNE could leverage government policies to maximize the profitability of FDI. The country of Egypt became independent from United Kingdom’s protectorate status in 18th June 1953 and became a Republic. The capital of the country is in Cairo. The elected government of the country undertakes strict policies to protect the interests of the commoners. The Prime Minister of the country is Hazem el-BEBLAWI since this July 2013 (CIA, 2013). When Wal-Mart would approach in Egypt for doing business it should strategically consider certain policies that would help to leverage the state’s decisions, in a way that would prove to be profitable for its business. The company must show a positive outlook about foreign investments to the government in Egypt. It should make the government realize that FDI is a primal catalyst required for economic development. The company should introduce an effective, broad and efficient investment model for the country that focuses in investing across different regions equitably. The governments of emerging economies often impose barriers for foreign investments because they become over protective about the domestic sectors. Wal-Mart should make the government realize that its low priced and effective operations would help to serve a healthy competition to the domestic firms in the country. The company must make the government believe that foreign investments would help the country to augment its employment opportunities. Newly established business of Wal-Mart would require large number of workers in business. The company should make the government realize that it would be most cost effective for them to employ workers in Egypt than employing workers from the foreign countries (WTO, 1996). 5. Analyze the financial management, operations, marketing, and human resources needs resulting from the proposed FDI and outline a strategy for one area. Wal-Mart adopts different entry modes to launch its business in different economies. It can be analyzed that, since Egypt is a growing competitive economy, the company may decide to set Turnkey projects in the economy (Rugman, 2002). The business firm can design new, ready to start strategies to get its success in the market of Egypt. The company may start issuing equity shares in the market to capture domestic funds. Since 1990’s the country has opened domestic stock market to the foreign investors. The company may set up several outlets at different locations of the country. The warehouses must be set up in the country in locations where the transportation and communication facilities are good. This would help in distributing the commodities at low transportation costs to different outlets. The company should carefully observe the prices set by the potential rivals in the industry. Several discounts and offers like quantity discounts should be given by the company to attract buyers. It would be easier for the company to know the tastes and preferences of consumers if it appoints local workers in Egypt. Those departments of the company that has to deal with the local habitants need to be run by these local employees. Likewise local employees appointed in the marketing and sales departments will cater better services to the consumers in the market of Egypt. The best strategy outline for the company would be to first start its business in Cairo (Farah, 2009). Cairo being the capital is highly developed in Egypt. After achieving business success in Cairo, the company may decide to spread its business focusing on the economically developed locations of the country. Spreading business in Egypt will help Wal-Mart to improve its worldwide business turnover and revenue. References CIA. (2013). The world fact book. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/eg.html. Farah, N. R. (2009). Egypt's political economy: power relations in development. Cairo: American Univ in Cairo Press. Feed the Future. (n.d.). Usaid and Walmart. Retrieved from http://www.feedthefuture.gov/model/usaid-and-walmart. Gagnon, J. E. (2011). Flexible exchange rates for a stable world economy. Massachusetts: Peterson Institute. Lane, R. (2010). Professional ethics. Retrieved from www.westga.edu/~rlane/professional/lecture17_csr1.html. ? Martin D. & Envas, D. (2011). Exchange-rate dynamics. New Jersey: Princeton University Press. Papaioannou, M. (2006). Exchange rate risk measurement and management: issues and approaches for firms. Retrieved from http://www.imf.org/external/pubs/ft/wp/2006/wp06255.pdf . Rugman, A. M. (2002). International business: joint ventures and modes of entry. London: Routledge. Stone, K. E. (1997). Impact of the wal-mart phenomenon on rural communities. Retrieved from http://www2.econ.iastate.edu/faculty/stone/10yrstudy.pdf. WTO. (1996). Trade and foreign direct investment Retrieved from http://www.wto.org/english/news_e/pres96_e/pr057_e.htm . Read More