The Argentine Market - Assignment Example

Is entry into the Argentine market a good strategic move for Continental? Is Fintelco an appropriate venture partner? Exports can be undertaken in several ways. Each marketing strategy has its own risks, advantages and disadvantages. While exports is the simplest form of entering an international market, other strategies that companies can consider are licensing, joint ventures and off-shore operations. Joint ventures have to be applied in countries where foreign ownership is restricted. Investment decisions and control are important - whether it should be a joint venture with a local partner, whether they should acquire an existing company in that country or have a global partner. Thus before making an entry into a foreign market, the firm has to consider two strategic decisions – the level of control over the local engagement and the mode of entry. Various factors like investment costs, market size, difference in technologies, market structure and competition intensity affect the market choice. In larger markets acquisition is more favorable (Muller, 2007). Cross border deals were very high 1979 and 1985. Findings suggest that US firms rely a great deal on joint ventures. Studies further suggest that 15% of the joint-ventures end in the first two years and about 50% are dissolved in the first six years. Joint ventures are close substitutes for assets sale and they are merely an intermediate form between hierarchy and markets that permit firms to overcome information asymmetries at low cost. Many MNCs decide on joint ventures when entering a country where political risks are high. They require the local partner to be well equipped for dealing with host governments. Joint ventures may perhaps be time-consuming and initially difficult, but yields optimum results both for the foreign firm and the local company offering partnership (Gross, 1995). The major advantage in joint ventures is sharing of risks and the ability to combine local knowledge with a foreign partner with know-how in technology or process. Foreign investments can be in three forms – foreign direct investments, indirect foreign investments and official loans. FDI includes investments in physical assets such as plant and machinery and it is based on an equity ownership of at least ten percent (Forfas, 2002). The main types of FDI are acquisition of a subsidiary or production facility or participation in joint venture, licensing and establishing of Greenfield operations. FDI involves transfer of knowledge and technology. The FDI has an influence on the host country’s productivity. Continental was looking for investment opportunities in countries that were politically and economically stable. They were also looking for virgin markets comparable to US but Argentina was a mature market. They were not interested in outright purchase of cable companies as knowledge of the overseas market is very essential. Knowledge of the local market is extremely important in this industry which includes knowing the customs and culture, programming tastes, and the political and regulatory environment. Continental planned to enter a developing economy with high potential and Fintelco was already a market leader. The cable market in the region was highly developed. Even though Fintelco enjoyed a good market share, the industry was very competitive with homes having choice of two or three operators to select from. Besides, even though Argentina at that time was both economically and politically unstable. Even though foreign trade and investment was liberalized, there was a steady depreciation of the over-valued currency. Even though it did recover temporarily, Argentina was vulnerable to external shocks. Thus entry into Argentine at that time is not the right strategic move and Fintelco too not the right choice of a venture partner. What are the major opportunities and risks you see in the venture? FDI has been growing faster than the world GDP and is now a major component of foreign investment (Razin & Sadka, 2005). FDI triggers technology spillovers, assist human capital formation, creates a competitive business environment and enhances enterprise development (Tusiad & Yased, 2004). The Argentine cable market was the most developed in Latin America. Government deregulation of the cable industry resulted in a competitive but strong cable and programming market. The cable market was extremely competitive and homes had the choice of at least two operators. Fintelco held 81% of the market share in Argentina’s second-largest city. Besides, the government treaty scheduled to be signed in 1994 would allow the foreign firms to own up to 100 percent of the Argentine cable system and 25 percent of broadcast-television stations. Besides, the telecommunications market in Argentina was underdeveloped and untapped. Continental also eyed the telephony as the major market growth in the country. Hence from the growth and investment point of view, entering Argentina was a good strategic move. Thus, as far as Continental is concerned this was a right strategy but the risks far outweighed the opportunities at the time of taking the decisions. In Argentina, cooperation between the banks and the government broke down and the banks had to face the disintegrating situation alone. The banking system nearly collapsed with freeze on the consumer deposits, loss of public confidence, currency devaluation and series of banking holidays (Barton, Newell, & Wilson, 2004). Emerging economies in the Latin American region were at increased risk of defaulting on their foreign debt obligations. Mexico, Brazil and Argentina could not sustain the economic growth and lurched from one financial crisis to another (Elstrodt, Lenero, & Urdapilleta, 2002). Debt has been the largest source of capital flows in the developing countries but despite that, economic development has not been successful. Output and employment were depressed, the normal functioning of the banking system was disrupted, the Government was unable to service its debts, and substitute quasi-currencies started circulating throughout the economy. The crisis gave rise to substantial financial losses. Confidence is at low ebb, not only in the economic and financial system, but also in social and political structures more generally. The government froze account holders access to checking accounts above $10,000 and savings account above $3,000 for at least one year. Activities in exchange houses reduced 50% from 7 hours working time. That measure affected about a third of all bank deposits and generated a fresh wave of violent street protests. (Munter, 2003). Under the circumstances, despite government deregulation and permits, Continental would risk its investment in Argentina. Developing economies offer opportunities but the risks have to weighed before taking a plunge. Although the growth potential is huge specially in the telephony market, Fintelco has not been able to attract investors and financial institutions and hence whether they would be able to keep their commitment of further investment is doubtful. This would leave a deficit for Continental which implies that risks far outweigh the opportunities in partnering with Fintelco. Is million for 50 percent interest in Fintelco a fair price? Joint ventures help the foreign companies gain access to the domestic market while still maintaining control over its activities. Joint ventures are driven not only by economic factors but also other factors like legal, technological and cultural factors. Joint ventures involve co-ownership and co-management and both partners are exposed to the risk that obstacles could arise during the course of the project. If US firms enter growing markets in joint venture, they get a foothold over the market and at the same time they avoid the market risks associated with wholly owned ventures (Desai & Hines, 1999). In joint ventures firms cede control over operating and financial decisions in return for opportunities to benefit from the other firms; tangible and intangible assets. The transaction cost in FDI and foreign investment is high due to distance. In this case both the entrepreneurs shared common characteristics and both believed in concentrating on subscribers geographically which would spread operating, distributing and advertising costs. The growth potential in Argentine was tremendous and as far as cable industry was concerned, Fintelco had 81% market share in the second largest city of Argentina, which meant an undisputed market leader. Continental was getting the benefit of local expertise and a ready market to tap. Fintelco was not comfortable allowing larger share as it would lose control over operations. This was the first time that Continental had decided on 50-50 ownership but it would be worth their while as the risks also are shared in joint ventures. Hitherto Continental had always been aggressive in joint venture and kept operating control but this time they were even willing to extend technical assistance which would enable them to develop a flexible relationship. Fintelco growth trends have been promising but since the government policies are undergoing changes, foreign firms could enter through other modes also. Continental should not opt for 50-50 stake in Fintelco. Should Hotsetter recommend the joint-venture proposal for adoption? Multinationals, before venturing into a foreign market have to take into consideration various factors like the macro environment, which include government regulations and policies and demographics. The increase of FDI up to 2000 was largely due to liberalized trade policies, removal of barriers, growth in the telecom industry, mergers and acquisitions, cross-border transactions and globalization. World FDI inflows have risen in the last two decades, especially in the last decade when it went up by 4 times of the amount in the previous decade (Bitzenis, 2005). Integrating into the world economy has resulted in economic growth, poverty reduction, and development across nations (IMF, 2001). Income and simultaneously the living standards too have increased due to progressive reduction of tariffs and quotas through successive rounds of multilateral trade liberalization. The US economy gains about $1 trillion from globalization (Ahearn, 2005). Some argue that trade liberalization in poor economies may have a detrimental effect on growth while others claim that it can actually increase the overall domestic productivity through several channels (Topalova, 2004). According to some, domestic firms may be unable to successfully adapt foreign technologies to local methods of production. Besides, Argentine is reeling under foreign debt which is too huge to repay especially as it has been lack of progress in structural economic reforms. Trade liberalization has benefited the developing nations far more than the developed nations. Study of the case suggests that growth potential in Argentina is very high not only in the cable industry but also in broad-casting television and the telephony. While joining hands with a known, local company has its own advantages; FDI into Argentina could be through any other mode. Besides, the government has relaxed the rules for foreign investment, liberalized trade and the foreign firms could own up to 100 percent of the firms in Argentina, This although is not advisable because having a local partner enables sharing of risks. At the same time, it must be noted that as per terms of 50-50 stake, Fintelco is expected to invest further $70 million over time. However, Argentina’s capital markets do not understand the cable business. The capital market in Argentina is undeveloped and media lending, which is largely cash-flow based is relatively new to Argentina. Hence there is a high probability that Fintelco would not be able to keep its commitment of investment. Fintelco has been concentrating on the cable market and is not looking beyond for further opportunities. The cable market is matured and saturated with high competition. Fintelco wants a control of the 85% of the Rosario market but all of this is in the cable business. The fact that Fintelco was not willing to cede 75 percent ownership, demonstrates that they expect growth and chances are that they could execute the exit agreement after four years. In the meantime, Fintelco would benefit from the technical assistance that would be provided by Continental. Another major risk that lies in this joint venture is the currency risk that would result from the fact that Fintelco’s revenues would be denominated in pesos while a significant portion of its liabilities, including interest expense and a portion of programming costs, would be denominated in US dollars. Overall, the gain would be enjoyed by both Fintelco and the nation while Continental carries the most risk despite growth and opportunities in investing in Argentina. Hence Hotsetter should not recommend the joint-venture proposal for adoption under these terms. If Fintelco is agreeable to bring down its share to 25% leaving the operating control in the hands of Continental this joint-venture proposal could be carried. References: Ahearn R J (2005), Trade Liberalization Challenges Post-CAFTA, 27 July 2007 Barton, Dominic, Newell, Roberto and Wilson, Gregory (2004), Pursuing best practice in bank turnarounds, The McKinsey Quarterly, 27 July 2007 Bitzenis A P (2005), European Business Review, Volume 17 Number 6 2005 pp. 547-565 Desai, M. A., & Hines, J. R. H., (1997), ‘‘Basket cases’’: Tax incentives and international joint venture participation by American multinational firms, Journal of Public Economics 71 (1999) 379–402 Elstrodt, Heinz-Peter, Ordorica, Lenero Pablo, and Urdapilleta, Eduardo (2002), Micro lessons for Argentina, The McKinsey Quarterly, 27 July 2007 Forfas (2002), World Trade Organisation Negotiating Objectives for Irish Enterprise Policy, The National Policy and Advisory Board for Enterprise, Trade, Science, technology and Innovation, 27 July 2007 Gross A (1995), China Market Entry Strategies, 27 July 2007 IMF (2001), Global Trade Liberalization and the Developing Countries, 27 July 2007 Muller, T., (2007), Analyzing Modes of Foreign Entry: Greenfield Investment versus Acquisition, Review of International Economics, 15(1), 93–111, 2007 Munter, Paivi (2003) Argentina Disappoints. Financial Times. Razin, A., & Sadka, E., (2005), Corporate Transparency, Cream-Skimming and FDI, 27 July 2007 Topalova P (2004), Trade Liberalization and Firm Productivity: The Case of India, IMF Working Paper, 27 July 2007 Tusiad & Yased, (2004), FDI attractiveness of Turkey, 27 July 2007 Read More