Risks for European Transnational Corporations - Essay Example

Risks for European transnational corporation while expanding into emerging markets Introduction Any transnational corporation with an eye set on the international market has more often than not observed the frenzy surrounding emerging markets, following Indian’s significant development in the technology sector and China’s fiscal growth. In-spite of these apparent prospects, a number of multinational organizations based in Europe consider expansion into these volatile zones as a game of poker. Expansion into emerging markets is often considered as risk associative for European transnational corporations. Although this expansion strategy is lucrative, it is potentially a high stake game, where the odds are most likely stacked against the corporations itself (Henisz and Zelner, 2010). In one way of saying, corporations are right in having such a perception. For example, in case of gambling, those who get straight into the game without paying adequate attention to rules and regulations as well as without studying tactics of other key players are more likely to incur huge losses. This theory holds true for transnational corporations as well. Nonetheless, investors who adopt proper measures to identify macroeconomic factors inherent to the emerging markets attain the capability to reach out to millions of customers and widen target customer base. Figure 1: Emerging market (facts and figures) (Source: Wang, 2010) A number of European transnational companies, such as, Vodafone and HSBC, have increased their stronghold in emerging countries such as, India and China, by simultaneously gaining access to cheap labour as well as a larger customer base. On the other hand, companies, such as, Ericson had failed to establish its presence due to strategic dysfunctions. Majority of these dysfunctions are consequences of various internal and external factors associated with emerging countries, which can prove to be immensely dangerous for European organizations, considering an expansion into these countries in order to achieve business growth (Henisz and Zelner, 2010). The relevance of this study lies in the fact that it highlights the relative risks and challenges in face of European transnational companies while considering an expansion into emerging economies. Uncharted Waters The most commonly understood definition of an emerging country is a low income economy with rapid growth, which utilizes economic liberalization as the primary stimulator for achieving further growth. Macroeconomic stabilization, revelation of administration monopolies to domestic and foreign competition and trade liberalization has in a combined way led to evolution of a new community in these countries, known as the middle class, with an apparently unquenchable requirement for services and products ranging from Starbucks coffee to BMW automobiles. As a consequence, the issue that can prove to be detrimental for transnational corporations based in Europe is an accelerated growth of the market. Thus, it is imperative for organizations based in Europe to face difficulties so as to allocate individuals in right places with both ability to make quick decisions and strong turnaround skill (Henisz and Zelner, 2010). Figure 2: Middle class and above middle class population in the emerging economies (Source: Wang, 2010) Similarities do exist between an emerging country and a turnaround atmosphere. As in every turnaround circumstances, cash becomes an issue or priority in an emerging market. While operating in an already developed market like, Europe, transnational corporations should implement appropriate strategies in order to do a methodical evaluation of effectiveness of their working capital as well as develop proper action plan for venturing into emerging economies (Humberstone, 2013). In addition, companies should also take prudent measures so as to assure their investors and creditors that the management is implementing essential strategies for the purpose of mitigating challenges and maximizing value for the company. It is at this juncture where similarities diminish and need for attaining the ability to address several complexities and problems becomes essential. Generally speaking, issues that can prove to be a barrier in the path of a European transnational organization’s success in establishing presence in an emerging economy are: Inadequate market awareness for entry mode services and products. Unproductive attempt to develop a brand that is both consistent and has an international recognition. Failure to set up a local or regional team in the host country in order to supervise company’s regional business operations. Unwillingness or inability to communicate efficiently and effectively. Mismanagement of supply chain (Harvard Business Review, 2010). All the factors mentioned above are in one way or the other responsible for hindering business operations of transnational companies based anywhere in the world, but the emerging economies. However, this depends on the strategies adopted by these organizations while seeking entry into emerging markets (Humberstone, 2013). A European transnational corporation with a sound strategy will obviously be susceptible towards succumbing to these factors, but will always be in a better position to mitigate the challenges. On the contrary, a corporation with a seemingly inadequate preparation will be more likely to fail under stringent circumstances of emerging economies. Hidden Risks for European transnational corporations expanding in emerging markets When an organization with value generating managerial or technological capability makes a foreign investment, the host country as well as company’s shareholders becomes the prospective benefit receivers. Even so, regardless of the fit between offerings of organizations and actual needs of consumers, success is very far from guaranteed (Harvard Business Review, 2010). Elections and several different political events, changing attitudes of the society and economic downturns can often prove to be factors, which upset even those organizations that have a sound expansion strategy, let alone those with inappropriate strategies and inadequate preparations. The interaction of above mentioned forces combined with repercussion of the political decisions made by European transnational organizations may further slow down growth of the company, when the emerging country government applies an uncanny strategy to survive during the period global economic and financial meltdown (Grant Thornton, 2012). Subjects such as, taxation on executive reparation, actual capacity of financial regulation and international merger and acquisition activities, have come under focus in the wake of an almost imminent crisis in emerging countries. Drastic differences can be witnessed in the opinions and policies of international leaders on these subjects. The drastic difference in policies followed by European transnational corporations in their home countries and those in the emerging countries makes it difficult for companies to gauge the appropriate outcomes of a particular strategy. Moreover, it also becomes considerably challenging for European transnational corporations to measure favourability of their outcomes (Harvard Business Review, 2010). This is precisely because an outcome may prove to be favourable to a company in their home country, but the same outcome may not be similarly fruitful in an emerging economy. Politicians in European as well as emerging countries will find it considerably inconvenient to harmonize popular demands so as to penalize the ones who are perceived as responsible against the plight of financial and human capital and fear of obstructed innovation (Pinfield, 2007). A broader domestic economic concern such as, protectionist feeling in reply to repositioning of fiscal authority in support of emerging countries such as, India and China, will also have an inevitable effect on transnational companies based in Europe. Those European transnational corporations who would give optimum effort to anticipate and manage opportunities and risks in the emerging economies will obviously gain a significant competitive advantage compared to rival companies (Grant Thornton, 2012). Traditionally, the biggest risk that lies in face of European transnational corporations expanding into emerging economies is the considerably volatile and immature political system. The chief concern previously associated with an expansion in emerging countries was expropriation risk (Harvard Business Review, 2010). A foreign company is exposed to expropriation risk when the host country government decides to confiscate foreign-owned assets under a particular circumstance. In the contemporary business environment, this risk has virtually diminished. Symbiotic form of growth in the economy and robust international policies in emerging and developed countries has brought down the cases of asset seizures to almost zero. On the other hand, foreign organizations have shown increasing interest in tapping the emerging markets in order to attain larger customer base and gain significant market share (Pinfield, 2007). At the same time, governments in the emerging economies have understood that greater value can be extracted from foreign country organizations by means of more delicate mechanism of regulatory management, instead of complete asset seizures. So, this gives rise to a new form of risk that European transnational organizations face while expanding in emerging economies. The risk that a government, may change or modify regulations, contracts and laws that govern the mechanism of investment, at its own discretion or may fail to enact such a law in a way that deteriorates the return earned by European transnational organizations is termed as policy risk by academic scholars and world leaders (Grant Thornton, 2012). Even though information on policy risk is less precise than the facts and figures available on outright asset seizures, press declarations about policy risk in terms such as, political risk, regulatory uncertainty and regulatory risk, suggest that this risk has escalated drastically as rate of asset foreclosures have fallen down. Changing dimension of risk exposures for European transnational organizations in the emerging market Several facts and figures are consistent with the revelation that policy risk or political uncertainty has increased considerably in emerging economies over the past decade. According to a study conducted by Price Waterhouse Coopers in 2001, an obscure policy-making atmosphere is equivalent to about 33% hike in taxation (Henisz and Zelner, 2010). According to the authors, a study by World Bank in 2004 reported that about 15% to 30% of the contract covering nearly $371 billion worth of investment in private infrastructure during the 90s were subject to government induced disputes and negotiations in the emerging markets. This suggests the highly volatile political environment prevailing in emerging economies. The continuing battle between political parties and subsequent changes in legislations heightens difficulty of companies in managing their operations by keeping track of appropriate legislations. It has often been witnessed that multinational organizations fail to record the updated legislations and thus, end up being on the wrong side of the law. As a result, they are overwhelmed with lawsuits and legal notices. This significantly depletes profit margin. This is one factor that may prove to be a huge barrier for European transnational organizations when they expand into any of the emerging countries. According to another survey conducted by Economist Intelligence Unit and Multilateral Investment Guarantee Agency, multinational corporations consider limitations on the movement and convertibility of proceeds, violation of contract, regulatory restrictions and civil disturbance to be more risky than potential seizure of their assets by the government (Harvard Business Review, 2010). Unfortunately, conventional contractual and financial mechanisms that organizations implement in order to evaluate and alleviate business risks have a very limited value. Hence, it is imperative for the European transnational companies to formulate proactive strategies associated with political management so as to be able to minimize incentives of government and other regulatory authorities to divert return of foreign investors. It is believed that in yester years, relatively unexplored markets use to be of huge benefit for foreign organizations (Pinfield, 2007). Nonetheless, in due course of time, expanding into relatively unexplored markets as that of the emerging ones became risky. It became increasingly difficult for European transnational corporations to conduct their business in countries that are frequently associated with corruption, bribery and fraud. These factors proved to be hugely destructive for both foreign organizations as well as the domestic economies. Even in the contemporary business environment, countries like, India and Brazil, are often associated with fraud, bribery and corruption. As a result, European transnational organizations seeking entry into these countries should be aware of such facts and formulate their strategies accordingly for being able to shield themselves from impacts of such activities. Other issues to be faced by European transnational corporations The language spoken in the European countries are drastically different from that of emerging economies (Kawar, 2012). Language barrier is one of the most significant factors that might deteriorate performance of a transnational corporation. Although English is the most commonly spoken or desired language, apart from India, none of the other emerging countries has English as their first language. The countries such as, China, Russia and Brazil, are very biased towards their regional language and this might prove to be a huge barrier for a European transnational corporation (Hennart and Zeng, 2002; Harrison and Huntington, 2000). Considering the example of China, it can be said that managers from European countries will fail to understand Chinese and at the same time Chinese employees will face difficulties in comprehending organizational expectations and objectives stated in English (Forster, 2000). In addition, even though majority of the Chinese employees do have a strong grasp over English, yet they communicate with their own accent, which might sound vague to the foreign company managers. Precisely because of these issues, it will be relatively complex for the expatriate managers to ensure a flexible communication process (Pinfield, 2007). Challenges A European transnational corporation planning to expand into emerging markets will encounter certain grave challenges, particularly because of the fact that both these geographic regions are majorly different in terms of culture. The complications expected to arise are: Difficulty in management and administration of individuals who belong from different cultural background. Establishing an appropriate framework for communication that will ensure a smooth flow of information (Oertig and Buergi, 2006; Schwartz, 2006). Difficulty in managing people from different cultural background The facts set forth by research scholars as well as the practical scenario suggest that managers of European transnational organizations will encounter substantial difficulties while managing a culturally diverse workforce. One of the major reasons behind this difficulty, as explained by Wood and Eagly (2002), Schaffer and Riordan (2003) and Triandis (2001), is the manager’s incapability to understand the expectation of culturally diverse employees. Consequently, the managers might resort to formulation and subsequent implementation of a simplified technique while managing all their employees. In such a context, managers will not be able to establish a relationship based on trust and respect. According to Harrison and Huntington (2000), Gelfand, Erez and Aycan (2007) and Hånberg and Österdahl (2009), ultimately managers of European transnational organizations can find themselves in uncomfortable circumstances, where they might even experience unenthusiastic attitude from their subordinates. Besides that, there might not be any collaboration between leaders and group members, which can deteriorate efficiency and henceforth, productivity of the organization (Johnson, Lenartowicz and Apud, 2006). The facts stated in this section provide justification regarding the difficulties that European transnational organizations may face while seeking entry into emerging markets. Hence, it is imperative that managers will have to formulate their strategies in accordance with the country wherein they are seeking entry and also study culture of the people belonging to the same (Dalton, et al., 2002). Setting up a robust framework for communication The issues regarding language barriers explained in the section above calls for the need to select a common language for communication. It would be the responsibility of managers of European transnational organizations to ensure the fact that, regardless of the local language spoken in host countries, English should be recognized as the primary language for communication. Apart from that, each and every operational detail as well as business process should be specified in English in order to avoid any discrepancy. The reason behind adopting such a measure is that the expatriate managers may find it substantially difficult to manage employees in countries where English is not the primary language of communication (Walumbwa, Lawler and Avolio, 2007). China and Brazil can be cited as appropriate examples of countries where natives are highly biased towards their own language and tend to avoid English or any other language. As a consequence, expatriate managers might be unable to ensure a flexible information flow between each and every organizational member (Govindarajan and Ramanurti, 2011). Conclusion With rapid developments in the emerging markets, these countries have become a centre of attraction for majority of foreign investors. This is precisely the reason behind increased amount of FDI inflows in the emerging economies. Investors are showing high interest as well as confidence while investing into these countries as they believe this to be a positive net present value investment. However, given the fact that attributes as well as situation (both internal and external) of the emerging countries are drastically different from that of European countries, European transnational corporations should be aware of possible challenges and hence, formulate their strategies accordingly. Although investments in these countries may seem lucrative, they entail their fair share of risk. This is why European transnational corporations should be adequately prepared to counter any challenge, which may arise in their path while expanding internationally. Reference List Dalton, M., Ernst, C., Leslie, J. and Deal, J., 2002. Effective global management: Established constructs and novel contexts. European Journal of Work and Organizational Psychology, 11(4), pp. 443-468. Forster, N., 2000. Expatriates and the impact of cross‐cultural training. Human Resource Management Journal, 10(3), pp. 63-78. Gelfand, M. J., Erez, M. and Aycan, Z., 2007. Cross-cultural organizational behavior. 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