International Business - Assignment Example

International business Question Importance of acquisition to western oil firms The acquisition of the Russian oil deposits was an important thing to the oil firms because of a number of reasons. The first importance is the fact that Russian had large deposits of oil that had not being exploited before. That implies that the land was fertile with oil and the processing of the oil did not require many things. The availability of the large deposits meant that the oil was available cheaply because the firms did not need to do a lot of exploitation that would be cost intensive (Vladimir 3). The other advantage that the western firms enjoyed from the acquisition is the fact that the firms would enjoy increased income resulting from the sale of oil. The firms would be able to increase their sales volume that would be associated with increased income. The income would also be more because the costs of production in Russia would be relatively lower. The western firms would also enjoy market dominance because of diversification and increased market volumes. That will make the companies to be more reputable in the market and that will be associated with some benefits. The benefits include increased demand for company shares. The increase in the demand for the firm’s shares would lead to an increase in the share price and eventually the total worth of the company. Importance of acquisition to Russian government and economy The acquisition of the Russian oil by western oil firms is important to the government of Russia and its economy. The acquisition is important to the economy because it will yield to more income for the government. The government will benefit from charging tax on the exportation of the oil and other activities that are associated with oil. The country will also benefit from new technology (Vladimir 7). The western oil firms will aim at increasing productivity and that can only be obtained by the firms increasing their efficiency in the operations that they undertake. Efficiency can only be obtained by using new technology and improved processes. The western oil firms will also hire local citizens and that will reduce the level of unemployment and increase the living standards of people living in Russia. The economy will also benefit because the western companies will try to increase their profits from the oil business. That means that the companies will pay more corporate tax to the government. The economy will also gain from better processes and structures in the system. Before the acquisition, the oil industry was organized by hierarchies that did not care about efficiency rather than volumes. The government will also benefit from other things such as improved infrastructure that will be associated with the oil industry. Challenges and risks that western firms faced All business ventures are usually associated with some form of risk or challenge. The oil companies that want to venture into Russia were faced by a number of risks and challenges. The first is the issue of increased taxes. The companies were subjected to double taxation that included tax in Russia and in their mother countries. The issue of taxation had a large impact on the profit levels because it would increase the number of expenses. The oil firms also had a challenge of establishing new processes in the oil industry that would be capital intensive and that would be a setback for companies that did not have enough capital. The oil firms also feared the issue of political interference and lack of cooperation from the local citizens (Vladimir 7). Political interference would be a large setback that would affect the operation of the oil companies. Lack of cooperation from locals would imply that the oil industries had to increase their wages so that they can attract local employees. The other risk that existed is the risk of getting that the volume of oil that was available was less than the expectations of the oil companies. Strategies that were undertaken by the oil companies Phibro Phibor Company used the first entrance advantage. The strategy may be associated with both advantages and disadvantages. The advantages that the strategy may be associated with include the advantage of establishing its operations and that will lead to increased income. The company would establish its brand before its competitors and that will give them an advantage in terms of the market share. The disadvantage that is associated with the strategy is the fact that there are no laid down systems in the early stages of the oil exploration. That means that there are some policies that may be formulated by the government and they end up having adverse effects to the company. In the case of Phibro, the company got an increase in the number of taxes and that was not in line with the company’s expectations. There is also the risk of uncertainty. The company would be the pioneer in the field and they may be faced by many constraints like training employees about the oil industry and laying down the proper infrastructure for the business. Phibro company was faced with the issue of uncertainty when some oil fields turned up to be less valuable than earlier stated and that caused a decrease in the company’s expected income (Vladimir 8). Mobil The company used the strategy of waiting by the side. The strategy is associated with risk averse persons. The strategy is aimed at ensuring that all risks are properly calculated and weighed to determine if the venture is worth taking. The disadvantage associated with the strategy is the fact that while the company is watch the pioneers in the field, the venture may be profitable, the industry ends up being flooded, and they may not be able to find a penetration route into the industry (Vladimir 10). Conoco Conoco used the strategy of crafting the venture. The strategy was well advised and it aimed at cutting any uncertainties that the company would face after establishing its operations in Russia. The strategy deals with initial investigation of the venture and the things that the company would face after venturing into the industry. That is the reason as to why Conoco sent a team to determine the worth of the oil wells and it also set to gain experience in the operation of the industry. The disadvantage associated with the strategy is the fact that the strategy may turn out to be a bit capital intensive and that will increase the company’s payback period (Vladimir 11). Evaluation of the different strategies The three strategies used by the different companies have their advantages and disadvantages. The risks however differ among the different strategies. According to my option, the wisest strategy is the strategy that aims at cutting the most number of risks and creating a certain level of certainty. The strategy used by Conoco of crafting the venture appears to be wiser than the other strategies. The reason behind that is the fact that the strategy ensures that all operations and risks of the industry become known before venturing in the operations. Question 3 How western companies can hedge their investment in Russian oil sector Hedging is considered as a way of transferring or decreasing risk of a business from any form of uncertainty. The western firms will face a number of risks in Russia and the risks should be hedged to ensure that the risk is minimized. The risks that exist include political risk. This is the possibility that decisions that are political may affect the oil industry. Political risks can be hedged by the western firms taking up political risk insurance. The insurance will cover against stand-alone terrorism, political violence, confiscation, and currency inconvertibility. The insurance cover will ensure that the western firms are compensated for any losses that may be associated with the risks that are covered. The other risks that can be hedged are the currency changes risk. The currency in Russia is not stable. That means that the western firms may suffer losses when exporting their oil to other countries. The firms can take forward contracts that would be aimed at ensuring that the firms don not make any losses that may be caused by changes in the exchange rates. The firm may also use other derivatives such as swaps. They will be aimed at mitigating any forms of uncertainty that may be found in the oil sector. However, the use of derivatives usually has a setback affecting the liquidity of the western firms. The other ways that the firms can hedge the risks that exist is by the firms carrying out a market research before venturing in the industry. That will ensure that the firms are aware of the things that are eminent in the industry and country that they want to venture. Market knowledge is available from magazines and industry journals that explain about the conditions that are in place in the market. The issue of hedging will minimize any financial losses that most firms fear in any industry. In order to reduce risks, firms need to carry out a proper research that will minimize risks. Work cited Vladimir Spielman. White nights and polar lights: investing in the Russian oil industry. Harvard business school. McGraw Hill. 1996. Print. Read More