Greenfield Investment - Canada and the Philippines - Case Study Example

Student Name: Tutor: Title: Group Report: Greenfield investment Course: Group Report: Greenfield investment Executive summary Greenfield investments are an important strategy of penetrating into the global market. An Australian company that seeks to invest in a developing and developed country has the best opportunity in Canada and Philippines. This report explores the opportunities, risks and benefits that exist for an Australian multinational that would want to invest in Canada and Australia. The introduction gives an overview of Foreign Direct Investments and definition of Brownfield and Greenfield investments. The first part looks at both the advantages and disadvantages of investing in Canada and Philippines. The consequences of legal system on the international trade in explored in the next part of the report. The cultural, political and cultural risks have also been explored in this report. The final part gives a recommendation where the Greenfield investment should be based and gives reasons to justify this decision. The conclusion recaps the main points in about Foreign Direct Invest and international business. Finally, a list of sources used to compile this report is also provided. Table of Contents Executive summary 2 Table of Contents 3 Introduction 4 Advantages and disadvantages of investing in both countries 4 Advantages Green field investment in Philippines 4 Disadvantages Green field investment in Philippines 6 Investing in Canada 7 Advantages of investing Canada 7 Disadvantages of investing in Canada 9 How legal system affect business 10 What political, cultural and economic risk apply 13 Recommendations 14 Conclusion 16 References 17 Introduction In the past twenty years, foreign direct investment (FDI) has become a main source of capital inflows for both developing and developed economies. These kinds of investments are usually made by multinational companies that enter a local market either through Brownfield or Greenfield mode. Brownfield FDI refers to cross-borders acquisitions and mergers. These two types of FDI have different effects on the market competition, social welfare, consumer surplus, and of the host country (Nocke & Yeaple, 2008). Green field investment involves a parent company starting a new venture in a foreign country through construction of new operational facilities beginning from the ground up. The companies create new long-term jobs in foreign country though hiring new employees. Advantages and disadvantages of investing in both countries Advantages Green field investment in Philippines Direct foreign investment had clearly decreased in the period 2008-2009 owing to the unfavorable international economic environment; nevertheless, it started to pick up in 2010. In the year 2012, Foreign Direct Investment influx grew by a rate of 15.5% as compared to this year. There are advantages of investing in Philippines. The education system churns out many graduates who offer excess skilled manpower for that economy. Filipinos speak English and thus making it easy for an Australian company to operate there. There will be a huge and cheap labor force and besides, many of the raw materials have not been exploited fully. It will be an opportunity for the Australian multinational to take advantage of the cheap labor as well as the raw materials available (Neary, 2007). The company will being to Philippines superior technology that will enable it to attract competent and well trained workers. Methods of production which are efficient can be invested in Philippines as a duplication of the parent company in Australia. The Philippines has a strong cultural proximity to the US hence making it easy for the Australian values to fit in. Australia is a strong ally of America from the international front. High-tech methods of production can also be easily imported from America. Foreign Direct Investment in Philippines has remained low and the company can take the opportunity to exploit new markets and play the role of a market leader in hitherto unexplored markets. The country is slowly evolving into the service industry that has low capital hence minimum equipment is used to put up a foreign direct investment like the ‘Greenfield’ investment that the company intends to start in the country. The company can exploit the opportunity of having low capital equipment to import efficient equipments from Australia or United States. Moreover, the government is favoring subcontracting agreements between local enterprises and foreign companies as opposed to foreign direct investment (Head & Sorensen, 2005). The government of Philippines can favor Greenfields investment since they want to create jobs for many of its people who are jobless. Many workers from Philippines are moving to the United States, United Kingdom, and other European countries to seek employment. The employment rate is high and the government would like to create jobs and Greenfield investment may be a perfect opportunity (Yeaple, 2009). Loss of corporate tax in favor of creation of jobs for Filipinos is a wise option for the government of Philippines. Philippines offers an attractive market due to low levels of competition from the local enterprises. The huge population offers ready market for goods produced in Philippines. Disadvantages Green field investment in Philippines Being a developing country, Philippines has not yet achieved political stability and the political situation can be risky at times. The multinational has to be aware of the political risk that exist and do everything possible to protect its property in the country. The company has to be familiar with the security situation of where it sets out its plant in Philippines. Political changes in developing countries can lead to expropriation where by the government takes control of the assets and property of a firm. This may be done when the government feels that the firm is threat to national security. In some circumstances, the cultural disparities between different countries prove to be very enormous (Golub, 2009). Major differences in cultural differences between the two countries (Australia and Philippines) can lead to disagreements and termination of business. It may be costly to establish a new business in Philippines due to the underdeveloped infrastructure. The company will have to incur a lot of expenses with an effort to open up the local market to its products. The poor infrastructure will lead to high cost of production and it can take a long time before the business break-evens. The legal system in Philippines may fall short of demonstrating fairness and justice since it is still developing. The company may find problems when it comes to litigation and defending itself in case of any other accusations (Meldrum, 2000). The landmark ruling on by the Supreme Court on the Philippine Long Distance case shows that the court is narrowly interpreting its powers against executive branch decisions, hence respecting the authority of the executive branch to make foreign investment-related decisions. In a previous case, the court ruled in the opposite. These cases show economic policies that are opposing that alternately divert and attract foreign investment in Philippines (Tolentino, 2012). Such decisions discourage foreign investment and create an environment of uncertainty in case of litigation cases that will involve foreign companies. The verdict enhances the nationalistic feeling which desires to exclude foreign investments which underlie Philippine judicial decisions and legislations (Peng, 2009). In the Long Distance Telephone case, the Supreme Philippine Court gave a verdict that had instant negative repercussions on foreign investment in the country. This case demonstrates that there can be bias and unfairness towards foreign investment in the Philippines. Investing in Canada Advantages of investing Canada The economy of Canada is hugely dependent on foreign direct investment and international trade. These represent crucial channels through which Canada connects to the global economy. Canada presents a stable environment where foreign direct investment can fair on well without fear of political risk. Canada is an industrialized country with a stable economy as well as fair and just legal system that attract international trade and investment in to the country. Canada provides a world-class economy having one of the strongest banking industries in the world and fiscal policy of the government that compete with the G-7 countries (Choe, 2003). Canada is unmatched with regard to investment climate that provide foreign direct investors with relatively low corporate taxes and a progressively manufacturing tariff regime that is duty free. There are many opportunities of advanced research and development that can assist the multinational company from Australia to develop profitable new products. Canada has the lowest research and development structure in the G-7 countries and its tax structure compete favorably on the global forum. Consequently, Canada has continued being a favorable investment destination for FDIs. Canada is widely understood as one of the best places in the world to do business (Wong, 2006). In 2011, federal corporate tax rate in Canada was reduced from 18% to 16.5% and this is expected to even drop lower. The corporate tax in the United States at the same time was 39.2%. When the two countries are compared, Canada remains the better option for international investors (Smarzynska, 2004). Canada ranks among the top countries from the tax perspective. Technological infrastructure and the developed and sophisticated cities in Canada provide an avenue for competitive international business. Foreign companies operating in Canada are more technology intensive as compared to Canadian companies (Nolan, 1996). Consequently, foreign companies are productive and offer high salaries as compared to Canadian firms. The foreign technology spills over to Canadian firms and leads to increased productivity. Foreign investment in Canada is responsible for stimulating employment, productivity, trade, and capital formation. Canada is also among the largest free-trade zones in the world for firms in the business of importing manufacturing goods. Free-trade zone reduces barriers to international trade and encourage foreign investment. Canada has is implementing a major incentive that will compel tariffs on all manufacturing inputs reduced to zero by the year 2015. Disadvantages of investing in Canada The ample environment in Canada increases the chances of other multinational companies coming to invest and hence leading to stiff neck competition for market, skilled manpower, and capital finance. There is no chance of having a monopoly on the means of production and the company will have to spend a huge amount of money on marketing activities in order to make its presence known. Developing competitive advantages is not easier since other companies may have superior technology and therefore enjoying economies of scale (Klemm & Baqir, 2008). The Stability of the Canadian currency makes exports from Canada to be expensive and rules out price strategy as a method of new market entry. Moreover, few opportunities may be available in Canada since the country is industrialized and has high quality technology which leaves few areas that require research and development. The local firms have an advantage over foreign firms in terms of understanding the environment, registration, competition, and building competitive advantage for themselves. How legal system affect business Businesses have crossed national boundaries of countries and expanded themselves to many parts of the world in search of cheap labor, availability of raw materials; talent and market for goods. International businesses have to be aware of the legal system of a foreign country where the company is investing. The legal system of any country is essentially important to international business (Mayrhofer, 2004). Disparities in the legal systems affect the attractiveness of a specific country as an investment site or a market. The law of a country regulates business activities; describe business policies, obligations and rights involved in business transactions. Consequently, laws differ from one country to another. The country’s government defines the legal framework in which firms do business. Australian multinational companies have to be aware of the legal system of the country on which they are investing. Businesses are impacted by legal environments of countries in various ways (Dorrenbacher, & Geppert, 2006). Not only are legal environments based on different regulations and laws in regard to business, they are defined by the factors like access to legal systems by foreigners, rule of law, and litigation systems among others. Some countries possess a strong rule of law which means that laws a strictly applied, fairly, and quickly while in some countries laws are not applied expediently for various reasons that include weak legal institutions, strong nationalism, and corruption. A company depends on lawyers in seeking justice or defending itself in a case of any litigation. Multinationals are affected by the role of lawyers in foreign countries (Schaffer, Agusti & Earle, 2009). There are few lawyers in some countries and it is very costly or difficult to engage a good lawyer. A company can lose a case for litigation because of poor representation. Some lawyers may be biased to favor locals or corrupt. Access to legal system is also different from one country to another; particularly for foreign entities. Some countries accord easy access of foreigners to courts while others may exhibit many restrictions. In one country the burden of proof with regard to litigation is on the defendant while on others the burden proof lies with the plaintiff (Qiu & Wen Zhou, 2006). The applicant has to prove that there is substantial evidence for the case to proceed. It may be challenging for foreign to prove certain situation in foreign markets where unfamiliarity will play to the disadvantage. Countries possess different legal provisions for appeals and review of lower courts decisions. Countries like Iran, Saudi Arabia, and Yemen apply the legal system which is usually based on the religious system. Principles of the Koran and Islamic laws are strictly followed (Savoie, 2010). A firm operating in these countries has to get acquainted with this legal system. International business has to interpret law within the context of operation. The common law system is widely applied in form Great Britain’s colonies and it is founded on the legal history of the country, ways in which laws are used in particular circumstances, and past court ruling on cases commonly referred to as case laws. Judges in common law systems possess the power to interpret the law and provide guidance in a given case (Hitt, 2009).  Countries like India, Australia, and United States of America apply common law systems. A lot of businesses transactions are regulated by contract and contract law are used to govern contract enforcement. International businesses have to possess good comprehension of contract laws of a country. It is important for international business to interpret law in respect to the county and its effect on commercial activities. Common law system has long and expensive process of jurisdiction. The system is flexible and permits judges to interpret contract disputes in a particular circumstance as compared to civil law system. International businesses have to understand and consider differences while dealing in contracts (Qiu & Wang, 2011). Majority of countries enact laws to protect property rights but in practice local authorities do not try to enforce these laws. Property rights can be violated through public or private action. Private actions refer to theft, piracy, threats or blackmail from groups or individuals. A legal system that is weak may not be able to protect international businesses from wrong doings. Public actions entail violation by local government bureaucrats for some favor or as part of corruption for monetary gain (Ferrett, 2005). Government Corruption is very rampant in countries like Mexico, India, and Bangladesh. Intellectual property rights protection changes from one country to another. Weak enforcement of intellectual property rights opens a window for wide piracy of intellectual property like trademarks, copyrights, and patents. China is one of the countries where pirated software is very rampant. It is common in Asian countries to get Levi’s jeans, computer software, and Rolex watches being sold on the street. Countries are trying as much as possible to enforce the law to protect intellectual properties, alleviate piracy in order to attract foreign investment (Janeba, 2002). Being an Australian firm, it will be important to understand the legal system of both Philippines and Canada in order to settle well and compete favorably with other players in the market. What political, cultural and economic risk apply Political risk is the risk of non-serving or non-repayment of payment of services or goods, trade-related-finance, loans, and dividends; the non-repatriation of capital, and/ or absence of enforcement in the regulatory framework as it apply to non-domestic firms. Political instability is used interchangeably with political risk (Petrović & Stanković, 2009). Nevertheless, in cases whereby the components of political risk tend to be institutionalized and/or measurable objectively, political instability is somehow subjective and inherently challenging to measure. In the regard t political risk, the government can use it monopoly on legal coercion to retract previous agreements with private firms for the purpose of affecting redistribution of rents among public and private sector actors. Political expropriation can take many forms that involve forced renegotiations of contracts with other public entities, unfavorable revisions of regulatory rules, negation from agreed commitment on tax gains, and nationalization of assets that are privately owned without full compensation (Aizenman & Marion, 2004). These reasons reduce the financial returns from a given investment. In the same manner firms come up with market-based strategies of shaping the distribution of economic rents between competitors in the market place, companies also come up with non-market strategies with a goal of influencing the administrative, judicial, and political actors who are in charge of the non-market environment (Reynolds, 2003). Obsolescing bargain best describes the relationship of the host country and the foreign direct investor in its lifetime in the country. Foreign firms often encounter a deteriorating bargaining position with the host government in the course of the lifetime of the foreign investment hence resulting into the risk of expropriation as time goes by. The culture of a society can enormously affect its economic activities (Busse & Hefeker, 2007). Culture is defined by the acceptable ways in terms of customers, behaviors, and values of a particular society. A deep understanding of the culture of the host nation will hugely enhance the changes of Greenfield investment succeeding in Philippines. It is important to understand the major social and cultural factors such as education, behaviors, values, language, customers, and religion when it comes to international business (Tong & Reuer, 2007). It will be vital to understand the culture in both Philippines and Canada. The management of the company has to conform to the values and customers of the culture of that country in matters like treated of women and equal opportunities in the workplaces. It is important to note that both Philippines and Canada use English and therefore, makes it easier for an Australian FDIs to invest since they share the same language (Nauro & Nugent, 2003). Slow economic growth of a country and challenges in the financial sector can hinder the expansion of foreign investment. Philippines may not have a very efficient financial industry to support huge foreign investment. Recommendations Philippines will be best suited to host the investment since developing countries offer prospective companies subsidies, tax-breaks, and other kinds of incentives in order to set up green field investment. Governments consider losing corporate tax revenue is a small price that should be paid if jobs are being created and technology and knowledge gained to boost the human capital of the country. Foreign Direct Investment is accompanied by a long-range investment by a foreign investor into an enterprise resident in an economy apart from where the foreign investor appears to come from. The Foreign direct Investment relation consists of a parent enterprise as well as a foreign affiliate which together make up a transnational Corporation (Anand & Khanna, 2000). The foreign direct investment has to be controlled by the parent enterprise. Greenfield investments are a basic objective of a host country’s promotional efforts, due to creation of new capacity of production and jobs, know-how and technology transfer, and can open up local markets to the international level. Being a strongly developing country, Philippines will be offer tax-breaks, quick legislation process, and other incentives with the goal of attracting foreign direct investment into the country. The technological capital in Philippines is not vastly developed or robust and therefore, it will offer the company an opportunity to establish itself as a market leader and create competitive advantages. The Philippines offers a good opportunity for Greenfield investments because there will be cheaper access inputs. Raw materials may be available easily and availability of huge and cheap labor cannot be overemphasized (Holger, 2000). Competition in the market and means of production is not high as would be the case in Canada. The Philippines is undergoing growth and many international companies have not penetrated into the market. The company will have an opportunity to control price and set the pace in the market. The multinational will be able to compete favorably with other international corporation owing to cheaper access to means of production. The quality of the products has to meet the international standards and the company can use price strategy to enter into new markets globally. There will be new market opportunities in Philippines and the neighboring countries hence increasing the operations, profitability, and market share of the company. Increased market share translates to larger profit margins, increased revenue, and provides an opportunity for the company to take advantage of economies of scale. Conclusion Foreign Direct Investment is the best way of ensuring growth and expansion of a local business into the global market. Both Greenfield and Brownfield investment have been applied to access opportunities in the global environment. Canada and Philippines provides a good opportunity for the Australian multinational to take part in international business. Tax-breaks offered in Philippines and other incentives, provide an opportunity for the company to enjoy economies of scale and exploit underutilized resources and markets. Easy access to cheap labor attracts investors to Philippines. Despite the incentives extended to foreign investors to invest in Philippines, there are a number of challenges that still affect foreign investors in the country. Bias in court cases against foreigners send mixed signals to investors and international business. Canada has well established infrastructure and excellent technology. Research and development is encouraged and low taxes attract foreign investment. However, Canada being a destination to many foreign investors, there is high competition and few opportunities to build competitive advantage. This report recommends Philippines to be the base of the Greenfield investment due to the many opportunities and incentives to foreign investors despite the few challenges that exist. 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