Implications for International Firms - CVC Capital and Vodafone - Case Study Example

International Business Name: Lecturer: Course: Date: Introduction Proliferation of international firms seeking business opportunities in emerging markets started some 200 years ago, although they were essential in the form or portfolio. Today, the foreign investments are characterised by joint-venture and greenfield investments (Adeoye 2009). Many international firms are seeking emerging and developing economies in their strategies to secure optimal returns in usually inefficient and opaque markets. Despite the fact that these investment correlated with increase regulatory, political and currency risks, foreign direct investments is rapidly trending in response to the increased globalisation (Ganster 2001). This essay examines the implications for international firms doing business within an emerging and the macro-economic factors considered in choosing locations in emerging markets. Two firms are analysed: CVC Capital, which seeks to invest in China and Vodafone, which seeks make further investment in India and Egypt (Chu 2014; Zakeria 2014). Both firms are headquartered in the UK. This essay argues that the size of market and the economic growth prospects of the host country is the most important factor that influences decisions to invest in emerging markets Implications for international firms doing business within an emerging market The concept of emerging markets was first used in the 1980s by the World Bank in reference to marketing activities in countries regarded as operating within the transitional phases, between developed and developing status (Ganster 2001). Emerging markets are nations that aim to structure their economics with the view of making them relate to market-oriented globalisation, offer trade opportunities, transfer of technology and foreign direct investments using open-door policy. Glesem et al. (199) explained that such countries maintain large resource-base and population. Additionally, they seek to abandon traditional-state interventionist policies in pursuit of having sustainable economic growth. According to Ganster (2001), emerging markets are the world's fastest growing economies, which play a significant part in contributing to the international trade growth. Based on these factors, multinational firms have sought for investment in these countries. Investing in emerging markets has various implications for Vodafone and CVC Capital. A key implication to the two international firms is higher return on investment. Vodafone and CVC Capital seek to attain efficiency by reducing the cost and maximising their economies of scale. At the same time, they seek to reduce duplication of effort. They seek investment in the emerging markets that have cheap labour. For instance, India and Egypt where Vodafone seeks investments has a cheap labour market. The same goes for China where CVC Capital seeks further investments (See Appendix). Additionally, the economic conditions should be highly favourable for optimal profitability. For instance, when the factors of production, such as raw materials and labour in the home market are costly, an opportunity would be investing in emerging markets that generally offer cheaper factors of production (Adeoye 2009). These influenced American conglomerates General Electric to plan and invest an estimated $300 million over the next five years in Australia. As pointed out by Adeoye (2009), when a multinational firm with administrative capability and value-generating technological capacity expands in an emerging market, the shareholders and the host country’s people are bound to benefit. Despite this, regardless of how attractive the noticeable fit between what the international company offers and what the host country requires, success is not always assured (Adeoye 2009). This is since a number of events, such as economic crises, political instability and the shifting social attitudes can upset the strategic plans in the developed and emerging economies. Interplay of these forces and their implications for decisions that multinational corporations make becomes predominant (Koza & Lewin 2000). For instance, while Vodafone’s customers in India and Africa contributed some 22 percent of the company’s revenue as of March 2013. However, the funds are mostly repatriated to Europe. Additionally, India and Africa make up a large bulk of its customers. The rule of law and the existing legal frameworks in emerging markets have various implications to international firms seeking investments in emerging markets. As stated by Vardar (2014), they are directly correlated to the existence of efficient institutions with effective structural regulations. While a growing body of researches have provided evidence that existing proper mechanisms have no direct impact on an international firm’s investment decisions, they positively impact its development by promoting investments, which typically experiences limited certainty and greater return on investment. Good governance also comprises other factors, such as capacity to secure property rights and to create efficient public sector that reduces redundant regulations and trade restrictions (Adeoye 2009). Essentially, these promote efficient financial performance for international firms by increasing the scope of their profitability. Overall, international firms are confronted with a range of difficulties in regards to regulations rather that the existing resource materials in emerging markets. There are also several implications for the host country. One significant implication is that these international firms shape the economy of host countries. For instance, some global corporations from the developed countries exceed the GDP of many developing nations. By operating in their markets, these firms create employment opportunities (Adeoye 2009). At this stage, it is critical to argue that the economic differences between the home and the host country are significant considerations for the international firms. Since, the home countries provide economic conditions, such as economic liberalisation, which is conducive for globalisations, (Vardar 2014). Hence, such firms have had reciprocal correlation with globalisation, which in turn leads to higher FDI flows to the emerging markets. On the other end, the opportunities to attract a great share of global FDI flows motivate emerging markets to further liberalise their economies. Among the negative implications on the host countries is that the international firms cause disappearance of domestic firms by intensifying competition (Vardar 2014). In Zekaria’s (2014) article, India-based Bharti Airtel faces stiff competition from Vodafone in the Indian market. Since the international firms have competitive and celebrated brands that command high brand equity and customer loyalty, as well as, superior technology that is patented, highly skilled managerial resource, domination of the global market and high economies of scale, the local firms in the emerging markets may be pushed out of the market (Adeoye 2009). Further, international firms have been criticised for seeking control of the economic policies and pursuing actions that contradict those of the home country’s interests. Relevance of Legal, political, cultural and economic Based on the above analysis, it is important to realise that the legal, political, cultural and economic differences between home and host countries are important considerations for international firms. However, in the case of CVC Capital and Vodafone, some selective factors come into play. In regards to economic factors, the size of the market of the host country’s growth prospect plays an integral role in influencing the location for investment, since investing in the emerging market is intended to service domestic demand rather than just tap into the cheap labour. Availability of infrastructure is essential (Vardar 2014). Hence, emerging markets that are prepared to address infrastructure bottlenecks are often attractive to the international firms. For instance, one of the factors that influenced Vodafone to consider investing further in India, Egypt and South Africa is since the countries have relatively good communication infrastructure, as the mobile phone penetration is high. Political factors are also essential. Ganster (2001) suggested that although emerging markets with relaxed policies that accommodate tax incentives or holidays do not determine investment decision, still, those with reasonable and stable tax regimes do. According to Vardar (2014), cultural factors have become less significant due to the rapid globalisation. However, emerging markets with a culture of corruption, including seeking business licensing system and bureaucracy, may discourage international firms from investing in affected emerging markets. This however did not apply in the case of CVC, which overlooked the corruption culture in China while aiming for the lucrative Chinese market (See Appendix). In regards to the legal factors, international firms today give great attention to the rule of law and legal frameworks in an emerging market. In which case, a country with a predictable and consistent legal system that respects the sanctity of contracts as well as promotes fair competition is attractive to the international firms (Whipple & Frankel 2000). These factors attracted CVC Capital to Chinese market and Vodafone to Indian and South African markets. The most relevant macro-environment factor for an international business In my opinion, the market size and its growth potential is the most important macro-environment factor. As indicated in the case of Vodafone, India has one of the largest market sizes in Asia. Additionally, Egypt has one of the largest market sizes in Africa. The large market sizes offer opportunities for growth. China also offers a huge market for CVC Capital’s services. It also has a huge potential for business growth. Vardar (2014) suggests that the size of the market is measured in terms of GDP, size of the middle class and per capita income. In the case of Vodafone, a key attraction was the large population size in India and Egypt and the growth in demand for mobile phones. These increased demand for mobile telecommunication services. The same case goes for CVC Capital, which decided to invest $300 million in a Chinese firm called South Beauty due to the fact that China offers a lucrative large market, based on its large population. Within this context, I submit that investors are mostly driven to emerging markets that offer good market for their products and which also offer opportunities for growth. As indicated in the Zekaria (2014) article, although Vodafone has considered upgrading its European network, it seeks long-term investments in emerging markets, with more expansions expected. CVC Capital also selected Chinese market as it offers opportunities for growth. As indicated in the article, the company targets the high expected profits in the market to be invested further in expansion across China (Chu 2014). Vodafone’s decision to invest more in emerging markets, where the revenues have been increasing due to large market size in preference to the developed European Nations such as UK, Germany and Italy, where its revenues have plummeted can be explained by the concept of financial risk in portfolio investment. The theory suggests that the variability risks should be reduced by investing in different markets – or putting eggs in many baskets (Shenkar 2007). Observers tend to view that due to the vast vertical linkages in production networks, a number of foreign direct investors are motivated by the potential for substantial client-base that generates agglomeration effects (Vidar 2014; Adeoye 2009). It also creates potential for growth of supplementary firms, or foreign direct investment clusters. This is further evidenced by Vodafone’s decision to seek further investments in Africa, apart from South Africa and Egypt. This perspective is supported by the Heckscher–Ohlin model (H–O model), which is based on Ricardo’s theory of comparative advantage. The theory predict patterns of production and commerce based on the resources of a target market (Morgan & Katsikeas 1999). Vodafone’s decision to invest in the lucrative Indian, Egyptian and South African market is consistent with that of CVC Capital,to which seeks invest in Chinese market (See Appendix). This can be explained by market imperfection theory, which postulates that firms go for market opportunities and their decisions to invest in foreign markets are rationalised by the need to capitalise on capabilities that are not shared by competitors (Morgan & Katsikeas 1999). Indeed, based on the analysis of Vodafone’s investment in Egypt (especially after the Arab Spring), it is significant to argue that other factors such as low inflation, regulatory factors tax regime, stable exchange rate and cost of the local labour are not highly prioritised as compared to the size of the market (Zekaria 2014). For instance, while attractive tax regimes, low inflation and cost of the labour markets have only enabled the firm to sustain its profitability in the region, it could be argued that the highly competitive local market could have made the company to rethink its investment. London-based firm CVC Capital’s decision to invest in South Beauty, a Chinese firm, is indicated by the fact that the company overlooked other macro-economic factors in favour of the large market size. For instance, as indicated in the news article, despite allegations of corruption that has discouraged and the restrictive regulatory regime that have turned away some investors, CVC Capital vowed to pursue the investment further (Chu 2014). These reasons for investment are consistent with the Porter’s Diamond Theory, which explains the competitive advantage of nations. According to the theory, the intrinsic reason why international firms consider some markets to be more competitive on a global space than others is due to the local population size, labour, natural resources and land (Morgan & Katsikeas 1999). Conclusion The size of market and the economic growth prospects of the host country is the most important factor that influences decisions to invest in emerging markets, as seen in the case of CVC Capital and Vodafone. Hence, although macroeconomic factors such as low inflation, regulatory tax regime, stable exchange rate, cost of the local labour, and the size of the market are considered in determining whether an international firm should invest, in my opinion, the size of the market is the most important macroeconomic factor. Reference List Adeoye, A 2009, "Macro-economic level corporate governance and FDI in emerging markets: Is there a close relationship?" Journal of Economics and International Finance Vol. 1(2), pp. 030-043 Casson, M & Cox, H 1993, "International Business Networks: Theory and History," Business And Economic History, Vol 22, no. 1, pp42-48 Chu, K 11 March 2014, Western Firms Rethink Asia Approach, Wall Street Journal, viewed 1 May 2014, http://online.wsj.com/news/articles/SB10001424127887323293704578331484097835860 Enu, P & Attah-Obeng, P 2010, Impact Of Macroeconomic Factors On Foreign Direct Investment In Ghana: A Cointegration Analysis," European Scientific Journal vol. 9 no. 28, 331-338 Ganster, M 2001, Opportunities and Challenges of Investing in Emerging Markets: A Case Study of Panama, Boston College, Boston Henisz, W & Zelner, B 2010, "The Hidden Risks in Emerging Markets," Harvard Business Review Glesem, A, Kahley, W & Riefler, R 1990, Foreign Direct Investment: Motivating Factors an Economic Impact, viewed 1 May 2014, http://jrap-journal.org/pastvolumes/1990/v20/20-1-6.pdf Koza, M & Lewin, A 2000, "Managing Partnerships and Strategic Alliances: Raising the Odds of Success," European Management Journal, Vol. 18, No. 2, pp. 146–151, Morgan, R & Katsikeas, C 1999, "Theories of international trade, foreign direct investment and firm internationalization: a critique," Management Decision, vol. 35 no. 1, pp/68–78 Shenkar, 2007, Foreign Direct Investment Theory and Application, viewed 3 May 2014, http://www.sagepub.com/upm-data/18594_Chapter_3.pdf Vardar, M 2014, "Factors Of Investment Decision For Multinational Corporations: The Case Of Turkey," The Journal of Turkish Weekly, viewed 1 May 2014, http://www.turkishweekly.net/article/343/factors-of-investment-decision-for-multinational-corporations-the-case-of-turkey.html Whipple, J & Frankel, R 2000, "Strategic Alliance Success Factors," Strategic Alliance Success Factors, Vol. 2 No. 13, p.1-12 Zekaria, S 10 April 2014, Vodafone Lines Up Emerging Markets, Wall Street Journal, viewed 3 May 2014, http://blogs.wsj.com/corporate-intelligence/2014/04/10/vodafone-lines-up-emerging-markets/ Appendix News Articles a) Vodafone Lines Up Emerging Markets, < viewed 3 May 2014, b) Western Firms Rethink Asia Approach Read More