Challenges Faced by International MNCs in MENA - Research Paper Example

Challenges faced by international MNCs in MENA There have been numerous debates about impact of globalisation and expansion of various business houses in different countries by means of subsidiary, franchising and licensing. In recent years, Middle East and North Africa has become business hub for many retail giant, especially Fast Moving Consumer Goods producers. The study examined whether the known theories of international business mentioned in literatures are well-utilized in explaining existence and operations of Multi-National Companies (MNCs) in Middle East and North Africa. In the analysis, research has also been conducted to investigate various opportunities and problems faced by MNCs in these countries while operating their business in context of economical, social and political factors. The paper further discusses the current economic scenario of these countries that are favourable as well as unfavourable for retail firms. In addition, on basis of the analysis, future prospects of these firms in Middle Eastern and North African countries will be discussed. Table of Contents 1.Introduction 4 2.Literature review 4 2.1Theories related to internationalisation of business 5 2.2Emergence of MNCs in Middle East 6 2.3Emergence of MNCs in North Africa 7 3.Research Objectives and Research Questions 7 4.Research design (Method and Methodology) 8 4.1Data collection and analysis 8 4.2Analysis of MNCs 12 5.Comparative analysis of MNCs 15 6.Conclusion 15 Reference list 17 1. Introduction The method of doing business has transformed manifolds with the intervention of globalization. Globalization has unified all economies worldwide into one global market. As a result, impact of globalization on the retail industry does not have any surprising element. The present market scenario in major developed economies has touched saturation. As its consequence, global retailers are being pushed to expand in international market because post-saturation, it is very difficult to achieve growth in domestic market. Movement of major companies in the international market has resulted in fierce competition among all companies across the globe. In addition, negative consequences of past activities, such as, economic slowdown and credit crisis, have made it more complicated to gain consumer’s trust (Hassan, 2004). This research study has been undertaken to understand the impact of internationalization on retail firms in the context of Fast Moving Consumer Goods (FMCG) companies. The research paper tries to highlight challenges that are faced by MNCs while venturing in different countries. These challenges can be of different types such as, cultural and social aspects, scarce resources, technological differences, manpower management, legal practices and economic and political scenario of the country. The research objective is focused at studying challenges faced by Unilever and Nestle in context of Middle East and North Africa. The research has tried to analyze influence of international business theories on activities of business houses as well as challenges faced by these companies while operating in Middle East and North Africa (MENA). 2. Literature review The literature reviews focuses on taking into account researches done, journals and reviews in order to critically analyze the scenario and develop better understanding about the subject. A number of studies have been considered to determine influence of international business theories on performance of retail firms. The diversified markets have a profound impact on international firms in terms of a variety of stimulants that helps in shaping operations of the firms by depending on their experience or learning from similar markets. Studies suggest that retail firms often achieve competitive advantage by operating in different nations. Availability of different resources in separate countries allows firms to access certain resources at an inexpensive cost in country of their operation. This improves performance as well as scale of economies for a firm. Internationalization not only helps in improving profit of firms, but also reduces production costs (Mellahi, Demirbarg and Riddle, 2011). Many authors suggested that firms that are present in multiple national markets are comparatively well equipped to meet competitive challenges. Moreover, this step protects them from fluctuation in interest rates, wage rates, legal problems, political upheavals and price variations. While a number of studies suggest that internationalization has a favourable impact on a firm’s performance, several studies also emphasise that internationalisation has more negative effect such as, cultural difference, unfamiliarity with the new market and unfavourable rules and regulations (Lagoarde-Segot and Lucey, 2008). 2.1 Theories related to internationalisation of business As mentioned earlier, a variety of theoretical frameworks have been suggested to explain impact of internationalisation on performance of a firm. Some of these theories, in perspective to this paper, are theory of cross-cultural theory, best fit approach model, theory of transaction cost and agency and theory of organisational learning (Mellahi, Demirbarg and Riddle, 2011). 2.1.1 Cross-Cultural theory A very important cultural theory has been suggested by Hofstede. The ‘Five cultural dimensions’ suggest that different cultures are influenced by mainly five factors, such as, power distance relation, individualism to collectivism, perception towards uncertainty, gender influence and long-term orientation. The author suggested that these factors are of paramount importance and are observed in some form in a culture. Hence, an organisation must critically consider the local culture as it influences work culture (Mellahi, Demirbarg and Riddle, 2011). 2.1.2 Best fit approach model From an international perspective, the best fit approach model recognises that vertical integration of organisational strategies and HR policies enhances competitiveness of a firm. Three strategies were identified by Porter under this model: Innovation: A firm needs to be highly innovative, in terms of product, services, production, logistics and marketing strategies. Quality: Quality of product should meet or exceed expectation of consumers. Cost leadership: Ability of the firm to maintain cost effectiveness alongside quality (Mellahi, Demirbarg and Riddle, 2011). 2.1.3 Theory of transaction cost and agency On contrary to other theories, transaction cost and agency theory has a different view point towards internationalisation of firms. According to this theory, very high degree of internationalisation negatively affects performance of a firm due to high transactional cost and cultural and governing differences. It further suggests that with greater diversity in product market, existing processes may prove obsolete in global market, which will result in further increase in cost (Mellahi, Demirbarg and Riddle, 2011). 2.1.4 Theory of organisational learning The framing premises of this theory suggest that in a crude sense, the most important resource for any organisation is knowledge, which can be explained as information and experiences, which can be implemented in various activities. Internationalisation facilitates easier ways to acquire knowledge through exposure to different people; but on the other hand, buying behaviour of individuals is objective and standardized. Hence, international presence of a firm increases learning opportunities of a firm more than its business opportunities (Mellahi, Demirbarg and Riddle, 2011). 2.2 Emergence of MNCs in Middle East Middle East is considered a diverse land with presence of a variety of languages, ethnicities, religions, political and economic systems. With growing population and rise in income level of people, it has become a centre of attraction for international FMCG companies such as, Nestle, Unilever and Coca-cola. The most attractive feature of Middle Eastern business policies is that companies have easy access to the free trade zone of the Greater Arab, which results in tax evasion and lower tariff rates. As per various authors, Middle East is devoid of business related problems that are sometimes experienced by companies in other countries (Hassan, 2004). The high unemployment rate among younger generation, a problem that the Middle Eastern government is coping with, is a great opportunity for companies to hire relatively inexpensive workforce for the plants and offices. The declining growth of developed economic market has become a compelling factor for MNCs to shift towards Middle Eastern markets. Moreover, recent liberalisation of economic and political policies has also contributed towards entry of foreign enterprises by reducing barriers. The only barrier that may influence performance of a foreign firm in Middle East is the culture followed therein. The main religion of Middle East is Islam; Islamic culture is contrastingly conservative compared to the western culture (World Bank, 2014a). 2.3 Emergence of MNCs in North Africa In North Africa, major countries such as, Egypt, Jordan, Lebanon and Tunisia, have been suffering from underinvestment in infrastructure and industrial sector. In these countries, the greatest barrier is that business sector is dominated by cronyism. From individual country’s perspective, Jordan is considered to have highest unemployment rate; whereas, Libya has major share of unemployed university graduates. On contrary, in Yemen, availability of labour is very high. The major reasons for economic disparities in these countries are social and economic tensions related to Syria war and dependence of the economies on oil import (World Bank, 2014b). However, according to World Bank, economies are slowly recovering and advancement in economic activities related to manufacturing, agriculture and trade sector has been observed. In addition, it has also been suggested by World Bank that greater improvement is witnessed in these countries with increase in growth of non-oil sectors, which will reduce dependence of the fiscal revenue on oil revenue. Another positive point added was slow, but steady growth of Foreign Direct Investment. For MNCs, high unemployment rate, growth of foreign investment and urgent involvement of non-oil sectors for economic rebound can prove beneficial for entering in these countries. There are few barriers for a foreign firm’s entry in North African countries such as, structural rigidity, reluctance of people towards private sector, overrated wage and political imbalance (World Bank, 2014b). 3. Research Objectives and Research Questions The purpose of this research paper is to analyse the emergence and role of MNCs in MENA region. Starting with a review of international business theories available in previously conducted researches, books and journals, the paper has tried to evaluate relevance of these theories with the existence of MNCs in MENA countries. The research has considered two companies, Nestle and Unilever, for conducting the study. The main research questions that will be addressed through this study are: a. What are the economic and non-economic challenges faced by a MNC while operating in MENA countries? b. What is the impact of MNCs in the economy of MENA countries? c. What are the problems faced by the host country because of presence of an MNC? d. Comparative analysis on entry of Unilever and Nestle. 4. Research design (Method and Methodology) The paper has adopted secondary data collection method for conducting research. The research has considered both qualitative as well as quantitative analysis. The qualitative data were obtained from online databases and different journals, while the quantitative data comprises financial statement of mentioned MNCs and economic data relevant to Egypt from the Middle East and North African region. The quantitative analysis have been done with the help of excel tools and represented in the form of graphical charts. Keeping in view the vast data range available, the research has followed case study pattern of evaluation for analysis of available data. 4.1 Data collection and analysis The research project is exploratory in nature and the requisite data can possibly be obtained through secondary sources. Therefore, the researchers has utilised online databases such as World Bank for gathering economic data on Egypt and company database of Nestle and Unilever for the financial data. Moreover, the data have been analysed using excel tools and have been represented in the forms of graphs and trend line. Since secondary data collection method has been applied and the researcher has accessed authenticated public sources, hence no ethical dilemma has been recognised. Table 1: Economic data of Egypt (Source: World Bank, 2014c) 4.1.1 Gross Domestic Product Figure 1 (Source: World Bank, 2014c) The GDP trend of Egypt during 2008-2012 shows a slow, but positive growth in GDP of the country. The reason that is considered to be responsible is excessive dependence of the government on the oil sector. However, a positive GDP trend, even during the 2008-09 financial crisis, implies that Egyptian economy did not suffer as much as UAE and other developed economies. 4.1.2 Population Figure 2 (Source: World Bank, 2014c) The graph represents the population trend of Egypt between 2008 and 2012, which shows a steady growth that has resulted in growing number of youth in the country. Large scale youth population for a country is considered favourable because they are regarded as the driving force of a country’s economic prosperity. Such a huge young population can prove advantageous to Unilever and Nestle, in terms of manpower in their plants. 4.1.3 Total labour force Figure 3 (Source: World Bank, 2014c) In Egypt, as the data depict, a tremendous growth has been observed in labour force in the given five year span. Greater quantity of labour force ensures availability of the same at an inexpensive cost, which helps the firm with cost advantage. FMCG companies are generally manpower-oriented; hence, Egypt proves to be a favourable location for Unilever and Nestle plants. 4.1.4 Unemployment rate Figure 4 (Source: World Bank, 2014c) The high unemployment level can be explained as a result of greater degree of inclination of individuals in MENA regions towards public setor related formal jobs. Moreover, majority of the unemployed individuals are university graduates, who seem to prefer high-paid jobs. Alongside, it has also been observed that to a great extent, the government is also responsible for this situation. Reforms that are necessary to create employment and initiate economic growth are overdue for a long period in order to avoid social and political discontent. 4.1.5 Export of goods and services Figure 5 (Source: World Bank, 2014c) The main commodities exported by Egypt are crude oil and petroleum products, processed food, cotton, metal products, textiles and chemical. Its major export partners are India, European Union countries and US. The decline in export post-2008 can be explained in terms of financial crisis, which affected EU and USA the most. 4.1.6 Foreign Direct Investment Figure 6 (Source: World Bank, 2014c) The MENA countries such as, Egypt, are mostly dependent on developed economies as those of European countries and USA. When the financial crisis had hit USA and EU market, the economies slumped and recession affected their investment, which is clearly visible in the declining foreign investment trend in Egypt. However, post-2011, foreign investment has been growing consistently, which provides a great opportunity for entry of FMCG companies. 4.2 Analysis of MNCs 4.2.1 Unilever Table 2: financial data of Unilever 2008-13 (Source: Unilever, 2013) Figure 7 (Source: Unilever, 2013) Unilever is considered as one of the oldest multinational companies worldwide. It is a producer of fast moving consumer goods, such as, food, beverage and personal and household care products. The company owns more than 400 brands. From data presented in the table, it is observed that yearly turnover of the firm has been continuously growing and in 2012, it was more than 50000 million Euros. The firm’s productivity is very high and its products are highly preferred by consumers (Unilever, 2014). The graph represents revenue earned by the company in 5year-span, from 2008-2012, which shows that except a drop in 2009, the revenue has been consistently growing. The drop in revenue can be justified for the financial crisis of 2008. Nevertheless, post-crisis scenario of the firm shows remarkable growth. Moreover, the company seems to have not disappointed its shareholders during that period as shown by constant growth in dividend as well as earning per share. Unilever’s performance and marketing approach makes it suitable for the Egyptian market and economy as the company’s entry will generate employment for the youth, bring foreign investment as well as improve GDP of the country. The company being an MNC has cross-cultural environment; hence, culture of Egypt should not be a hindrance (Unilever, 2014). On a negative note, entry of such retail giants may result in wage inequality as they often tend to offer a pay package that is higher than that of the local firms. Furthermore, MNC policies often fail to comply with local culture and policies, triggering unethical practices. 4.2.2 Nestlé Table 3: Financial data of Nestle 2008-12 (Source: Nestle, 2010; 2012) Figure 8 (Source: Nestle, 2010; 2012) Nestle is world’s oldest food and beverage company, headquartered in Switzerland. By revenue, it is the largest company globally in its sector. Nestle is currently operating in more than 86 countries with around 450 plants along with 2000 plus brands (Nestle, 2014). The analysis of the company’s financial data shows that company’s revenue have fluctuated during 2009-11 and in 2012, growth has been observed (Nestle, 2010). Nestlé’s yearly turnover for the year 2012 was CHF 92186 million (Nestle, 2012). Despite the declining revenue, the firm’s operating profit shows a positive trend and so does the operating margin. This fluctuation can be considered as an effect of excessive expansion. A steady growth in the dividend paid is also visible; it explains that shareholders of the firms were not disappointed. Before expanding in MENA region, Nestle must undertake research so as to evaluate the demand. Being world’s renowned food and beverage company, Nestle should not face severe objection, but an understanding of cultural and social aspects of the target country is important. Previously, one of Nestle products had faced rejection in Africa because of negative advertising; so, marketing strategies need to be reframed keeping in view the country’s economic and social scenario. With entry of companies like, Nestle, MENA countries are expected to benefit, in terms of employment generation, increase in revenue, availability of fresh products and increase in foreign investment. From another point of view, entry of the company may adversely affect business of the local firms. In addition, wrong marketing strategies may result in hurting sentiments of locals. 5. Comparative analysis of MNCs After an extensive study of both the MNCs and economic condition of Egypt, it was observed by the researcher that Unilever is the most suitable company to enter in the MENA region. The main advantage of Unilever is the kind of product it produces. While Nestle is strictly in food and beverage sector, Unilever has broader segments covered. Moreover, data obtained from both the company’s database suggest that Unilever has been more stable in its business than Nestle. With cropping social disturbance in MENA, trust of the people can be wined only if the company has satisfied its shareholders. Keeping in view the Dividend paid by both companies and their respective EPS, odds are highly in favour of Unilever. 6. Conclusion The research paper was prepared to analyse the scenario of international business in MENA region, impact of MNCs in these countries as well as a comparative analysis of Unilever and Nestle with respect of MENA. The MENA region comprises oil and gas producing countries. As a result, the governments are extremely dependent on oil exporting. There are several issues such as, high unemployment, depleting foreign investment and social disturbance, prevalent in the country. The paper concentrates upon ways in which entry of MNCs can solve or reduce these problems as well as impact of such critical scenario on the foreign companies and other way round. With entry of FMCG companies such as, Nestle and Unilever, huge employment can be generated and being retail companies, mild fluctuation would not affect their revenue. Hence, the gross domestic product or income will grow with involvement of these companies. It has also been observed that countries in MENA region are highly affected by the Syria war and other social causes. The employment rate is very low partially because the wage rate is overrated and people’s inclination towards public sector has also led to saturation of the sector as well as rise in unemployment rate. For any MNC to operate in these countries, the foremost need is government reforms and measures in order to reduce the economic and social unrest. Reference list Hassan, M. K., 2004. FDI, information technology and economic growth in the MENA region. [pdf] ERF. Available at: [Accessed 14 May 2014]. Lagoarde-Segot, T. and Lucey, B. M., 2008. Efficiency in emerging markets—Evidence from the MENA region. Journal of International Financial Markets, Institutions and Money, 18(1), pp. 94-105. Mellahi, K., Demirbarg, M. and Riddle, L., 2011. Multinationals in the Middle East: Challenges and opportunities. Journal of World Business, 46(4), pp. 406-410. Nestle, 2010. Annual report 2010. [pdf] Nestle. Available at: [Accessed 15 May 2014]. Nestle, 2012. Annual report 2012. [pdf] Nestle. Available at: [Accessed 15 May 2014]. Nestle, 2014. About us. [online] Available at: [Accessed 15 May 2014]. Unilever, 2013. Charts 2013. [pdf] Unilever. Available at: [Accessed 15 May 2014]. Unilever, 2014. Introduction to Unilever. [online] Available at: [Accessed 15 May 2014]. World Bank, 2014a. Slow Growth in the Middle East and North Africa Region Calls for Bold Approach to Economic Reform. [online] Available at: [Accessed 15 May 2014]. World Bank, 2014b. MENA Quarterly Economic Brief. [pdf] World Bank. Available at: [Accessed 15 May 2014]. World Bank, 2014c. Data. [online] available at: [Accessed 14 May 2014]. Read More