International Investment - Expansion into the US Oil and Gas Industry - Case Study Example

International Investment: Expansion into the U.S. Oil and Gas Industry Name Institution Course Date Table of Contents Table of Contents 2 Executive Summary 3 Introduction 4 Political and Legal Factors 4 Mode of Entry 5 Ethics in International Business 6 Conclusion 7 References 8 Executive Summary Internationalization has become a trend in the oil and gas industry. This report shows that the United States presents the best foreign market for expansion compared to Japan, China and India because the U.S. is the world’s current largest consumer of oil and this implies a huge market opportunity in its oil and gas industry. The report also indicates that joint venture will be the best mode of entry into the U.S. oil and gas industry. However, to succeed in this market, the company will have to address the political and legal factors that are likely to create obstacles to the company. Additionally, since consumers increasingly prefer socially-minded companies, the firm will have to ensure that business is conducted in accordance with the ethics and moral standards of the U.S. oil and gas industry. Introduction Internationalization has become a trend in the oil and gas industry. Although there are several foreign markets that the UK gas and oil company can expand to, such as China, India and Japan, the United States presents the UK firm with the best business growth opportunity, thus needs to be considered for business expansion. The United States is the best destination because it is the world’s largest consumer of oil with its consumption standing at 19.53 million bpd. This is far higher than Japan, China and India, whose oil consumption stands at 4.12 million bpd, 11.12 million bpd and 3.73 million bpd respectively (Deloitte US 2016). This report analyzes the most appropriate mode of entry into the U.S. gas and oil industry, the political and legal factors that will affect the operations of the company in the U.S, as well as the ethical considerations in the U.S. oil and gas industry. Political and Legal Factors Political and legal factors are some of the major obstacles that foreign gas and oil companies seeking to invest in the U.S. market face. Political and legal factors denote how far the government intervenes in the activities of a company. The political factors include trade restrictions, tax policy, environmental policy and labor laws among others. The exploration of oil and gas in the U.S. is regulated by executive orders, federal laws, and regulations. These include Noise Control Act, Clean Air Act, Oil Pollution Act (OPA), Safe Drinking Water Act (SDWA), Clean Water Act and Resource Conservation and Recovery Act (RCRA). American Indian Religious Freedom Act, Antiquities Act, Executive Order 13007: Indian Sacred Sites, National Historic and Preservation Act, just to name but a few (Zhiguo Gao, Z 1998, p. 84). The company will have to comply with these laws, regulations and Executive Orders to operate in the United States. The operations of the company will also be greatly affected by the state severance gas and oil taxation laws that vary from one state to another. For instance, in Alabama, the company will be required to pay 8% of its gross value at point of production in taxes to the state government while in Alaska; the taxes are as high as 20-50% depending on the net value of gas and oil at the point of production (Pless 2012). Different severance taxes apply to different oil and gas states. Moreover, the U.S. has on many occasions imposed restriction on oil exports and such political moves can impact negatively on the operations of the UK oil and gas firm. For instance, in 1973, the U.S. imposed oil embargo that banned its oil exports (Mtsiva 2003, p. 15). Although the ban was lifted in 2015, an embargo similar to this could affect the company in the U.S. The other political and legal issue that would affect the company is the labor laws, particularly the minimum wages that are applicable in the United States. In the U.S., the company will have to comply with the federal and state minimum wages that are different. However, the higher rate between that of the federal and the state is what is applicable. For instance, in New York State, the minimum wage stands at $9.70, North Carolina $7.25 and $8.15 for Ohio while the federal minimum wages is $7.25 (SBA 2016). However, corruption will not be an issue in the U.S. as the country ranks among the countries with high transparency in business, according to Transparency International (The Economist 2006) this implies that no bribes will have to be paid to get business permits. Nonetheless, the U.S. still faces the threat of terrorism as it is a target of international terrorists, such as Al-Qaeda and ISIS, though the U.S. government has taken proactive measures that included enhancing its homeland security. This implies that the threat of terrorism is minimal. The political and legal obstacles highlighted can be overcome through negotiation with the U.S. government officials, as well as lobbying for the creation of a business environment that promotes investment, such as lowering taxes on foreign firms and removal of trade restrictions. Mode of Entry The mode of entry used by the company will determine whether it would succeed or fail in the U.S. oil and industry. It has been demonstrated that the kind of market entry mode used by a company has a direct influence on the performance of a company in a foreign market. Considering the nature of the U.S. oil and gas industry that is highly regulated, the best market entry mode into the U.S. oil and gas industry would be joint venture. Joint venture is a market entry mode in which a company comes together to form a new company. Joint venture partnership is appropriate for the company as it will enable the firm to overcome the legal restrictions on entry into the U.S. oil and gas industry. Therefore, by partnering with a U.S. local company, the UK firm will find it easy being accepted to enter and operate in the U.S. oil and gas industry. Besides, joint ventures is appropriate for the UK firm as it would enable the company to overcome the obstacles associated with differences in business culture that would otherwise affect the success of the company (Arroyo et al. 2014, p. 760). Forming a joint venture partnership with a U.S. local company is also advantageous for the UK firm as it will enable the company have access to superior technology. The U.S. is one of the technology giants in the world, as the nation has not just highly skilled personnel, but has also invested heavily on research and development in the oil and gas industry. As such, partnering with an American corporation will give the UK company access to superior technology that it would help enhance its competitiveness in the market. Joint venture will also be advantageous to the UK firm as an entry mode into the U.S. oil and gas industry since it will give the company the opportunity to acquire local personnel with the skills and knowledge about the U.S. gas and oil industry. Other advantages of joint venture to the company include risk sharing, and leveraging on the economies of scale created by joint venture partnerships (Das 2011, p. 101). Although joint ventures will be the best mode of entry for the UK firm into the U.S. oil and gas industry, there are certain drawbacks that the UK firm must consider before adopting this entry mode. First drawback has to do with differences in cultures and this is likely to result in integration difficulties that can affect the success of joint venture (Arroyo et al. 2014, p. 763). Joint venture is also disadvantageous in the sense that it can result in conflicts and disagreements in management that might affects the running of the new company. Additionally, finding a U.S. firm willing to partner with the company might present a challenge. Other shortcomings associated with joint ventures include imbalance in level of investment, expertise and assets. Ethics in International Business Business ethics is increasingly becoming an area of increased focus across industries, oil and gas industry not an exception (Seeler 2013, p. 12). In the modern world, the majority of consumers prefer to purchase products from socially-minded companies. Pollution and oil spill are some of the ethical issues that will face the company in the industry. Oil and Gas industries are cited for being responsible for pollution and climate change. Besides pollution and oil spill, employee exploitation, and corruption are other ethical issues that the company will have to address to ensure successful operation in the U.S. oil and gas industry. There are a number to business ethics that can be adopted to ensure high standards of morality is maintained in the oil and gas industry. The approaches include utilitarian, Kantian deontological approach, emotive approach, justice approach, moral-rights approach. Utilitarianism approach to ethics advocates doing that which maximizes the greatest benefits to the greatest number. Deontological approach is an business ethics approach that advocates doing that which is right because it is the right thing to do and avoiding that which is wrong because it is not right to do it (Seeler 2013, p. 15). Emotive approach, however, maintains that ethics and morals are personal points of view and that moral judgments are meaningless emotional expressions. Justice approach is an ethical approach that maintains that the right decisions are those that are non-discriminatory, but instead involve treating everyone equitably, fairly and impartially. Lastly, moral right approach views ethics and morals as respective and safeguarding the human rights of others and treating people equally under law. Although all the approaches can be applied in the U.S. oil and gas industry, utilitarianism is the most appropriate. This implies that the managers of the company should strive to do that which maximizes benefits to most Americans (Seeler 2013, p. 14). These include not just conducting the business for purposes of maximizing profits, but preventing negative effects of the business operations on the society, such as carbon emissions and other pollutions through investment in social responsibility initiatives. This would make the company more acceptable in the U.S. oil and gas industry. Conclusion The report has shown that the U.S. will be the most appropriate business decision for the UK oil and gas company to expand to because of the U.S, is the largest oil consumer, thus large ready market available for the company. However, before venturing into the U.S. market, the management of the company must ensure that it adopts the best entry mode, understand and respond to the political and legal factors, as well as ensure the adoption of the right ethical approach. The best entry mode according to the analysis would be joint venture, while ethically the company will have to consider adopting utilitarian approach and engage in social responsibility initiatives. References Arroyo, J. P. A., Yago, M., Nasir, M. A., & Wu, J 2014, “Strategic alliance in energy sector & implications for economic growth and technical efficiency: The case of Petrobras and Galp” International Journal of Energy Economics and Policy Vol. 4, No. 4, pp.759-771. Das, T. K 2011, Strategic alliances in a globalizing world. IAP, Mason, OH. Deloitte US 2016, Oil and gas industry outlook 2017, viewed 27 January 2017 https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/oil-and-gas-industry-outlook.html Gao, Z 1998, Environmental regulation of oil and gas. Kluwer Law International, New York. Mtsiva, V. C 2003, Oil and natural gas: Issues and policies. Nova Publishers, Oxford, NY. Pless, J 2012, Oil and gas severance taxes: states work to alleviate fiscal pressures amid the natural gas boom, viewed 27 January 2017 http://www.ncsl.org/research/energy/oil-and-gas-severance-taxes.aspx SBA 2016, Oil and gas industry, viewed 27 January 2017 https://www.sba.gov/managing-business/business-guides-industry/oil-and-gas-industry Seeler, J 2013, Business ethics and stakeholder management: developing a structured approach for small business' owner-managers. GRIN Verlag, London. The Economist 2006, World investment prospects to 2010 Boom or backlash? Viewed 27 January 2017 http://graphics.eiu.com/files/ad_pdfs/wip_2006.pdf Read More