Entry of KM Labs Inc into the Azerbaijan Market - Assignment Example

KM Labs Inc Previous market research and analysis into the Azerbaijani economy: the largest country undergoing post-soviet transition shows that it has developed into a successful oil-based economy, and a regional economic hub. Azerbaijan’s GDP has been on the rise: it grew by 41.7% during the 1st quarter of 2007. Despite varied GDP levels, the economy remained stable, with that of 2011 standing at USD 93 billion. Following these indicators, it will be very profitable to enter into the Azerbaijani market, as the current growth will favor the profitability of our company. The issues identified from the Azerbaijani market and their influence on the capacity of KM Labs Inc to do business successfully. Issues favoring the entry of KM Labs Inc into the Azerbaijan market: Azerbaijan is the largest country, among those undergoing post-soviet transition, and an emerging economic hub in the region. For instance, the economic growth of Azerbaijan has remained stable in the region, since 2005. The economy is solidly built upon its large oil reserves, which are a major contributor to the economy. Following the favorability of the economy’s standing, investing in Azerbaijan will offer our company the opportunity to benefit from the stable economy: This will offer our company the opportunity for expansion, due to the market potential of the Azerbaijani market, due to its large population of 9 million, increasing by 11% in 2009 (RBC, 2007; Daniels et al., 2008; B.E.B.A, 2012). According to information from World Bank sources, the economic success of Azerbaijan – differed from that of the other nations in the region. This has resulted from the characteristics of the economy, which include that it does not rely on exports, only – but also on a number of other factors: a strong domestic demand, increasing public investment, and the inflow of foreign investment. The economy and the local demand is built on different industries including the energy, steel and iron, chemical, cement, cotton, textiles, food, and machinery. The characteristically strong domestic demand will promote the investment of KM Labs Inc positively, as it will offer a strong market base for the products of the company (B.E.B.A, 2012). The Azerbaijani market is not greatly weighed down by excessive debt, and the banking sector has showed relative resilience against the global financial crisis – as evident from the indicator that it did not rely on state support. Noting the effect of excessive debt, which increases inflation rates, the investment of our company will be safe from the losses that result from monetary fluctuations. Also, the resilience of the economy and the banking sector will ensure that our company’s investment is safe, despite the inevitability of economic constraints like the recent financial crisis, which could recur, resulting in risks to the new investment (B.E.B.A, 2012). Azerbaijan is emerging as the leader of the region, creating a hub for investment. Considering the central role of Azerbaijani at the region in general, especially as the strategic link between Eastern Europe and Western Asia, the success of investing at the location will offer a guarantee for the success of the investment – both at Azerbaijani and among the surrounding economies. These neighboring economies draw from the Azerbaijani economy, thus will create more market for the products of the company (B.E.B.A, 2012). The infrastructure of Azerbaijan has been under rapid upgrade, as this is expected to strengthen its role as the economic corridor linking Eastern Europe and Western Asia. Investments have been channeled towards railway network upgrade, and highway construction. Following the rapid institutional reforms and instructional development, the company after investing in Azerbaijan, will benefit from the wide trade networks available at the area, which will allow it to reach more customers, thus create a strong customer-base, within a short period of time. Also, the fact that Azerbaijan is the bridge between different economies, will promote the development of the company’s position within the region, as it will benefit from the business channels established throughout the region, which will offer more market and expansion opportunities (B.E.B.A, 2012). Azerbaijan has a huge domestic market, offering a widely skilled labor force, which is relatively cheap within the region – making it a very attractive destination for investment due to its prospects. For example, in 2011, 440 FDI companies were listed in Azerbaijan, while 126 joint investments were launched. The huge domestic market will offer a wide customer-base for the company, while the widely skilled labor will offer services to the company, at relatively lower costs, which will promote the reputation of the company at Azerbaijan, thus increase its acceptance and economic success. This is based on Hofstede’s value dimension of short-term orientation, as employing locals will foster a faster outreach of the company, which will help it reach the market more easily (B.E.B.A, 2012). Azerbaijan is the largest country in the region, with a population of more than 9 million, which is characteristic with an expanding middle class, thus a resultant increase in the economy’s internal demand. The characteristically expanding consumption levels at Azerbaijan will form the consumer population for the products of the company, which the company can take advantage of, in expanding their business coverage throughout the country. The highly resilient consumer spending patterns of the middle class population, which remained stable, even during the recession, will ensure a stable customer-base for the company in the long term (B.E.B.A, 2012; Daniels et al., 2008). Many of the economic sectors of the Azerbaijani economy are relatively fragmented – and going through restructuring, where the effect of the wave of privatization is offering great opportunity for investment. Due to these opportunities for investing, our company will be able to maneuver its entry into the Azerbaijani market and economy much easily. Azerbaijan is a nation, which is open to global business relations, and the economic authorities offer a range of investor incentives to draw more foreign direct investment (FDI). These incentives include the legal provisions on the protection of foreign investments, the grandfather clause, the ease of registration and entry, the production sharing agreement and the yet operational special economic zones. The open Azerbaijan economy, which is friendly to FDI, will foster the entry of KM Labs Inc, as it will benefit from foreign investments protection, the grandfather clause and the production sharing agreement (B.E.B.A, 2012). Issues not in favor of the entry of KM Labs Inc into the Azerbaijani market: These include the difficulties that characterize the transitional systems of the region: Institutional risks are still a major threat in the Azerbaijani economy, which may create a major challenge for the company, as investing big amounts will place such investments at the risk of the negative effects. The Azerbaijani government should invest in reducing institutional risks, as this will increase investor confidence, thus increase FDI levels (B.E.B.A, 2012; Daniels et al., 2008). There are still considerable change in the legislation of the region – where it may be self-contradictory at times, and inconsistently applied in investment issues at times. This limiting condition may affect the standing of the company, after entry into the Azerbaijani economy; as such legislative differences may affect the capacity of the company to trade in the country. The Azerbaijani government should invest in streamlining these inconsistencies, as these will foster investor confidence (B.E.B.A, 2012). The legal procedures observed can be considerably inefficient and the organizational requirements, during the launching of business are relatively complex. Due to this limiting factor, it may be difficult to plan the entry of the company into the Azerbaijani economy; as such inefficiencies may affect the levels of profitability. The Azerbaijani government may need to reduce such complexities, as these will promote the entry of more FDI (B.E.B.A, 2012). The timeliness, accessibility and the robust nature of commercial and financial information may not meet global standards. Due to this limitation, the economic projections of the company, upon investing in Azerbaijani, maybe based on nonfactual data, which places such an investment at risk. The government should work hard to ensure that information and data meet global standards, so it can gain a standing internationally (B.E.B.A, 2012; Daniels et al., 2008). The quality of infrastructural systems varies between regions and the local supply network limits the capacity of foreign investors. The factors may affect the entry of the company, as its coverage across the country may be limited and the acceptance of its products may be difficult, as expressed under value of collectivism, by Hofstede. Further investment should be channeled to infrastructural development, as this will ensure more streamlined development across the nation (B.E.B.A, 2012). The distribution system in Azerbaijan presents a challenge to foreign businesses. This may negatively impact on the uncertainty, which can result in the avoidance of the products of the company by local customers, for the reason that there are cultural limitations. The government should work hard to streamline the distribution channel for local and foreign investors (B.E.B.A, 2012). A large part of the retail market is run under the considerably fragmented primitive model of trade, which the company knows nothing about. As a result, its entry into the market will be limited to the acceptance by local retailers, which may be very difficult. Efforts should be made to eliminate these traditional traits of fragmentation, so as to foster more investment (B.E.B.A, 2012; Daniels et al., 2008). The factors favoring the entry of KM Labs Inc into Azerbaijan include that it is a rapidly increasing economy, it is friendly to FDI, and the economy is resilient to market conditions like the recession. Also, the economy is a leader in the region, Azerbaijan is a source of skilled, cheap labor, and it is the largest country in the region, offering a wide consumer population. Further, the fragmented nature of the economy favors foreign investment and the openness of the economy to FDI will favor the company’s entry into the market. However, the company should be ready to address a number of challenges, including institutional risks, the considerable changes in the regions legislation, and the complex requirements needed prior to investing. Other challenges include the unreliable nature of the region’s information, the varied infrastructural development, and the unfriendly nature of the economy to foreign entrants (Daniels et al., 2008; B.E.B.A, 2012; Walsh, 2007). References Bureau of Economic and Business Affairs. (2012). 2012 Investment Climate Statement – Azerbaijan: 2012 Investment Climate Statement. US Bureau of Economic and Business Affairs. Retrieved Nov 05, 2012 from http://www.state.gov/e/eb/rls/othr/ics/2012/191103.htm Daniels, J., Radebaugh, L., Sullivan, D., & Radebaugh, L. (2008). International Business Environments and Operations, 12th edition. Upper Saddle River, NJ: Prentice Hall Higher Education. RBC. (2007). CIS Statistics Committee reveals average GDP growth. RosBusinessConsulting. Retrieved Nov 05, 2012 from http://www.rbcnews.com/free/20070403193147.shtml Walsh, B. (2007). The World's Most Polluted Places. Time Magazine. Retrieved Nov 05, 2012 fromhttp://www.time.com/time/specials/2007/article/0,28804,1661031_1661028_166102 4,00.html Read More