The Main Factors for Market Selection into an Emerging Market Country - Term Paper Example

Business Introduction Qatar, located in the Middle East is a peninsula bordering the Gulf of Persia and Saudi Arabia. Technically the country is located in Western Asia with Saudi Arabia as the only land bordering it. The country has come a long way from its initial days of being a poor country ruled by British to that of one of the wealthiest countries among the emerging economies. The country saw its economy being crippled in the early 80’s and the 90’s owing to the opulent and corrupt rule of the Amir (Rathmell and Schulze, 2000). It was only in 2000s that the country could solve its disputes with Bahrain and Saudi Arabia regarding border issues and since then the country has followed a path of robust economic growth. The current population of the country is 2,123,160 according to latest statistic. The country has one of the highest GDP per capita in the entire world and as of 2013 the GDP per capita was $102,100 (CIA, 2014). One of the chief reasons which can be attributed to the growth of Qatari economy in the recent times is the high reserves of oil and natural gas of the country. The robust growth of the economy in the latest decade occurred mainly because of the hike in the oil prices in the global economy and the increasing surge of investments in the energy sector of the country. Presently the policies of the government are also geared for promoting investments in the non-profit sector (Harrison, 2013). Since its political independence the country has become an active member of a large number of organizations like United Nations and Pan-Arab Organization, World Trade Organization. The country has also become a member of League of Arab Emirates, Organization of Petroleum Exporting Countries and Organization of the Islamic Conference (International Monetary Fund, 2008). The purpose of this paper is to examine the market conditions in Qatar that can play a major role in attracting investments in the country. It uses tools of strategic management like PESTLE analysis to examine the external environment. This paper also applies Dunning’s OLI theory to comprehend the factors that has been responsible for attracting investments in the nation. PESTEL analysis Political: Qatar is a classical example of emirate-type government. Since the independence of the country, it has been ruled by the Al-Thani family. The political environment of the country has been highly stable over the past few decades. This factor has been one of the most important factors that have propelled the economic growth of the country when most of other countries of Middle East were burdened with political instability. Over the past few decades the government has devised its policies in a way which attracts major investments in the energy sector. Government in Qatar has introduced the double tax treaties to avoid the issue of repeat taxation. This has been done in order to increase the inward investment in the country by attracting more companies. The government has established the permanent Qatar Constitution which had come to effect from 2005. The government has separated the executive from the judiciary to promote easier functioning of the business (Gray, 2012). The state of Qatar is one of the safest in the whole world despite being a Muslim country as the rate of crime in the country is very low and there are no potential threats to start a business. It is the second most peaceful country in the Middle East (CIA, 2014). Economic: Qatar is one of the fastest growing economies in the entire world and it has emerged as one of the most prosperous countries. The compounded annual growth of the GDP of the country from 2007-2011 was 13.9%. The following table shows the GDP growth rate of the economy over the last ten years. Table 1: GDP growth rate Qatar (Source: The World Bank, 2014) Table 2: Industry by sectors Qatar (Source: Ministry of Economy and Commerce, 2014) The GDP per capita growth of the nation has been shown in the following table. As the per capita GDP of Qatar is already very high so some of the negative figures in the table are justified. One of the facts which emerge from the figures is that the level of GDP per capita growth was not heavily affected even during the global financial crisis. Table 3: GDP per capita growth (Source: Source: The World Bank, 2014) The oil sector provides the largest impetus to the growth of the economy and it is fully under the control of the State of Qatar. Over the years the Qatar Petroleum (the state owned oil company) has spread its prospering Liquefied Natural Gas business by forming strategic partnerships with a large number of companies like Shell, Total and ExxonMobil. Recently the government has been using the budget surplus earned by it to promote the infrastructure, healthcare, social programs and education. This is an attempt to modernize the economy and promote the non-hydrocarbon sector. Qatar has recently announced that the 2022 FIFA football world cup will be held in the country. This is the first time that any Middle Eastern country had made such an announcement. This will not only be an important step in the development of football but will also act as a catalyst for attracting FDI. Investments from media, broadcasters and large sponsors come in huge quantity. Qatar’s had recently experienced immense growth in the construction industry. Looking into hotels alone there has been development of a large number of four star and five star hotels between 2008 and 2010 which bears testimony to the increasing flow of FDI in the country. There has also been development of shopping malls and other public buildings including banks (Harrison, 2013). Social: It has been observed in case of international businesses that the social stability of an economy is as important as the political stability of the country. Qatar is a country which has high values of the national culture. Though the society is conservative with Islam as the state religion yet the country is progressive in terms of commercial and business activities. The workforce of the country is mainly concentrated in the private sector which provides 61.2% of the jobs, whereas the mixed sector employs 28% and the government employs 5.6% of the workforce. Most of the people reside in the urban areas of the country and 69.9% of the population of the country is aged between 25-54 years (CIA, 2014). One of the unique features of the Qatari workforce is that most of the labours are non-native. In order to work in Qatar a person must get the permit issued by the Department of Labour. The following chart shows the key indicators of the labour force in the Qatari economy. In the society the ranks in the society is an important factor. Personal interaction is favoured more than the strict schedules. The sense of family honour in the society is very high. Over the past few years the role of women in the community and business has increased (Nair, 2013). Table 4: Labour force summary (Source: CIA, 2014) The government has been recently paying attention to improvement of education for the overall development of the country and this had led Qatar to become the best performing Arab gulf state in terms of education. The literacy rate if the country has improved greatly. Not only has the primary education but also in terms of higher education the country shown improvement. The following table shows the opening of universities in Qatar. Table 5: List of universities opened (Source: Knight, 2013) Technological: The Information Technology department of Qatar is not very well developed as the main focus of the economy is in the energy sector. One of the recent developments on the technological front is the joint venture between Honeywells UOP and Qatar Petroleum to develop technologies that can reduce the production cost of petroleum. The IT industry in Qatar is expected to grow very strongly in the forthcoming years and it has been estimated that the growth is to be around US$151mn by 2014. This has a huge potential on the growth of a large number of businesses like financial services, communications, healthcare and education. This will play a major role in the diversification of the economy. The Ministry of Information and Communication Technology in Qatar has identified specific areas of development and investment opportunities that are going to come in the Qatari economy in the forthcoming years. The ICT strategy has conducted a comprehensive assessment of the investment opportunities and identified 68 distinct areas for possible investments. Among this, 17 areas have been prioritized. This is bound to create positive economic development of the country (UNCTAD, 2013). Legal: The legal structure of the country is liberal. In case of foreign investment in the business community, the legislation holds that the local equity of 51% is mandatory. The legislation also clearly specifies the requirements and the standards required by the directors, shareholders and the process of incorporation. The Qatari financial market authority is responsible for the legislations that allows in the smooth functioning of the capital markets of the country. This independent regulatory authority was set up in 2005 to focus on the transparent dealings in the financial markets and make the process more effective. The legislations in the nation is such that most of the companies wants to establish themselves as limited liabilities company as in this process the requirement of capital is smaller in this type of a set-up. If any company wishes to establish a joint venture with the government then it is mandatory for the company to establish a private joint stock company according to article 68 of Commercial Practices Law. Finally, another factor, which regulates the activities of the foreign investor apart from the equity ownership, is the nature of business. Environment: The Ministry of Industry and Agriculture in Qatar is responsible for the protection of the environment arising from the different commercial activities. As the energy sector is the most important sector in Qatar so the protection of the oil reserves is on the top of the priority list of the ministry. Other areas of importance include the preservation of wildlife heritage and improving the quality of the water supply. The pollution generated from the hydrocarbon sector has affected the water supply of the country in a negative way for which the agriculture sector is in trouble. Damaged agriculture is likely to harm the economy for which the Ministry has been trying to reduce the adverse impacts to the environment from the commercial and the business activities. As Qatar focuses on the petrochemical industry for its economic growth so the government has been focusing heavily on the environmental and protection services to reduce the oil spills and the pollution caused from it (Gerry, Kevan and Richard, 2009). Theories predicting investments Dunning’s Theory The OLI theory that was developed by Dunning is one of the most significant theories that explain the concept of foreign direct investment (FDI). OLI is the acronym of the Ownership, Location and Internationalization. The eclectic paradigm developed by Dunning is actually a combination of a number of internationalization theories like Coase’s theory of transaction cost, Buckley and Casson’s (Buckley and Casson, 1981) theory of internationalization and Hymer’s (1976 cited in Hennart, 1982) monopolistic cost advantage theory. Ownership Specific Advantage This refers to some of the exclusive ownership factors posses by an organization which provides it competitive advantage and compensates for the cost of setting-up a foreign operation and running it at a cost lower than the indigenous producers (Rugman, 2009). The paper published by Dunning in 1976 had stated that the there are three primary sources from which a firm can derive its competitive advantage (Dunning, 1997). The first one comes from the possession of particular assets which are owned exclusively by the company. The second one come from the advantage enjoyed by the branch of a firm compared to the new firm and the final advantage comes from the geographical diversification. The ownership specific advantage mainly includes the intangible assets of te firms like intellectual property, trademarks, superior production techniques derived from economies of scale and strong financial position to name a few. Location Specific Advantages Dunning had described location specific advantage as an advantage which accrues to the firm from the specific spatial factors of that region. This implies that the firm will take its production to that particular country where it can combine intermediate goods transferable from the firm’s home country with the immobile factor endowments of the foreign country (Dunning, 1988). According to Dunning it is the location specific advantage which becomes the crucial factor for firms in choosing between exporting and FDI. This implies that location specific advantages are the advantages which are absent in the home country but present only in the host country. These advantages are derived from mainly four factors namely natural endowment advantages, political factors, legal factors and economic factors. In terms of natural endowment, Qatar is one of the countries with the highest natural reserves of oil and gas. The nation is the largest exporter of LNE in the entire world and a significant portion of the revenues of the government comes from the petroleum products. Table 5: Energy Statistics (Source: U.S. Energy Information Administration, 2014) In terms of the economic and the trade environment it has also been observed that Qatar has experienced robust growth of GDP and stable investment conditions. Law No. 13 which has been introduced in 2000 was done to ensure that the foreign direct investments can be done in a more transparent manner. As a result of the policies of the government the FDI flows increased from QR 13.8 billion in 2008 to QR 29.6 billion in 2009. Even during the financial crisis the 2008-2010 the FDI flows of the country kept on increasing and the compounded growth rate recorded was 11% (World Trade Organization, 2014). The major factors which led to this increase were mining and quarrying, manufacturing, insurance and finance and construction. This implies that the legal and the political policies adapted by the government have been successful enough in bringing the foreign investments (U.S. Department of State, 2014). Table 6: FDI Growth Qatar (Source: UNCTAD, 2013) Therefore, it can be observed that the government of Qatar has been trying to create factors which promote the development of the economy by creating conditions which attracts foreign direct investment. The political stability of the nation coupled with the impressive economic performance has been successful in bringing more investments. The easy tax policies of the government and the average tariff rate of 5.1% are luring investors (Gani and Al-Abri, 2013). The opening of the Qatar Financial Centre in 2005 has been a positive development in attracting financial firms. Internationalization Dunning in (1998) had shown that the firms always prefer to transfer their ownership-specific advantages within their own organizations when they are undertaking cross-nation transfers. Dunning had also observed that if the net benefits from the cross border internationalization are higher it is more likely that the firm takes up foreign production than licensing. Therefore, internationalization particularly relates to the question of mode of entry for the company (Santangelo and Meyer, 2011). In case of Qatar it has been observed that the most popular mode of entry chosen by the foreign investors is the mode of establishing them as Limited Liabilities Company. An important consideration that needs to be taken by the companies before they enter the Qatar business community is to disclose the type of business they are associated with (Al-Kaabi, Demirbag and Tatoglu, 2010). It has been observed that for investments in the energy and the mining sector, the Ministry on Energy and Industry regulates the degree of foreign ownership determined on a case-by-case basis. If the investments are in the engineering industry then temporary branches are registered in Qatar. The general modes of entry that has been observed for the foreign investors are limited liability company, single-person company, simple limited partnership, unincorporatedjoint venture, general partnership and joint stock company (public or private) (Latham and Watkins LLP, n.d.). Table 7: Ownership structure of Industry (Source: Ministry of Economy and Commerce, 2014) Diamond theory Porter’s Diamond model of determining national competitive advantage identifies four factors which provide competitive advantage to a nation (Singleton, 2013). They are natural endowments, demand conditions, competition in the industry and the strength of supporting institutions and industries. Porter had also stated that the government policies towards education, infrastructure development, investment policies and competition are also very important for determining the competitive advantage of a firm (Curran, 2008). Analyzing Qatar on the basis of the Porter’s diamond model it can be seen that in terms of other industries, the government is constantly promoting the non-energy sector of the economy. Particularly the IT sector of the economy is growing very strongly. Infrastructure development policies have also been taken by the government. In terms of factors it has been observed that Qatar has one of the largest deposits of oil and natural gas. The government is trying to transform the wealth derived from the hydrocarbon sector and improve the other sectors of the economy. Qatar is one of the most prominent destinations for the foreign companies as it has a transparent method of granting contracts and stable legal and political outlook. Qatar has witnessing a surging demand in the LNE business evidenced by the fact that it has emerged as one of the world’s oil largest exporter (Etgar and Rachman-Moore, 2010). The real estate sector and the hospitality sector are also growing. In case of Qatar it has been observed that the biggest rivalry is in the Telecommunication sector. The national government is in the favour of putting the Qatari nationals onto a greater position of authority. The eradication of the direct taxation and the establishment of zero statutory tax rates have improved the business environment. Example Royal Dutch Shell plc is a multinational oil and gas company having its headquarters in United Kingdom. In terms of revenue it is the largest company in the petrochemicals sector. The business of the company includes both production of the oil and its refining. It is also involved in the marketing, distribution of its products. It is also involved in the power generation. Royal Dutch Shell is one of the many companies that has entered Qatar through foreign direct investment and has been operating efficiently. Qatar Science and Technology Park is one of the government agencies in Qatar that is provided with the responsibility of providing commercialized technologies in Qatar in energy, IT, health service and education. All the participating companies in this sector are exempted from paying any type of tax as well as a 100% foreign ownership. As Shell is one if the member companies so it enjoys these privileges. The company has been actively involved into a number of projects like Pearl GTL Project and liquefied natural gas projects like Train 7 with a capacity of 7.8 mtpa. This implies that the favourable business conditions in Qatar have been responsible for Shell in taking up the projects in Qatar which is mutually beneficial to both the State of Qatar and the financial benefits of Shell. Shell follows its own mission of growing through sustainable business practices along with the overall development of Qatar. This is in line with the Qatar National Vision of 2030. Shell has undertaken major investments in Qatar and is currently the largest foreign investor in Qatar with more than$20 billion invested. The company is committed to the policies of “Qatarizarion” view of the government and has been hiring its human resource locally. It engaged in providing contracts to the local businesses (Shell, 2014). Conclusion This paper has analyzed the case of Qatar as a lucrative market for the MNC’s seeking investment in the markets of the emerging countries. It has been observed after analyzing the external macroeconomic conditions of the market that the government polices of the country are in favour of promoting the foreign investment for robust economic development of the country. Qatar is one of the nations which have been experiencing very high GDP growth even during the period of recession. The technological and the legal grounds of the country are also strong for FDi. The eclectic paradigm developed by Dunning and Porter’s Diamond model has been used to analyze the investment that has been occurring in Qatar during the past decade. It has been observed that the location specific advantages are the most important factors which have been bringing the investments in Qatar. The tax policies of the government, extremely well endowed natural reserves and politically favourable policies are the key factors which has been promoting the development of the Qatari economy. The case of Royal Dutch Shell has been included to show how the company has been successfully operating in the Qatari economy by helping the country realize its National Vision of 2030. The mutually beneficial relationship has also been evident in the fact that the company has been hiring mostly local candidates for the junior and the senior positions for realizing the vision of the government. Reference List Al-Kaabi, M., Demirbag, M. and Tatoglu, E., 2010. International market entry strategies of emerging market MNEs: A case study of Qatar telecom. Journal of East-West Business, 16(2), pp. 146-170. Buckley, P. J., and Casson, M. C., 1981. The optimal timing of a foreign direct investment. The Economic Journal, 91, pp. 75-87. CIA, 2014. The World Factbook. [pdf] CIA. 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