Multinational Enterprise: Airtel - Case Study Example

Multinational Enterprise Introduction The Emirates making up UAE formally agreed to come together to a constitutional agreement to form a single state in 1971. Each of the seven emirates is administered separately under emirate governance but with an overall administration coming from Abu Dhabi that is the federal administrative emirate for the entire country. Geographically UAE is located in the west of Asia bordering Saudi Arabia and Oman along the Arabian Peninsula. The country has land mass measuring approximately 84,000 square kilometers with a population of about four million residents. Nearly eighty percent of the total land mass is a desert with a large proportion of the population comprising of expatriates. Traditionally, the entire country was a desert with the primary economic activity being fishing, nomadism and a bit of trading (Zaman, 2011). In 1980, the Gulf state discovered oil and gas deposits and begun exploiting those resources. Thus, from this point, the economic landscape of UAE tremendously changed to the current economic powerhouse that it is among the Gulf States. Currently UAE has the fourth largest crude oil reserves in the world while being second in terms of export volumes of oil; however critics argue that with the current rate of exploitation the reserves will be depleted in the next 20 years. Its GDP currently stands at USD 103 billion as of 2012, and it is growing at an annual rate of 4.4%. One-third of the total GDP comes from oil and gas while 50% comes from the service sector that includes external trade, real estate, tourism, transshipments and re-exports services. The country is governed by Sharia law though being conserved in nature foreign trade and investment is boosted by the existence of free zones where much of the local regulation do not apply thus being open to foreign investment (Darraj and Puller, 2009). Bharti Airtel is an Indian telecommunication company operating in approximately twenty countries across the globe. The firm offers mobile telephony, broadband and digital television services bundled together through a well-structured GSM network. Currently it is the largest provider of telecommunication services in India and the second largest in the Asia-Pacific region behind China Mobile. In the trans-Saharan region is it the market leader in a number of countries with over twenty million subscribers. Political environment Politically the UAE has enjoyed a considerable long period of political stability that has enhanced confidence of the investors thus attracted them in large numbers. The level of political tolerance and stability that is experienced in this Gulf state is unequalled to its neighbors who are always engaged in turmoil ranging from succession to revolts against totalitarian regimes. Recently the United Nations described UAE as a model state that other Arab nations should UAE’s style of governance to achieve economic growth similar to what has been made in UAE in a short period. The sound political environment experience in the country has enabled the implementation of consistent economic policies that have seen the nation achieve significant financial milestones in a short stint of time; thus, reinforcing the social structure of the society (Darraj and Puller, 2009). The government has enacted a number of regulations that are aimed at creating an enabling business environment to safeguard the foreign interests of the investments that have already been set up. However, there is a government policy that is in place that directs that 51% of all licensed companies should be owned by UAE nationals this is to prevent the country’s economy to be entirely owned by foreigners. In 1999, the country enacted the UAE emiratization policy; this was meant to increase the number of UAE nationals in skilled labor jobs in the companies in the country. In the policy, all businesses whether foreign or locally owned were supposed to ensure 5% of their employees were UAE natives. Despite the native population of Emiratis being 20% of the total population, there has been an increased rate of unemployment among the UAE citizens due to illiteracy in the country. A considerable number of the people of UAE are not formally educated; thus, they are not favorable to take up the formal jobs in the companies (Darraj and Puller, 2009). Social environment UAE is a conservative Islamic state that emphasizes on moral and social norms in the society. In terms of education, the country has undergone a great transformation since 1975 when the literacy levels in the nation were at 51% for men and 46% for the female. The situation has however changed since the county implemented educational reforms that were aimed at increasing the literacy levels by making education affordable and available to all including women who were previously not supposed to go to school. Today the literacy levels stands at 90% for both genders and women are notable in high ranking government and private jobs in sectors such as; engineering, telecommunication, mining, etc. The government provides all social amenities to its people including education and health at subsidized rates the foreigners also enjoy the same services however much higher rates as compared to its citizens (Darraj and Puller, 2009). Generally, the Emiratis are tolerant people who have embraced people from various cultures and backgrounds a testament that is evident with the substantial composition of foreigners in the county’s population. Ideally UAE is a cosmopolitan state since most of its population is composed of expatriates a majority who have come to work while the rest are investors with a significant number of long-term tourists being present. Despite the conservative nature of many Islamic states, the UAE has defied all odds to be an open society that has embraced both technology and social diversity to incorporate various cultures in the society. People from across the world can freely mingle and expose their rich cultural diversity without any restrictions as long as they are done within the jurisdiction of the law (Zou and Fu, 2011). Economic environment The UAE has a vibrant economy thanks to the proceeds from oil and gas that are responsible for a considerable percentage of the total GDP. For a long time the nation has been solely depending on revenues from these two sector but with pundits suggesting that the crude oil reserves will be depleted in the next twenty years going to the current production rates the nation embarked on diversifying the economy to open up for other sectors to make contribution to the GDP. Today UAE is a renowned economy in the world since it is an important trading partner for most countries as well as being a trading hub for the entire Middle East region (Darraj and Puller, 2009). The presence of the port of Dubai arguably the largest in the whole region has made it a transshipment hub with cargo from across the world passing through here for re-export purposes. The federal government has set up special economic zones and free zones where foreign investors can leverage from the benefits that come with easy setting up of business enterprises without harsh regulations. The free economic zones are also characteristic of exempting investors from certain taxes and tariffs as long as they are operating within the designated areas. Profit and capital repatriation is yet another advantage that comes along the free zones; in a nutshell it is prudent to note that the free zones are rescue areas that are designated to aid foreign investor from the strict economic regulation of the country by ensuring they benefit from their investment. They serve to boost the confidence of foreign investors of the commitment that the government has in promoting external investment. That notwithstanding, it is a welcoming gesture to draw more investors given the multiple benefits that they are set to leverage from (Darraj and Puller, 2009). According to reports from World Bank, UAE has the fifth largest crude oil reserves translating to nearly 10% of the global reserves. A significant proportion of these reserves is in the emirate of Abu Dhabi a reason the emirate contributes more than half of the country’s GDP. Economically Abu Dhabi is the largest emirate with most of its revenues coming from oil and gas exports, Dubai holds the second position with a little bit of petroleum exports but a considerable amount of income from this emirate comes from the service industry that includes; tourism, hospitality, external trade, ports and airport business and retail trade (Zou and Fu, 2011). Dubai is the home to the world’s most architectural marvels ranging from the tallest skyscraper to artificial islands. The UAE government has invested heavily in the main infrastructural projects in the emirate including luxurious hotels, mega ports, an artificial island, largest shopping mall in the world just to name but a few to diversify the economy. The investment have paid off since their establishment Dubai has been experiencing more than 10 million tourist each year with the number of traders from around the world standing at 21 million annually (Zaman, 2011). Thus, the mega projects have established UAE as a global destination for luxurious hospitality, tourism, shopping and sporting activities (Darraj and Puller, 2009). Today Abu Dhabi and Dubai are famous sporting destination for activities such as; Formula one, athletics, rugby etc. whenever those events take place an economic boom is experienced since they attract large number of spectators who come to witness. The port of Dubai is an important maritime destination in the world since its geographical position that gives it a proximity to both Africa and Asia makes it ideal to handle cargo from the rest of the world. The free zone policy makes it more favorable since traders will find it economic to utilize it for transshipment of their cargo since it will be cheaper (Ghauri and Cateora, 2014). The GDP of UAE as of 2012 stood at USD 103 billion with the favorable economic environment that the country has been experiencing it has it is steadily growing at a rate of nearly 4.4 %. Despite the sound economic progress experienced in the country, unemployment remains a major problem that has caught the attention of the political class that are responsible for policy formulation. It is from this situation that the emiratization policy was implemented that ensures UAE nationals get employment opportunities in foreign companies (Darraj and Puller, 2009). However since a majority of the population is composed of young people roughly below 18 years it is expected that in the near future there will be an escalated number of people that will join the labor markets further increasing the level of unemployment in the country ( Abu Dhabi, 2013). The policy is an impediment to conducting business in the state since most of the nationals do not have the prerequisite skills that are required in certain sectors; thus, making it hard for them to conform to the requirement that needs foreign companies to be composed of 5% local employees. The consolidated budget of UAE runs considerable amounts of deficits due to the significant infrastructural undertakings that the federal government is funding. The government has lately engaged in private-public partnerships that are aimed at cost sharing the capital burden on private investors to ensure the economy remains firm (Zaman, 2011). Table 1.2 Major macroeconomic indicators   2012 2013 2014 (e) 2015 (f) GDP growth (%) 4.7 5.2  4.3 4.2 Inflation (yearly average) (%) 0.7 1.1  2.2 2.2 Budget Balance (% GDP)  13.7  10.7  10.5 10.3 Current account balance (% GDP)  18.5  16.1  11.1 11.8 Public debt (% GDP) 17.1  11.7 11.4 11.4  Source: (“Major Macro-Economic”, n.d.). Position in Trade and Foreign Investment The United Arab Emirates is a trading nation; this can be demonstrated by the high rate of imports and exports combined to the total GDP as of 2012 it stood at 145%. The country actively participates in world capital markets via numerous investment organizations including; Dubai Port World, Abu Dhabi Investments Authority, Dubai Holdings, etc. Since the UAE was officially formed back in 1971, its current account has always been in surplus despite the enormous current transfers that are occasioned by foreign employees. Oil prices have been increasing exponentially since 2004, and this translated to increased surpluses as of 2007 they accounted for 12% of the GDP (Zaman, 2011). The country maintained a trade balance of USD28.1 billion with much of the revenues coming from export of oil and its related products. Nearly 60% of non-oil exports originated from the free economic zones situated in Dubai mainly comprising of; consumer electronic, machinery and computer peripherals. The country exports its oil to mainly China and Japan while 30% of non-oil products are exported to India, 23% in Arab nations while Europe gets 12% of the total exports. UAE mainly imports transport equipment, machinery, medical equipment and foodstuffs; these commodities come from Japan, Germany, UK and India. Over the years, the country has experienced an influx of foreign direct investments mainly in the oil and gas sectors. However, considerable investments have been made in the telecommunication, water, power and medical equipment industries by major foreign investors (Darraj and Puller, 2009). Table 1.2 Balance of Payment 2007-12 2007 2008 2009 2010 2011 2012 Trade balance 18.8 14.0 14.9 21.5 28.1 40.4 Exports 49.6 47.5 52.5 67.3 82.3 103.4 Oil and its by-products 23.4 19.7 20.3 25.8 33.3 46.5 Crude oil and condensates 21.7 17.6 16.6 22.1 29.6 41.5 Petroleum products 1.7 2.1 3.6 3.8 3.7 5.0 Gas 3.7 3.3 3.3 3.9 4.7 6.9 Non-hydrocarbon 7.5 8.5 10.6 14.1 16.6 18.3 Exports by Emirates 2.0 2.0 2.4 2.9 3.5 3.9 Free-zones exports 5.5 6.4 8.3 11.3 13.1 14.5 Re-exports 15.0 16.0 18.3 23.4 27.7 31.7 Non-monetary gold 1.9 1.9 1.9 2.0 2.3 2.3 Imports -30.8 -33.5 -37.5 -45.8 -54.2 -63.0 Imports by Emirates -25.9 -26.8 -29.4 -35.4 -42.1 -48.7 Free zones -4.9 -6.7 -8.1 -10.4 -12.1 -14.3 Incomes, net 3.8 2.9 0.8 -0.1 0.1 3.6 Banking system 1.6 1.0 0.5 0.4 0.6 1.5 Private non-banks 0.4 0.3 0.1 0.1 0.1 0.1 Government 4.0 3.0 2.2 1.9 3.8 5.7 Foreign partners- oil -1.9 -1.1 -1.9 -2.3 -4.1 -3.3 Foreign partners- gas -0.3 -0.2 -0.2 -0.2 -0.4 -0.4 Services, net -6.4 -6.2 -7.7 -9.1 -10.8 -13.0 Credits 2.2 2.4 2.6 2.8 3.0 3.1 Travel 1.1 1.2 1.3 1.4 1.6 .. Transport 0.8 0.8 0.9 0.9 1.0 .. Government services 0.3 0.4 0.4 0.4 0.5 .. Debits -8.6 -8.5 -10.3 -11.8 -13.8 -16.1 Travel -3.0 -3.0 -3.7 -4.0 -4.5 .. Transport -1.1 -1.1 -1.2 -1.2 -1.5 .. Government services -0.3 -0.3 -0.4 -0.4 -0.4 .. Freight -4.2 -4.0 -5.1 -6.2 -7.4 .. Transfers, net -4.0 -4.2 -4.4 -4.7 -5.1 -6.5 Private -3.7 -3.9 -4.1 -4.4 -4.6 -6.1 Official -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 Current account 12.2 6.5 3.8 7.7 12.3 24.5 Financial account -9.7 -4.1 -7.3 -7.8 -10.9 -22.4 Private capital -3.8 -3.9 -1.9 3.9 7.7 6.6 Direct investment, net -1.6 0.7 3.1 3.3 9.0 10.3 Outward -2.1 -0.4 -0.4 -1.0 -1.0 -1.0 Inward 0.5 1.2 3.5 4.3 10.0 11.3 Portfolio securities 0.0 0.0 0.2 0.0 2.0 1.5 Commercial banks -3.2 -2.5 -6.9 -1.1 -5.5 -4.4 Private non-banks 1.0 -2.1 1.7 1.7 2.2 -0.8 Official capital -5.9 -0.2 -5.4 -11.7 -18.6 -29.0 Errors and omissions 0.4 -2.0 4.7 -0.1 2.1 0.8 Overall balance 2.8 0.5 1.1 -0.2 3.5 2.9 Source: (IMF, 2005). Government Policies To spur economic development the federal government has come up with policies that are aimed at improving the business environment to attract investors. The free economic zone policy creates certain areas within the Emirates where any form of economic activity that is conducted there is not subject to the economic regulation of the country. The investment done in these zones benefit from cuts in taxes and other stringent regulation that govern business in the nation. The emiratization quota is yet another policy by the government that seeks to secure employment opportunities for its citizens in foreign-owned companies. The policy directs that the personnel of any company that is belonging to foreigners should be composed of at least 5% of Emiratis (Darraj and Puller, 2009). It was meant to curb the rising number of unemployment among the locals with an increased number of expatriates in the nation taking white collar jobs. Apart from the free zones any foreign company that is set in the country should have 51% percent of its ownership belonging to Emiratis. It is a stringent policy that tends to scare away potential investors making most of the investors to opt setting up business in the free economic zones (Zou and Fu, 2011). Recommendation Going by the analysis above UAE has a robust economic environment that is ideal for investment. Its geographical position provides a proximity to other associated markets thus making it strategic to set business in this location to later capture the surrounding markets through expansion operations. It is indeed economically viable for Airtel so make an investment in this country to roll out its telecommunication services. The country has sufficient telecommunication infrastructure that is already in place complete with fiber optic cable that are interconnected to overseas countries it will be convenient to set up business since the company will be riding on the advantage of the already developed infrastructure (Ghauri and Cateora, 2014). Demographically the country has a population of about eight million people of which more than sixty percent comprise of expatriates who have come to work in the state. It is indeed a good market given the fact that currently is it being operated by only two telecommunication operators, which is a strong indicator that there is still an opportunity for exploitation. Political stability that has been experienced in the nation for a considerable period is an encouraging factor as the investor will be more confident to commit their capital to this market since they feel secure. With all the benefits at hand, Airtel needs to come up with a strategic entry plan that will make it favorable for clients who are currently attached to the two operators to shift to their services. Previously the market was a monopoly that was dominated by Etisalat but later on Du entered the market and liberalized it in a way. Despite that government regulations tend to favor Etisalat which is a local company as opposed to other firms that seek to enter the market and thus it will be beneficial for foreign enterprises that wish to enter that market to set business in free media zone particularly in Dubai to avoid some of the regulation that make it difficult to conduct business (Ghauri and Cateora, 2014). Conclusion The strategy to enter the market should include a low price factor in terms of the price that it charges for its services both mobile telephony and broadband services. It will make the firm competitive to the other companies that have been in the market for long. The consumers will be willing to opt for cheaper alternatives since the quality of both companies is to international standards. Airtel does not only offers mobile telephony services it will enter the UAE market with other value added services that include broadband and digital television to make it convenient for consumers to have all the services by one provider instead of subscribing to a number of suppliers. More than sixty percent of the population in UAE is composed of young people between the age of 18-35 years thus it will be ideal if Airtel fashions its products to meet the demands of its target market. Thus, this will make its services more attractive to the target market thus ensuring it readily commands a section of the market share. It should come up with trendy and innovative services that are more appealing to the young people this should include massive campaigns and advertisement in social media platforms that are frequented by the youth to relate to them on a one on basis to easily win them. Finally Dubai has a number of industries that assembles mobile phones and other related products, Airtel should partner with these organizations to produce mobile phones that are networked locked but to be sold at a cheaper price to the clients. It will ensure that customers will be willing to buy the phones readily due to the competitive price attached to them they will be also compelled to utilize Airtel services since the phones will not allow services from other companies. References Darraj, S. M., & Puller, M. (2009). United Arab Emirates. New York: Chelsea House. Ghauri, P. N., & Cateora, P. R. (2014). International marketing. IMF (2005), Article IV Consultation – United Arab Emirates, Staff Report, Washington D.C. Retrieved from http://www.coface.com/Economic-Studies-and-Country-Risks/United-Arab-Emirates Major Macro-Economic Indicators. (n.d.). Retrieved from http://www.coface.com/Economic-Studies-and-Country-Risks/United-Arab-Emirates Report: Abu Dhabi 2013. (2013). Place of publication not identified: Oxford Business Group. Zaman, N. U. (2011). UAE and globalization: Attracting foreign investments. Norderstedt: Grin Verlag. Zou, S., & Fu, H. (2011). International Marketing: Emerging markets. Bingley: Emerald Jai. Read More