Analysis of the Royal Bank of Canada and FMSS Mode of Entry - Case Study Example

Name: Instructor: Course: Date: FMSS/mode of entry analysis and recommendation Management Introduction This report will assess the foreign market entry modes FMSS a multinational enterprise can use to into Mauritius. Issues that may hinder the multinational national from effectively conducting business. Through SWOT analysis, the MNE will be in a position to understand the internal and external environment of Mauritius. In this report an emphasis will be laid on the factors and the influences a regional organization might have on the multinational corporation and Mauritius being a member of SADC- South African development community an insight will be given on the possible influences it may have in the operations of the MNE. After the analysis, a mode of entry will be selected to help the multinational start its operations with ease. Porters five forces model will be used to analyses the industry the multinational will venture into. The emphasis will be put on empirical researches to support the report finds by use of different models and theories. MNE analysis The royal bank of Canada is a multinational enterprise that offers financial products in several countries. Its services range from wealth management, insurance and capital market services on a global basis. SWOT analysis on the royal bank of Canada will help identify the strengths, weakness, opportunities and threats, this analysis will be paramount is selecting the best mode of entry to be used (David &Fred1993). The most important strength for this bank is the assets and resources at its disposal, having a geographically diverse business which can shield it in case of a major hitch like a recession in the region it operates in. Another strength is the diverse workforce and skills, a strong reputation having that it is ranked number one in Canada by the revenue and market capitalization. Their major weakness is that it depends on volatile markets and lack of branches in a global base, and discrimination issues have also been reported in its operations in the US. The external environment provides opportunities and threats at an equal measure. There is an opportunity for expansion, mergers, acquisition and partnerships. Setting up operations in third world countries that don’t have sufficient banking systems, there is also an opportunity for the bank increase the services it offers to attract more customers from different regions. There are also threats that it encounters in its daily operation the banking market in Canada is vulnerable, and there are numerous regulations and legal changes in Canada that are detrimental for the operations of the bank (Royal Bank of Canada, 2014). There is intensive completion in the banking industry from the likes of Canadian Imperial Bank and the bank of Montreal and thus venturing into a new market may help in maintaining its revenues. The royal bank of Canada has a social responsibility policy committed to catering for their clients, investors, employees and communities and the banks priorities on social responsibility emphasizes on five key areas: economic impact, marketplace services, workplace practices, environment-friendly businesses, sponsor key community initiatives (Royal Bank of Canada, 2012). Industry/sector analysis The banking sector comprises of 21 banks; 6 are locals, 10 foreign-owned subsidiaries, 1 is a joint venture while 4 are branches of foreign banks. The banking industry in Mauritius is very competitive, and two major banks control over 57% of the total bank assets. The banking industry in Mauritius in resilient and profitable despite the disappointment faced by international banking from the weak economy worldwide and financial crisis. Banks offer card based payment services, internet banking and phone banking facilities. As part of an economic reform program, interest rate limits were abolished, and limits also on credit allocation were abolished (Bank of Mauritius, 2008). This was part of the liberalization program brought measures that are aimed increasing financial intermediation promote competitiveness, efficiency and stability in the domestic banking system. To better understand the banking industry research has shown that rivalry is very intense in the banking industry in Mauritius but in most instances, governments are very strict on banking services, and they regulate competition. The royal bank will face fierce rivals like the commercial bank of Mauritius, Barclays and standard chartered but the Mauritius industry has not been fully exploited and thus they can turn their fortunes around. The bargaining power of suppliers, the impact of suppliers in the industry can affect profitability but unlike other industries the banking industry is more independent and controlled by the bank of Mauritius (Porter, 2008). Being a bank suppliers may range from the labor market and those that supply the basic things needed in a bank setup hence the bank of Mauritius is the currency supplier for all banks. Bargaining power of customers in Mauritius is a major concern having that customer are interested in banks that offer low interest rates and minimal withdrawal charges hence the royal bank of Canada will find it hard penetrating the customer market. Threat of new entrants is a major concern in the banking industry in Mauritius and thus bank should always be prepared for new players entering the industry. Threat of substitute goods is a major concern in Mauritius in that customers use mobile phone money services to access their fund and having that technologic in Mauritius is lagging behind then banks are more likely to face stiff competition in the new future from mobile service providers. Saccos to offer banking services to customers and this has proved to be hectic for banks operating in Mauritius (Porter, 2008). Country analysis Mauritius was discovered in 1505, and it was colonized by Britain, France and Dutch. English is the officially used language in Mauritius, and its currency is the Mauritian rupee. In order for the royal bank of Canada to determine the appropriate entry mode, it needs to understand the country of operation as this will be instrumental if it has to conduct successful business there. A government of a nation has a direct impact on the demands, firm’s strategy and rivalry and the industry in general thus Mauritius is one of Africa’s oldest democracies and it enjoys political stability which essential for any business to thrive. Its economic policy is open and liberal which is favorable for foreign investments. Technologically its Information Technology industry is under-developed which may scare away investors. Socially, Mauritius has a multicultural society comprising of people from African, European and Asian descent. It also encourages freedom of religion, and thus many religions exist there. Environmentally, just like any government, Mauritius has strong institutional and legal policies in place for managing and protecting Mauritius’ environment, therefore, presents any firm with a chance of conducting business freely and comfortably. Porter argues that a comparative advantage resides in factors that a country may be fortunate enough to have these factors are natural resources, labor, land and the size of the local population. Mauritius’s factor conditions range from its skilled manpower, their economic GDP and infrastructure for conducting businesses (Davies & Ellis 2000). Demand conditions in Mauritius are fairly good in that the market attracts foreign investor who in turn help the local firms anticipate global trends thus many Mauritian banks may decide to venture globally and become MNEs. There are many related supporting industries in Mauritius and tourism and finance have experienced tremendous growth lately. Having global banks supply services to the tourism industry promote the exchange of ideas and innovations. The firm’s strategy, structure and rivalry, Mauritius government controls business and the conditions they set may prove detrimental or advantageous to foreign firms thus this sets rivalry which forces organizations to move beyond basic advantages that the home country enjoys e.g. low factor costs (Davies & Ellis 2000). Therefore, the Mauritian government encourages companies to raise performance, focusses on creating specialized factors, it helps in stimulating early demand for advanced products. Mauritius stimulates rivalry by enforcing antitrust regulation to limit espionage Porters diamond model for competitive advantage of nations Analysis of the regional organization Mauritius being a member of SADC any enterprise seeking to do business there should as well understand the region that specific country operates in. Apart from the challenges Mauritius may cause an emphasis should be put on the region it operates in as this may affect a business’s operations. South African development community comprises of 15 countries from the southern part of Africa. All members of the SADC are influenced by the SADC Trade Protocol which was established in 1996 and Mauritius being a member it’s bound to abide by those protocols. Economically, SADC is mandated to liberalize trade among the member countries with the aim of increasing employment, poverty eradication and access to larger markets. SADC has removed trade tariffs in the recent past making business more vibrant in the region, as a result of this SADC protocol intra-trade among member countries has doubled. By doubling of intra-trade any investment in Mauritius will be beneficial due to the regional and domestic market base. Mauritius is the most attractive market for doing business in sub-Saharan Africa. In fact, Mauritius offers a very pro-business environment, irrespective of whether the investor is local, from a member country of the SADC or a non-member of SADC. Legally SADC formulates trade rules for member states on trade tariffs, and SADC has the power to eliminate tariffs and export taxes imposed by any member state. SADC is also concerned of the environmental factors that may hinder is member states thus it regulated the amount of imports from non-SADC countries into the region. The regions present a challenge for foreign investors in that there trade protocol to eliminate trade tariffs by 2016 will see an increase in taxes that may hinder operations of foreign countries Technologically, SADC has member state who are more advanced in terms of technology hence an international investor can easily acquire high skilled employees from countries like South Africa. Most countries in the region have English as their official language thus the royal bank of Canada won’t have difficulties in case they decide to import some of their employees. The region is diverse in cultures and foreigners won’t have difficulties coping with the societies of the region. FMSS/ mode of entry analysis and recommendation Entry modes into foreign markets have a significant impact on the results of an organization. Foreign market entry modes analysis is vital for any business that seeks to venture into any foreign market as it gives the company an insight of the kind of opportunities and the best way possible it may use to venture into foreign markets (David &Fred 1993). In regards to the royal bank of Canada and the type of sector it operates in foreign direct investment will be the most appropriate mode of entry it should use to enter the Mauritius market. FDI will give the royal bank of Canada an opportunity of owning facilities in Mauritius like the Barclays bank and standard chartered bank. FDI encompasses the transfer of resources plus capital, technology and human labour. Direct foreign investment can made either be through acquisition or establishment of a new enterprise (David & Fred 1993). Through PESTEL analysis, the banking industry in Mauritius is dominated by foreign banks a clear indication that the local banks have difficulties in operating in the banking industry as it is. FDI presents the multinational enterprise an opportunity to control its operations and gives them a clear insight of the customers and the competitive environment. With 21 banks in Mauritius foreign direct investment will help the royal bank of Canada come up with strategies to reduce the market share of banking giants like Barclays (Mwilima, 2003). The government of Mauritius is favorable for foreign investment as well as the region it operates in. The trade protocol of 2006 makes doing business in Mauritius a bit tricky having that the government imposes heavy taxes on foreign investments. Mauritius being a member of SADC gives any multinational an opportunity to further venture into the other 14 countries thus a foreign direct investment will give the bank an opportunity to establish a permanent regional base where it may seek to expand its business from e.g. opening another branch in Zimbabwe (Bank of Mauritius, 2008). Foreign direct investment theories Doing business abroad is a very lucrative venture, and many theories have come up to support expansion of business to other countries. Smith’s theory of absolute advantage argues that any nation with an absolute advantage in the proficient manufacturing of goods, should specialize and export commodities it has absolute advantage on by producing commodities cheaply compared to its competitors and imports only commodities it has an absolute cost weakness. There the royal bank of Canada being a major player in the financial sector both in Canada and the world won’t face major challenging from the banking industry having that it has an absolute advantage over most banks in Mauritius apart from Barclays and standard chartered. Ricardo’s theory sought to expand Smith’s theory to comparative advantage and argued that within this structure, imports may include goods that could be manufactured, though less efficiently, in the home-based market and thus, that trade is a positive- sum game for everybody. In the banking industry in Mauritius the bank of Mauritius controls the currencies and foreign exchange rates thus if the bank decides to offer a lower rate it will have an advantage over its competitors. The theory gives a multinational competitive advantage in that; a multinational enterprise will enjoy economies of scale and in this case, marketing economies due to the nature of their brand. A firm enjoys marketing and managerial expertise having that they have had experiences in other foreign markets. Multinationals enjoy advanced technologies, financial strength and the ability to do research and development and produce a variety of products. Adam’s theory differed from the mercantilism theory which argues that trade is a zero-sum game. Mercantilism theory argues that if nations want to be rich and powerful, they must be exporters and limit imports to a minimum. Such policies would result in an influx thus a balance-of-trade surplus, towards other countries with the help of governmental interference. In the case of Mauritius the government encourages foreign investment and instead of limiting inflows, most third world countries like Mauritius encourage foreign investment. Thus, a financial power like the royal bank of Canada will not be subjected to any resistance from the governments have that taxes from businesses account for almost 40% of the total budget in Mauritius. Adam and Ricardo’s theories were strengthened by the Heckscher–Ohlin theory that assessed trade patterns based on factor endowment, concentrating on the effects of labour and capital. One of the main strengths of the royal bank of Canada is financial power and thus labour and capital won’t be a major factor for them hence making FDI the most suitable mode for the bank. Vernon’s theory of product life cycle emphasized on the timing of export and import. This theories argues that firm’s produce products for home use and once the product becomes standardized a company may consider investing abroad to maintain its monopolistic power thus it may trigger rivals from the domestic country to invest in that foreign country. Barclays bank made standard chartered follow it to several foreign countries. The royal bank of Canada enjoys profits in Canada at greater margins and thus it will be wise to venture into foreign markets having that most of their products are in the growth stage and resurfacing them in a country like Mauritius will help maintain the product life cycle and hence avoid a decline. The New Trade Theory was developed in line with the idea that with specialized products from a nation, economies of scale and low cost of production can be attained when seeking to venture into foreign markets. The new trade theory questions the controls of first movers and oligopolies. Therefore, an expansion to Mauritius by the Royal Bank of Canada will make it enjoy economies of scale and having that no foreign bank from the American region is operating in Mauritius and it may stretch out to the SADC communities and that may encourage banks from that region to consider venturing in Africa. The Knickerbocker theory suggests that derivate behavior in oligopolies can also be found in reserves of equity resources and foreign direct investment which is considered as group behavior. Using this theory other banks like the Canadian imperial bank may decide to follow suit and invest in foreign nations thus the royal bank of Canada will act as a pace-setter in Canada having that most of their banks only extend to America and fear investing in other countries more so third world countries due to the sensitivity of the banking industry. Porter’s diamond theory on the competitive advantage of nations explained the main characteristics to trade in the nation are condition factors, the demand conditions in the marketplace, relating and supporting industries, and organization strategy, structure and rivalry (Dunning, 1993). Foreign direct investment works best in this case having that Canada has a competitive advantage over Mauritius and having that the banking industry in Mauritius is stable then the Royal bank of Canada will enjoy tremendous growth and influence. The Theory of internationalization suggests that an organization overpowers market imperfections by creating its market, and this helps protect their knowledge base, unlike other intellectual property rights. Internationalization is best for a firm that wants to invest directly in a foreign country as it limits knowledge sharing hence partnerships, or joint ventures are not appropriate. The royal bank of Canada can exploit the advantages that are associated with the internationalization theory in that they have a large pool of experience and expertise which will give them leverage over the other competitors in the local banking industry. Due to the complexity of the banking industry it should create its own market hence direct investment is the best viable option. This theory of internalization for a long time it has been regarded as a theory that explains why FDI occurs thus if a firm internationalizes across national boundaries, it become a multinational enterprise. In the eclectic theory or OLI model, assessment of the organization and the host country are used. Dunning argues that if a company contemplates on making or buying decision it should consider three advantages namely; ownership, location and internationalization. Ownership presents the particular nature and nationality of the owner for example asset specifics (capital and brand name), transaction specifics i.e. Multi-nationality advantages, and capability to reduce comparative operation costs. Internationalization on the other hand presents advantages that could arise from the transfer of ownership advantages to another location within the organization. Location advantages ensure through diverse resources, institutions and regulations that affect the revenue and cost of production. Unlike other foreign modes of entry, FDI benefits most from dunning’s theory. It argues that that the greater the Ownership and Internationalization advantages possessed by firms and the more the Location advantages of creating, acquiring and exploring these advantages from a location outside its home country, the more likely it is that foreign direct investment will be considered. Therefore, the royal bank of Canada will enjoy tremendous profits and expansions if it chooses to invest directly in Mauritius. Due to its specific capital; Human capital, patents, technologies, brand and reputation. Empirical review of foreign direct investment Empirical research can enable an individual gain knowledge through direct or indirect observations or rather experience it. Mauritius as a country has been successful in attracting FDI based on its natural resources, the size of the local market and their improved business climate. GDP growth influences, and government stability makes Foreign Direct Investment lucrative for businesses who want to venture into the Mauritius markets. Economists argue that foreign direct investment (FDI) inflows play a crucial role in explaining growth of recipient nations (Buckley et al., 2002) There has been an increased consensus that Foreign Direct Investment increase a nation’s output and productivity through a further efficient use of available resources and by absorbing unemployed resources. Research has shown there is a positive impact for any company that decides to use FDI over other modes of theory some have also reported negative impacts due to poor methods applied (Borensztein &Gregorio, 1995). Developing countries are known to encourage foreign direct investment as it helps in the growth of the country’s economy. The principle of economic development is the swift and efficient transfer of best practices across borders to help establish organizations without losing its international status and standards (Blin, 2004). FDI in this case is best suited for companies that seek to venture into Mauritius having that, its proximity and better access to SADC provides a large market which is essential for attracting foreign direct investment. FDI helps improve the efficiency of domestic enterprises and thus they can improve their productivity by learning and interacting with foreign firms. FDI has been known to advance the value of domestic human capital and increase the know-how and managerial skills of local firms. Foreign direct investment can help increase competition in the local market (Mauritius), create current job opportunities and intensify market access of the developed world and in turn results to economic development in recipient countries (Wignaraja, 2001). Conclusion From the paper it evident that FDI is the most suitable means that a multinational like the royal bank of Canada can use to venture into foreign markets. Before any organizations decides on the best mode of entry to use in conducting business in a foreign country, it's paramount to do an analysis of both the industry, nation of interest and in regions that may directly or indirectly have an impact on a business. It’s paramount for an organization to conduct a SWOT analysis as this will give the top management a better understanding of the organizations ability to be suitable in a foreign country like Mauritius and most importantly how to remain competitive. From empirical research, it’s evident that FDI is the most suitable mode of entry it any foreign market in that its limitations are minimal compared to other modes. A company with financial power should consider FDI and avoid other modes like joint ventures and exporting as they pose a number of threats like the unnecessary bargaining power of customers. MNEs should consider FDI because it has become progressively important in the developing world, with a rising number of developing countries succeeding in enticing substantial and increasing amounts of inward FDI. Work cited Bank of Mauritius. Annual Report, 2008, Bank of Mauritius. Bernhofen, D.M. & Brown, J.C. ‘A direct test of the theory of comparative advantage. Journal of Political Economy. (2004) 48–67. Blin, M. Mauritian trade liberalization policies and the reproductive economy. 2004, University of Manchester, Manchester. Borensztein, E., de Gregorio. How does FDI affect economic growth? 1995. 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