The Possibility of Investing in a Developing Country - Essay Example

Introduction Whenever businesses are looking beyond their borders to establish themselves, there are a number of factors that make certain countriesmore lucrative than others. At no single time in history have businesses been more interested in investing outside their borders; consequently, it is essential to look for alternatives that would work for the company rather than against it. The paper shall look at the possibility of investing in a developing country from the eyes of a Company operating in a developed nation. Some guidelines will be given on what to look for in developing countries and recommendations given on whether to proceed with the venture or not. Issues concerning international business in developing countries Prior to investing in developing nation B, it is essential for one to look into the popularity of doing business in such countries. However, the general trend currently is that many developed nations are looking towards the developing ones to further their returns. Additionally, it is essential for one to consider the cost of doing business in country B. The combination of the latter two factors is actually what brings out the beauty of doing business in country B. Rarely is it possible to find that an investment idea that is both cheap and popular. However, choosing to take one’s business to developing nations is likely to change all of this in one instant. (Vernon, 2001) Research conducted earlier this year in Europe indicated that close to forty six percent of investors are choosing to take their businesses to emerging markets. What this means for the company is that there will be substantial levels of capital getting into such an economy thus reflecting on the overall returns obtained there. In 2008, it was asserted that percentage returns from emerging economies approximated to about fifteen percent. One the other hand, the level of returns from developed nations was eleven point one percent. Consequently, this company will be at a better footing if they chose to invest in country B which is an emerging economy. Some experts may argue that launching one’s services or products into a lucrative area is always a risky thing to do because one can never be sure when investment costs will go up or down. Consequently, it is always advisable to be cautious. However, projections made about developing countries have indicated that prices are likely to remain positive and that returns will still be higher in developing nations rather than in developed ones. (Oxley, 2000) The company should proceed with investing in country B owing to three major factors Historically, investments have been cheap there Investments are cheap compared to developed markets Investments are cheap on absolute basis. Numerous experts have asserted that in a developing nation like country B, one is likely to find a multinational investing in single digit ratios. However, such companies may yield double digit growth rates thus indicating that it is indeed a wise idea to invest in these emerging economies. It should also be noted that most of the latter mentioned companies actually trade in the London Stock exchange and so far, they have recorded positive indications for the commodities. In other scenarios, some of these companies are actually purchased through brokerage houses located in those respective countries. The same thing can happen in country B. Additionally, these kinds of returns may depend upon the geographic are chosen for the business venture. (Twomey, 2000) In certain instances, country B may be located near other emerging economies and it would then make more business sense to invest in an entire region. However, for purposes of starting out, it would be wiser to tackle country B first and then proceed to other parts of the world. (Norback & Persson, 2007) The F and C management company based in London claimed that when investing in developing countries, one was likely to find price earning ratios of close to ten. This is an overwhelming discount compared to what one has to spend when operating in other parts of the world especially when those other areas happen to be established economies. In order to understand why this is the case, one has to look at the underlying economic history of developing nations. When Asian countries began rising back in the nineteen nineties, their share prices were overstretched and their economies began shrinking again. In order to respond to these negatives, their governments opted to adjust their policies. The overall result was better performance. This is largely the reason why most developing countries have ended up out performing the United Kingdom or other developed nations. (Turner, 1999) In order to ensure success in investing in developing country B, it is crucial to identify productive sectors in the country. There are certain characteristics that will make trading in country B more likely to succeed. First of all, the government in the country needs to ascertain that there is adequate cash flow in key foreign trade investment areas for instance, electricity is one such area. If country B has collection discipline and if their tariff levels are reasonable, then choosing to do business in such a country would not be a bad idea. It should also be noted that contracts and laws are instrumental in making sure that businesses achieve what they had set out to do. If the government of country B indicates commitment to the enforcement of legal provisions in business, then such a country would be appropriate. Some governments may make very attractive rules on paper; however, they may not be willing to adhere to those commitments. This means that doing business there would cause more harm than good. If country B has an honourable government that is committed towards restoring or establishing credibility in business contracts then it would be a good place for business. (Sampayo, 2006) In making the decision to invest in country B, it will be crucial to look at another factor that is closely associated with the latter one. This is a country’s responsiveness to investor’s needs. Usually, this responsiveness is assessed by government actions within that specific country. In other words, administrative efficiencies in country B ought to be considered. If the country has minimal processing delays, then chances are doing business there would go very well. In order to maximise one’s ability to succeed in a developing nation such as country B, it is essential for the business environment to posses some relative degrees of freedom. This is only possible when the government exercises minimal interference in this area. Consequently, most regulatory processes need to be done in an independent manner so as to leave business ideas to operate under the basic principles of economics. Operational and management control are crucial areas that need to be examined. In order to quickly asses whether this parameter exists within country B, one can simply look at the numbers of investors opting to enter this country. When the numbers are high, then chances are that such a country has minimal government interference and that they are indeed good for doing business with. (Patibandla, 2005) Care should be taken when entering country B, because it may seem lucrative in the short term but there may be nothing to write home about in the long run. Consequently, a lot of time is needed to ascertain that the return for doing business in such countries falls in line with the overall goals and aspirations for this multinational. Great endurance is necessary in operating within developing nations because sometimes it takes a lot of tenacity and strong will to realise one’s aspirations. In close relation to the latter fact is the need to look for risk guaranteed investment. Numerous investors who choose to do business in developing countries may opt to do so when they have been assured of a return of sixteen percent or more for their investments. While this may seem like a relatively high amount, one must not underestimate the fact that these levels actually reflect investment trends in risky areas. Another alternative could be investing in a sector that is risk guaranteed. This means that one’s terms and agreements are likely to be honoured by the developing country irrespective of the business environment. Consequently, this company should invest in country B only if a risk guaranteed area can be identified or if there are relatively high returns for the selected project. (Whiting, 2005) Developing country B would provide this multinational with an opportunity to diversify their investment portfolio and this can only be possible by expanding into other markets. It should be noted that there are instances in which a company may engage in business for very long within a certain country or region until they reach a point of no return, consequently, it is essential to look for other markets that can make the business grow. In certain scenarios, operating within similar countries may exhaust all options of making substantial returns. Consequently, country B would therefore be a good alternative to increase the maximum obtainable returns for this business. In order to do well in country B, it would be advisable for this respective company to diversify their business interests in country B. Research has shown that most investors taking their businesses to developing countries usually report satisfaction with their investments. However, in order to be assured of a similar report, it is essential for this company to adhere to some of the same principles that the other investors have been using. It has been shown that most of these investors do well in such countries owing to the fact that they normally spread their businesses around to more than one portfolio. Consequently, this minimises overdependence on one aspect and it also mitigates the negatives in one area by the benefits in another. (Patibandla, 2002) It should be noted that a high percentage of individuals within the corporate arena who have taken the time to invest in developing countries have reported positive results. Taking the example of a survey conducted in the year 2002 by the World Bank on satisfaction ratings about investing in developing nations, it was seen that most of the investor’s approval ratings were either average or high Developing country chosen for investment Approval ratings from investors (1-10) Bolivia 8 Costa Rica 7 Jamaica 5 Kenya 8 Peru 4 El Salvador 3 Morocco 5 Panama 8 Source; (West and Ethel, 1998) As it can be seen below, only one country was given an approval rating of three. Most of the others exceeded the average mark indicating that the investors were satisfied with their investments. On the other hand, countries that scored eight and beyond can be regarded as very satisfactory. Consequently, this company needs to consider whether country B falls within any of the latter developing nations and if so, what their approval rating is. Once it has exceeded the average mark, then it can be regarded as a feasible venture. (Bas and Sierra, 2002) It should be noted that some of the countries that received poor approval ratings were those ones who had low payment discipline. In other words, an investor would make a commitment with his or her trading partners and find that those trading partners would not stand by their word. Consequently, it can be asserted that in order to do well in country B, then some research will need to be done concerning its citizen’s ability to honour their contracts. If they have high commitment levels, then chances are that this multinational would do well in the latter country irrespective of its status as a developing nation. Additionally, research has shown that most investors who succeed in developing countries are those ones who have engaged in international business before. It has been shown that when one has a bad experience with a certain country, then one is likely to succeed in other markets when they have chosen to invest in other regions that are far away from the country that did not do well. For instance, if one did business in South America and found that they were not succeeding there, then it would be better if this company chose another region of the world such as East Africa. In other words, before this company decides to invest in country B, they need to consider some of the countries that they have had prior experience with. If country B falls in a region that they have good experiences with, then it would be favourable to invest there. However, if very little progress has been made in that region than it would be wiser to think of another country other than country B. (Ghemawat, 2002) It should be noted that there are certain prerequisites that can necessitate the success of a certain business area when choosing to invest in a developing country. If that country does not have these prerequisites, then one ought not to proceed with business there. They include; Legally defined investor rights and obligations Guarantee availability Payment enforceability and discipline Collection discipline and retail tariff level Fair adjudication of disputes and tariff adjustments Management freedom and operational control Long term contract that assure investors of long term commitments The latter issue reflects the idea that investors are now moving towards a more basic approach to doing international trade. This is a trend that may not be easily visible when trade occurs between one developed nation and another. This is because at that time, most investors assumed that the countries chosen for investment would provide fair adjudication or they would enforce discipline in payment. However, such traits need not be assumed in developing countries since some investors have bad experiences there. In order to ensure success, this multinational company needs to devote a lot of time and energy in determining whether country B has such qualities or whether it falls in line with some of the negative expectations that have been associated with the developing world. (Ghemawat, 2001) Adequate cash flows within country B are also instrumental in assuring this company of doing well in that respective area for instance when one is dealing with a business that requires a lot of contact with respective clients, there is a need to ensure that those consumers will meet their end of the bargain. Additionally, even when the nature of the business is removed from the clientele, care should still be taken to ensure that consumers still have adequate cash flows. Country B would be a feasible venture if the government has instated some mechanisms for covering the non payment of debts or such issues. In terms of responsiveness to the needs of an investor, country B should only be selected for investment if their government illustrates this trait. For instance, there may be certain scenarios in which the government causes unnecessary hurdles to doing business as is the case in developing countries. Certain countries may have very long licensing waiting periods. Additionally, it is also possible to find that other countries are slow in terms of soliciting for bids or in terms of making concession auctions. All these matters need to be taken into account when analysing country B. An investor stands to loose a lot when they are always waiting for feedback for these issues. All these are related to administrative efficiency in the matter. Some of the countries that have been identified as the worst in terms of poor administrative efficiency include -Indonesia -Pakistan -India (Widstrand, 2006) The reason behind this observation is that their government processes all types of projects i.e. both small and large. In other countries such as China, their government has been very instrumental in ensuring that waiting periods have been reduced. For instance, the government passed a policy in the mid nineteen nineties that would ensure processing of foreign investment projects falling below thirty million dollars at the provincial level. Consequently, the government now had adequate time to deal with some of the challenges that they were facing. It should also be noted that if country B has instated such mechanisms, then it can be a suitable country to invest in. (Patibandla, 2002) In order to do well in this country, there is a need to evaluate whether a multinational or any foreign investor will have adequate control of their investment. In certain developing nations, governments do not allow full management control or operational flexibility. What this does to the investor is that it prevents him or her from fully enjoying the benefits of his investment. Consequently, there is a need to look into these respective issues before selecting country B. In line with this argument is the assertion that there may be certain scenarios that can promote or hinder management control in developing nations. Some experts have asserted that the availability of public private joint partnerships may be such a scenario. However, in practice, it has been shown that not all countries with state sponsored enterprises are likely to do well with these kinds of arrangements. Consequently, care should be taken before entering into such agreements. (Ulgado and Negandhi, 2004) It should be noted that regulatory independence will largely determine success levels in this respective country. The reason behind this observation is that when a country has regulatory institutions that operate in a just and unbiased manner then chances is that fair concession will be made and that businesses can get what they had bargained for. Research indicates that one of the countries in which regulatory institutions operate without government interference in the developing world is Chile. If this multinational is to succeed in B, then they should ensure that the country operates in a similar manner to Chile. The issue of vertical integration may also be an important in determining success of the investment issue. For instance, this respective multinational could look at country B’s availability of suppliers, exporters and the like and whether they could benefit from it. Vertical integration is an innovative way to cut business costs and to allow the company to improve their product or service delivery. Consequently, if these issues are existent, then there may be chances of succeeding in such a market. In certain instances however, there may be some developing countries that have competitive selection processes. This means that such countries may not be the best alternative for doing business because this multinational would have to dedicate a lot of their time in the bidding process so as to secure deals in the country. If country B happens to be a country where there are so many investors working there, then chances are that the bidding process is very competitive and this may sometimes interfere with the level of satisfaction in this kind of arrangement. It should also be noted that when making the decision to invest in a developing nation, then it is necessary to look into the transitions being made by the sector under consideration. When certain sectors have been publically owned and they are then being transferred to private entities, there may situations in which these areas are not ready for competitive market economics. This may affect an investor’s success levels and this may eventually cause them to realise low levels of returns. Examples of sectors that one ought to be cautious about include the telecommunications sector, electricity sector and transportation sectors. Most often than not, these sectors are usually government controlled and if private investment is allowed in developing countries, then chances are that those respective areas may not be fast moving in terms of returns and feasibility. (Bergesen and Sonnett, 2003) The following can be some of the reasons that could cause hesitating to enter in sectors making transitions into competitive arenas Lack of market structures for competition Lack of consumer discipline Low government efficiency Low independence of regulators All the latter issues may not be highly prevalent in a sector that is just entering the competitive market structure. Consequently, companies that choose to invest in such areas may actually be creating for themselves problems in terms of dealing with the challenges facing them. It should also be noted that prior to investing in country B, one should go out of their way to balance their respective portfolio. This can only be translated into success when the area under consideration will create a balanced risk. In assessing these risk levels, one ought to look at the relationship that a developing country has with other seemingly fragile economies. For instance, when considering investing in the oil business, a lot of caution should be taken because most developing countries depend upon certain adverse levels of investment from other parties. Consequently, this multinational should proceed with investing in country B only if the portfolios chosen are not directly dependent on other risk prone countries. It should be noted that current occurrences within a developing nation are instrumental in determining what will happen in the future. For instance, if country B has just announced some bad news in a particular sector then it would be advisable to invest small sums in that area while continually increasing them because that area may eventually pick up. By making investments of small sums, then one may not necessarily be susceptible to substantial loses that can occur after making such huge announcements. (Vaitsos, 2002) Conclusion Developing countries have been the new direction that developed nations are heading to. Consequently, this multinational definitely needs to embrace that aspect. However, there are a number of factors that could make the business in country B succeed or not. If this country possesses the latter qualities, then chances are that the multinational can succeed there – they include; minimal government interference, independent of regulatory institutions, ability of consumers of honour contractual agreements, existence of a series of successful portfolios, availability of government support to investors and a favourable business environment. References Norback, P. & Persson, L. (2007): Investment liberalization: Why a restrictive cross-border merger policy can be counterproductive; International Economics Journal, 72, 2, 366-380 Sampayo, F. 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