Global Business Entry into BRICs Market - Essay Example

?Global business entry into BRICs market: A Brazilian case study Task Introduction The globalization of business operations and the emergence of multinational companies have created the need for developing better strategies and approaches for entering new markets. New markets are characterized by different economic and fiscal environment that makes it a unique business environment thus calling for a well-strategized approach before entry. The BRICs block is one of the emerging economies in the world with a number of opportunities currently exploited by multinationals from developed economies. Within this block are countries like Brazil, Russia, India and China, which have distinguished themselves as some of the promising and alternative markets to the developed economies (O’Neill, 2001). Emerging markets are characterized by a growing fraction of middle-income consumers, demand for goods, services, technological advancements, and discoveries. However, entry into such markets cannot be an overnight decision, as it requires planning, strategic understanding of the market dynamics and cultural differences. Issues related with intellectual property rights, taxation, employee salary packages and other market jurisdiction factors must be considered before initiating entry into the business. Brazil has distinguished itself as a major member within the BRICs block with its dynamic and promising market structure and dynamics. The country has a strong currency against other international currencies like the dollar, aptly controls its inflation rate and has an expanding middle class population. With a steadily increasing population and a stabilized GDP, Brazil is an economy worth considering among the BRICs members. In this report, an advisory description of the Brazilian market and economy will be provided for a company that is seeking entry into the market (Cui, 2005). The factors to consider and the key areas to develop before entry into the market will be described in detail, providing an understanding of this market structure as compared to a developed economy like the United Kingdom. A Danish owned production company seeks to establish an autonomous production subsidiary unit in this country and this paper will highlight how the company can establish a strong company despite the market challenges. Brazil has cut a niche for itself among the emerging economies and as a member of the BRIC economies by developing into a country with greater purchasing power. However, as present in all emerging economies, entry into the Brazilian market is never smooth sailing and foreign organizations must develop proper strategies to succeed. A number of issues exist in this market and economy that every new entrant must encounter and address to succeed. The government regulatory measures and programs however make new entrants into this market undergo tough challenges including high taxation and bureaucratic setting (Teixeria & Grande, 2011). Factors to consider before entry Danish business environment differs significantly from the Brazilian economy in terms of tax regimes, bureaucratic procedures and other government related factors. As such, a multinational with operations in a different country must be in a position to evaluate both the internal and external factors, which may affect the successful operation of the business. A poor understanding or underestimation of these factors has contributed to the failure of a number of multinationals across the world. A number of internal and external factors exist that are specific to Brazil as an emerging economy. In evaluating the external factors that may affect the success of Danish based multinational in Brazil, an evaluation of both the macro and microenvironment within the external factors is necessary. According to Harold Leavitt, pioneer global business analysts, businesses cannot operate as an island as they are exposed to a number of external factors that influences its success. This Danish based multinational must first conducts an analysis of the external environment within the Brazilian economy and evaluate how this will affect its operations. Macro environmental factors involve those aspects of a business related to government policies, demographic changes and other policies that affect the operations of a foreign business. These vary from the introduction of new tax systems, international trade regulating laws, other barriers to trade and demographic changes, which influences the overall demand in the country. All these factors are categorized under the PESTLE tool of business analysis, which provides the understanding of the political factors, economical factors and social determinants. Other aspects of the external environment analysed under the PESTLE tool include technological advancement, environmental determinant and the legal systems in the country. An in depth analysis of these factors will enrich the Danish multinational and provide proper basis for entry into the Brazilian market (O’Neill, 2001). The understanding of the microenvironment will also strengthen the ability of the company to enter into this market with deep knowledge of what to expect. These are factors found within the immediate area of operation of this multinational which will either increase or reduce its market impacts. Before entry into this market, the company must appreciate the fact that there are other players in this sector who have all along served the demand of the local population (Goldman Sachs Global Economics Group, 2007). Factors within the microenvironment include competition from other organisations, the nature of customers and their demands, the distribution and supply channels in the economy. Knowledge of the public will be critical in developing approaches of how to tackle demand and supply related challenges that the business may encounter once it begins operations. Understanding the microenvironment is done using the five porter analysis tool which looks into the behaviours and practices of the rivals within this sector. The five-porter analysis evaluates the current bargaining power of the consumers and the challenges that new entrants meet and how providing a substitute product may be received in the market (Bhaumik, 2005). Apart from the microenvironment and its impacts on business entry, Danish firms entering the Brazilian market must understand the impacts of foreignness and how this affects their success. Foreign multinationals entering a new market especially the emerging economies must understand the impacts that their foreignness can have on their successful operations in the country. Multinationals in foreign business environments are exposed to a number of foreignness liabilities, which affects their success. One of the major costs incurred by multinationals in a foreign emerging market is spatial distance cost, which arises from the need for travels; transportation and the management of oversee subsidiaries from the head office (FITA, 2006). The lack of proper knowledge on the new business environment as a result of foreignness also decreases the ability of the business to integrate its operations. Other foreignness factors that increase liability to a foreign business entering any emerging market in the BRICs block include government-imposed restrictions of foreign businesses, legitimacy and tax regimes directing foreign businesses and the level of technological advancement of the business. As an acute simple company whose sole objective for entering the Brazilian market is to seek new markets for its products and establish horizontal units, the market dynamics are complicated (Cui, 2005). This company will not introduce a new product that is different from the one-marketed back at home but instead seek new markets for its replica products. This will increase the local for local competition for the company and make initial success after entry difficult making it essential for prior research (Elaine, 2005). Brownfield and Greenfield entry Apart from the external factors that require the PESTLE and Porter analysis tool for the Danish based company to evaluate, there is need for understanding the internal business strengths and weaknesses that affects it successful entry into an emerging economy in the BRIC block. Three alternative modes of entry into a foreign market exist that a business can research on before making the final choice on how to make a grand entry. One of the widely used approaches in entry into new markets especially emerging markets is acquisition, which allows business and multinationals to acquire the resources and customers of the previous company. Following acquisition, a business inherits the entire resources and other assets and liabilities of the business, which can provide the much needed head start. Greenfield projects on the other hand involve the initiation of businesses start-ups and subsidiaries from scratch with no local resources apart from those brought in from the head office. In this kind of entry, a business uses the resources from the head office to set up a new subsidiary, which initially lacks any technical, financial and human resource support from the new country of operation. Brownfield entry is on the hand, a special type of entry in which the multinational acquires a local business but uses its own resources to build the consumer base, infiltrate the foreign market and make significant impacts. Through this model, the multinational replaces the resources within the local unit acquired like human capital, technological means of production and other capabilities of the firm with its own. Depending on the internal strength of the Danish firm, the entry modes may be full acquisition, Greenfield or brownfield entry depending on a number of market factors and consumer behaviours (Al-Kaabi, 2010). Apart from the above factors discussed the success of an entry in BRIC countries require an understanding of the competition within this market that may influence the success of the business and impact significantly on its future operations. Competition is influenced by the structure of the market that this MNE seeks to enter and these include pure monopoly and monopolistic market structures which may affect the entry of a new market player (Wallop, 2011). Task 2 Internationalisation of firm’s theories The emergence of cross border trade and globalization has made it essential for economies to work towards the creation of a more serene and allowing environment especially for firms with limited home markets. The world has changed since the development and advancement of international trade into one market filled with a number of complexities to be tackled by the players. To succeed, most firms enter the global market with specific orientations that enable them gain specific competitive advantage from doing business in multiple countries. A number of theoretical perspectives have been developed to explain the success of different organisations and multinationals in the global market. Through these theories, the process of internationalization of small firms is shown to be linear and time thronged which makes them impossible to explain using the traditional theories. Vernon, Johanson, Vahlne and Dunning developed a number of theories to explain the internationalization process of small scale multinationals. According to Johanson and Vahlne, the internationalization of firms occurs as an incremental process that depends on the sequential decline in the distance that organizational leaders accumulate knowledge and experience on global markets. In this section, a comparative approach will be adopted on the theories advanced by the three scholars and how such theories can be used to explain emerging market multinationals (Dunning, 1988). According to Dunning (1998), a multinational in the exporting sector can only compete favourably if it has some form of ownership advantage over other multinationals. These ownership advantages are gained in terms of an organisation’s trademark uniqueness and the advancement of its technological approaches. Such a multinational must also have high entrepreneurial abilities and the ability to return to scales once the operations are completed. A company must develop a comprehensive reason as to why a foreign market can be best served by a foreign based multinational. In this situation, such a company must conduct business and avail its services and products in a way that is better than the domestic firms (Johanson & Vahlne, 2006). According to Vernon (1971), the internalization process occurs according to the principles of product life cycle in which different phases exists for a product to follow in the market introduction process. In the introductory phase, the products are introduced into the original country of production before they are shipped top to the global market for the final international trade process. According to this theory, home production is flexible due to the market advantages available in the home market and this is more than the cost advantage enjoyed by multinationals in producing in the international market. However, the strength of this theory has been criticized even by Vernon (1979) due to the changes that have occurred on the geographical reach of many global companies and the narrowed differences in countries that currently exists. Most industries with high innovation like mobile telephony and consumer electronics have proved Vernon theory to be inefficient in making a comparison. Despite not completely rejecting his model, Vernon argues that his model has lost a lot of explaining power on the current trend and events on the international arena especially within innovation intensive markets. This model can however be applied successfully to small scale multinationals that have not yet created significant market influence as compared to others like Samsung, Nokia and Dell (Vernon, 1966). Johanson and Vahlne (2006) developed the Uppsala theoretical model of international trader in which enterprises have the ability to increase their international involvement and thus improve their global ratings. In their model, the two provided a descriptive difference that exists between psychic and physical distance as far as international trade is concerned. In the internationalization process, this theory states that firms enter the international market by first moving into physically near markets. This provides the company with experimental knowledge on the behaviour of the international market and thus opens more international space which is physically distant. As compared to the Vernon (1971) theory, the Uppsala internationalization theory describes the evolutionary process that organisations go through until it reaches the higher degree markets. This theory provides a better explanation of the internationalization process since it provides the gradual steps that a firm follows before actually achieving high degree market participation (Vernon, 1971). Despite its strengths, this model has also not escaped criticisms as other scholars argue that they have not been able to fully explain the processes of internationalization of small firms in today’s highly technologically advanced and competitive global market (Anderson & Wictor, 2003). To eliminate the weaknesses of the Uppsala and the Vernon theories, a new global approach and theory has been developed and it has worked to provide a better explanation for the internationalization process. Most small and medium sized firms have failed to abide to the incremental stage theory as explained in the Uppsala model and this makes it essential to develop a better explanation for the small firm internationalization process. Most small firms begin international operation from inception and move towards increasing its international presence through an increment in the export and import scales. Since the time when the Uppsala and the Vernon theories were adopted, a number of changes have occurred in the global sphere and this has contributed to the changes that have occurred especially on the perception developed towards these theories. These changes have resulted into the formation of the ‘global born’ theory which provides internationalization from an integrative perspective. According to Anderson and Wictor (2003), a number of reasons can be attributed to the current emergence of companies that are born and conceived global and expand into other markets from that basis. The need to specialize at inception to provide a competitive edge for organization has resulted into the emergence of organization that is conceived global. The pressure to specialize and increase the consumer base for the beginning firms pushes them into specialization and this increases their competitive advantage. The current advances in technology and better production means gives no ground for tradition production methods as the domestic market is as informed as the international market (Vernon, 1979). This, coupled with advances in communication channels and approaches makes it much easier for multinationals to enter the international market directly from inception as opposed to the gradual hypothesis of the Uppsala model. Smaller firms operating in the international sphere also have easier ability to respond to market demands and customize goods and services based on the market demands and consumer taste. As such, internationalization and entry into global spheres for operations have been made much easier for international markets as opposed to the traditional entry approaches. Finally, globalization has been witnessed with increased vigour due to the elimination of the trade barriers and the development of facilitating institutions across the globe. This provides more knowledge to entrepreneurs on international trade and thus makes it possible for them to develop ideas with the international market and features in mind. These institutions and channels created by the advances in international trade has also acted as a source of knowledge to small scale entrepreneurs who enter the global markets with much informed ideas as compared to the time when the Uppsala and Vernon theories were developed. As much as the features described make it easier for small scale firms and organisations to be born global, few have benefited from the available opportunities. The ability of a firm to be categorized as born global depends on its ability to look into the specific needs of the new customers and develop swift policies to capture on the available deficit. According to Freeman et all (2006), a number of variables exists that influence the internationalization process for small scale firms. The size of the domestic market plays a major motivating factor for medium sized companies that intend to join the international market. With such a small market, such firms may find it necessary to increase both their competitive advantage and operation levels to enable them enter the global market. The small and medium firms with the ability to enter the global markets have specific characters that differentiate them from local large scale firms. The senior management and major stakeholder to the firm must have a strong commitment and belief on the process of internationalization and how it will influence the performance of the company. It must also be willing to develop a number of approaches and entry modes such as the formation of mergers and partnerships to increase its competitive advantage. Conclusions Entry into the international markets especially emerging markets require a well strategized approach especially for multinationals with operations in developed economies like Britain and the united states. Emerging markets have divergent dynamics, which makes them unique and complex at the same time, aspects that any organisation especially foreign-based multinationals must understand. Brazil, Russia, India and china are some of the emerging markets that have attracted widespread focus and need for investments especially by multinationals and organisations with global operations scales (Bhaumik, 2005). In this paper, entry into Brazil by multinationals based in Denmark has been highlighted, majorly focusing on the challenges and opportunities available should such entry succeed. The paper also contains a consultancy letter to the managing director on the causes of Tesco exit from japan and the United States and how their entry approach failed to make significant impacts into the market. References Anderson, S., & Wictor, I 2003, Innovative internationalisation in new firms: Born-global—the Swedish case. Journal of International Entrepreneurship, 1(3), 249–276. Dunning, J.H 1988, Multinationals, Technology and Competitiveness. Allen & Unwin, London. Freeman, S., Edwards, R., & Schroder, B 2006, “How Smaller Born-Global Firms Use Networks and Alliances to Overcome Constraints to Rapid Internationalization”, Journal of International Marketing, 14 (3), pp. 33-63. Johanson, J., & Vahlne, J.-E 1977, “The internationalization process of the firm – A model of knowledge development and increasing foreign market commitment”, Journal of International Business Studies, 8 (1), pp. 23-32. 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