The Dubious Logic of Global Megamergers - Essay Example

? International Business 4th, April, ASSIGNMENT 2 (PART In the international business context, a merger refers to the process of combining the business operations of two or more companies to form a single business entity (U.S Securities and Exchange Commission 2013, p.1). Notably, in most cases business mergers involve former competitors with an aim of combining market shares to enable them control market forces and offer quality products to the customers and majority shareholders to approve a merger. Nevertheless, specific monopoly laws pose a legal challenge for two dominant market players to merge. Most significantly is the fact that mergers have resultant benefits and accrued demerits. As a result, there have been diverse arguments for and against the policy of mergers in the international business. Over the years, the growth of mergers continues to fall. In fact, in 2011 and 2012, there were few mergers, with only four deals hitting the $20 billion mark in 2012. The pro-mergers argue that those global level mega-mergers are inevitable as part of the cycle of consolidation and concentration in globalizing industries where firms seek to gain advantage and accelerate their presence (Deans, Kroeger, & Zeisel 2002, p.1-3). On the other hand, the anti-mergers argue that business leaders should embrace innovativeness and desist from mergers in approaching international business Ghemawat & Ghadar (2000). Indeed, according to AT Kearney, in a span of 25 years, all industries in the globe will consolidate in four stages that include the opening phase, the accumulation, focus, and alliance stage (Deans, Kroeger, & Zeisel 2002, p.1-2). He notes that the four stages are distinct and derive unique results. He argues that industries follow a similar consolidation pattern although some industries may spend more time in certain stages than others may. Moreover, he states that all industries encounter similar challenges at respective stages. Additionally he argues that the size, location, and type of business does not matter in consolidation but endgames stage matters. An industry starts at a low level of concentration and increases its merger and acquisition activity until it reaches saturation. At this point, alliances form. From the article, we can derive that companies follow a uniform consolidation pattern and consolidation allows companies to get bigger (Deans, Kroeger, & Zeisel 2002, p.1-3). More so, merger decline upon reaching concentration and result to alliances. As such, when companies understand the patterns that mergers follow, and appreciate that their companies stand on the consolidation curve, then they can initiate successful mergers. Actually, A.T. Kearney’s theory predicts that then dominant players in the industry will gain 60-70% of global market revenues in a merger endgame. This demonstrates the escalating free movement of resources, people, and information over the few years (Deans, Kroeger, & Zeisel 2002, p.1-3). Most importantly, it is worth noting that mergers bear significant benefits to international business despite the process having reasonable risks. As such, the benefits of any merger rely heavily on the marketing strategy in application and therefore not all mergers are successful. Notably, a successful merger that combines two or more companies’ leads to expansion of services and products offered as well as customer base and market shares. Ideally, when companies combine in a buyout strategy, they relevantly share resources and expand their market presence locally and internationally. More so, the market expansion and consolidation of resources cuts down operation and business costs (Periasamy 2009, p.11). For example, when a local company mergers with an international company the local company gains international market presence through the networks established by its partner. Indeed, most companies lack international networks and thus to gain international market presence a merger is relevant. More so, the establishment of a merger enables a profit making company to declare its partner’s losses as a tax write-off. This adds up to a tax benefit to the latter company. However, most importantly a merger allows for the combination of relevant marketing strategies, skills, and operations to form a wholesome business entity (Periasamy 2009, p.11). For example, the merger between a company with good at administration and a company with good marketing strategies allows the formation of a new business entity with synergy. Indeed, despite the risks involved, the rules of synergy can effectively create a successful a merger. In this case, the new business entity will have greater potential in the marketing and administration departments thus creating a superior competitive advantage than individual companies. Furthermore, companies with complementary products or services need to merge to increase their competitive advantage in the global market. Since, most companies are only perfect in one area, a merger is thus necessary to ensure business entities are wholesomely prepared to engage in the global competition (Periasamy 2009, p.11). In addition, the modern business world presents a rapid growth of Private Equity Funds, regulatory environment of the publicly owned companies coupled with gusto to gain advantage and accelerate their presence in a short time. This has made mergers necessary, as most companies cannot achieve this on their own within a short time. Actually, mergers can fast track a company’s success story by eliminating any weakness through restructuring and strategizing. More so, the current business environment that adopts the aspect of globalization fosters streamlined operations and synergies thus encouraging the emergence and growth of business mergers for purposes of increasing market presence and competitive advantage. Indeed, with the transfer of technology and resources in a merger with an international company, local companies can survive and succeed in the international arena. Actually, a merger will enable a company to develop, launch new products, open new distribution channels, improve technical knowledge, and expand infrastructure base (Qureshi 2012, p.1). Otherwise, the huge capital required, logistics involved, and risks there in, discourage, and demean the success of young companies in the global market. Actually, some companies are not self-sufficient to operate on their own subject to the above factors and inability to keep up with other competitors. In such a case, subsidiaries companies must merge with the parent company to ensure a going concern and guarantee better output. This is clearer since a merger reduces the operating costs of the new business entity. Indeed, this makes up a good strategy for a recession. Furthermore, to enhance competitive advantage, companies need to merge for purposes of improving company and monopolizing the market to the disadvantage of their competitors. On the other hand, the modern business society is prone to political interferences across the globe. These political factors affect a business in diverse ways. As such, a merger with a company in a country with a friendly political environment will reduce the political risks and guarantee a competitive advantage over companies in hostile political environments. Otherwise, hostile political environments will only cripple companies in those countries. In addition, it is quite notable that capital markets do not function effectively and hence a merger is necessary to lower the cost of capital. At the same time, the modern business environment requires companies to have more economies of scale for it to survive in the global market. In this case, a merger is relevant in raising the economies of scale by providing a national network especially in a horizontal merger (Periasamy 2009, p.10-11). More so, the modern global market requires companies to engage in continuous research that will ensure better marketing strategies and competitive advantage. Many companies may lack the resources for such research and thus the need for a merger to guarantee profitability and availability of such resources (Pettinger 2012, p.1). At the same time, companies can merge with an aim of avoiding duplication of services. This guarantees low operation costs and resultant environmental benefits. Furthermore, businesspersons assume that a merger results to an increased shareholder value of a firm thus increasing the value of a company. Indeed, the new established shareholder value will be higher than the value of the sum of the shares of the two separate companies. Hence, to increase the value of a parent company, a merger is necessary. Most certainly, a successful merger fosters the confidence of customers as the new business entity can now produce reliable products and gain market share. However, we have anti-mergers who claim that business leaders should embrace innovativeness and desist from mergers in approaching international business Ghemawat & Ghadar (2000). Indeed, the two authors reckon that many companies are engaging in global megamergers with a mistaken assumption that this will guarantee concentration and that the global economy is a winner-take-all economy. They however feel that in the modern globalization companies have better alternatives than the global megamergers. They categorically state that research shows that globalizing industries has led to a decrease in concentration since World War II (Ghemawat & Ghadar 2000, p.1). They therefore offer alternative strategies to guarantee competitive advantage and accelerate their presence in the international market. They propose that companies can buy cast-off assets from merging rivals as such assets may offer significant growth opportunities to smaller companies. To this effect, they give the example of the now competitive oil industry after the Williams Companies bought terminals from the1998 merger of BP and Amoco (Ghemawat & Ghadar 2000, p.1). Additionally, Ghemawat & Ghadar (2000) propose that companies can put more emphasis on domestic or regional expansion market rather than on establishing global presence. This guarantees that a company commands a high price regionally as globalizing may be too expensive. Indeed, expanding a business in the domestic and regional market is cheaper than establishing global market presence. More so, they argue that since a megamerger requires a lot of time, management, and resources, one can use these factors to improve their market position as other strive to establish megamergers. Indeed, this guarantees competitive advantage with less business risks. Furthermore, they argue that indeed companies can engage in partnerships instead of mergers saying that in most cases, alliances are better and easier to enter than mergers. They give the example of a successful alliance between IBM Company and its PC business like Acer (Ghemawat & Ghadar 2000, p.1). Subject to the costs, laws, and logistics involved, an alliance is more beneficial than a merger. More so, they argue that it would be better for a company to sell out instead of entering into a merger as this may add value to Internet stocks. On the other hand, they propose that where one cannot respond to their competitors' mega-deals on their own, then they can coerce regulators in their industry to institute antitrust proceedings against their competitors. Although this may not be an ethical approach, it is less expensive compared to a merger. Finally, they argue that if your industry offers substantial first-mover advantages, then it would be relevant allow other engage in global consolidation first. This will enable the company to have wide knowledge of the industry before thinking of a merger (Ghemawat & Ghadar 2000, p.1). Most importantly, it is very clear that certain monopoly and federal laws pose a great challenge for two dominant competitors to merge. Hence, a merger may not be a formidable solution to gain competitive advantage and global market presence. Indeed, to establish a merger, the partners in in the proposed merger must sanction their respective shareholders and in most cases seek for a two-thirds approval (U.S Securities and Exchange Commission 2013 p.1). This is however not a simple challenge and it can lead to significant differences thus making the process lengthy and complicated (Qureshi 2012 p.1). As such, the partners may waste a lot of time and resources trying to create a merger at the expense of establishing dominance in their domestic market. More so, a merger can reduce competition, increase monopoly, and hence increase prices of products (Pettinger 2012, p.1). This will thus disadvantage the customers and thus leading to low market value. At the same time, a merger can generate a conflict of goals and objectives between partners thus leading to difficulties in making decisions and disputes in the new business entity (Qureshi 2012, p.1). This degrades the value of the company in a significant scale. Additionally, the increased size of the new business entity may foster diseconomies of scale due to lack of consistent and reasonable degree of control. This will result to management challenges that would discourage the commitment of the employees thus lowering the productivity of the new entity (Pettinger 2012, p.1). Most significantly, although a merger may be beneficial to the managers and other stakeholders, it can lead to loss of employment as the new firm seeks to eliminate the under-performing sectors in a takeover (Pettinger 2012, p.1). This would hurt the economy and thus demeaning the significance of a merger. In conclusion, I find that a merger has great benefits and accrued demerits. Most assuredly, I appreciate the contribution of mega mergers in international business. The role played by mergers in establishing competitive advantage and international market presence is synonymous. However, I reckon that many statute and monopoly laws, logistics, and capital requirements that make the process of establishing a merger so complex and challenging. More so, there are significant alternatives to a merger process in the business environment that derive superior competitive advantage at lower costs and reduced risks. Furthermore, the effects of a merger are not universally beneficial to the economy and economies of scale. Indeed, in the last three years, we have experienced reduced megamergers with reduced revenues and this trend demonstrates that this year we will have fewer megamergers. Actually, the time and resources used in the process of formulating a megamerger can significantly lead to superior domestic and regional market dominance. As such, I conclude that global mega-mergers are a bad policy to undertake in international business practice. ASSIGNMENT 2 (PART 2) Q.3 (a) Foreign direct investment (FDI) refers to the measure of foreign ownership of productive assets. FDI involves the direct investment in a foreign by a company in a parent country. Notably, FDI promotes economic globalization. The recent years have experience tremendous growth in foreign direct investment, privatization of companies, and resultant increase in net inflows. Ideally, the growth of foreign direct investment flows to developing countries to the benefit of both countries. However, there have been great considerations on the potential for greater foreign direct investment flows in disregard of environmental conservation. Moreover, there is growing global awareness that foreign direct investment needs to be sustainable for the foreign and parent nations to benefit. This leads to the concept of sustainable foreign direct investment. This paper will compare and contrast the concept of sustainable foreign direct investment and Dunning’s definition of transactions cost foreign direct investment. The concept of sustainable foreign direct investment propagates the consideration of the environmental, social, and economic influence that foreign direct investment yields. The concept recognizes the need to integrate cheap labor and raw materials with the requirement to invest in environmental conservation, technology transfers, health, labor and security rights, and education and training (Lillywhite 2002, p.2). Indeed, the concept of sustainable foreign direct investment ensures a pleasant environment for social, economic, and ecological development by reducing environmental and social impacts of foreign direct investment and increasing the quantity of foreign direct investment inflows (Zarksy & Gallagher 2003, P.1). To achieve a sustainable FDI, host nations should highlight and advocate for their development priorities to the foreign investors. The host nation should equally request and ensure an evaluation of how foreign direct investment projects will influence the environmental, social, economic, and ecological factors. On the other hand, the foreign investors should evaluate and strategize on how to promote societal benefits with an aim of ensuring that both parties enjoy a win-win result (Zarksy & Gallagher, 2003 P.1). Indeed, we can qualify an investment to have followed the sustainable foreign direct investment if it enhances local productive capacities, fosters environmental performance, and strengthens social cohesion. On the other hand, Dunning defines the dynamics of foreign direct investment by including the aspect of transaction costs and designing the Dunning’s international business paradigm that define the feedback benefits of foreign host location advantages to the ownership advantages of the firm. Dunning referred transaction costs as the “costs of organizing relationships over and above that which have to be incurred in a perfect market. The costs may be both endogenous and exogenous to firms. Both kinds of costs may vary between countries, sectors of activity and firms. Both kinds of costs may also contain elements of both structural and endemic market failure” (Cuervo n.y, p.6). To this effect, Dunning seeks to show that a foreign investor must have the knowledge, skills, and ability to invest in a less costly and more efficient manner with an aim of becoming effective and producing goods at a reasonable price. Moreover, Dunning’s eclectic framework manifests an improved approach to transaction cost by incorporating transaction cost variables and location and ownership factors. He sought to show that transaction costs relate to relevant economics and investment decisions that may affect the investment rate. Q.3 (b) There is a clear and direct relationship between corporate social responsibility (CSR) and foreign direct investment in international business. To this effect, corporate social responsibility refers to all voluntary action that demonstrates the commitment and responsibility of a foreign investor towards the social, environmental, economic, and legal aspects of the host nation (Foreign Affairs and International Trade Canada 2013, p.1). Indeed corporate social responsibility entails more than just giving donations but equally manifests a commitment by the foreign investor to behave ethically, uphold environmental conservation, foster economic development, and improve the quality of employee’s, their families, and the public’s life. Actually, over the years, corporate social responsibility and foreign direct investment has been interdependent and yielded many positive results to the host developing nations. Notably, corporate social responsibility has a potential of guaranteeing positive social contribution to the society and the development of local economies. Most assuredly, there is enormous importance in real CSR to large multinationals operating foreign direct investment projects in developing host nations. Corporate social responsibility seeks to achieve a balance between the foreign investor’s urge for maximum profits and the diverse community and environmental needs (Banerjee 2007, p.18-20). Corporate social responsibility involves the policies and actions that ensure the integration of investor’s business operations and values and the diverse interests of all stakeholders in the host nation. It may also involve the integration of economic, social, and environmental terms in the mission statement of a foreign company (New Zealand Trade and Enterprise 2013, p.1). More so, corporate social responsibility involves the compliance of the established local rules and regulations furthermore, in relation to foreign direct investment, corporate social responsibility relate to constant monitoring of the company’s image and operating in an open, transparent, and accountable manner (New Zealand Trade and Enterprise 2013, p.1). Actually, this may entails personal concern on the employees and the society in the host nation. In addition, CSR include living up to the company’s responsibilities and commitments as well as adopting a good business practice that will guarantee equality, fairness, and morality in the host nation. Indeed, there are practical endeavors that a foreign company can adapt to ensure implementation of the corporate social responsibility policy. A foreign company can establish a Staff Welfare Fund to cater for the social needs of the employees and their families. Additionally, a foreign company can give donations, visit children’s home, elderly homes, and the less fortunate homes with an aim of improving the quality of their lives. At the same time, the company can venture in social and charitable activities that would benefit the local community. Furthermore, the foreign company can collaborate with government and non-government organizations to boost the livelihood of the local society. However, in recent times, we have seen international foreign investors neglect their corporate social responsibility thus causing massive human and ecological disasters in their global operations. Nevertheless, many multinational companies have been consistent in implementing their CSR thus receiving numerous awards. Ideally, a corporate social responsibility is fundamental in managing the way a foreign company deals with societal issues in the host nation. Such issues may include managing employee’s wellbeing, gender equality, and social welfare. Indeed, the corporate social responsibility strategy will ensure that a foreign company acquires a positive image in the host nation by offering positive impact to the society (New Zealand Trade and Enterprise 2013, p.1). This translates to goodwill that enables a foreign company to gain competitive advantage in the host nation. Worth noting is the fact that the common notion of corporate social responsibility on foreign direct investment assumes that corporate social responsibility is mostly beneficial to the society in the host nation. However, a foreign company that adopts a corporate social responsibility policy not only guarantees sustainable development in the local community but also ensures that the foreign company operates in a comfortable environment. This ensures that the company attains high productivity, a going concern and enjoys high turnovers. Actually, once a foreign company adopts an effective corporate social responsibility, it gains an advantage to attract additional customers as the CSR policy develops some uniqueness from its potential customers. Indeed, customers seemingly like companies that engage in corporate social responsibility and considerably value their products Nyankweli 2009, p.19). Furthermore, a CSR policy in a foreign nation plays a major role in motivating the company’s staff and enhancing customer service. Ethical behavior (Schwartz 2011, p. 29), employee welfare organizations, and culture sustainability demonstrate CSR and sufficiently boost the morale of employee thus guaranteeing quality and increased production. In addition, this plays a major role in reducing employee turnover since the employee would be willing to stay. It also ensures professional recruitment as the company will have a chance to recruit the best since the top cream of the host nation would love to associate with the foreign company. Moreover, a company that adopts a corporate social responsibility policy would manage to retain and satisfy its employees thus enhancing commitment and productivity (International Institute for Sustainable Development 2013, p.1). Notably, in most cases foreign companies expand their market presence to countries where their business is unknown. In such a case, a corporate social responsibility policy would enable the company to acquit itself with the local conditions and cultural trends. This enhances business acceptance and good will for its products and services in the host nation. At the same time, the fact that many local and foreign nations have a mandate to adopt corporate social responsibility policies, this creates a chance for local and foreign companies to interact. As such, in course of articulating corporate social responsibility in foreign direct investment, a foreign company can establish significant alliances with other companies and organizations that would effectively boost its market presence and derive competitive advantage. Furthermore, corporate social responsibility involves compliance with established local rules and regulations in a host nation by a foreign company. Upon successful compliance of the law and government policies, a foreign nation avoids potential legal costs or fines that may result from noncompliance or ignorance (New Zealand Trade and Enterprise 2013, p.1). In addition, compliance ensures that the foreign company is at peace and not in conflict with the government, local community, and regulatory agencies. Furthermore, such compliance will ensure that the foreign company produces safety products and decreases company’s liabilities. This guarantees a good business environment, good will, reduced operating costs, and acceptance in the host nation. At the same time, there is common assumption that products from a company that practices corporate social responsibility, holds an additional benefit and thus corporate social responsibility would increase the turnover of products in a foreign company. Most assuredly, CSR ensures ethical behavior in company operating in a foreign nation. This reduces conflicts-of-interest between managers and non-investing stakeholders as all comply with the set standards. At the same time, corporate social responsibility reinforces the positive engagement in the management of a foreign company thus creating a positive influence in operating performance. Indeed, the aspect of corporate social responsibility ensures that a foreign company has an easier and effective mechanism of solving disputes and designing development strategies. Additionally, a corporate social responsibility policy seeks to boost the reputation of the foreign company to the local society thus creating an acceptance experience. Moreover, foreign company’s CEOs adopt corporate social responsibility policies to curb future instances of activism against the foreign company. Indeed, this secures the professionalism and success of a CEO for future considerations (Harjoto & Jo 2009, p.2-5). The associations of the foreign companies with corporate social responsibility policies that guarantee environmental conservation ensures that the company secures high quality raw material that depend on the environment of the host nation. Actually, corporate social responsibility policies in foreign direct investment signal brand differentiation and the production of high quality product at reduced costs. However, the most significant benefit of adopting a corporate social responsibility policy by a foreign company is that it guarantees productivity, acceptance in the local society, good reputation (Werther & Chandler 2010, p.22) goodwill, and going concern that facilitates high market share value in the stock market. Indeed, this is significant in that other stakeholders can associate with the success of the foreign company all over the world. This ensures that the benefits from the foreign nation flow to the parent nation. Actually, with the improved market share value, the foreign company can access additional financial capital that would facilitate future development of the company. Furthermore, the improved financial performance (International Institute for Sustainable Development 2013, p.1) from corporate social responsibility policies will ensure that shareholders of the foreign company enjoy financial gains through dividends and share allocations. Moreover, the improved financial performance that the foreign company gains from corporate social responsibility enables the company to diversify its operation and production thus increasing productivity. At the same time, access to additional capital enables the company to gain competitive advantage and establish successful global presence. As such, it is quite clear that there is great importance of real corporate social responsibility to large multinationals operating foreign direct investment projects in developing host nations. 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