When it comes to large companies deciding to expand their business, there are numerous ways they can achieve this. Obviously they want to do it in a way that maximises shareholders wealth so that they achieve their main goal! Although companies have the option to expand into their domestic market, when this becomes saturated they need a new market to take hold of and grow into. One way of doing this is to become multi-national and take hold of foreign markets around the world. They can enter the foreign markets in numerous ways such as exporting, licensing and the much talked about foreign direct investment. The question is which one do they choose?
When it comes to exporting, many companies like to use this
method because it allows them to remain in their home country and domestic
market and still sell their products around the world. However there are
serious problems with this, such as high costs depending on what you’re
selling! For example if you’re a cement company, why stay in England? It will
cost a fortune because of the weight of the product and at the end of the day;
you can make cement anywhere can’t you? Therefore the company may decide to use
licensing! They can go to a local supplier in a foreign country such as China and
teach them how to make their cement product. The local supplier will then sell
it in the Chinese market on behalf of the UK cement company. However, as has
been the case with other licensing agreements, what is stopping the Chinese
supplier then using the UK Company’s techniques and selling the product under
their own name? Nothing is the answer! This has been known to happen to
companies which as a result have then gone bust...Schwinn is a perfect example
of this!
If all the other options are taken what is left? Foreign
Direct Investment...everyone’s heard about it, countries are always trying to encourage
it and companies are always using it, yet most people don’t know what on earth
it is! Well in simple terms, it’s when a company buys a significant amount of
the ownership of a company in another country to gain control over it, or it
when a company buys physical assets abroad. One form of foreign direct
investment is ‘Greenfield investment’ which is when companies go abroad, buy
land and build their business on it. Companies which are known for foreign direct
investment are major worldwide supermarkets such as Wal-Mart and Tesco, also McDonalds
and Burger King use this to enter into new markets.
As I mentioned above, countries are always trying to encourage this and
you may ask yourself, why? Well when a company invests into a country, that
money then flows into the economy helping with many features such as job
creation. One country who has recently opened up channels to encourage FDI is
India, who has opened up the opportunity for large retail supermarket chains to
invest there. ‘India approved allowing
overseas companies to own as much as 51 percent of retailers selling more than
one brand, paving the way for global companies such as Wal-Mart Stores Inc.
(WMT) and Tesco Plc to own stores.’ (Bloomberg, 2011)This will encourage
companies such as Wal-Mart and Tesco’s which are huge multinational companies,
to take advantage of this new market, so they can expand further and as a
result maximise shareholder wealth. India has also eased up its retail rules
which will make the likelihood of Wal-Mart or Tesco investing there greater.
As I talked about above, India
will be developing its rules to allow FDI into the country because of the
advantages it brings with it. Bloomberg (2011) talks about how the investment
from foreign companies into the Indian retail sector will bring in around
10million jobs, help farmers with increased prices and one condition of the
relaxed rules is that foreign companies invest in the Indian infrastructure. You
may ask yourself that while it brings so many good things to an economy, what
then it does for the company?
Well, India boasts a population
of around 1,170,938,000 (World Bank) and if Wal-Mart for example decided to invest
in supermarkets there, they are possibly opening their customer base to another
1,170,938,000 people! This could potentially
create a massive boost in profits and as a result will most likely contribute
to the maximisation of shareholder wealth! However FDI does also bring
uncertainty and companies are at the disposal of the political forces in that
country... 2012 shows the uncertainty that Foreign Direct Investment can bring,
much of the Indian population were opposed to the new rules which will allow
multinational giants to dominate their retail markets. The result...the
government has put on ice the new rules which could prevent Tesco’s expansion
into India! However Tesco are not letting this set back stop them as they are
determined to enter into a market which offers so much potential! Although the
government has frozen the rules for the moment, are they really likely to not
go ahead with them when it will bring so much money into their country?
Although the market is uncertain for Tesco, they are still ploughing ahead with
their plans to invest there and the real question is why wouldn’t a company
choose to use foreign direct investment and open up its business to whole new
markets, with huge customer bases? In my opinion it’s only a matter of time
before Wal-Mart and Tesco have a huge presence in India!
Sources Used:
World Bank
According to your view is Tesco can not expansion into India - is mainly a matter of time.
ReplyDeleteHowever, that considering the FDI will be accompanied by a negative impact, over time, India itself has strong retail market competitiveness; do you think the Indian government will consider loosen the policy or rule to encourage and attract FDI in retail market?
Well the Indian government had lowered the barriers to allow retail FDI into the country. Its because of the public reaction that has caused them to freeze the lowering of the FDI barriers. However I think that in time, the Indian government will go ahead with their plans to attract FDI into the country because the benefits definately outweigh the negatives!
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