Q.1. Good governance is one of the qualifying features for attracting inward investment. What ways in which governance can be improved to help countries benefit from foreign investment?
Globerman and Shapiro (2002) studied the effects of governance quality on Foreign Direct Investment inflows and outflows, by using a sample of developing and developed countries between 1995-1997. They applied HDI (Human Development Index) and ESI (Environmental Sustainability Index) along with Kaufmann’s six governance indicators which include: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption) to assess the impact. They found that good governance had a strong positive relationship with FDI inflows. Thus, countries can benefit the most from inward investment by improving on the six dimensions of governance suggested by Kaufman et al (2009).
Inward investment generates job opportunities for local people and increase the level of economic activity in the host country. It also raises competition in the domestic market and the standard of living of people by improving the quality of products/services being offered, reducing prices and giving more value for money. With FDI inflows, developing countries benefit from transfer of technology and management practices. Many MNCs (Multi-national companies) drive research & development, innovation and are responsible for training the human capital of a less developed host country. Labor productivity and increase in real incomes of citizens of a country are important benefits of FDI inflows into a country.
Countries must encourage economic freedom and liberalize trade in order to benefit from FDI inflows. A sound financial system including banks, stock markets and bond markets attract foreign investors. A strong financial system allows MNCs to expand and reach their expected potential and does not limit their growth due to capital constraints (Alam, Mian & Smith). When MNCs get opportunities to expand their operations, they make investments in the host country. This additional investment from foreign investors and companies drive economic growth and development in the host country. Governments must develop secure property rights, put in place an efficient public sector and limit regulatory bans and restrictions on foreign companies.
Governments must take measures to improve the investment climate (by offering incentives, tax holidays, reduce import duties) to attract and retain foreign investment. Also, governance should be made transparent and free of corruption to gain maximum benefit from FDI inflows (Globerman, Shapiro, Tang, 2004). Government regulation should only aim to correct market failure and protect the welfare of the consumers, environment, employees and society. Bureaucracy, red tapism, complex documentation and regulations should be eliminated to attract more foreign investment and derive maximum benefits from it. Corruption not only deters foreign investors but also limits the spill over effects of economic growth and development to the masses.
To reap the maximum benefit out of inward investments is to improve governance in the areas of human capital development. An educated and healthy workforce not only attracts foreign investors but also facilitates quick and effective knowledge and skills transfer. A less skilled and physically weak human resource of a host country starts to rely on the foreign investors and learn nothing from them. Thus, governance and budget allocations in the areas of human capital and infrastructure development must be improved. Such effective governance that protects local interests from unwarranted exploitation but also at the same time creates a conducive environment for foreign investment benefits the most.
Q.2. Is sustainability a new meaning? Discuss the extent to which businesses and government have joined up to sustainability?
Sustainability was well defined in a 1987 UN Conference as ‘meeting present needs without compromising the ability of future generations to meet their needs’. This encompasses ecological sustainability and human sustainability. Ecological sustainability refers to ‘redesigning organizations to contribute to sustainable economic development and the protection and renewal of the biosphere’ (Dunphy, 2000). Human sustainability means ‘building human capability and skills for sustainable high level organizational performance and for community and societal well-being’ (Dunphy, 2000).
Many businesses and governments did not include sustainability as one of their primary objectives to achieve. Business organizations focused all their efforts and strategies on maximizing profits, even if that entailed exploiting the environment and depleting natural resources to obtain short term financial benefits. Governments too ignored this important issue. However, this widespread ignorance and disinterest towards sustainable development that prevailed ten years ago has been reversed. The awareness about the issue has increased now but a lack of cooperation and understanding between the businesses and governments has limited the success of initiatives towards sustainable development.
There is a battle between voluntarism and compulsion going on between governments and businesses (Cowe & Porritt, 2002). According to Cowe and Porritt, prominent businesses understand their responsibilities, but governments have not taken up their share of responsibilities, suggesting that voluntary business action towards sustainable development is better as compared to government intervention that ultimately has a negative impact.
Government policy makers wrongly believe that attaining sustainability just involves devising environmental controls or employee protection laws to reduce exploitation while the businesses hold that by increasing the efficiency and productivity of their existing production systems they can prevent wastage of resources and environmental degradation. Sustainability actually involves developing whole new business models and incorporating organizational cultural change. It is the job of the governments to create awareness and give incentives for businesses to change their policies, procedures and incorporate sustainability in their vision and mission.
U.S department of Commerce presents an example where a government department has increased the awareness sustainability. U.S Department of Commerce has encouraged U.S. firms to implement sustainable manufacturing practices. Instead of creating environmental and employee laws and levying tax charges on firms, the U.S Department of Commerce has spread the perception that firms that adopt environmental and economically sustainable manufacturing processes are able to reduce their cost of doing business and gain competitive advantage. U.S Department of Commerce’s Manufacturing & Services unit has introduced a Sustainable Manufacturing Initiative (SMI) and Public-Private Dialogue with the aim of outlining U.S. industry’s most pressing sustainable manufacturing challenges and coordinating public and private sector efforts to address these challenges (International Trade Administration, 2010).
Q.3. Using familiar case study, apply and critically evaluate the strategies for expansion into emerging markets?
In recent times China and India, the two most fast emerging markets in Asia, have presented great opportunities and large market segments to be explored by foreign multinational companies. These countries not only have large consumer bases for products of international companies but also provide highly talented, educated yet less costly human resource (Van de Kuil, 2008).
Taking the case of India, we understand that various MNCs have used different expansion strategies to enter the Indian market. Licensing and franchising is an effective expansion strategy. Licensing refers to an arrangement by which the licensor or the international company gives the right to the licensee to use patent rights, trademarks, copyrights or product or processes know how (Levi, 2007). Franchising refers to an arrangement or relationship whereby a franchisor provides a license to the franchisee to use the franchisor’s brand name, production techniques and management techniques in another geographic market. Franchising was used by McDonalds to enter the Indian market.
The advantage that McDonald’s had by using franchising to expand into the Indian market was that it did not have to invest large sums of money in India and so did not face any financial risks and development and set up costs of business. It was not only a cost effective way of expansion but it was a quick way to expand. Franchisor (McDonald’s) has considerable control over the management and processes of the franchisee and at the same time benefits from the local knowledge of customer behavior and market trends that the Indian franchisee possesses.
The Indian franchisee benefitted as it did not have to develop brand identity or brand positioning. It simply had to leverage the already established brand name and equity of McDonald’s. However, a major challenge that McDonald’s had to face in India was that of maintaining quality standards that it has internationally. In developing countries, it is difficult to find employees that are already trained to carry out the standard services.
Strategic alliances and Joint Ventures are other important expansion strategies used by foreign companies to enter the Indian market. Strategic alliance refers to an agreement between two companies in order to combine their value chain activities for the purpose of competition advantage (Levi, 2007). Joint Venture occurs when one company has enough stake in another company that gives it a right to voice opinions in management issues but does not allow it to dominate. When the international retail giant – Wal-Mart wanted to expand its business to India, it formed a joint venture with Bharti Enterprises, Inc in 2006.
Wal-Mart benefitted immensely from this joint venture to establish itself in the Indian market. Both Wal-Mart and Bharti Enterprise were able to form a working business unit (Fea, 2009). Wal-Mart was able to mitigate reputational and legal risks as it had a local partner involved. It was able to comply with all the Indian government restriction for foreign investors. The only likely threat to both the parties of this joint venture is that conflict of objectives and strategies may create rift between the two partners and raise risks for both.