Country Risk Analysis And Entry Modes: A Case Study Of Walmart In Mexico (Essay).

PEST Framework for Country Risk Assessment

Question:

Discuss about the Case Study of Walmart Global Operations.

Analysis of country risks enables organization such as Walmart deals with the prediction of political, macroeconomic source of change and non-market events such as social and economic causing strategic, personnel and financial loss. Before making investment decisions, country analysis helps in comparing country market. Assessment of risks can be done by using PEST framework. This framework incorporate all the risk factors associated with organization entry into other countries. Political risks, economic risks, social risks and technological risks.

Political risk can be at micro level or macro level. Stability of political factors is of utmost importance for Walmart when entering in developed and developing economies. Entry decision of organization is greatly impacted by political uncertainties in country. Some of the political factors impact decision of Walmart involves government regulations and political system, secure and safety domestic environment. Mexico lacks institution and there is marginalization of population along with manipulation of populism. Corruption is another factor that poses the risk of investment decision in the country (Csipak et al. 2014). Political agreement of Mexico helps in facilitating free movement of goods and services that leads to import export promotion.

Foreign direct investment and trade regulations might have important effects that can be transmitted through vertical structure of production. Business of Walmart would get affected by some of economic factors such as change in exchange rate, interest rate, taxes, recession, demand and supply scenario. Payment to international suppliers will be affected by change in exchange rate and strategies formulated by organization is impacted by change in interest rate (Wach 2014).

As understood from the characteristics of the social risk, it can originate from numerous ways. In some circumstances, Walmart might internationally or unintentionally contribute to the social or environmental problems and might enable the stakeholders to mount the difficulties by whatever means they have. Walmart might face the problem of operating in areas that are having deep social problems with stakeholder’s negative perception on misinformation or the lack of resources to the problems that prevails. Problems such as communications, chains of supply and other trading relationships might pose as a social risk for Walmart.

Walmart has struggled online and has lagged behind in the market experiments by using social networking technologies that have yielded mixed success. The company faces technology risk in the areas of promoting its merchandising in the local markets internationally. The ecological aspects of the company lags in the areas of radio-frequency identification tags under the supply chain. The technological aspects of the company has led an effect on the customers inattention to customer service at home. 

Risk Factors in Political, Economic, Social, and Technological

Greenfield- Green field strategy is a strategy where a wholly owned subsidiary is owned by expanding firm in a country by subsidiary building. Strategy of green building emphasizes on making good use of capacity of resources of organization. This will assist in establishing new production capacity and production means from foreign market. Main focus of this type of investment is to develop business strategies. Investing via the Greenfield strategy comes with drawback that it required huge amount of financial resources for establishing subsidiaries (Xu et al. 2015). In most of the case, less information is available about host country apart from financial issue. This is so because operations is commenced by new subsidiary with no resources that are transferred from local company compared to merger and acquisition.

Merger and acquisition is an investment method used by organization through external market trading for expanding internal growth. A cross border merger is strategy in which two countries operating in home countries agrees to integrate on a relatively equal basis and combining their competitive advantage for contributing to global market success. Cross border acquisition is an entry mode where firm willing to expand to other country buys controlling interest in existing company of foreign country (Li et al. 2013).

Joint venture is another foreign market entry mode under which an organization is allowed to gain access to new market. An organization intending to enter international market is able to reduce their risk exposures as such type of venture requires less managerial attention and investment. There are some key issues associated with joint venture such as pricing, technology transfer, technology, length of agreement, government intention and long term capabilities (Khandelwal 2014).

The choice of entry modes by organization depends upon various risks prevailing in organization. There exist risks in terms of demand uncertainty of products, political risks and others risks prevailing in any particular country. Moreover, selecting a particular entry mode can be risky to the organization if it brings high risks. Choosing joint venture is a high investment that comes with high risks. Entering any country using foreign direct investment is associated with higher management complexities and greater risks. Similarly, green field investment and acquisition also involves high level of financial investment along with risks. If the market in which organization is seeking entrance is characterized by low risk, then in such scenario, firms tends to opt for wholly owned entry modes (Isa et al. 2016). 

Entry Modes for Foreign Markets

Entry of Walmart in Mexico was in response to various factors such as liberalization of foreign investment codes and reduction of trade barriers in mid 1980s-1990s. The commitment of Mexico in general to integrate with global economy and opening of its market particularly to United States was one of the compelling factor for Walmart to enter the country. Restrictions on foreign investment was relaxed by Mexico. Signing of North America Free trade agreement (NAFTA) in year 1994 and joining of nation with General agreement on tariff and trade led Mexico to lock its inward looking policies and shifting away from populist (Daszkiewicz and Wach 2014). The performance of industrial sector has been considerably affected by opening of market of Mexico and liberalizing of its trade policies. Factor that has made nation an attractive business destination of Walmart is reducing trade barriers. It was perceived by largest retail brand of United States that such barriers reduction would assist them in easily brining consumer goods to market of Mexico. Another fact that as sufficient for inducing producers to make investment in re-tooling and marketing is protection of producers of caustic soda and border fictions removal.

Under mid-1980s, producers of consumer goods in Mexico were highly protected. This was the main reason why the retailers of United States stayed away from investing and doing business in Mexico as their main strength was in home market suppliers. Following over half decade, retailers in Mexico began selling consumer goods in their home country that was imported from United States because of declining tariff on such goods. There was transformation in commercial policy of Mexico due to signing of NAFTA and providing foreign investors with national treatment made Mexico an attractive place to large retail chain based in US. Population of Mexico also heightened this attraction with increasing urbanization and growth in middle class. Demand of consumer gods was driven by growing and increasing affluent population of Mexico.

Participation of foreign retailers such as Walmart initiated in light of approach of Mexican retailers concerning possible collaboration with their counterparts in California and Texas. Progression of negotiations of NAFTA resulted in increasing interest by United States retailers in Mexico. A wave of joint venture was triggered between foreign retailers in United States and Mexican retailers due to these events. In year, 1991, Walmart entered into market of Mexico by forming joint venture with Aurrera an important retailer of nation. The majority of control of Aurrera was took over by Walmart and eventually half of retail market of Mexico is controlled by Walmart. Furthermore, entrance of US retailers was in response of approach of suppliers of Mexico as it will enable them to reach larger market without making any investment in logistics and distribution. Experience of Walmart in South Texas where researcher and analysts cited gains from expanding in Mexico added further to making foreign investment by retail giant. Economic integration was also because of US companies seeking cheap labour (Thomas et al. 2014).

Greenfield, Merger and Acquisition, and Joint Venture

The H-O model can be defined as the general equilibrium model that is used to measure the equilibrium of the international trade. The model is used as the comparative advantage for Walmart in predicting the pattern of trade and commerce and the factors involved in the production depending upon the endowment factors of the Mexico. This is essentially used by the Walmart in order to export the products that uses their abundant and cheap factors of productions and imports products that make the use of the scarce resources factors. The model is used as the comparative advantage in those consumer goods for which the needed factors of production are relatively abundant domestically. As a result of this for Walmart goods that are domestically abundant is cheaper to produce than those goods that need inputs which is scarce in Mexico.

Growing interest on part of super chain retail market to accommodate the population of Latin American countries by providing them with heritage and nostalgia brands. It also propelled retail gain super chain market to establish their business in Mexico. Products of supermarket chains of US has well established brand names in Mexico and in this context, it was not required by Walmart to spend of costly advertisement campaign. Increase in export share of US and accordingly import share of Mexico was another factor that compelled host country and foreign country to engage in such investment (Nguyen 2017). This had the possibility of improving trade relations and overall economic scenario of both the countries.

The introduction of largest retailers of US made foreign firms feel that they do not need local collaborators and this resulted Walmart in buying controlling interest in Aurrera with which it formed joint venture. Competitive pressure brought by Walmex has resulted in creating innovation and waste reduction. Moreover, shedding of labour has resulted in contributing to gain to developing counties such as Mexico. Innovative activities have are resulted in creating successful firms by improving their revenues and increasing products appeal (Kahn and Kok 2014).

Mexican retail sector was induced with two fundamental changes with growing dominance of Walmex. Retail sector was modernized in terms of inventory management, warehousing and distribution. The way suppliers interacted with retail companies was also changed. Growing information technology availability was also reflected as foreign investment benefits to host country. Supply chain system of Mexico was also changed by US retail companies requires drivers to have identification cards and delivery trucks to have appointments and relying on centralized warehouse to channel deliveries to suppliers. Standardized palettes were required for carrying out transactions through shipment. Quality of products produced was subjected to test by third party auditors. Upstream supplying industries were significantly impacted by entry of Walmart into Mexico (Shabbir 2016).

Walmart's Entry into Mexico

Several benefits was attributable to Mexican owned firms that was brought through the interaction of foreign suppliers and imitation. Such firms were approached with new production process, new inputs and innovative products. The production efficiency of small and medium sized suppliers was improved through stimulus provided by retail giant such as Walmart and enabling them to adopt innovations. Foreign investment such as those of Walmart into Mexico has resulted in increasing exports of host nation and capturing a greater share of foreign market (Spicer and Hyatt 2017). 

Relative bargaining position of large and small firms in developing countries such as Mexico was one of the fundamental effect of Walmex. Supply to store brand, cleaners and detergents was done by Walmex using domestically owned medium and small sized producers. This has resulted in uplifting position of such small business firms and thereby contributing to development process. Foreign investment has also resulted in increasing industry wide efficiency of major brand suppliers and small suppliers and this has been done shifting the high cost suppliers out of business. Firms relying on terms of Walmex has resulted in exploiting scale of economies by enabling them to reach larger share of market.  Retailing in Mexico has become more efficient by the distribution system of retail giant. Manufacturing process, inputs and packaging are some of major new developments in Mexico. Mexican producers are effectively precluded by these trends from including detergent technologies. Suppliers have been encouraged to develop inputs by cutting inventory cost among large detergent makers (Martínez et al.2017). 

The manufacturing sector of Mexico has been polarizing effected by Walmart’s entry into Mexico. Difference between strong and weak firms have been sharpened by Walmex for manufacturing sector as a whole. For some of Mexican producers, Walmart’s entry was beneficial while for some other producers, it was detrimental. However, intensified competition brought by the entrance of retail giant has brought some remarkable structural changes in Mexico.

References list:

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Daszkiewicz, N. and Wach, K., 2014. Motives for going international and entry modes of family firms in Poland. Journal of Intercultural Management, 6(2), pp.5-18.

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