Global & International Business Essay For Diamond Analysis.

Porter’s National Diamond Analysis

Describe about the Global & International Business Contexts for Diamond Analysis.

The diamond model is a study to find out why certain countries succeed in international trade whereas others fail. The model shows that industries are located in particular regions where there is abundance of land, labour, material and capital which make up the four factors of production supported by a chain of markets, suppliers and customers (Hargrovesn & Smith, 2013). Porter’s model of competitive advantage model of nations considers the following factors:

Factor conditions: Every country is endowed with its own natural resources which include minerals, cheap labour, technology, financial structure which provides capital to industry and favourable land (Saeedi, et al., 2015). These factors are not present in equal ratio in all the country and are an essential determinant of the type of industry that could develop in a country (Månsson, 2014). South Africa is rich in minerals, timber and has human resources to work for soft drink industry but it does not have the capital required and most importantly the technology.

Demand: Customers, being the creators of demands play a very significant role in deciding a firm’s success. When there is a large domestic demand, a company produces better quality products for the home market which also influences the foreign market (Obizhaeva & Wang, 2013). International soft drinks brands like Pepsi and Mountain Dew bear the testimonial that the South African market has good opportunities and the cold drink company can enter the market to exploit its scope.

Related and supporting industries: The presence of ancillary units provides a firm with easily available parts for its assembled finished products. This encourages further development and growth of an industry because availability of parts decreases the cost of importing or buying parts from far off markets. For example, big soft drinks manufacturers like Coca Cola have their own ancillary bottling unit which enables them to cut the cost of buying bottles from outsiders.

A firm’s structure, plans and competitors: The strategies of a firm, structure and rivalry reflect market conditions. South African soft drink market already has two players Coca Cola and Pepsi which presents a huge challenge to a firm of the same category who wants to enter South Africa (Lungeanu & Zajac, 2014). It must also be noted that South Africa is poor in infrastructure, which will make a huge investment in infrastructure mandatory. The marketing strategy of the firm has to be modified to suit the poor conditions of South Africa, like selling the soft drinks from hand carts instead of a chain of stores prevalent in rich countries of Europe, North America and Asia.

Factors Considered in Porter’s Model

Chance events: Changing market conditions, sudden happenings and new innovations can create new opportunities for a firm to exploit. The present soft drink market in the world is experiencing rise in demand of health drinks and low calorie soft drinks. This gives an opportunity to soft drink companies to manufacture sweet carbonated drink for the young and traditional cola lovers, the energy drinks for the health conscious and a low calorie cola variant for the drinker in between these two segments.  Such incidents also allow the soft drinks companies to acquire new buyers and increase profits.

Government policies: This is by far the most important factor which can influence all the stated factors. Today governments encourage entry of foreign companies poses a big threat for the domestic companies especially, the small ones with limited resources. Governments earn huge taxes from them in return of business permit in the country. Thus government policies determine the entry of a multinational company. The soft drink company should follow the laws and rules set by the government of South Africa.

Figure 1. Porters diamond model

(Source: Zhao, Gao & Shi, 2015)

Foreign direct investment refers to investment by a company abroad either by acquiring a company, by means of joint venture or merger in order to get access to its resources and earn profits (Moosa, 2016). Based on the above findings, a company intending to enter the market of South Africa can acquire shares of a domestic company, thus gaining right to manage and control the company’s assets and other resources. A poor country like South Africa can derive the following advantages from FDI:

Economic development stimulation- South Africa has a huge economic resource but lacks the infrastructure and capital to utilize it for the country’s growth. FDI through equity mode can bring in more investment from foreign companies which can help domestic companies to flourish. The European soft drink company can acquire a domestic firm and generate production and employment, thus stimulating economic development.

Employment and economic boost- When a global company enters a new economy, they create companies to cater to the economy’s market. This also leads to growth of ancillary units to supply parts to the main company. This creates employment opportunities bringing about economic growth and improvement in the living standard of the people. Coca cola operates in South Africa through takeovers and other forms of FDI, employing more people than a small domestic company.

Foreign Direct Investment in Equity in South Africa

Easy international trade- International trade policies tend to favour rich, powerful and big countries leaving bleak chances for poor and small countries to bargain. When a global company like Pepsi enters a market through FDI, it can take advantage of the capital and infrastructural strength of the country. FDI makes international trade easier and also gives the domestic companies a platform to explore foreign market opportunities.

Development of human capital resources- A big multinational soft drink company requires more trained and experienced people to handle operations across the various markets it serves. Such a big company not only provides employment to the people in the host country, but also trains them. Thus, a multinational company improves the quality of human resource in its host country and gradually leads to better income and economic growth.

Tax incentive- The governments in the host countries give tax incentives to global companies in return of their technology, expertise and capital. These big giants as a result can inject more capital in the host market thus expand its business further and also decrease the price of their goods and products (Shunko, Do & Tsay, 2014). One of the biggest soft drinks manufacturers in the world, Coca Cola can utilize the tax incentive gained in South Africa by strengthening its market and also reduce the price of the cola drink.

Resource transfer- When a multinational company holds equity shares of a smaller company in another country, it gets right to control the assets and resources of the latter. This means, it use the good and services and also the human resources of the smaller company to support its international trade. Thus, the goods and services get new market abroad and the human resources gets new exposure enriching it (Yarbrough & Yarbrough, 2014).

Increase in productivity- New markets creates new demands thus calling for increase in productivity. A multinational company has the capital and resources to meet the sudden increase in demand, thus helping the domestic to cater to the international market. The brand values of multinational companies also help their subsidiaries to promote their products and grow in the market.

Increase in income- It is evident from the above discussion that, increase in employee productivity and new markets result in larger inflow of revenue. Moreover, FDI through equity mode strengthens the capital structure of a company. These two factors contribute towards faster growth of a domestic company thus expanding its control over the market. A domestic soft drink and bottling plant in South Africa can increase its productivity by assisting a company like Pepsi.

Advantages of FDI in South Africa

FDI, through acquisition of equity shares gives a great boost to an otherwise local firm with limited resources and a limited market. However, FDI too has its own share of demerits or disadvantages. The following are the disadvantages of FDI through equity mode:

Hindrance to domestic income- Michelle Hutches and Sonja Rego in their work, state that the equity capital of a firm is directly responsible for its capability to take risk (Hutchens & Rego, 2013). As per definition, equity capital is the difference between the total of a company’s assets and libilties. It can be understood from these two statements that when a multinational soft drink company acquires FDI right by buying equity shares, it gets the power to control the total assets of the domestic company as well. Such a multinational company often uses the resources to retain its worldwide market position, thus depriving the domestic firm of its deserved income.

Risk of political changes- Unfavorable political changes in the home country of the multinational company affects the business of the domestic company as it becomes totally dependent on the former. Similarly, a political change in the country of the domestic company can affect it the new policies go against the multinational company which winds up its operations in the host country. In either of the cases, the smaller company gets badly affected and is often left with scarce resources and market to sustain on.

Negative influences of exchange rates- A big multinational company like Pepsi or Coca Cola has the expertise like a local beverage company to take advantage of the difference in exchange rates. A domestic company gets exposed to exchange rates and often has to acquire resources at higher prices.

Higher costs- Getting involved in international trade demands more productivity necessitating hiring of more staffs to support it. Complying with various international laws and adapting to various market norms causes manifold increase in the cost. A small soft drink manufacturer, unlike a global player in same category, cannot bear the high cost and usually closes down.

Economically non viable- Unlike the previous defects, this affects the multinational companies who acquires the equity of a foreign company. The market conditions in the host company may become unfavorable and require winding up of the business in the host country. The multinational company incurs heavy losses which may also hamper its business elsewhere.

Expropriation- The government of the host country may acquire the ownership of the assets of the multinational company present within the area of domination. The multinational companies which invest a huge amount towards FDI have to take heavy losses which have significant impact on its resources.

Modern day colonialism- Many countries, especially the ones under colonization by a foreign country like the European countries, hinder FDI. They perceive it as a form of modern colonialism leaving their resources and people open to exploitation by the global companies. It must also be noted that most of the multinational companies in the world including Pepsi and Coca Cola either belong to America or Europe. This fact only fuels this perception of modern day colonialism hindering affecting international trade.

The work titled “Earth, Wind and Fire” states that the mining wealth of South Africa is worth $2.5trillion (Ting, 2016). The following are the recommended strategies which can be undertaken to enter South Africa’s market through FDI in equity mode and for strategic management of it :( Please refer to Appendix 1)

Critically analyze the South African market studying legal, economical, financial and technological aspects related to equity FDI, cultural and other important factors.

Study the local conditions and establish strong relations with financial institutions, especially those with branches in Europe. The company must also look for quality source of raw materials locally otherwise, it has to import the raw materials from other countries.

The company instead of setting up a new subsidiary can take over an existing soft drink company through equity mode FDI and use its plants to create a niche for itself in the South African market.

The bigger portion of the South Africans are poor, hence they cannot afford to visit a hotel or a bar and relish a customized cola drink. The company should employ people to sell drinks at low price to the poor in hand carts which will also allow it to penetrate the rural market. However, tourists visiting the country can relish the coal in hotels and bar. Such an approach will allow the firm to cater to both the poor and the rich (Laws, 1995).

Now a day’s expansion in a new market requires a great deal of open innovations and is very expensive (Chesbrough, H., Vanhaverbeke & West, 2014). The company should enter into contract with institutions for functions like research, promotion, financing and staffing (Johanson & Mattsson, 2015) at local level. This strategy is very effective after entry as the demand increases because availing these services even from an overseas branch of the same company becomes expensive.

Strategies and their implementation need to be more localized after the initial establishment stage (Stromquist & Monkman, 2014). The company at this stage should acquire a bigger firm; obtain stakes of big material supplying ancillary units and promotion channels.

First, South Africa is rich in raw materials but does not have the required infrastructure, capital investment and expert human resource. Hence, a company intending to enter the market of South Africa needs to invest a lot of capital in it before it can start generating high revenue.

Secondly, acquiring equity shares of a domestic company will also require a lot of investment because the market already has strong competitors like Coca Cola and Pepsi. The legal system in the country is still not as open as the European and Asian countries giving rise to a lot of legal complications and high expenditure thereof. Moreover, the people might look upon FDI as a modern form of foreign domination.

PESTEL theory studies the political, economic, social, technological, environmental and legal factors effecting a business organization. They are external or macroeconomic factors which affect a multinational corporation more than a domestic company. A multinational corporation has to consider these factors while making strategies and also incorporate them in its communication plan.

The government policy, political stability, foreign trade policies and the policies and laws pertaining to FDI play a key role in expansion of a multinational company. The political instability and strict control of the South African government put a huge pressure on the foreign companies (Smith, 2014).

International agreements pertaining to taxes, tariffs and exchange rates among other terms and conditions play a very important role in international trade. South Africa is a part of BRICS along with Russia, China, India and Brazil. (Carnoy et al., 2013) This means that an FDI with the country will also access to these emerging markets.

Every country has its own legal framework and departments dealing with taxes and tariffs. The governments monitor the working of the MNCs closely since they are among the biggest tax payers. A multinational company should also abide by the rules of the bodies governing commodities or its raw materials. For example, drinkable water in South Africa has to confirm to the standards of South African National Standard 241 Drinking Water Specification (Janse, Barnard & Krüger, 2016).

The business of an MNC is affected by international incidents like terrorism, inflations and wars adversely leading to heavy losses. Transparent policies and target centred strategies can help to tackle such situations. The company must communicate policy changes to the stake holders like customers and governments to ensure cooperation from them. It can minimize the losses suffered due to such urgencies by spreading them over its global market.

An MNC should use the international laws and laws in various countries to gain best advantage and means to spread its losses owing to unpredictable factors and make them up.

Economic factors are factors of production which include land, labour, materials and capital (Fuss & McFadden, 2014). An MNC should take into consideration the cost of land, laws pertaining to land use and ownership. There exist international labour laws and country specific labour laws in order to protect human resource from exploitation of multinational firms. The firm must include the prevalent remuneration scales and perks in its employee policies to ensure quality labour production. The MNC must abide by the laws to avoid penalty.

Each country has its own reserve of natural resources which can be exploited commercially for production. Entering an economy through FDI allows a global company to get access to a country’s resources helping it to increase productivity. South Africa has natural resources which attracts foreign companies to invest in her resources. An MNC should create ties with various financial institutions to get advantage of various financing options. It must also follow the rules and directions set by the international and national bodies and agreement. 

A multinational corporation caters to a market spread across several countries having their own culture. The multinational company gets both human resource and customers from these markets. It must not act in a way so as harm the religious, cultural or racial sentiments of the people. A big problem in South Africa is apartheid referring to a disparity in laws and treatment giving the minority whites of European origin over the blacks Africans. A multinational company should not indulge in practice of any such policy which will not only affect its business in the country adversely but also hamper its goodwill abroad.

Technology refers to innovation, research and development and autimation which decides minimum levels of production and outsourcing in an economy. South Africa is very poor as far as technology is concerned necessitating a huge capital investment through FDI (Ho, 2014). The resources of the country have not been utilized because South Africa is a poor country without skilled labour force and know how to harness the resources.

Every country has laid down laws to protect its environment in response to international laws to preserve the depleting ecosystems. They also cover water ways, sewage, human health, recycling goods and production of biodegradable products using eco friendly ways. Violation of such laws attracts penal actions or winding up of the business (McIntyre, 2016). Destruction of water resources, forests and wild animal is considered a crime and is dealt in “green criminology” (Beirne & South, 2013). The soft drink company should consider environmental measures tectonic while framing policies so as to avoid grave consequences.

A MNC seeking to enter a foreign market through FDI has to abide by the laws of its home country, host country where it wants to enter and international laws which are often interrelated (Carr & Stone, 2013).  It must use the land and resources of the host country ethically and legally to maximize its revenue. Private and public sectors participate simultaneously to improve conditions of labour. The company must follow labour laws and use its human resource judiciously to avoid conflict and interruption in production resulting in long term losses. Such a problem can also create unfavourable political situation abroad market related to this market. Many countries give consumers legal remedies against fraudulent products and services (Weatherill, 2013). The soft drink company must produce quality soft drink and simultaneously preserve the environment so as not to attract penalties or closure of business.

OLI theory, abbreviation for Ownership, Location and Internalization, is a theory of foreign direct investment (FDI). The theory developed by John Dunning believes that a firm deciding to enter international trade, especially through FDI, considers the three factors and its control over them (Dunning, 2015). These factors go a long way in deciding why some firms are successful global players while others are not. The three determinant factors have been explained below:

Ownership, according to this theory refers to possession of assets and resources and includes raw materials, work in progress and finished goods (Masulis, Pham & Zein, 2015). The key idea is that if a multinational firm acquires the equity of a company in another country, it gives it access to the company’s assets as well. The multinational company can then use these resources and assets for production without degrading their value. A multinational company is able to cater to a global market due to its control over vast resources from different countries. It can also be pointed out that dynamic economies like South Africa encourage this kind of FDI from big multinational corporations due to its inherent advantages

A firm can take to two approaches in FDI to expand its business in a foreign country. It can locate its plant abroad for production and access to the host country’s market which is called horizontal approach. It may take to invest in a foreign country to avail lower cost of production. In both cases, the corporation generally locates it’s headquarter in its own home country and the overseas branches are controlled from the headquarter. The control is considered as vertical often lending FDI its vertical nature (Goswami, 2013). A firm usually prefers acquiring locations in developed or developing nations as they have the customer base with purchase capacity for their products. Countries like India, China and USA have become famous destinations for FDI. Multinational companies like Microsoft, Samsung and TATA have FDI in these countries. Big cities like Beijing in China, Mumbai in India and Washington D.C. in the USA are the most preferred location for setting up controlling units.

A multinational company is dependent on supply chains in all its markets. It can acquire ownership of the firms supplying it with very crucial materials in order to maintain standard in quality and competitive advantage in the market. Here, the supplier becomes a subsidiary or employee of the MNC and this is known as internalization. Again, an MNC may take over its service providers and ancillary unit to ensure speedy servicing and supply of parts at low price. This saves a company’s budget and also increases its business. The company should use its huge international market to follow its internalization policy and execution. This will allow it to acquire local business unit in various areas and derive advantage from them. 

References:

Beirne, P., & South, N. (Eds.). (2013). Issues in green criminology. Routledge.

Carnoy, M., Loyalka, P., Dobryakova, M., Dossani, R., Froumin, I., Kuhns, K., ... & Wang, R. (2013). University expansion in a changing global economy: Triumph of the BRICs?. Stanford University Press.

Carr, I., & Stone, P. (2013). International trade law. Routledge.

Chesbrough, H., Vanhaverbeke, W., & West, J. (Eds.). (2014). New frontiers in open innovation. OUP Oxford.

Conconi, P., Sapir, A., & Zanardi, M. (2016). The internationalization process of firms: from exports to FDI. Journal of International Economics, 99, 16-30.

Dunning, J. H. (2015). Toward an Eclectic Theory of International Production: Some Empirical Tests. In The Eclectic Paradigm (pp. 23-49). Palgrave Macmillan UK.

Fuss, M., & McFadden, D. (Eds.). (2014). Production Economics: A Dual Approach to Theory and Applications: Applications of the Theory of Production (Vol. 2). Elsevier.

Goswami, A. G. (2013). Vertical FDI versus outsourcing: The role of technology transfer costs. The North American Journal of Economics and Finance, 25, 1-21.

Hargroves, K., & Smith, M. H. (2013). The natural advantage of nations: business opportunities, innovation and governance in the 21st century. Earthscan.

Ho, J. K. K. (2014). Formulation of a Systemic PEST Analysis for Strategic Analysis. European academic research, 2(5), 6478-492.

Hutchens, M., & Rego, S. (2013). Tax risk and the cost of equity capital. Available at SSRN.

Janse van Rensburg, S., Barnard, S., & Krüger, M. (2016). Challenges in the potable water industry due to changes in source water quality: case study of Midvaal Water Company, South Africa. Water SA, 42(4), 633-640.

Johanson, J., & Mattsson, L. G. (2015). Internationalisation in industrial systems—a network approach. In Knowledge, Networks and Power (pp. 111-132). Palgrave Macmillan UK.

Laws, E. (1995). Tourist destination management: issues, analysis and policies. Routledge.

Lungeanu, R., & Zajac, E. (2014, January). Director Expertise and its Influence on Firm Strategy: Theory/Evidence from Firms after their IP. In Academy of Management Proceedings (Vol. 2014, No. 1, p. 17095). Academy of Management.

Månsson, A. (2014). Energy, conflict and war: towards a conceptual framework. Energy Research & Social Science, 4, 106-116.

Masulis, R. W., Pham, P. K., & Zein, J. (2015). 7. Ownership and control in family business groups around the world. Research Handbook on Shareholder Power, 131.

McIntyre, O. (2016). Environmental protection of international watercourses under international law. Routledge.

Moosa, I. (2016). Foreign direct investment: theory, evidence and practice. Springer.

Obizhaeva, A. A., & Wang, J. (2013). Optimal trading strategy and supply/demand dynamics. Journal of Financial Markets, 16(1), 1-32.

Saeedi, S., Abiri, B., Hajimiri, A., & Emami, A. (2015, September). Differential optical ring modulator: breaking the bandwidth/quality-factor trade-off. In European Conference on Optical Communication (ECOC) (pp. 1-3).

Shunko, M., Do, H., & Tsay, A. A. (2014). Should a Multinational Firm Place Part of its Supply Chain in a Tax Haven?: Strategies to Enable International Tax Arbitrage. Strategies to Enable International Tax Arbitrage (September 28, 2014).

Smith, N. C. (2014). Morality and the Market (Routledge Revivals): Consumer Pressure for Corporate Accountability. Routledge.

Stromquist, N. P., & Monkman, K. (Eds.). (2014). Globalization and education: Integration and contestation across cultures. R&L Education.

Stromquist, N. P., & Monkman, K. (Eds.). (2014). Globalization and education: Integration and contestation across cultures. R&L Education.

Ting, M. B. (2016). Historical Review of the Relationship between Energy, Mining and the South African Economy. EARTH, WIND AND FIRE, 60.

Weatherill, S. (2013). EU consumer law and policy. Edward Elgar Publishing.

Yarbrough, B. V., & Yarbrough, R. M. (2014). Cooperation and governance in international trade: The strategic organizational approach. Princeton University Press.

Zhao, H., He, K., Gao, X., & Shi, L. (2015, June). Analysis of environmental protection industrial cluster in Yixing based on diamond model. In Industrial Electronics and Applications (ICIEA), 2015 IEEE 10th Conference on (pp. 1081-1086). IEEE.