Main Strategic Motives of Companies Who Choose to Invest Abroad - Essay Example

International Financial Management Contents Contents 2 Introduction 3 Discussion 3 Main strategic motives of companies who choose to invest abroad 3 Motives of three MNE’s behind investing abroad 5 Conclusion 8 References 9 Introduction In present day scenario a company has to face several risks while operating a business. The risk associated with a business gets compounded when the companies try to open branches in more than one country. Besides facing Exchange rate related risks a multinational enterprise has to face risks in the line of Political, Legal, Social and cultural, Technological, Economic and environmental. The risks come associated with additional benefits and prestige of being a globally recognised company. In the following pages the article tries to find the reasons and motivating factors that motivates a company go international and to establish its operations worldwide. The strategic motives behind the move are analyzed in respect of three different countries and it is tried to find out whether the strategy has proved to be successful. Discussion Main strategic motives of companies who choose to invest abroad There are several risks associated with investing abroad like exchange rate related risk and other risks identifiable by the PESTEL framework (Xun & Zhenyu, 2009). However a company still goes for business overseas. The motives behind the company going in for overseas business are Resource seeking The main aim and reason why the companies go for setting up of international business is because they want to acquire a particular resource that is not available in their home country or is available at foreign country at a lower cost than the home country (Franco, Rentocchini & Marzetti, 2008). The resource may be labour, some raw materials, natural resources etc. Labour The cost of labour is found to be less in many cases in foreign countries especially developing countries as compared to developed countries. So to utilize the services of low labour cost which ultimately translates to lower operational costs and ultimately higher profit many companies open their branches or subsidiaries overseas. Raw materials The raw material required for production in certain cases is available in particular countries and companies set up their factories in that country to use the source of raw materials for their production. Market seeking Often a multinational company sets up a subsidiary or rather invests in a foreign country because it wants to exploit the market potential. For example many companies are now setting up their branches or subsidiaries in countries such as China & India, because market potential and market growth rate of both these countries are huge. In certain cases the threat of competitors capturing a major share of market motivates companies to open a subsidiary in a foreign country. Efficiency seeking In certain cases the factor that motivates the company to open their subsidiaries abroad are to take advantage of the efficiency that will be available in terms of production, economies of scale etc. They seek to take advantage of the differences that exist in cost availability of different factors in different countries. Strategic asset seeking Firms may invest internationally in order to take strategic advantage or build strategic assets (Floyd, 2000). Other factors that guide the decision of opening a business venture abroad is the fact that opening businesses in various company helps it to take the advantage of different political situation, diversification of risks, and availability of large capital (Hillson & Murray-Webster, 2007). By opening their business ventures abroad companies are actually able to diversify their risks because of the fact that although all the countries are economically connected still the internal market, scope and risk associated with a particular country is different from other countries. Motives of three MNE’s behind investing abroad British airways This airline was formed in the year 1974 through merger of two major airlines British Overseas Airways Corporation (BOAC); and British European Airways (BEA). It is the major airline of Britain and is largest on the basis of fleet size no. of international flights and destinations. British airways have long followed the strategy to increase market share on the basis of worldwide mergers and acquisitions. It has acquired several airlines worldwide over the years to become a global company, increase fleet size, diversify market risk and cater to new markets. Recently British airways have acquired Iberia Airlines and Vuera to form a new company called international airline group in 2011. The main reason behind forming this merger and setting operation overseas is to cater to a large market and increase market share. Lufthansa This airline was founded in 1953 and begun its operation in 1955. Lufthansa is the largest airline in Europe in terms of no. of passengers carried by it and its fleet size if combined with the no. of flights operated by it and subsidiaries together. Over the years Lufthansa has acquired many airlines like Air Dolomiti of Italy, Austrian airlines an Austrian Company. The logic behind its acquisitions is to grow faster into newer markets and outperform its competitors by sheer size. They have acquired numerous airlines over the years to cater to customers in different countries and to offer its customers unique rewards. Recently Lufthansa has acquired jet blue with the target of achieving supremacy among the three main airlines like Air France, British Airways and Lufthansa (Grossman, 2007). Air France Air France like Lufthansa and British airways was initially founded as a national carrier within the country of its origin. It was originally found in 1933 by the merger of 4 different airlines. Air France was originally constituted and operated as a national airline of France. The Airlines was a member of the sky alliance group Sky team. Recently the airlines have become private with government selling its major shares of the company. The selling of its majority shares by the government in the company; it has earned the freedom to expand its operation globally. With a view to expand its scale of operations, expand its market share and earn more revenue it merged with Netherlands based KLM airlines. How successful have these strategies been? Air France- KLM Air France and KLM were the national air carriers of France and Netherlands respectively. They joined their operations in 2004 to form a merged entity Air France- KLM group. However the two companies continue to run individually under as a subsidiary of the group. The merger of the two airlines was done for cost savings to the tune of 400-500 million Euros. Besides increasing their market share and catering to a large no. of customers worldwide, the merger has resulted in the formation of largest company on the basis of operating revenue. The company also achieved a distinct first to become the largest company on the basis of total kilometres covered in Europe. British airways- Iberia Airlines The main market dominance of British airways cantered around North America, Asia and Europe. With this merger the British airways would be able to spread its wings over Latin America a previously unexplored market of the British airways. The merger was done because it was viewed that the two businesses will complement each other well. Through this deal the British airways was able to expand its operations to Europe, North America, Far East and Australia, Africa and South America. British Airways was able to become third largest in Europe through this merger. British Airways has two major competitors in the form of Lufthansa and Air France. Although started as national airlines the companies have emerged as major players in the international airlines market post liberalization. The British airlines want to dominate the competition and lead the market. This deal will serve it in that regard to achieve its goal. Luftansa- Jet blue Lufthansa was previously the national carrier of Germany. Since privatization it has emerged as one of the largest airlines in the world. To expand its business it has acquired many airlines from different countries in the past. It has acquired close to 20 % stake in Jet blue. Through this investment it wants to expand its services in America by taking advantage of Jet Blues reputation in America as a low cost carrier (JetBlue Airways, 2007). The acquisition would further help Lufthansa consolidate its position as one of the leaders in the airlines industry and would be able to stack well against its competitors British airways and Air France. Conclusion It is found that although there are several risks associated with a company going in for investment in international markets and different countries, still the companies continue to do so. The motives that drive them to open their branch overseas or expand their business on international scale are recourse seeking, market seeking, efficiency seeking and strategic asset seeking. Resource seeking involves opening of new business overseas to take advantage of raw materials, labour etc. Market seeking refers to the opening of foreign branches to take advantage of international market and efficiency seeking in respect of better economies of scale. The report analyses this theme on the basis of three airlines company namely British airways, Lufthansa and Air France. In all these cases it is found that the airlines expanded their operation oversees to capture several strategic advantages but most importantly to increase market share and consolidate their position in the fiercely competitive airline industry. References Floyd, D. 2000. International Business Environment. Journal of Management & Development. Vol.15 (5), pp.48-52. Franco, C., Rentocchini, F.& Marzetti, G. V. (2008) Why do firms invest abroad?an analysis of the motives underlying foreign direct investments. Available at: www.etsg.org/ETSG2008/Papers/Franco.pdf. [Accessed 22 November 2014].  Grossman, D. 2007. JetBlue and the global battle for air supremacy. [Online] Avialable at: http://usatoday30.usatoday.com/travel/columnist/grossman/2007-12-24-jetblue-global-battle_N.htm [Accessed 22 November 2014].  Hillson, D. & Murray-Webster, R. 2007. Understanding and Managing Risk Attitude. New York: Gower Publishing Ltd. JetBlue Airways, 2007. Lufthansa to Make Equity Investment in JetBlue; Will Buy Up to 19% Stake For $7.27 Per Share. [Online] Available at: http://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-newsArticle&ID=1087283&highlight [Accessed 22 November 2014].  Xun, L. & Zhenyu, W. 2009. Corporate risk management and investment decisions. The Journal of Risk Finance, Vol. 10 (2), pp.155 – 168. Read More