Question

Section D: (35%) 1.Please illustrate how host market environment affects MNEs on choosing different entry modes such as greenfield (newly establishment) or acquisition. You can choose one perspective from culture, political and legal, and economic aspects to support your argument (30%)

Answer 1

Lets look at this question with examples. Consider MNEs trying to enter the developing markets such as India, China, Malaysia or Indonesia.
In China, the government regulations until in the late 1990s were such that no outside entity could open a business in mainland China. The currency flows were also very restrictive and flow of funds for investments or repatriation of profits was also very cumbersome. This was an era of protectionist regime. During such times, the MNE had to go through the route of acquisition and partnership with the local business. Opening a totally new business venture was not feasible.

In India, until the early 1990s, the government was not very open to foreign investments and currency flows. A pro-socialist government was practically against MNEs. The flows of funds in India for investment and repatriation of funds was very restricted. The central bank and government took active role in managing the flow of foreign currency in and out of the country. Hence, the MNEs had to establish separate legal entities that would operate from within India to start business in India. Starting a Greenfield project funded from outside India or acquisitions was not an option. This deterred MNEs like Coke, P&G from entering the Indian markets for a long time. Unilever on the other hand, established a legal separate entity called Hindustan Unilever to do business in India. After the 90s, Indian economy has started to open up. However, the laws prohibit any foreign company from opening a business owned 100% by entities outside India in certain sectors. The FDI rules require a minimum Indian ownership or stake in the business, which varies for different sectors. This requires a partnership approach for starting a new venture in India. This approach of India and China was, more or less, copied by multiple developing South East Asian countries in the region.

Countries in the Middle East have a strong political influence on the business. For example, in Saudi Arabia, all the businesses have to be owned by the locals and a foreign entity cannot open a new business, wholly owned from outside Saudi. Additionally, almost all major industries have some influence and/ or control of the Sheikh. This is how the legal and political aspects dictates the route of entering a foreign country for MNEs.

The cultural aspect is equally important. When MNEs like Nestle were trying to enter African countries, they had to keep the local preferences in mind. Nestle promoted their milk powder in the poor African countries as a substitute to the mother’s milk. This caused hundreds of thousands of deaths in Africa. The fiasco occurred due to inconsiderate approach of Nestle with regards to the local culture. In countries where the cultural influence is very string, the companies prefer a collaborative approach and opt for a partnership or acquisition of an existing business.

The Greenfield route is more advantageous in countries which have a more developed market and open societies. Countries where the influence from the Western developed cultures is high, the MNEs could opt for Greenfield route. Flow of funds for investment and repatriation of profits is not a big problem in such countries.

Additionally, the intellectual property rights also play a big role in choosing a route for entering the market. Countries where the IPR are strongly protected, Greenfield route is feasible. However, in countries where IPR are strongly protected, the MNEs may chose a partnership approach if they get a better protection from local stake in the business. This is especially true in case of companies in technology, design, medicine, research and development etc.