Telstra Tower Foreign Direct Investment in India and New Zealand Essay

Table of Content 1. Introduction1 2. Telstra Internal1 3. 1 Introduction2 3. 2 External factors3 3. 2. 1 Political3 3. 2. 2 Economic and Business Environment4 3. 2. 3 Culture4 3. 2. 4 Production, market and industry5 3. 3 Entry mode for India5 4. New Zealand7 4. 1 External factors7 4. 1. 1 Political8 4. 1. 2 Cultural8 4. 1. 3 Economic8 4. 1. 4 Technology8 4. 1. 5 Industry9 4. 2 Entry mode for New Zealand9 4. 2. 1 Foreign Direct Investment9 4. 2. 2 Exporting10 4. 2. 3 Licensing11 5. Conclusion12 5. New Zealand12 5. 2 India13 1. Introduction International business is becoming common around the world. Companies can gain access to areas of high growth allowing them to substantially boost their profits. Telstra Corporation is one such company that has reaped the benefits of investing in international markets. Through investing overseas, they have been able to not only boost revenues but also maintain a competitive advantage over local companies and improve demand for their products and services.

This paper will analyse the business environment in New Zealand and India and examine how it might benefit or hinder the growth of Telstra if they were to invest in either of these markets. Our paper will focus on both internal and external factors. For internal factors, we will examine Telstra’s mission, objective and strategies. For the external factors we will consider such things as culture, politics, government regulations, economic, technology and industry. Each factor will determine the suitability of that country for Telstra to invest in.

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In the second part of the paper will discuss which entry mode is suitable for Telstra to apply in New Zealand, exporting and India. Three entry modes will be considered; Foreign Direct Investment, Exporting and Licensing. Each of these will have a varying impact on Telstra. Finally, a final decision will be made about where the optimal investment opportunity lies for Telstra. 2. Telstra Internal Telstra is one of the best-known brands in Australia, they provide the most efficient telecommunications services within the country.

They offer a full range of services and compete in all areas of telecommunications both domestically and internationally. Telstra is divided into 4 strategic units, Domestic Retail, Telstra Wholesale, Telstra International and Infrastructure Services. Telstra’s future strategic direction is to further improve its position as the leading telecommunications and information services company in Australia, and to expand its presence internationally.

Telstra understands that in order to stay competitive with emerging companies in foreign markets they need to focus on developing a wider range of products for all markets. In addition to this, Telstra has begun to develop its international presence especially in the Asia-Pacific region in order to increase their revenues; acquire additional infrastructure; reduce their exposure to any down turn in the Australian market; and also to minimize the competitive risks. As Telstra is a multinational company, they have a competitive advantage in providing global sales and professional technical advice.

They take a decentralized approach to staffing in order to allow their managers to develop specific knowledge about the countries in which they operate. Telstra also operate their global businesses separately, by doing so they are able to expand their range of products to develop new and innovative products for their specific markets and reduce production costs. When investing in new markets, Telstra has tended to focus on economies that are experiencing rapid growth to deliver the largest source of profit for the company.

For example, in 2001, Telstra took a 60% control of Regional Wireless Company Ltd, which is a company owned by the leading telecommunication business CSL Ltd in Hong Kong. At the time, this investment represented an opportunity in a high growth and stable market consistent with Telstra’s strategy. 3. INDIA 3. 1 Introduction Over the last 20 years India has seen a huge amount of FDI flow into the country. India is one of the largest manufacturing sectors in the world, spanning almost all areas of manufacturing activities. With a population of 1. 3 billion, India is emerging as one of the most competitive and compelling telecom markets in the world. For this reason, many telecommunication companies are scrambling to establish a foothold in this expanding market. India represents access to low-cost labor, high-quality networks and innovative marketing. Despite these enormous benefits, India also has a potential downside. Their political instability, cultural differences, economic uncertainty and widespread poverty all represent key challenges. 3. 2 External factors 3. 2. Political Although a company may take the upmost care when investing in a foreign country it will often find that there are external events, beyond its control that will impact the value of the firm. Some of these factors relating to India are: • Slow down in government decisions due to political instability • Adverse changes or unpredictability on foreign investment, import, ownership, pricing or tax issues • Cultural problems, delays or legal disputes due to local partners and suppliers • Labour unrest and industrial action Disruption of normal business due to social and political unrest • Unexpected delays and cost-overruns due to overlapping governmental jurisdiction • Fluctuation in interest, inflation and currency rates • The lack of infrastructure, the grinding poverty, widespread corruption, the continued negative imprint of the caste system and lackluster leadership Of these factors, the most serious for Telstra, in terms of its impact on firm value, is corruption in the Indian government.

Corruption is widespread in India and can be extremely costly for a firm as it adds to the cost of doing businesses, presents ethical challenges and has many legal implications for foreign companies. The main reason behind such corruption and poverty is the poor political system. As a result, many people are reluctant to invest in India as they cannot justify the risk which has caused investment capital to decrease, which eventually discourages investment growth in the country (Feng 2001). Indian courts are said to have a backlog of 27 million cases, and it can take decades for disputes to regarding patent protection and labour laws. 3. . 2 Economic and Business Environment India is the 7th largest and 2nd most populous country in the world. It is also the 4th largest economy in the world in terms of PPP. Recently, India has implemented a number of economic reforms targeted at deregulating the economy and stimulating foreign investment. This has begun to turn India into a hub for investment in the Asia Pacific Region and unleashed the potential strength of a complex and rapidly changing nation. India’s economic policies have helped to make investment in India an attractive proposition and significant capital inflows have begun to flow into India on a long term basis.

The economic policies also urge technology scale agreements between Indian and foreign companies and it has resulted in significant inflows of foreign investment in all areas of the Indian economy. But even with a huge population, India is still has a relatively unskilled workforce due to its insufficient public educational system. This is pushing wage rates for high skilled workers and eroding the cost of advantage that has driven much of the economic growth in India in the past ten years. Even if improvements are made in the education system other key areas will hinder their potential for growth.

Massive investment is required in infrastructure, communication systems, education and health care. 3. 2. 3 Culture Telstra need to understand the culture of India before doing business. In India, different states will have their different official languages. But central government in India only recognizes Hindi as their official language. However, when doing business in India, English is the language of international trade and commerce. Particular attention also needs to be paid to the hierarchy system in India. This system plays a key of role in India and their business culture.

Under the Hinduism and caste system, Indian society operates within a structure of rigorous hierarchy that specifies people’s roles, status and social order. Doing business in Asian countries it is often customary to develop a relationship with clients before business is discussed to build a trusting relationship. Similarly, in India it is likely that locals are more likely to deal with those they know and trust, and turn down those that they do not know no matter how attractive their proposal. 3. 2. 4 Production, market and industry

Since the opening of the Indian market to foreign investors, many new telecommunication companies have tried to gain access to the market. During this time, there has been a steady rise in income levels, which has increased the demand for more advanced and expensive technology like cell phones. Another reason for this telecom boom is the decrease in the call tariff which has made foreign investment less expensive. The increase in competition within the telecom industry has decreased the cost for local customers to use the telecommunication service.

With more than eight million subscriber additions per month, India has become the fastest growing telecom market in the world overtaking China. 3. 3 Entry mode for India The growth of international business in India has just started since 1991. From 1973 till the early 1980s, the Indian government had introduced a ‘40% foreign ownership limit’ policy, which limited the amount of foreign companies operating in India. During this period, many large companies such as Coca-Cola and IBM left the Indian market.

These firms were unable to sustain their operations and comply with domestic rules at the same time and thus refused to reduce their majority control down to only 40% (Majumday 2008). [pic] Table 1: The amount of investmnet in india since 1956 The ownership restrictions were removed in 1991, this increased the freedom for international firms to enter and exit the market. Since then, the economy in India has been growing faster than ever and they have now become the world’s 12th largest economy at market exchange rate and 4th largest in purchasing power.

However, the development in India has been very fast-paced and many of the underlying problems in India, like corruption and instability in the political system, have caused a large imbalance between the development of the market and the living standards which are incredibly poor. Telstra should take this potential problem into account when considering its entry mode. Foreign Direct Investment – Greenfield or Merger and Acquisitions, is a common form of entry that has many advantages. This method allows foreign firms to have tighter control over their operations and a better ability to transfer all valuable know-how most conveniently.

On the other hand, foreign direct investment can be expensive and risky for countries with political instability like India. Businesses in India are still affected by the government and interest groups because of the heavy cultural influence in this country. Some state-owned businesses are starting to privatized but at a low speed. The longer state-owned business last, the more legal risk foreign firms have to face since many businesses are still protected under the government, hence restraining the expansion of these foreign firms in Indian market.

Nevertheless, successive business can benefit from the geographic location of India for future merger and acquisition into neighbor countries like Pakistan, China, Nepal, Bhutan, Bangladesh and Myanmar. Even though the growth of economy has encouraged trade in India with other countries, the government has still attempted to maintain certain trade barriers and high import tariffs to protect its local companies by preventing the massive import of inexpensive goods from China. Therefore, exporting has not been a popular form of entry mode for foreign firms wanting to invest in India.

Last but not least, licensing is easy to establish in India since the competition of production in many industries is becoming more intensive, the choices of finding potential licensee is very high. After the failure with Hong Kong venture Pacific Century Cyber Works (PCCW), Telstra has become more risk averse and is distracting attention from the Asian opportunities. Licensing investment can be lack of control over the operation. However, Telstra is more of a service provider then the degree of control might not be very significant and have much impact on Telstra’s operations.

After considering all possible alternatives, it seems like licensing would be the best option for Telstra to invest in India. This entry guarantees a quick market entrance that only requires Telstra to commit minor amount of resources. Licensing would also help eliminate the risk of exposure to market, political and cultural uncertainties that would be prominent in an acquisition or joint venture (Barkema & Pennings 1996). 4. New Zealand 4. 1 External factors FDI in New Zealand provides very few hurdles in terms of external factors for an Australian company like Telstra.

This is due primarily to the close proximity and similar cultural, economic, political, social, industry factors, market and production factors and technological standings of the two nations. 4. 1. 1 Political The close proximity of the two nations has given rise to close trade and investment ties. As such Australian companies are relatively unhindered when entering the New Zealand market. Both Governments have pledged their commitment to building trade between the two nations and to develop a seamless business environment under the single economic market.

During the 2004 annual Ministerial meetings between the two nations, ministers acknowledged the good progress being made on business law indicating the strength of the relationship. This close political and economic tie has resulted in a number of agreements including most notably the Closer Economic Relations (CER) agreement which is widely recognized as one of the most comprehensive trade agreements. 4. 1. 2 Cultural Adding to the simplicity of investing in New Zealand is the closeness of the two countries cultural and economic positions.

Unlike nations in Asia where there may be significant cultural differences, New Zealand cultural and business norms are very close to those of Australia and other western nations. 4. 1. 3 Economic The economic environment of New Zealand and Australia is also very similar. Both enjoy a stable economic system, characterised by their low corruption, relatively high incomes, low unemployment and their egalitarian cultures. New Zealand ranks third in the world for ease of cross-border transactions with foreign partners; ahead of Australia, the United States of America, Ireland, and Germany. (World Competitiveness Yearbook 2005). . 1. 4 Technology Being a developed nation also means that the necessary technology required to develop a wireless network is already in place. New Zealand was one of the earliest adopters of wireless technology and its technology is relatively advanced and in place. Hence, one of the clear advantages of this is that entering the New Zealand market is that it would be significantly less costly to invest compared with operating in a less developed country. 4. 1. 5 Industry The most significant impediment to Telstra’s investment in New Zealand is the current industry landscape in New Zealand.

The current telecommunications industry is characterised by a larger company Telecom and many smaller companies. Government regulation of the industry is extremely limited and they have previously stated that they prefer to encourage competition rather than over regulate the industry. Without any significant regulation to protect new entrants the industry has been dominated by telecom. In particular, Telecom has recently argued that the Government should not impose any new regulation in order to protect Telecom’s control of production of the new wireless network.

This makes it exceptionally difficult for new entrants into the market. 4. 2 Entry mode for New Zealand Telstra and other service firms face a difficult decision as to which entry mode to choose. The type of entry mode into a foreign market is critical for the firm’s future success. The options available to Telstra include foreign direct investment by way of Merger and acquisition or Greenfield Venture, Exporting, and Licensing. We will now examine Telstra and the advantages and disadvantages of each of these entry modes into New Zealand. 4. 2. Foreign Direct Investment Merger and Acquisition In a cross border merger and acquisition, two firms pool their assets and liabilities to form a new company or acquire a controlling interest over a target firm. Benefits of this mode is that it allows for greater market power, no transportation costs are involved, quick entry to the market and the opportunity to gain new knowledge of the business environment and gain resources. The costs associated with this mode are the costs of integrating the businesses together and the acquisitions costs at takeover.

Telstra’s advantage and success comes from its quality of service, affordable prices and customer services. With this mode, Telstra could transfer their Australia based expertise and couple it with the existing experience and infrastructure, this infusion of knowledge and practices could boost the development of new knowledge (Abrahamson & Fombrun 1994; Bantel & Jackson 1989; Walsh 1995). The pool of new people, skills, cultures and ideas could also serve to stimulate firm growth as the firm will begin to become more flexible to change which could mean greater prospects of future survival. Greenfield

Greenfield Ventures, are ventures which start from scratch in a foreign country and for this reason they require the largest resource commitment out of all the entry modes mentioned. Telstra would need to build its own telecommunication towers which could be a lengthy process, making this mode very slow to implement. High resource commitment in turn allows it to achieve the highest return with the highest level of control. The risks associated with this full control, is that firms are unwilling to change their organizational cultures which make it hard to succeed in foreign countries, where social and culture norms differ.

Many firms which start from scratch are inclined to implement its habitual ways of organizing and managing (Hedberg 1981; Levinthal & March 1993). Firms in foreign markets will tend to hire employees which fit its existing cultures, the affect that this has, mentioned by Freek Vermeulen, is that processes get even more emphatic when the organizations culture becomes simple and compelling. Hence, due to repeated replication, the companies knowledge base narrows and the organization becomes increasingly simple, less flexible and less suited to respond to changes.

This inherent problem associated with Greenfield ventures could be detrimental to Telstra’s survival in the long run. 4. 2. 2 Exporting Exporting is a low investment, low risk and return alternative. Production is done in the home country then exported overseas, as such full control is granted to the local distributors. The main disadvantage of this mode is the high transportation costs involved from transporting products across borders, such as tariffs or taxes. And it’s marketing control which is lost to the local agents.

Firms that benefit from this mode of entry are firms in the manufacturing industry that possess superior assets and skills which can offset the high transportation costs. Since Telstra’s edge in telecommunications is the services it provides, exporting would be very difficult due to its intangible nature, also international services differ from domestic services in that they must cross borders and embrace a foreign culture as discussed by Clark and Rajaratnam (Clark 1999).

Erramilli classifies telecommunications as a, soft service, which to a major extent, are inseparable in the sense that production and consumption occur simultaneously, requiring the local presence of the service firm. Erramilli also noted that for these types of services, exporting is not a feasible entry mode, whereas mergers and acquisitions or owning a facility are more viable options. (Erramilli 1990) 4. 2. 3 Licensing With a licensing contract, Telstra would contract with a company in New Zealand to market Telstra’s service in return for royalties, fees or other compensation.

The foreign firm will then assume the responsibility of marketing and distributing the service in New Zealand. The several advantages Telstra can gain is that it can enter the market relatively quickly without a large resource commitment, transportation costs between countries don’t exist as the service is provided in New Zealand, and risks of an unfamiliar or politically volatile foreign market are not an issue. The main disadvantage of this mode is that it provides the least control for the firm.

Also firms that possess the ability to develop differentiated products, run the risk of loss of long-term revenues if it shares this knowledge with host country firms (Aganval & Ramaswami 1992). However, in Telstra’s case, a service is being provided which means that the degree of control is less important and does not impact Telstra as much. After the above entry modes were analyzed, it seems like the most viable option would be Merger and Acquisition, it achieved the most benefits at the lowest cost and also was the entry mode which ensured the greatest chance of long term survival in New Zealand. . Conclusion After considering the costs and benefits of investing into either New Zealand or India, we came to the conclusion that New Zealand has more competitive advantages over India and it would be a more sound investment for the future. The costs and benefits of each country are outlined below: 5. 1 New Zealand For many years New Zealand and Australia have been maintaining an agreement called Closer Economic Relations (CER), which is a free trade agreement between the two countries.

This close relationship has helped to shape both countries, adopting similar market, political and legal systems. Similar business practices and organizational structures between the two nations allow firms to expand their operations as well as integrate with the existing firms in New Zealand with less effort and time. Furthermore, because New Zealand is a popular tourist location, the inflow of tourists will boost the demand for telecommunication services, which would also increases the incentives for Telstra to enter the market.

If the investment were to be under taken in New Zealand, domestic customers would benefit from greater quality service at a lower cost as competition has increased, Australian Telstra customers could also benefit by making and receiving free calls to New Zealand. New Zealand’s economy is classified as a high income economy, citizens have high living standards and high income. This implies that New Zealand citizens will have a tendency to purchase higher standard products, this positive penetration into the telecommunications market will give Telstra more opportunities to expand their business operations. . 2 India India has only been a developing economy for less than twenty years. Besides the development of many industries, high population and corruption effect of the country has held back the improvement in living standard and social welfare of the citizens. The unstable market and political system has taken away the confidence of citizens over their currency and investment, therefore people tend to spend instead of saving. The lack of investment increases the existence of poverty, malnutrition, poor education, low skill employees and poor infrastructure.

In order to strengthen market, Indian government attempted to enforce higher policy over corporation, which could make foreign firms in India to face various legal and political risks from interest groups and the public. Furthermore, the cost of doing business in India can be expensive due to the culture differences. Adoption of these differences can cost the business more effort, time, higher marketing cost and high employees training.

In addition, many businesses in India are still state-owned, the protection granted by government for this firms will constraint take over and expansion of international businesses. Although both countries have their pros and cons, New Zealand has come out as the less risky alternative with the more stable returns. This does not mean that India has no potential, as the economy continues to improve at a fast pace, many opportunities will present themselves in the future and could be one of the worlds leading destinations of foreign direct investment.

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