Introduction
In the wake of globalization, many companies are considering expanding into new markets outsides their home countries. However, the transition has a number of risks that most companies should put into consideration before making decisions to enter new markets (Beath, Fan, Frauscher, Jarvis, & Reis, 2008). Multinational corporations seeking to expand overseas are usually faced with challenges categorized into economic, business, and legal issues. This discussion will focus on some of the risks of doing business in Brazil and India with reference to Vodafone.
India
India has many opportunities for economic growth, something that is attracting many foreign investors to consider expanding into the country. However, many constraints should be considered prior to do business in India. A major risk of expanding into India concerns regulatory issues. The impacts of political risk cause positive outcomes of free trade reforms put in place in 1991 to decline (Beath, Fan, Frauscher, Jarvis, & Reis, 2008). The political environment of India is weak because of many scandals associated with corruption in addition to escalating food and fuel costs. There is a history of paralyzing the decision-making process in the country.
Investors from overseas in India, especially with regard to phone companies, have been disrupted and about $900 million pulled out of the stock market of India. The main worry is that mobile phone licenses are on the brink of being revoked or renegotiations being inevitable. In the last five years, India’s inflation ran at 8.23pc, which is above the target of the central bank pegged at 5 to 6pc. In a move to have inflation rate checked by the central bank, there are high chances that interest rates will soar at a faster rate than before. The move reduces the economic growth of India. Statistics reveal that the country is experiencing a rise in interest rates by 175 percent (Reuvid, 2013).
Brazil
Brazil has experienced economic stability in the past 10 years, making it one of the first nations to exhibit recovery from the 2008 global economic recession. The country is rated seventh in the world based on GDP at PPP (Beath, Fan, Frauscher, Jarvis, & Reis, 2008). However, with a population of more than 200 million, Brazil’s income per person is still low, ranking 74th worldwide. In the past decade, over 35 million people in Brazil have come out of poverty, although income distribution is still unequal.
Economically, Brazil grew by 0.1 percent in 2014 and it was projected to reduce by about 1.5 percent within a year. Economic growth in the country has been marred by declining prices in primary goods. There is also a decline in consumer purchasing power since inflation increased unpredictably to 9 percent (Reuvid, 2013). To stabilize the economy, interest rates rose sharply in the last decade. From 2014 to 2015, the country experienced an increase in unemployment rates from 6.5 percent to 8.1 percent.
Brazil is rated among the leading investment destinations in the world. However, amid a formally robust business environment, corruption is still a major hindrance to doing business in Brazil. The aspect of corruption is prevalent when it comes to conducting business deals with local authorities. It is notable that Brazil has various regulatory bodies because of the national makeup of the political system. This increases the possibility for officials to demand bribes from potential investors (Cavusgil, Ghauri, & Agarwal, 2002).
At the same time, the tax system in Brazil is sophisticated and prone to incidences of corruption. Available information indicates that tax collection agencies usually ask for bribes to be less stringent on tax evaluations and inspections. Investors may find it hard to maneuver sophisticated systems and stakes when expanding to do business in Brazil.
Risks for Vodafone to Consider Before Entering Brazil and India
India
Cultural Risks
When entering India, Vodafone should overcome the aspect of cultural differences evident in the Indian population. Due to cultural diversity, India does business differently. The country’s business culture is established on the Hinduism culture with an overlay of Islam, western business structures, and the British Raj. It will be important for Vodafone to understand the hierarchical perspective, sophisticated communication patterns, and a slew of other subtleties before establishing the approach of entry.
When entering India, Vodafone should overcome the aspect of cultural differences evident in the Indian population. Due to cultural diversity, India does business differently. The country’s business culture is established on the Hinduism culture with an overlay of Islam, Western business structures, and the British Raj. It will be important for Vodafone to understand the hierarchical perspective, sophisticated communication patterns, and a slew of other subtleties before establishing the approach of entry.
The Indian hierarchical structure of the society is one of the key aspects of the culture Vodafone has to consider before entering the market since it can significantly affect the business. For example, it may not be quite clear about who is making the final decision when partnering with foreign companies. The majority of Indian companies are family businesses where the decision is made by the family’s patriarch; this can significantly complicate the interactions with possible business partners of Vodafone, a company that is used to the Western traditions.
Furthermore, the hierarchy is also present with regards to middle and junior management, so it will be very confusing for the Vodafone representatives to understand in which way they should approach business with Indian corporations. Communication patterns in India are also irregular; for example, even company owners cannot answer ‘no’ to a business deal and will make promises that they cannot accomplish. This, in turn, can significantly affect Vodafone since it is ineffective to establish clear plans when there are no guarantees that a business deal will go through.
Financial Risks
A major problem when expanding into India with regard to financial risk is foreign exchange rate fluctuation. India uses Rupee as its currency. While Vodafone may have an advantage because of the strength of the dollar and sterling pound, the constant fluctuation of the Rupee may present a risk when doing business in India. The currency is not pegged at other foreign currencies at a stable rate.
Economic and Political Risks
According to market assessment, the government of India put in place predetermined conditions that should be met by foreign investors. Such policies are in line with the bureaucratic system of the government, which makes it hard for an increase in India’s FDI.
Furthermore, some sectors of the economy in India cannot get FDI, and such regulatory deterrence locks out a profitable source of technology and expertise. Vodafone should put in mind that most sectors in India require a license from the government before investment takes off. While the licensing procedure was established to improve quality and hygiene, it has instead become a problem affecting competition in the telecommunication industry (Cavusgil, Ghauri, & Agarwal, 2002).
However, in recent years, the government has significantly relaxed the norms for foreign direct investment in the sectors of defense, power, and stock exchanges, as well as telecommunications (IBEF, 2016). This means that despite the fact that Vodafone will have to go through a licensing procedure, it is highly likely that India will accept its foreign investment and allow expand the business in the country.
As aforementioned, corruption is a big problem among officials in India. Statistics show that the government controls approximately 43 percent of the capital stock and 15 percent of labor outside agriculture. As such, entering India will present a problem in terms of the privatization of foreign companies.
Poverty levels of India are rated among the worst globally. It would be difficult to achieve profitability for a company like Vodafone operating in a poor population. The last aspect to consider when entering India is the security (Reuvid, 2013). The country is yet to have peace with Pakistan. The conflict makes India vulnerable to terrorist attacks, which paint a bad image for the country.
Infrastructure Constraints
India is known to have a poor transport infrastructure. This poses a great risk for any foreign company planning to expand into the country because accessibility to some areas to market a product would be challenging. Despite the fact that Vodafone offers telecommunication and does not rely on transportation as a tool for delivering quality services, the poor transport infrastructure may become a barrier in cases of emergency technical maintenance procedures. For example, if there are some issues with the operation of a cell tower and an emergency technician has to get to it quickly, the traffic and the overall poor infrastructure may increase the downtime and leave customers unsatisfied.
Consumer Behavior
India has the worst poverty rate in the world, which causes malnutrition and reliance on child labor. Demographically, India has more children below the age of 14 years as compared to most developed countries around the world. Children comprise 3.6 percent of the total workforce in the country (Cavusgil, Ghauri, & Agarwal, 2002). Although in many poverty-stricken countries the usage of the Internet and mobile phones is considered a luxury, the sphere of tech and telecom has advanced in India so extensively that is embedded in the everyday culture of the country.
Even the poorest families in India have at least one cellphone, so the potential for Vodafone to expand its business in India is very high. Moreover, Vodafone already had a positive experience with expanding its business in Kenya (launching of M-Pesa cooperatively with Safaricom) (Leach, 2015), a developing country in Africa, so reaching customers in India where the culture of telecommunication is an integral part of everyday life for the majority of the population should be an accomplishable task.
Brazil
Cultural Risks
Uncertainty avoidance presents a major cultural risk when it comes to doing business in Brazil. With regard to cultural peculiarities that can present some risks for Vodafone, it is important to mention the language barrier. While in India the bulk of the population understands and speaks English, the distribution of the English-speaking population in Brazil is uneven (Plotkin, 2013), so Vodafone’s representatives will have to employ translators and interpreters in order to adapt to the cultural environment in the country.
Financial Risks
While Brazil is perceived as a considerably stable economy, any company entering the market has risks to face with regard to finance. The country’s currency has remained obstinately expensive for many years (ScotiaBank, 2016). The effect of this is seen in the high cost of living. Moreover, the widening gap between the urban rich and rural poor presents a risk of inequality.
Such a gap between the earning abilities of the highest and the lowest-earning population in Brazil is a significant challenge that Vodafone will have to overcome since it is important to provide high-quality services that will satisfy the rich and offer prices that will be acceptable to the poor. It is, therefore, important for Vodafone to undertake extensive market analysis to understand the difference between people in the urban and rural areas of the country.
Economic and Political Risks
Politically, Brazil has 26 states and a single national district. The legislative organ comprises of a bicameral National Congress that is made up of the Senate and the dispute chamber (Cavusgil, Ghauri, & Agarwal, 2002). Three decades ago, the country transitioned from a military dictatorship and embraced a positive democracy that has a presidential structure. Although President Dilma was re-elected, the 2015 economic recession and severe policy implemented to attain a balance in public finance; the government is infamous due to huge corruption scandals.
According to the research conducted by ScotiaBank (2016), the vote to impeach President Rousseff in Brazil will be one of the key challenges for foreign investors in 2016-2017 due to economic and political instability. Therefore, Vodafone should investigate the situation in the country in great detail in order to account for any possible risks associated with entering a new market.
Brazil has more than 200 million people with an income rate per person ranking the country 74th globally. The income per head indicates that most of the people in Brazil fall under the middle class. This requires that Vodafone provide products that meet the needs of middle-class populations to assure profitability. Economic growth in Brazil is still very low with only 0.1 percent in 2015. Conducting business in the country proves challenging because of the declining prices on primary commodities (Cavusgil, Ghauri, & Agarwal, 2002).
Infrastructure Constraints
While Brazil has a strong economy, it still has some characteristics of developing countries. The integration of big cities with other areas of the country is hindered by a poor transport system. Infrastructural inefficiency will present a challenge for a company like Vodafone to reach areas where the coverage of the telecommunication needs to be fixed, which is similar to the problem the company may face in India. Despite the fact that Vodafone does not manufacture any products, the efficient design of the infrastructure is needed for maintenance purposes as well as cooperation with local businesses.
Consumer Behavior
Consumer purchasing power is also low because of a 9 percent increase in the inflation rate. Vodafone may find it hard to get prospective customers for its services because of the steady increase in unemployment rates. It has been noted that unemployment rates soared from 6.5 percent to 8.1 percent in 2015. Most people may not have enough income to purchase expensive telecommunication services from a foreign company. This challenge may be one of the most significant barriers that Vodafone will face when entering the Brazilian market since there is not much room for growth.
On the other hand, the upper and middle class of consumers is characterized by a large population of young people who are proficient in technologies and are always on the look for a good telecommunication provider that will offer high-quality services and be reliable enough for the Internet coverage. Therefore, consumer behaviors in Brazil are quite diverse due to the broad range of customer segments that have different requirements with regards to the services offered by Vodafone.
References
Beath, A., Fan, Q., Frauscher, K., Jarvis, M., & Reis, J. G. (2008). The investment climate in Brazil, India, and South Africa: A comparison of approaches for sustaining economic growth in emerging economies. Washington, DC: World Bank.
Cavusgil, S. T., Ghauri, P. N., & Agarwal, M. R. (2002). Doing business in emerging markets: Entry and negotiation strategies. Thousand Oaks: Sage Publications
IBEF. (2016). Foreign direct investment. Web.
Leach, A. (2015). Mobile money: Why isn’t M-Pesa effect hitting more countries?Web.
Plotkin, J. (2013). Why is the level of English so low in Brazil? Web.
Reuvid, J. (2013). Managing business risk: A practical guide to protecting your business. London, UK: Kogan Page.
ScotiaBank. (2016). Global economics and foreign exchange strategy. Web.