Challenges that Firms in Developing Economies face when investing in the Global Environment

Introduction

Bah, Kefan & Izuchukwu (2015) construct that countries value foreign direct investments mainly because they stimulate development and growth of the national economy through knowledge transfer and use of advanced technology. FDIs also help host countries to participate in global markets and therefore, many countries are improving their local conditions to create a favorable environment that attracts foreign investors. Kazakhstan is one of these countries whose government has an interest in developing its local industries with activities that are of more value and therefore, foreign investors are mostly focused on expanding already existing activities. China is another example of a country that has made reforms in order to have its local enterprises assisted in dealing with the challenges being brought about by the unfavorable changes taking place in the global markets and therefore, the country is receiving a high inflow of FDIs. However, not all countries are after FDIs. In Europe, the flow of FDIs are especially through merger and acquisition deals but the policy of the government is one that that directs investments to be done mostly by the locals than the foreigners. Apart from the needs of the host countries, foreign investors also are attracted by the greenfield investments that developed countries have (United Nations, 2017). This paper, explores the entry of Mittal Steel, an Indian company to the global environment to establish what forces attracted it to expand globally, and the benefits and drawbacks its hosting countries have had from its investments. In addition, the paper will assess why its investments were objected in Europe. The study ends with a conclusion that sums up the findings.

History of Mittal Steel Company

Mittal Steel now succeeded by ArcelorMittal, was established by Mr. Lakshmi N. Mittal in 1976. ArcelorMittal was one formed by the merger of Mittal Steel and Arcelor in the year 2006. Mittal Steel is noted to have rapidly grown since the year 1989 because of its successful strategies of developing through business acquisitions it made in Mexico, Canada, Kazakhstan, Germany, the United States, France, Algeria, South Africa, China, Poland, and many more. Arcelor is said to have been a firm that was established in 2002 from the merger of three steel manufacturing firms from different countries, which are Luxembourg, Spain, and France. Arcelor already had production plants in Argentina, Italy, Belgium, Brazil, and Germany. Arcelor’s expansion to other countries also involved having an interest to be one in control and its merger with Mittal Steel, meant that the company was one dominating because; it was already the second largest steel manufacturer globally. ArcelorMittal the newly formed merger has continued to expand its operations globally (ArcelorMittal, n.d).

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The Forces that drove Mittal Steel to start expanding across National Borders

According to Hill (2010), Mittal Steel established in India, experienced growth problems during its first years in business mainly because of unfavorable governing regulations and stiff business competition in the country. To gain a competitive advantage, the company employed a low-cost business strategy by transferring its productions to Indonesia and its supplier was a public firm and seeing how the Mittal Steel run the company successful, the public company chose to hand over its operations to Mittal Steel to stimulate its growth. When this task became successful, Mittal Steel acquired the public firm. Not only was the steel industry a challenge to the local firms in Indonesia, but also in other countries and this challenge had lasted for about four decades. Thus, many countries engaged in the industry were in need of reviving their local firms to be of more value to their national economy. Thus for foreign investors like Mittal Steel, they would easily enter such markets and this investor believed that the conditions in the global market would soon change for the better and decided to acquire public firms of needy countries. Thus, Mittal Steel began expanding globally first as a strategy to cut down its production costs and being attracted by favorable local conditions that host countries had for foreign investors.

Why Mittal Steel expanded to different Nations through Mergers and Acquisitions as opposed to Greenfield Investments

The steel industry is highly competitive and therefore, firms need to work with what they can move with quicker and in this case, mergers and acquisitions become most preferred than greenfield investments. Mergers and acquisitions are best also because, they help investors to capitalize on the competitive strengths of the targeted companies which include- operation systems, brand names, trademarks, customer loyalty, and others. Greenfield investment involves building an asset from scratch and risks to fail in a foreign environment are high. Most foreign investors are compelled that to succeed through mergers and acquisitions is less risky because, their input involves improving the efficiency of the targeted firms using better knowledge and skills, advanced technology, and more capital (Hill, 2010). In this regard, Mittal Steel may have preferred to enter foreign markets through mergers and acquisitions mainly to capitalize on the strengths of those firms and to make it easy for it to grow because of the pace at which it was expanding in other countries. More so, the company had the capability of stimulating growth in the targeted firms.

The benefits that Mittal Steel brings to its Host Countries

Mittal Steel’s host countries like those in developing economies like China and Algeria are benefiting from- the spillovers of advanced technology the company is using in its operations and  improvement of the competitive conditions in the business environment. More so, these countries are also supported to enter the global market and find opportunities to grow their national economies, which include creation of jobs for the locals. Transfer of foreign resources such as new knowledge and advanced technologies stimulate industrialization in host countries (Kurtishi-Kastrati, 2013; Hill, 2010).

The drawbacks that Mittal Steel could have on its Host Countries

Due to intensive business competition, Mittal Steel is likely to deplete the natural resources of its host countries. In addition, high dependence on this company to revive their steel companies may be negatively affected by sudden change that the firm may make with a short time. Hence, the host country is uncertain with how committed the company will run the industry in the long-term. The fact that Mittal Steel has acquired public firms; it leaves the host country being vulnerable to political unrests in regards to denying the nationals the control of their assets. Another drawback is that Mittal Steel is likely to create low-skilled jobs to the locals while making use of expatriates in doing better skilled jobs that are well paying. The profits that Mittal Steel makes are taken to India and are not used to grow the economy of its host countries (RCB/CEL, n.d).

Assessing the Objections that Politicians had against Mittal Steel’s FDI in Europe

European Union is described as an attractive region for FDIs but due to the members’ interests, the region has less FDIs compared to other countries. The member countries are noted to have an interest of protecting their economy and they do this by ensuring that the strategies that foreign investors have are those that are of value to their economy. That is, the foreign investors’ strategies are not one-sided where their home countries only benefit. FDIs are usually screened before they have their place in the European Union and what the members assess include- the potential impacts on the region’s infrastructure, technology, cyber security, critical facilities, and others. From these reasons, it is conveyed that FDIs from developing countries are likely to be objected due lower level of technology, knowledge, and skills that would drive its key industries backwards. Thus, the fact that India is a developing economy, it could have made Mittal Steel be among those foreign companies objected to invest in Europe’s steel industry because, its capabilities are lower and not able to add value in an advanced region (Sprich, 2017).

Conclusion

Mittal Steel’s expansion to the global environment was a strategic move that would make it more competitive in India. The company’s continued expansion was also a business opportunity to globalize easily in countries that it would be of benefit but in others that it would be a challenge due to its poor capacity to be of any significant economic value in those countries. The findings of this study convey that in such countries where FDIs from developing economies are opposed, they should find a different mode of entry perhaps licensing, which addresses the concerns of those countries.

References

ArcelorMittal (n.d). Our history. Retrieved< http://corporate.arcelormittal.com/who-we-are/our-history>.

Bah, A. O., Kefan, X. & Izuchukwu, O. (2015). Strategies and determinants of foreign direct investment (FDI) attraction. International Journal of Management Science and Business Administration, 1(5), 81-89.

Hill (2010). Management: international business 8th ed.: The global trade and investment environment.  New York: McGraw Hill.

Kurtishi-Kastrati, S. (2013). The effects of foreign direct investments for host country’s economy. European Journal of Interdisciplinary Studies, 5(1), 26-38.

RCB/CEL (n.d). Introduction to business management: Impact of multinational companies on the host country. Retrieved< http://textbook.stpauls.br/business_organization/page_144.htm>.

Sprich, C. (2017). Screening foreign direct investments? Position on the proposed EU regulation establishing a framework for screening of foreign direct investments into the European Union. Retrieved< https://ec.europa.eu/info/law/better-regulation/feedback/8162/attachment/090166e5b71ed952_en>.

United Nations (2017). World investment report 2017. Retrieved< http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf>.

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