Risks and Opportunities of Multinational Corporations

May 8, 2010
Heino Døssing

There are risks and opportunities that are indigenous to multinational corporations. Learn about these via two case studies, in Ukraine and the Caribbean.

It takes careful and fairly complex consideration, before a business decides to open operations abroad and become a multinational corporation. The company needs to ask what advantages are related to expanding abroad and how foreign operations should be run. In addition, the choice of foreign location should be based on a thorough scanning of the environment in several candidate countries.

This article focuses on the risks and opportunities related to the macroeconomic environment. One of the most well-known tools used to scan countries is the PEST analysis. PEST is an abbreviation of Political, Economic, Social and Technological. Trends in each of these factors can result in the success or demise of any company trying to break into foreign markets.

PEST Analysis – A Case Study of the Seafood Industry in Ukraine

In this case study, a fictional European producer of seafood is seeking to move into the Ukrainian market for fishery products. Before making the final decision, the business conducts a PEST analysis, based on Gain Reports from USDA Foreign Agricultural Service. Here are the macroeconomic risks and opportunities related to opening a subsidiary in Ukraine.

Political Environment

The most important issues for the seafood company are: the governing of Ukraine, import duties, tariffs, veterinary clearances and corruption. Both the relatively weak democracy in Ukraine, potential corruption in the local fishery market and strict standards for veterinarian clearance of imported fish represent some serious risks. On the other hand, both increased efforts to improve Ukraine's regulatory system (made in an effort to become a WTO member) and recent decreases in import duties may be opportunities that can be exploited.

Economic Environment

Numbers from Euromonitor International show that Ukraine has experienced rapid economic growth throughout large parts of first decade of this millennium. The Ukrainian consumers' preferences have shifted towards healthier and higher quality food products, such as seafood, as the overall wealth has increased. The increase in seafood consumption represents an opportunity. However, the individual Ukrainian can only eat a limited amount of seafood and therefore it can be questioned whether or not the increase in seafood sales is going to continue.

Social Environment

Historically, Ukrainian consumers have bought their fish at local open air food markets. By and large, this is still the situation. However, a shift in local traditions are in favour of modern supermarkets. Selling fish from coolers in air-conditioned stores makes it suitable for retailers to carry fish throughout the year. Thus, the current large seasonal swings in seafood sales may be mitigated. This represents a definite opportunity for seafood producers represented in Ukraine.

Technological Environment

Infrastructure for transportation and communication is fairly well developed in Ukraine. However, most of the large cold storage facilities that are used to store seafood are old, soviet era buildings. The low quality of these facilities makes it difficult to storage seafood appropriately during the summer. Thus, lack of modern technological standards in cold storage spike significant seasonal fluctuation in seafood sales. This provides the (fictional) European seafood producer with a significant opportunity; e.g. the company can build a modern cold storage facility and become one of the country's steadiest providers of seafood.

The Caribbean Community and Business Opportunities

Researchers across the world have looked into regional trade agreement (RTA) members' ability to create business opportunities and attract foreign investments. The economists Ruth Clarke and Twila-Mae Logan have looked closer at the Caribbean Community (CARICOM), a trade agreement covering 20 Caribbean countries. Clarke and Logan found that the establishment of CARICOM have helped its members attract an increased level of foreign direct investments (FDI). In their paper, Emerging FDI Patterns in the CARICOM Region, Clarke and Logan provide several explanations, e.g. CARICOM have:

created a larger local market that crosses national borders
promoted trade liberalization
made market entry easier

These three factors all represent increased business opportunities and it is thus very likely that the increase in FDI is a result of more foreign companies opening subsidiaries in the Caribbean region. However, some of the CARICOM member countries have been more successful than others. Those with sound legal and political institutions and less corruption have experienced the largest increases in FDI.

Development in Regional Trade Agreements

Clarke and Logan's findings are not surprising, as similar results have been seen after the establishment of trade agreements in other regions of the world. Due to the success of the earliest RTAs, e.g. the European Union, the numbers of RTAs grew by 300% between 1991 and 2000. Integration via trade agreements have obvious advantages and several countries standing outside existing trade agreements seek to be included. Thus, it is easy to assume that the trend towards more integration will continue. However, only the future will determine the outcome.