LOW PAIN, MORE GAIN: THE EFFECT OF COUNTRY RISK ON THE MODE OF MARKET ENTRY ON THE EXAMPLE OF U.S.

COMPANIES OVER FOUR DECADES

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A Thesis Presented to the Faculty of San Diego State University _______________

In Partial Fulfillment of the Requirements for the Degree Master of Business Administration _______________

by Johannes Thomas Adam Hensler Summer 2012

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Copyright 2012 by Johannes Thomas Adam Hensler All Rights Reserved

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DEDICATION
I dedicate this thesis to my family, who enabled me to get this far and supports me in all possible ways to reach my goals every single day.

Any time you take a chance You better be sure the rewards Are worth the risk -- Stanley Kubrick

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ABSTRACT OF THE THESIS

Low Pain More Gain: The Effect of Country Risk on the Mode of Market Entry on the Example of U.S. Companies for Over Four Decades by Johannes Thomas Adam Hensler Master of Business Administration San Diego State University, 2012 This thesis discusses the effect of country risk of seven developing countries on the behavior of ten American multinational corporations (MNC) over four decades. It shows that country risk has the explanatory power to significantly determine the corporate behavior when entering a foreign, developing country. Aside from country risk only a few other factors could prove to have contributed to the MNCs choices how to enter the new market. Further the thesis will explains that enterprises which did choose the right combination of country risk and mode of entry were in general quite successful. The framework for the analysis is built upon the eclectic model of Hill, Hwang, and Kim; a holistic model based on several managerial theories, specific transaction-cost theory, resource-based theory and bargaining power theory. Due to this comprehensive approach the model has higher explanatory power than models based only on one of the mentioned theories. The other parts of the framework are qualitative and quantitative country risk data and 51 cases of company entries into one of the seven developing markets. The thesis shows that a pure transaction cost-model or resource-based model is insufficient to explain the choice of market entry mode and, therefore the holistic eclectic model is chosen. At the same time a resource-based view provides the hypothesis, that country risk does significantly explain the behavior of the MNCs in the last four decades. In opposition to a transaction costmodel I assume that companies will tend to choose a mode of low resource-commitment for developing markets with a high country risk and vice versa. In cases where this hypothesis does not hold true the other forces of the eclectic model will be tested to determine, which the minor significant factors are. The thesis uses the PRS Groups International Country Risk Score (ICRS) in combination with qualitative data to determine country risk for each relevant period of time during the four decades. The cases are built by a mixture of corporate data and reports on the MNCs and then combined with the found risk data, to test the hypothesis.

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TABLE OF CONTENTS
PAGE ABSTRACT ............................................................................................................................. vi LIST OF TABLES .....................................................................................................................x LIST OF FIGURES ................................................................................................................ xii ACKNOWLEDGEMENTS ................................................................................................... xiii CHAPTER 1 THE STORY ..................................................................................................................1 Definition of the Problem ........................................................................................2 Goal of the Thesis ....................................................................................................5 Structure ...................................................................................................................6 2 DEFINITION OF RISK AND COUNTRY RISK ........................................................8 Risk ..........................................................................................................................8 Country Risk ............................................................................................................9 3 BUILDING THE FRAMEWORK ..............................................................................12 The Eclectic Framework ........................................................................................12 Methodology ..........................................................................................................15 The Variables .........................................................................................................16 The Modes of Entry ...............................................................................................17 Export ...............................................................................................................18 Partnership .......................................................................................................19 Joint Ventures ..................................................................................................20 Acquisition .......................................................................................................21 Greenfield ........................................................................................................21 The Research ..........................................................................................................22 4 THE COMPANIES......................................................................................................23 Archer Daniels Midland .........................................................................................23 Cummins ................................................................................................................26 General Electric .....................................................................................................27 Honeywell International.........................................................................................29

viii John Deere .............................................................................................................31 Johnson & Johnson ................................................................................................33 Kraft Foods ............................................................................................................35 Procter & Gamble ..................................................................................................36 Tyson Foods ...........................................................................................................39 Whirlpool ...............................................................................................................41 5 THE COUNTRIES ......................................................................................................44 Argentina................................................................................................................44 The 1980s (Relevant Years).............................................................................45 The 1990s (Relevant Years).............................................................................46 The 2000s (Relevant Years).............................................................................48 Brazil ......................................................................................................................49 The 1970s (Relevant Years).............................................................................50 The 1980s (Relevant Years).............................................................................52 The 1990s (Relevant Years).............................................................................53 The 2000s (Relevant Years).............................................................................56 Czechoslovakia and the Czech Republic ...............................................................57 The 1960s (Relevant Years).............................................................................58 The 1990s (Relevant Years).............................................................................58 The 2000s (Relevant Years).............................................................................60 India .......................................................................................................................62 The 1980s (Relevant Years).............................................................................63 The 1990s (Relevant Years).............................................................................64 The 2000s (Relevant Years).............................................................................67 Mexico ...................................................................................................................68 The 1990s (Relevant Years)...................................................................................69 Poland ....................................................................................................................73 The 1990s (Relevant Years).............................................................................73 The 2000s (Relevant Years).............................................................................76 Russia .....................................................................................................................78 The 1970s (Relevant Years).............................................................................79 The 1990s (Relevant Years).............................................................................79 The 2000s (Relevant Years).............................................................................81

ix Summary, Analysis, Findings, Success Stories And Conclusion ..........................83 6 7 8 SUMMARY .................................................................................................................84 ANALYSIS ..................................................................................................................86 FINDINGS ...................................................................................................................89 The Chance Strategy Cases ....................................................................................89 ADM in Argentina ...........................................................................................89 ADM in Brazil .................................................................................................90 Kraft in Argentina/Brazil .................................................................................90 Kraft in Russia .................................................................................................90 Tyson in Russia ................................................................................................91 JnJ in Russia.....................................................................................................91 P&G in Argentina/Russia ................................................................................91 Cummins in Brazil ...........................................................................................91 Honeywell in Russia ........................................................................................92 Whirlpool in Argentina ....................................................................................92 Whirlpool in Brazil ..........................................................................................92 Results ....................................................................................................................92 9 SUCCESS STORIES ...................................................................................................94 ADM ......................................................................................................................94 General Electrics ....................................................................................................95 Honeywell ..............................................................................................................96 John Deere .............................................................................................................96 Summary of Success rate .......................................................................................97 10 CONCLUSION AND LIMITATIONS OF THE THESIS ..........................................98 REFERENCES ......................................................................................................................100 APPENDIX ADDITIONAL INFORMATION ON THE ECLECTIC MODEL .................................112

LIST OF TABLES
PAGE Table 1. List of Companies Divided Into Product Clusters .....................................................23 Table 2. List of Analyzed Countries and Clusters ...................................................................44 Table 3. ICRG Ranking for Argentina 2010 ............................................................................45 Table 4. Conditional Analysis of Argentina 1980s ..................................................................45 Table 5. ICRG Ranking for Argentina 1980s ..........................................................................46 Table 6. Conditional Analysis of Argentina 1991 1992. ......................................................47 Table 7. ICRG Ranking for Argentina 1990 1992 ................................................................47 Table 8. Conditional Analysis of Argentina 1998 2000 .......................................................48 Table 9. ICRG Ranking for Argentina 1998 2000 ................................................................48 Table 10. Conditional Analysis of Argentina 2008 .................................................................49 Table 11. ICRG Ranking for Argentina 2008 ..........................................................................49 Table 12. ICRG Ranking for Brazil 2010 ................................................................................50 Table 13. Conditional Analysis of Brazil 1972 - 1974 ............................................................51 Table 14. ICRG Ranking for Brazil 1972 - 1974.....................................................................51 Table 15. Conditional Analysis of Brazil 1979 .......................................................................52 Table 16. ICRG Ranking for Brazil 1979 ................................................................................52 Table 17. Conditional Analysis Brazil 1988 ............................................................................53 Table 18. ICRG Ranking for Brazil 1988 ................................................................................53 Table 19. Conditional Analysis of Brazil 1992 .......................................................................54 Table 20. ICRG Ranking for Brazil 1992 ................................................................................54 Table 21. Conditional Analysis of Brazil 1996 .......................................................................55 Table 22. ICRG Ranking for Brazil 1996 ................................................................................56 Table 23. Conditional Analysis of Brazil 2008 .......................................................................56 Table 24. ICRG Ranking for Brazil 2008 ................................................................................57 Table 25. ICRG Ranking for the Czech Republic 2010 ..........................................................57 Table 26. Conditional Analysis of the Czech Republic 1989 - 1992.......................................60 Table 27. ICRG Ranking for the Czech Republic 1989-1993 .................................................60 Table 28. Conditional Analysis of the Czech Republic 2009 ..................................................61

xi Table 29. ICRG Ranking for the Czech Republic 2009 ..........................................................62 Table 30. ICRG Ranking for India 2010 .................................................................................62 Table 31. Conditional Analysis of India 1985 - 1989 ..............................................................64 Table 32. ICRG Ranking for India 1985 - 1989 ......................................................................64 Table 33. Conditional Analysis of India 1990 - 1991 ..............................................................65 Table 34. ICRG Ranking for India 1990 - 1991 ......................................................................66 Table 35. Conditional Analysis of India 1997 - 2001 ..............................................................67 Table 36. ICRG Ranking for India 1997-2001 ........................................................................67 Table 37. Conditional Analysis of India 2005 .........................................................................68 Table 38. ICRG Ranking for India 2005 .................................................................................69 Table 39. ICRG Ranking for Mexico 2010 .............................................................................69 Table 40. Conditional Analysis of Mexico 1989 - 1993 ..........................................................71 Table 41. ICRG Ranking for Mexico 1989 - 1993 ..................................................................71 Table 42. Conditional Analysis of Mexico 1997 - 1998 ..........................................................72 Table 43. ICRG Ranking for Mexico 1997 - 1998 ..................................................................73 Table 44. ICRG Ranking for Poland 2010...............................................................................73 Table 45. Conditional Analysis of Poland 1989 - 1993 ...........................................................75 Table 46. ICRG Ranking for Poland 1989 - 1993 ...................................................................75 Table 47. Conditional Analysis of Poland 2000 - 2003 ...........................................................76 Table 48. ICRG Ranking for Poland 2000 -2003 ....................................................................77 Table 49. ICRG Ranking for Poland 2003 - 2007 ...................................................................78 Table 50. Conditional Analysis of Poland 2003 - 2007 ...........................................................78 Table 51. ICRG ranking for Russia 2010 ................................................................................79 Table 52. Conditional Analysis of Russia 1991 - 1995 ...........................................................81 Table 53. ICRG Ranking for Russia 1991 - 1995....................................................................81 Table 54. Conditional Analysis Russia 2000 - 2004................................................................83 Table 55. ICRG Ranking for Russia 2000 - 2004....................................................................83 Table 55. The Relation of the Proposition and Entry Modes After Hill et al. .......................113 Table 56. The Characteristics of Different Entry Modes .......................................................114

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LIST OF FIGURES
PAGE Figure 1. Loss minimization vs. control maximization. ............................................................5 Figure 2. ICRG country risk ranges and country risk color codes...........................................11 Figure 3. The nine propositions of the Hill et al. (1990) model. .............................................13 Figure 4. Mode of entry color codes and risk perspective. ......................................................18 Figure 5. Timeline of ADMs market entries and mode of entry. ...........................................25 Figure 6. Timeline of Cumminss market entries and mode of entry. .....................................27 Figure 7. Timeline of General Electrics market entries and mode of entry. ..........................28 Figure 8. Timeline of Honeywell Internationals market entries and mode of entry. .............31 Figure 9. Timeline of John Deere market entries and mode of entry. .....................................33 Figure 10. Timeline of Johnson & Johnsons market entries and mode of entry. ...................34 Figure 11. Timeline of Kraft Foods market entries and mode of entry. ..................................36 Figure 12. Timeline of Procter and Gambles market entries and mode of entry. ..................38 Figure 13. Timeline of Tyson Foods market entries and mode of entry. ...............................41 Figure 14. Timeline of Whirlpools market entries and mode of entry. ..................................43 Figure 15. Timeline of all market entries and modes of entry. ................................................84 Figure 16. Overview of matching mode of entry with country risk. .......................................87 Figure 17. The color coding legend. ........................................................................................88

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ACKNOWLEDGEMENTS
I especially thank the chair of my thesis committee, Professor Massoud Saghafi, whose input, patience and support has made this complicated task possible. And I also thank Professor Francis and Professor Prisilin for their good-will to support me as members of the thesis committee, despite all set-backs and delays. A hearty thank you also goes to my aunt, Agnes Wener, who edited the whole thesis for me in countless hours. And last, but not least, I thank my family for all the support, understanding and help they provided me with throughout my studies abroad.

CHAPTER 1 THE STORY

When I applied for my American-German double-master degree, I was not aware that, though I was majoring at both universities in international business, I would have very different experiences to what is understood as international business and internationalization in both countries. As a German, when I hear the term internationalization, I think of exporting or a Greenfield approach as they are the two most common modes of entry in my home country (Douglas & Craig, 1995). However, when I came to San Diego I soon had to learn that Americans like Joint Ventures (JV) and acquisitions a lot more than exporting. In general, they think of a much wider variety of foreign market entry modes than I was used to. Certainly German companies also sometimes form joint ventures or licensing partnerships but mostly if this is required by foreign law and still these modes are perceived as rather unfavorable. American companies on the contrary are doing very well with their multitude of internationalization approaches. Even in places where it is not required to build a JV with a local company and in uncertain and unfavorable conditions, like in developing countries, U.S. companies are prospering through partnerships, acquisitions, etc. You name it, they did it. People all over the world are eating at McDonalds or Burger King, wearing Nike shoes and using Apple products. And it was interesting to read that most markets were entered with a strategy that fit the individual characteristics of the country. The question, then, is which factors determined how the American companies entered those markets? I started to take a closer look. Generally, three modes of entry could be observed: export, contractual agreements and wholly owned subsidiaries (Douglas & Craig, 1995). The most distinguishable characteristic of these modes is the amount of resources they require. Resources are input-factors that can be technical, financial, human or organizational (Hollensen, 2007). Therefore, I was especially interested in Multinational Corporations (MNCs). They have the financial and human resources to freely select among the different modes of entry. The committed resources serve as mitigation tools for various risks a company faces when entering a new market, but this will be discussed later.

2 At first the behavior of the MNCs seemed to be somewhat confusing. Often American companies entered the same country in the same time period with different modes, or the same company would enter two markets in the same time period with different modes. And even more interesting, success varied broadly among competitors in the same country and even within the same company among different local subsidiaries. To me the issue of which factors would determine how an American company would enter a foreign market was a very fascinating question. I also asked myself further if these factors would also be consistent with the success of a U.S. company in the entered countries.

DEFINITION OF THE PROBLEM

Entering a foreign market is not an easy task, and companies have to consider multiple factors, such as which market to enter and how to do so (Hutzschenreuter, Kleindienst, & Bieberstein, 2011; Morschett, Schramm-Klein, & Swoboda, 2010).The first step for a company is to select a market. This requires careful planning, and a lot of factors have to be taken into consideration (Hollensen, 2007). Market research is done to test for the fit of the products a company wishes to offer in a foreign market, a competitive analysis is performed and it is determined whether the market size and growth potential is sufficient (Douglas & Craig, 1995). This is an essential step in the process of entering a foreign market. However, this thesis is only concerned with the choice of the entry mode in regard to the market risk and the effects of a companys success and will therefore not elaborate any further on this first step. After a market is chosen, the task is to figure out which would be the best way to enter it, meaning to assess carefully the markets risks and benefits connected with each entry mode, as well as special characteristics of the market itself (Douglas & Craig, 1995). In this second step a company faces a multitude of different and often contradicting factors. This is the dilemma this thesis is concerned with and whether country risk is the most influencing factor for a company to choose the method of entry. In general these factors can be divided into two different groups: external and internal factors. Internal factors mainly consist of management objectives and strategic concepts. External aspects can be distinguished into country specific, legislative, and product specific factors (Douglas & Craig, 1995). Each factor has a certain risk level in regard to the entry

3 mode. For a company it is crucial to know how to weigh these different factors in order to make the best possible choice regarding the market entry strategy (Hollensen, 2007). Although there are plenty of different modes of how to enter a foreign market, most authors distinguish three general categories with differing names (Hill, Hwang, & Kim, 1990; Kim & Hwang, 1992; Hollensen, 2007). The most fitting for this thesis are: non-equity contractual, equity-based cooperative venture and wholly owned subsidiaries (Hill et al., 1990). As the names show they are distinguishable by the amount of resources a company needs to commit. Committed resources can be, for example, equity, knowledge, human capital and proprietary rights. In return for the resources, a company gets managerial control, which will be explained later (Gooderham & Nordhaug, 2003; Hill et al., 1990). This means that entry modes which require a lot of resources also provide the company with a lot of managerial control and vice versa. Managerial control is necessary for an enterprise to manage its marketing and distribution channels, protect its tacit knowledge and have strategic power about its product in the foreign market. This holds especially true for MNCs which greatly rely on their brand image in their internationalization process. In this sense, control lowers the risk of failure in the new market, since it allows the company to directly control its operations, marketing and logistics. It therefore grants flexibility to react and the ability to internally optimize the foreign business. The earlier mentioned risk of failure in the market from now on will be called control risk. At the same time, market entry modes requiring high-resource commitment increase the costs of entry and make a company vulnerable to shocks and crises. This derives from the fact that environmental risk is not spread equally among markets, meaning that some are more risky to enter than others. The consequence is that the higher the amount of resources invested by a company the more it might lose in the case of a sudden negative change in the host countrys environment. This means that an enterprise would trade off internal control against financial vulnerability to external effects. In this sense a company would minimize the risk of high resources losses by choosing an entry mode which requires only low resource commitment. This need to mitigate the risk of financial loss is caused by the environmental factors of the host country and shall be therefore called country risk. Therefore, MNCs are forced in two different directions in their decision of how to enter a foreign market in order to avoid two different kinds of risks:

4 Enter with a high resource-commitment mode to maximize control Enter with a low resource-commitment mode to minimize possible loses

The question that arises now is which force influences a companys decision the most? Or do both forces have the same impact and influence on the decision of how to enter the market equally? In very stable economies this question might be obsolete, since country risk can often be neglected. However, if we look at developing countries, the probabilities of an economic default of the government or radical political changes are much more likely. In general, the political conditions and economic realities are much more uncertain in developing countries; for example, the legal systems often are insufficient and corrupt, governments tend to react more erratically than in developed countries, and high social unrest sometimes erupts into revolutions (Hollensen, 2007). There is great fluctuation of risk within the developing markets, and under these conditions an enterprise should actually not enter such risky markets at all due to the high control risk (Desai, Foley, & Hines Jr., 2008). This is however only half the truth, as there is a negative correlation between risk and return, which means these high risk markets are also potential high profit opportunities (Maurer, 2004). Therefore, there is a real incentive for corporations to enter these high risk markets and when doing so they are faced with a difficult trade-off decision (Luo, 1999). They could lose money by entering a market with a high resource model and fail, or they could lose money by entering the market with a low resource approach and not fully make use of the markets potential (Daniels & Schweikart, 1998; Luo, 1999). Figure 1 shows the two forces as directional arrows pointing to the entry model they are driving a company toward. The models are ranked according to their resource commitment, which at the same time represents the size of potential financial loss in case of a crisis and the managerial control they provide to the company. When entering a foreign market a company is faced with the dilemma of which entry mode to choose in order to be successful. Both forces drive it towards different modes, and it is not clear which one provides the more successful approach. Most of the literature indicates that high risk markets should be entered with low resource modes, which would favor that the environmental factors weigh more heavily than the managerial needs (Douglas & Craig, 1995; Hollensen, 2007; Morschett et al., 2010). This would favor a dominance of the external country risk over the internal control risk in the question of how to enter a market.

Figure 1. Loss minimization vs. control maximization. There are contradicting studies, like the one by Agarwal and Ramaswami (1992) whose findings implied that MNCs tend to use a high resource model in disregard of the country risk, and Rasheed (2005) who discovered that most small and midsized companies entered high risk markets with a high resource model. This is mainly due to the transactioncost model used in these studies. This implies that high insecurity would have to be overcome by fully controlled institutions. However, as Morschett et al. (2010) showed in their meta-analysis, resource protection seems to weigh more for corporations in their internationalizing process, than transaction costs. In this sense a resource-based model does fit better in this study. To sum up the analytical framework so far, Figure 1 displays the country risk framework, which depicts a model of how the forces are influencing managements decision with regard to the mode of entry and the committed resources.

GOAL OF THE THESIS

The overall goal of this thesis is to investigate the impact of country risk as a force in influencing corporate decisions of how to enter the markets of developing countries. Furthermore, I assume that companies which enter markets with a mode of entry fitting the

6 countrys risk are more successful in the mid-range, a time period long enough to overcome short-term biases, but not too long to be substantially influenced by changes in the situation in the long-run. In this case a three-year period seems to be appropriate. The thesis will define which mode of entry fits with which type of country risk in Chapter 2. The purpose of this thesis then is to document the significance of country risk in the question of how to enter an uncertain market with a successful approach. The thesis shall show that certain modes of entry are better suited for certain country risk levels in order to maximize control and minimize risk and thus lead to a successful enter. Its practical use should be guidance for businesses seeking to enter a developing countrys market but are torn between the forces shown in Figure 1. Further, it shall give an overview of the development of country risk in the chosen countries over time and compare the mode of entry used to enter these countries. I suspect that there will be certain trends for each country and specific time ranges of entry that should be consistent with a change in the level of country risk.

STRUCTURE
First, the thesis will summarize the relevant problems faced by companies which desire to enter a foreign market. I will then discuss why the eclectic model, as described by Hill et al (1990), has been chosen to analyze the decisions of selected MNCs of how to enter certain developing markets. After this, the term country risk will be defined in detail and a scientific explanation will be given why country risk is thought to be of high significance. The relevant modes of entry will then be defined, followed by an explanation of the conditions for the choice of countries and companies. In the data part, relevant time periods of seven developing countries will be analyzed and assigned a respective country risk level. These will be based on qualitative data and complemented by the ICRG risk ranking. I will then analyze the entry behavior of ten MNCs over four decades with respect to the chosen mode of entry. Then, these cases will be matched with the country risk levels at the time of entry. To see which force has a significant influence on the MNCs decision, I will form certain control risk categories for the mode of entry and see if they fit with the suggested country risk level in each individual case. This thesis will further assume that right matches, meaning the cases in which the control risk level of a mode of entry and the country risk level are corresponding, were more successful.

7 For this purpose I am going to analyze several cases of success and failure and investigate if there is causality between the right match and the companys performance in the respective developing country. An analysis of individual cases that do not fit the model will be presented with possible explanations derived from the eclectic model of Hill et al. (1990). The summary will draw conclusions from these findings, as well as show the limitations of their explanatory ability.

CHAPTER 2 DEFINITION OF RISK AND COUNTRY RISK

Risk or more narrowly country risk is the central concept of this thesis. So far, the meaning of risk has not been fully explained, but since risk is a crucial term of this thesis it is necessary to clearly define its meaning. The following two subsections will define both terms.

RISK
We need a precise definition of the term, like the one by Renn (1998), who concluded that risks refer to the possibility that human actions or events lead to consequences that affect aspects of what humans value (Renn, 1998) in a negative way. In this sense risk shall be understood as the exposure to the possibility of bad outcomes of human actions or events. Action and events already imply a division of risk into two factors: internal (company or project specific), and external (country or industry specific) (Luo, 1999). From the perspective of a corporation entering a new market, internal risk derives from the fit of the product, of the distribution and marketing channel and of the corporate culture with the local market. External risk is based on forces outside the corporate entity. This risk derives from opportunistic behavior of suppliers, economic shocks, political changes and natural disasters. This corresponds with our observation that companies entering a developing market face internal risk, herein defined as control risk, and external risk, which we called country risk. It is important not to mix up external risk with the general market risk, like being outperformed by competitors, but to understand it as risk that is hard to calculate and most of the time out of corporate control (Hollensen, 2007). While market research can explore the likelihood of the success of a product and its distribution and marketing concept, insurance can cover natural disasters, and relational contracts can avoid supplier opportunism, it is quite hard to predict revolutions, administrative arbitrariness or an economic shock (Douglas & Craig, 1995). Therefore companies can hardly prepare for these events and should take them very seriously when assessing their risk management strategy to enter a foreign market.

9 Thus it appears that the above described economic and political disruptions, commonly known as country risk, pose the biggest threat to an entering company and are the least predictable factors. Ipso facto they should have the highest influence on a companys decision of which model to choose when entering a risky market.

COUNTRY RISK
As mentioned previously, the goal of this thesis is to prove that country risk is the most important factor in an MNCs decision of which mode to enter a developing market. It is however a rather broad term, as Susan Schroeder (2008) showed in her attempt to give a general overview of country risk research. There is not one definition of country risk that would cover all current or historical models. In fact, there is not even a generally accepted understanding of which factors should be considered components of country risk (Schroeder, 2008). Most commonly, the term is comprised of economic, political and social factors (Boczko, 2005; Calhoun, 2005; Click, 2005; Frynas & Mellahi, 2003; Schroeder, 2008;). While sometimes argued otherwise (Kobrin, 1979), economic and financial risk shall herein be understood as clearly distinguishable data. Economic risk shall be understood as a macroeconomic issue and financial risk as a microeconomic variable. Both are quantitative factors, while political risk is often a qualitative, subjective issue (Frank, 1985; Gentile, 1998; Schroeder, 2008). On the other side, Click (2005) pointed out that there is unexplained country risk, meaning not foreseeable and identified political risk as a great part of that uncertainty. This means that while we can try to statistically predict economic factors, political risk is much more volatile. An interesting finding is that foreign investment returns vary systematically with political risk (Mihir, Foleya, & Hines Jr., 2008). Therefore, political risk is the most important part of country risk for this thesis and has to be narrowed down and defined more precisely. Simon observed that political risk has a cross-discipline character as governmental policies touch a lot of economic factors which are interconnected with financial performance (Simon, 1982, 1984). Most authors summarize political risk as adverse actions of the government, such as expropriation or limits on the repatriation of profits into home countries, and interfering with a foreign businesss operations (Fitzpatrick, 1983; Kobrin, 1979). Others like Frynas and Mellahi (2003) also emphasized the social risk connected with political risk,

10 such as war and riots. Ekpenyong and Ntiedo (2010) defined political risk as any politically induced event that has destabilizing effects on the polity, and distorts the functionality of an enterprise, which summarizes all the above factors. In this sense social risk is an inseparable part of political risk. Therefore, political risk shall be understood as the uncertainty that the government is providing a sustainable and healthy economic policy (Gentile, 1998) needed for frictionless business operations. Summing up, country risk is composed of political risk and economic risk, meaning macroeconomic and financial factors which are unfavorable for the success of business. In this sense the ICRG score is a perfect match, since it provides a comprehensive score as well as the possibility to look further into country risk categories, such as economic, financial and political risk. This thesis uses ICRGs score index as a basis for the analysis of country risk (The PRS Group, 2011). The score was chosen for multiple reasons. It provides uninterrupted, consistent data since 1984, which makes it the longest recorded qualitative country risk score in the world. The ICRG score index is also very applicable to the concept of country risk as defined above, and it is cited by much of the literature on that topic as an excellent measure of country risk (Calhoun, 2005; Daniels & Schweikart, 1998; Frank, 1985; Gooderham & Nordhaug, 2003; Mihir et al., 2008; Schroeder, 2008). Basically it consists of three different risk scores for the political, economic and financial environment of a country. These are weighted and transferred into a composite value, giving a clear measurement of the risk level for each country on an annual basis. The index ranges from 0 to 100, with 0 being the highest possible risk and 100 being the lowest possible risk score. Originally it differentiated five different levels of country risk, but the very high risk and the very low risk range have been eliminated because hardly any cases qualified for them. The three remaining levels are high, medium and low risk and are defined by a risk score range, shown in Figure 2. In addition, the score will be augmented by qualitative data on the particular political, legal and economic conditions in the countries. This is necessary to capture the whole picture rather than relying on one country risk score and may also provide further evidence for the later analysis. The data derives, for the most part, from Country Watch, the PRS Group Country Reports and other high quality sources.

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Figure 2. ICRG country risk ranges and country risk color codes.

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CHAPTER 3 BUILDING THE FRAMEWORK

In order to ensure comparability and avoid a structural misconception, this thesis will use the eclectic model as described by Hill et al. (1990) as a framework to analyze the corporate behavior.

THE ECLECTIC FRAMEWORK

There are various models explaining MNCs entry modes into foreign markets. Most of these frameworks depend on three different theories: transaction-cost theory as mentioned before (Anderson & Gatignon, 1986), resource-based theory (Madhok, 1997) and bargaining power theory (Gao, 2004). Transaction-cost theory seeks to explain corporate behavior as actions taken to avoid hidden costs which derive from insufficient rules and regulations. It therefore implies a high necessity for control when possible transaction-costs are high. The resource-based frameworks, on the contrary, imply the need of resource protection, which leads to a preference of low-resources modes in high risk countries. Bargaining power theory enhances resource-based theory by non-equity resources, such as trust and in this sense tries to broaden the contingency framework rather than replacing it. As noted previously, this thesis will use the eclectic model of Hill et al. (1990), which was the first attempt to combine all of these three viewpoints and apply it to the analysis of the decision for the different modes of entry (Hill et al., 1990; Kim & Hwang, 1992). This model was also chosen because it is comprehensive, broad and practical. It is comprehensive in the way that it derives from known frameworks such as the transaction-cost-framework of Anderson and Gatignon (1986) but also includes strategic variables. It is broad because it consists of nine theoretical propositions that show the various influencing factors on a multinational enterprise when making its decision of how to enter a new market. And it is practical because each company can use this framework easily to determine its current situation when faced with the decision of how to enter a foreign market.

13 In general, the model consists of three variables, namely strategic, environmental and transactional variables. Each variable consists of several factors which all might have influence on a companys choice of how to enter a market (See Figure 3).

Figure 3. The nine propositions of the Hill et al. (1990) model. In their model Hill et al. (1990) described three different constructs having contradicting effects on the decision about the entry mode: control, resource commitment, and dissemination risk. Control refers to the decision-making power of a company in regard to strategy and operations of their foreign enterprise. Resource commitment is the amount of internal funds, knowledge and human capital a company has to invest into the host market. Dissemination risk is the risk of extraction or misuse of strategically important know-how and generally connected with external risk. Hill et al. (1990) distinguished three different entry modes: licensing, joint venture and wholly owned subsidiary. The constructs now are getting stronger or weaker, depending on the mode of entry. Finally, Hill et al. (1990) deduced the nine theoretical propositions from their model, which summarize how the variables influence preference for a certain value of the constructs. This again can be related to modes of entry. The Appendix (Table 55 and 56) depicts which proposition would suggest which entry mode.

14 In the eclectic model, country risk is connected with Proposition 4, which would suggest that companies in general would opt for a licensing approach, or better, a low resource mode. A low resource mode also means that there is low control and high dissemination risk. This is consistent with Luo (1999) who explained that country risk affects expected revenues and a firms growth, which in return affects the resource commitment for the entry mode, meaning that the riskier a market is the less risky should the entry mode be (Luo, 1999). Other authors are vaguer when they say that a company has to consider its objectives and the environmental conditions of a market when choosing the entry mode (Kim & Hwang, 1992). The argument is the same: a low resource-commitment allows companies to take advantage of the possible high returns and at the same time they minimize their risk of losing a lot of resources. This phenomenon will be referred to as risk minimization, since it minimizes the companys risk of losing its resources and still enables it to use the opportunity of the foreign market. Risk minimization should be understood as a force that draws the decision of how to enter the market into the direction of the less resource-intensive entry modes. The strength of this force thus depends on the size of the country risk, meaning that the riskier the market the higher should be the probability that a company enters with a low resource mode. In other words, this means that the higher the country risk, the higher the incentive to choose a mode of entry with low resource commitment. This of course implies that with a lower country risk the strength of this incentive, drawing companies to choose low-resource entry modes, should decrease and other forces should become more meaningful. In our framework this should be control risk, the trade-off for country risk, which should take over as the significant factor influencing a companys decision of how to enter a market. This would imply that the lower the country risk the higher should be the incentive for an MNC to take a high-resource approach in order to protect its brand. In this sense the other eight propositions could be understood as relevant but less significant forces that will influence a companys choice of how to enter a market as well. Therefore, I will carefully test for each propositions influence individually in cases where country risk is not explaining the companys behavior sufficiently. To adjust for the forces of propositions 5, 6 and 7, which all drive the decision of management to choose low-resource modes, all companies chosen were American companies and all markets chosen were

15 developing, meaning that there was sufficient demand and a lack of local competition. The fact that all companies are American means that the perceived distance to each host market for the same period of time should be equal. A sufficient demand does exist in each market and diminishes the uncertainty about the local demand and that local competition is not volatile. Proposition 1 also would drive management to choose low-resource modes of entry, and therefore the decisions will be analyzed to search for entry-patterns. Data on the TopManagement will be analyzed when needed to set it into perspective with possible behavioral consistencies. In the case that a regular pattern could be determined, despite varying country risk, proposition 1 should significantly explain the decision. The other propositions 2, 3, 8 and 9 have to be tested on an individual basis, if country risk cannot sufficiently explain the chosen mode of entry.

METHODOLOGY
Research was done on a case-based approach. I started by choosing product categories in order to rule out biases of specific product characteristics. These categories were chosen because they represent products that can be found throughout the globe and all of them are still extensively produced within the United States. It was important to choose physical products, since services come in a great variety and are distributed through an even greater variety of channels (Hollensen, 2007). In contrast, physical products all face similar problems in terms of the organization of their distribution. They all must be shipped from the production site to the place where they will be sold; they therefore require physical transportation and a distribution network. As they cannot be customized as easily as services, they often require specific marketing tasks that must be adapted and customized to local needs. These obstacles limit the possible modes of entry, and the similarity makes it easier to compare the companies behavior. I ended up with these four categories Consumer products Foods Consumer technology Industrial Machinery

I took the Fortune 500 in the 2011 edition as a base to determine the American MNCs whose behavior will be researched in this thesis. First I made a list of all companies from the Fortune 500 sorted by the four above mentioned categories. The Hoovers Company Records

16 database indicated which company belonged to which category. Then I randomly picked four companies, one from each of the four predetermined categories. Afterwards, I made a list of their biggest competitors, using the Hoovers Company Records database again and drew four competitors for each category, making up a total of 20 companies. Next, I crossreferenced the countries these companies had been entering in the past four decades. I chose those companies which had entered at least four of the markets I had picked in a parallel process. To avoid bias, countries had to be chosen carefully by special conditions that would only apply to one country or a certain country cluster. By definition of the thesis topic, they had to be developing countries. To ensure comparability of the cases they had to be entered by at least 4 of the 10 companies with most of those entrances having taken place while there was no legal restriction on the mode of entry. In addition they had to be able to be put into a cluster, to avoid a regional bias. An important question was how to start the country selection. The three criteria only exclude a small number of the approximately 200 nations in the world. I chose the so called BRIC countries, namely Brazil, Russia, India and China as a starting point. They have received a huge amount of corporate attention in the last four decades, and they have been undergoing some major transitions within that time span. China and India posed a difficult problem for criteria three because their economies are so vast and diverse that they are hardly comparable to any other country. However, China disqualifies because of its restrictive foreign investment policies, while India opened its market during the 1980s. Therefore, I decided to consider India its own cluster and only exclude China. Afterwards, I searched for countries that could be clustered with Russia and Brazil. After cross-referencing this country list with the company list, I chose those markets that were entered by 4 of the 20 MNCs. In the end, Poland and the Czech Republic as well as Argentina and Mexico were picked. Altogether, seven countries were chosen and three clusters were built.

THE VARIABLES
The important variable in our model is the behavior of the companies in the form of the chosen mode of entry into a foreign market. There are five different choices in our model and two different forces as explained above: risk minimization and control maximization.

17 The model does not include any other explanatory variables, but will deduce the specific causes that led to a choice in the aftermath. The risk minimization variable is represented by the country risk analysis, which is done for each time range one of the companies entered the market Control maximization is represented by the general sense of the management style that was used in the respective time period. It is documented qualitatively, since the overall sense of management will be pointed out and change in topmanagement will also be evaluated

Another non-explanatory variable is the time the entry took place; this varies over a four-decade period. Though this approach is not ideal, there is no other way to gather enough relevant market entries by multinationals for a shorter period of time. The length of time also has a benefit because it allows the thesis to show the change for each country over time. All other relevant variables are kept fixed like shown in the model above. The thesis will observe the same companies and the same countries, though not all companies entered all of the markets in those four decades. The thesis will consistently use the ICRG score for country risk and in every possible case a variety of sources on the qualitative political risk data to ensure objectivity. The decision process that leads to the choice is not included in this model, due to insufficient data on this kind of matter.

THE MODES OF ENTRY

The eclectic model of Hill et al. (1990) distinguishes between three different kinds of modes of entry, and so will this thesis. However, we will later divide these three into five subcategories. This is mainly due to the findings of the research on how companies entered developing markets, and it allows a more narrow comparison on the level of risk. Figure 4 shows the three modes of entry according to Hill et al. (1990) and their corresponding subcategories as derived from the research. They are ordered from the least risky mode of entry from a control-based point of view. The color coding, at this point, has no meaning but will be important when matching the mode of entry with the risk levels later on. Figure 3 also shows the intensity of control risk and country risk connected with each mode of entry. To get a better understanding of what these modes of entry actually mean, they shall now be defined.

18

Figure 4. Mode of entry color codes and risk perspective.

Export
Export is often described as an entry strategy with very low risk, basically due to externalization of most risks on the intermediary and the low resource commitment (Douglas & Craig, 1995; Gooderham & Nordhaug, 2003; Jenkins, 1998). Exporting does not require investing any resources; it is simply the contracting of an intermediary company which is completely responsible for the marketing and the distribution channel in the foreign market. Exporting then is simply the sale of goods/services across national boundaries to an independent organization (Jenkins, 1998). This includes direct exporting, which means selling to a corporation that is present in the foreign market and indirect exporting, selling to a corporation in the domestic market, which then handles the sale to the foreign market (Douglas & Craig, 1995). In this sense the local sales office of a company is not exporting, even if the sales office is only handling the contracting of intermediaries in that country. The office represents resources that the company has invested in the country and thus shall not be understood as exporting, but as foreign investment. This does not mean that exporting is free, but it requires some resource commitment in the form of a domestic department handling the relationship with the importer. It is often used to test a market or, more important here, to minimize the risk of losing invested resources in the foreign market (Douglas & Craig, 1995). A downside of export is the smaller revenue derived due to the large stake the intermediary requires for its services, and much more important here the lack of control over the local marketing and distribution channels. Exporting leads to a complete loss of control

19 over the product in the foreign market since the company hands over all rights to the intermediary. Therefore, it is the riskiest form of entering a developing market for an MNC from the standpoint of control, but at the same time the least risky from the standpoint of possible financial loss and exposure to country risk. (Douglas & Craig, 1995; Gooderham & Nordhaug, 2003; Jenkins, 1998).

Partnership
A Partnership is to be understood here as international subcontracting or technical training, which would be a subcategory of global strategic alliances. Global strategic alliances are cooperative arrangements formed by organizations from two or more countries (Beamish & Killing, 1998). In the very narrow description of market entry modes by Anderson and Gatignon (1986), partnership means an exclusive contract that is restrictive or nonrestrictive, as well as a nonexclusive restrictive contract (Anderson & Gatignon, 1986). Partnership in this sense does not involve financial resources, but tacit values, such as human capital, knowledge or brand names. In this sense partnership represents a closer cooperation with a domestic company than exporting and also involves a higher commitment of resources. Managers might have to deal more often with a partner than with an importer, and sometimes partnerships even require employees to be in the host country and, for example, train the partners employees. In addition, they normally involve whole or partial transfer of knowledge, exchange of certain rights or an agreement of cooperation for a limited time. Partnerships can be formed for various reasons; the important reason here is that they represent another low resource approach to enter new markets (Morschett et al., 2010). In contrast, export partnerships provide the entering corporation contractual control over the distribution channel and, to some extent, also over the marketing approach. In general they allow a company to enter a market covering a greater area with a higher level of control than exporting but still with lower costs, meaning lower financial risk than entry modes with higher resource commitment, such as an acquisition (Beamish & Killing, 1998; Morschett et al., 2010). However, a negative aspect of partnerships is the lack of control over the marketing channels in the foreign market. The entering organization has to trust the local companys knowledge of the market and thus is largely relying on their recommendations (Morschett et

20 al., 2010). This is especially risky for companies who rely on their brands image. Influence is limited by the contract and does not include direct managerial control. Another downturn of a partnership is that the local company still retains a huge stake of the revenues as compensation for the risk they take (Beamish & Killing, 1998).

Joint Ventures
Joint Venture (JV) is a kind of strategic alliance, but requires the foreign company to invest financial resources into the foreign business. It is basically the founding of a new enterprise financed by two or more business partners. Usually the new company is founded in the host market that the company desires to enter and can be built as a minority, 50:50 or majority JV, depending on the amount of resources invested by the foreign firm (Gooderham & Nordhaug, 2003). The benefits of a JV are the sharing of set-up and running costs of the subsidiary with another enterprise, meaning that the amount of resources committed are smaller, and therefore a JV has a risk-mitigating effect for the domestic company. Another upside is that management usually consists of combined workforces, meaning a huge gain in control in comparison to export and partnership (Douglas & Craig, 1995; Morschett et al., 2010). Often JVs are used to enter a market and determine whether the opportunity is big enough to sustain a wholly owned subsidiary (Beamish & Killing, 1998). Evidently, a major downside of joint ventures is the cost of coordination with the JVpartner, and in many cases this is also the crux of this mode of entry. Many joint ventures fail due to miscommunication of the goals that the partners want to achieve which results in counterproductive behavior (Gooderham & Nordhaug, 2003). In this thesis joint ventures represent a middle ground solution between high and low resources investment. A JV allows a company to mitigate the country risk in a new market with a partner while also gaining shared managerial control over the distribution and marketing channels. In this sense JV is a hybrid, but one that initially is formed to avoid the full commitment required by an acquisition or Greenfield approach. And as control is shared with the partner, the internal risk of miscommunication and conflicts are quite high. Thus JVs seem to be more a country risk avoiding strategy that makes it easier for companies to exit the market than a mode concentrated on control maximization.

21

Acquisition
Acquisition is a form of foreign direct investment (FDI) and involves a full or partial acquisition of another companys shares. It has gained tremendous popularity due to the international deregulation trend since the 1990s (Cheng, 2006), and although it sometimes is not distinguished from the Greenfield approach, a broad discussion in literature dedicated to the diversification mode shows the necessity to take a closer look (Brouthers & Brouthers, 2000). Morschett et al. (2010) emphasized that acquisitions pose a smaller risk of failure, due to the local expertise already existing in the company and the quick penetration of the market. Often acquisitions are horizontal or forward vertical diversifications, allowing the investing company to use their distribution network and or their brand equity in the local market. The acquiring company becomes the owner of the acquisitioned firm by buying a controlling interest of the shares. This excludes minimal partial acquisition from our definition of acquisition, which is justifiable due to its negligible role of American MNCs entering developing markets. A full buy-out of the shares is called fully owned acquisition, while majority acquisition refers to the purchase of at least 51% of a company (Gooderham & Nordhaug, 2003; Cheng, 2006). Due to this huge resource commitment, acquisition is a highly risky mode of entry, but it provides the company with an existing infrastructure and a working system. This allows immediate penetration of the whole market, while holding on to the majority of the revenues (Douglas & Craig, 1995). Similar to joint ventures, acquisitions often lack communication between the mother firm and the subsidiary. Thus, the integration of the acquired company often costs a lot of money and time which might even off set the benefits connected with this mode of market entry. This high resource commitment makes them quite sensitive to country risk. In case of failure, huge losses are the consequence for the investing company, and the benefits of control should be weighed carefully against the potential country risk.

Greenfield
The last entry mode is a wholly owned subsidiary, also called Greenfield. As the name suggests, this is a completely new founded company, virtually on the Greenfield, and financed solely by the entering enterprise (Morschett et al., 2010). The subsidiary is started from scratch, often by only setting up a sales office. From this point the local branch

22 develops its own distribution network and marketing channels, completely controlled by the mother enterprise. This clearly has the advantage of 100% control and low-conflict business (Gooderham & Nordhaug, 2003). It also cuts out all possible middlemen and this means that the company keeps 100% of the revenues. Of course this is also the riskiest mode of entry from the standpoint of country risk. It involves the highest resource commitment, since the entering company owns all of the equity and has to invest all the knowledge and human capital by itself. In the case of a crisis, the company might lose a large part of these investments or even face a total loss of property. Also, an enterprise entering the market on its own faces the complicated task of building all structures from scratch, which means a slower and often longer way to successfully penetrate the foreign market. In this sense a Greenfield approach might also cause the company to lose the opportunity to the competitor (Douglas & Craig, 1995; Gooderham & Nordhaug, 2003; Morschett et al., 2010).

THE RESEARCH
After building the analytical framework and defining the crucial components of it, the next step is to show the gathered data on corporate behavior and the country risk for each relevant period of time in the following two chapters. First, I will present the 51 entry cases of 10 multinational corporations, consisting of a temporal overview of their entries and background information on the managerial style to test for proposition one. Then, the country data will be analyzed in relation to the ICRG risk score and qualitative data on the political, financial and economic situation for each time period.

23

CHAPTER 4 THE COMPANIES

As described in the methodology subsection, I chose 10 companies out of the Fortune 500 and put them in four clusters of physical products (see Table 1). In the following part these MNCs will be described with respect to their managerial style during their entry into the seven countries, entry time and modes. A brief conclusion will be drawn from their behavior at the end of each case. Table 1. List of Companies Divided Into Product Clusters Consumer Products Johnson & Johnson Procter and Gamble Foods Archer Daniels Midland Kraft Foods Tyson Foods Consumer Technology General Electrics Honeywell Whirlpool Industrial Machinery Cummins John Deere

ARCHER DANIELS MIDLAND

Archer Daniels Midland (ADM) is one of the worlds leading producers of agricultural products and is the worlds number one company in the corn and oil crushing business (Gale Group, 2011a). In 2010 the company was operating more than 240 plants and 300 sourcing facilities in over 60 countries and was ranked no. 27 in the Fortune 500 (Archer Daniels Midland [ADM], 2011f; Fortune Magazine [FM], 2011a). ADMs extraordinary success during its more than 100 years in business is largely due to their clever expansions into foreign markets. About forty years ago in 1971 Dwayne Andreas became the CEO and started remodeling ADM successfully by selling unprofitable operations and acquiring profitmakers. By the mid-70s, he also had brought more and more of his family members into the management of the corporation. Andreas is the central figure of ADM during that time and has shaped the company sustainably by his vision of efficiency and profitability and by his unique character, frequently opposing mainstream business positions. He is often described as a low profile person, avoiding the public and focusing on his job of building a highly

24 profitable company (Gale Group, 2011a). Dwayne Andreas was succeeded by his nephew Allen Andreas as ADMs President who at the same time became Chief Executive in 1997. Allen took over in troubled times because the corporation was facing major law suits for charges of price scheming. ADM was still ruled by the Andreas Dynasty keeping a low profile approach for all their actions and concentrating on profits. The appointment of Patricia Woertz as President and CEO in 2006 marked a major change in the leadership of ADM. Woertz, a company outsider, ended the Andreas era but was holding up the efficiency paradigm of the company. Under her leadership ADM had record financial profits and was growing rapidly through major acquisitions while simultaneously trimming unprofitable operations. Though she did not have such a low profile as her Andreas predecessors, she is leading the company calmly and with clear goals and was still in charge at the end of this research. ADM first entered one of the relevant markets in 1974 with the acquisition of a soybean processing plant and edible oil refinery in Sao Paulo, Brazil. In 1976 it was transferred into a JV with Nestle (Gale Group, 2011b). At this time the company was mainly controlled by the Andreas family (Gale Group, 2011a). Under the leadership of Dwayne Andreas the company entered the Russian/Soviet market in 1980 through exporting and cemented its position in Russia by opening a sales office in Moscow in 1993 (ADM, 2011e). In 1996 ADM bought 22% of Gruma Group shares, the worlds largest corn processor and tortilla producer. ADM had already formed a JV with Maseca S.A., a subsidiary of the Gruma group, to serve the U.S. market with Mexican style wheat products and now wanted to enter the Mexican market. For this purpose a new JV was formed in Mexico with ADM holding 60% of its shares (Business Latina America, 1996; ADM, 2011e). In the same time span ADM formed another JV in a BRIC country, namely India. ADM joined forces with the Tinna group in 1998 to form Tinna Oils & Chemical Ltd., focusing on oilseed production and building an operational cornerstone for ADMs Asia strategy (ADM, 2011c). In 1999 ADM entered the Argentinean market with a sales office, which granted the company access to the second biggest economy of South America (ADM, 2011a).

25 2006 was the year ADM started its business in Central Eastern Europe. With the acquisition of the Slawa Wielkopolska, a country elevator facility, ADM entered the Polish market through a foreign direct investment (ADM, 2011d). In 2009 ADM expanded its Central Eastern European business by acquiring the Olomouc oilseed processing plant in the Czech Republic which would also bolster the other European businesses (ADM, 2011b). As Figure 5 shows, ADM does not prefer one mode of entry but uses a variety of approaches when entering different markets. They also do not seem to follow current business trends, as the Indian and Argentinean markets were entered at around the same time, but while ADM chose to enter the Indian market with a joint venture, it built a Greenfield FDI in Argentina. This means there has to be another reason why they chose to enter these markets using different approaches.

Figure 5. Timeline of ADMs market entries and mode of entry. There does not seem to be a regional pattern, meaning ADM did not expand in regions, but rather used opportunities in single countries in several geographical regions. An exception could be seen in ADMs market entry into the Central Eastern European market, since they entered in the Czech Republic and Poland nearly at the same time and with more than one business unit. This allowed them to use individual competitive advantages in both countries but provide the products and services without any barriers to the whole EU region. In addition to this, ADM also seems to have intensified its internationalization strategy in developing countries since the 1990s. This might have two reasons. On the one hand, most of these markets had not fully open until then and had restrictions to ownership of

26 equity or required local partners. On the other hand, a generation change began with Allen Andreas, and the younger leaders might have wanted to break with the old cautious, low profile management and invest in new, riskier markets.

CUMMINS
Cummins (CS) is the worlds largest independent diesel motor producer and was founded 1919 by Clessie L. Cummins. Today the corporation builds not only engines, but also power generators, filtration systems and emission solutions. It is operating in 90 countries around the globe, in 17 wholly owned subsidiaries and 10 joint ventures. On the current Fortune 500 Cummins is ranked No. 186. (Gale Group, 2011c; Gale Group, 2011l; FM, 2011b). Cummins started to enter the focus markets in the beginning of the 1970s, led by CEO Henry Schacht, a young Harvard Business School graduate. Schacht led the company through a challenging chapter of its history, which started with concentrating on the bread and butter business of diesel engines and selling off other holdings. By 1975, 25% of Cummins revenues derived from overseas. By the end of 1970, Cummins had come back financially and was growing its European business while successfully fighting back the Japanese incursion on the domestic market with austerity and restructuring measures. Thus, the beginning of the 1980s became a major growth period for the Columbus, Indiana, based company. However, in the end Schacht had made some miscalculations causing the companys market share to decrease until he convinced some of the major car producers to invest in Cummins and used the money to pay back debt and advance the European business in 1990. Cummins came back again in 1993, and one year later Schacht stepped down, ending his career with the highest annual revenue Cummins had ever made. The first of the relevant markets entered was Brazil in 1971. Cummins had agreed with the Brazilian government to produce NH engines and vehicles in Guarulhos (SP). Cummins Brasil opened its first plant three years later. In 1980 Cummins entered the Mexican market in a joint venture with the Mexican engines producer Parastal Dina, which was called Cummins Mexicana, S.A. de C.V. Cummins rushed into the Polish and Czech markets soon after they opened at the beginning of the 1990s by establishing sales offices in Prague and Warsaw.

27 The last of the focus markets Cummins entered was Russia in 1993, where they built a JV with KamAZ to produce diesel engines and helped their partner to replenish their stock which had largely been destroyed by a fire (Cummins Inc., 2011). All market entries took place under the leadership of Henry Schacht. The markets of the former Comecon (Common Market of the Eastern Bloc) were all entered shortly after the downfall of the socialist systems to ensure quick penetration and first-mover advantages (see Figure 6). The Brazilian and the Mexican markets were entered separately within a time span of nine years, meaning they were not planned in one strategic move. There seems to be no preferred approach on how to enter a focus market, though only Greenfield operations and JVs occur.

Figure 6. Timeline of Cumminss market entries and mode of entry.

GENERAL ELECTRIC
General Electric (GE) is one of the worlds largest conglomerates. It manufactures products from jet engines to light bulbs and provides services from broadcasting to financial services. During GEs more than 130 year-long history, the company expanded vastly across the globe, and today GE products and services are available in more than 160 countries. The company is currently listed No. 6 in the Fortune 500 (FM, 2011c; General Electric, 2011a). GE entered all of the focus markets from the beginning to the middle of the 1990s under the leadership of the legendary CEO Jack Welch. Welch had taken over in 1981 and started a radical remodeling of the structure and management of GE. He began by purchasing 338 companies and simultaneously selling 232 of GEs unprofitable branches, striving for efficiency and superiority in every field of operation. Indeed, Welch claimed that he wanted

28 GE to be either No. 1 or No. 2 in every single product category they were involved in (Gale Group, 2011e). He decentralized management and let his subsidiaries operate freely as long as they were committed to GEs ethics of relishing constant change and thriving on action. GEs first relevant market of entry was the former peoples republic of Czechoslovakia in 1990. GE created a Greenfield subsidiary which today operates with nine of the business units of GE in the (by now two) republics (General Electric, 2011b). In 1991 GE entered India with a joint venture. They built two JVs one with Godrej & Boyce Manufacturing Co., Ltd., an Indian appliance producer, and Petrochemicals Corp. Ltd., of India. These two JVs complimented the 1989 JV with Wipro in the Healthcare segment. Though GE already had previous projects in India, this was the first big stake they took in actual operations after it opened its market in the same year (Gale Group, 2011e). GE entered another former socialist country in 1992, Poland. Again it directly invested in a Greenfield business and built it to a full-sized branch, covering all business units (General Electric, 2011c). In 1996 GE formed a partnership with Russia-based Rybinsk Motors to build engines for jets (Gale Group, 2011f). It is obvious that GE entered most of the focus markets within a very short time span (see Figure 7), using a multitude of different modes of entry for those markets. Therefore, it can be concluded that there is no preferred mode of entry for General Electric.

Figure 7. Timeline of General Electrics market entries and mode of entry.

29 The starting point when GE entered the focus markets was a decade after Jack Welch had taken over. It seems that when he was done remodeling the management system and making his strategic shifts in GEs core competences, Welch was ready to broaden General Electrics country portfolio and overseas business. A clear signal for this theory could be seen in the purchase of 50 % of the British appliance manufacturer General Electric Company and GEs 1987 deal with France-based Thompson to exchange its medical business for GEs RCA TV unit. Another explanation could be that all the countries GE entered had just recently opened their markets to foreign investment or dramatically increased their open-market policies. However, in the case of Mexico and Russia the chosen modes of entry were already permitted prior to GEs entry, meaning that it could have entered earlier. In this sense the first explanation seems more likely.

HONEYWELL INTERNATIONAL
Honeywell International (HI) is a leading supplier of control systems and one of Americas biggest defense contractors. Its products range from turboprop engines to consumer care products. Honeywell has operational units in more than 51 countries around the world and is ranked No. 73 in Fortune 500 (FM, 2011d; Gale Group, 2011g). James Renier, former president of the computer section who was known for its radical cut-back management, became President and CEO of HI in 1986. He had been the first CEO to redefine Honeywells relation with IBM and cleverly mitigated the risk of the computer section by building an international three-way JV. Prior to Renier, James H. Binger had led the company since the 1960s through major changes, especially expanding HI internationally. However, Binger was a controversial leader with HIs support for the Southeast Asian wars and South Africa business (Gale Group, 2011g). Honeywell expanded to the Warsaw pact countries even during Cold War times. HI opened its first dealership in Czechoslovakia in 1962 through its branch in Austria, a country considered neutral by the Soviet Union. At the same time HI had already established some trade contacts in Poland in HIs chemical and petroleum refining segment. The company even opened a representative office in Moscow in 1974 after Nixons dtente agreement with

30 the Brezhnev regime in 1972. Of course, all business in these countries was export since there was no other mode of entry at that time (Honeywell, 2011a, 2011b, 2011c). However, their first real market entry in the Central Eastern European Markets occurred when these economies opened at the beginning of the 1990s. Honeywell International then made its own direct investment in Prague, setting up an entity of its Service & Engineering unit. In 1995 HI merged both units, the previous Austrian and the new American led subsidiaries, and formed Honeywell spol. s ro. (Honeywell, 2011a). In Russia HI still had the representative office in Moscow and with the fall of the iron curtain it opened another branch in St. Petersburg (Honeywell, 2011b). Both points in time will be represented in Figure 8, but I will consider the opening of the St. Petersburg office as the first voluntarily chosen market entry mode. After setting up a sales office in 1990 in Warsaw, HI transferred its polish business to Honeywell sp. z o.o. in 1993, making it an independent branch in the former socialist country (Honeywell, 2011c). In 1988 HI built a manufacturing, designing and engineering facility in India and called it Honeywell Automation India Ltd., (HAIL). HAILs set up proved to be very profitable and soon the Indian branch became a leader in providing and integrating productivity-improving software solutions (Honeywell, 2011d). Honeywell International seems to have a preference for direct investment as can be seen in Figure 8 suggesting that the company is cautious and values control over its business. Though they only entered four of the focus markets, their strategy among those is consistent. They start with a representative or sales office and grow their business from that point. Obviously, there was no other possibility in the case of Russia than to have a representative office and organize the import of Honeywell Products through this office, but Honeywell decided to do the same in the Czech Republic and Poland. In India however they took a different approach by opening a whole manufacturing and designing complex in Pune. It seems though that it already had some kind of local representation, but no further details could be found on that.

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Figure 8. Timeline of Honeywell Internationals market entries and mode of entry. This approach does not seem to comply with an approach that is much concerned about country risk, but it seems much more obvious that Honeywell needs to maximize its control opportunities and thus generally chooses an FDI approach (See Figure 8).

JOHN DEERE
John Deere (Deere) is a world leader in the production of farm and landscaping equipment. It was founded in 1837 in Grand Detour, Illinois, as a one-man blacksmiths shop and today operates in more than 45 countries around the globe, with its products available in many more. Its business is divided into three segments: agriculture and turf, construction, and forestry and credit (John Deere, 2011a). Deere is currently ranked No. 107 in Fortune 500 (FM, 2011e). William A. Hewitt led the company for more than two decades, starting in 1955 and was a major force for its internationalization. Hewitt calculated that the timing was right for Deere to manufacture abroad and seize opportunities in new markets, mainly Western Europe and Latin America at first. He was also the CEO and President who entered Deere into the financial market in the fifties, a service quite different from Deeres core competences, but it proved to be a wise decision. When he retired, Robert Henson took over in 1982. Henson was a longtime Deere employee and knew that his job would be a challenging task. He started with some dramatic cutbacks, and about 40% of Deeres employees were facing layoffs. His actions were unpopular but saved Deere through a long recession and increased their U.S. market share from 30% to 45%-50%. In 1987 Hans W. Becherer became President with Henson staying as CEO until 1989, when he retired. Under Becherers leadership Deere

32 further diversified and tried to recover from the 80s recession. In the year 2000, a longtime employee, Robert Lane, took over Becherers position and followed his predecessors course of diversification. Especially the private and hobbyist sector proved to be a valuable opportunity, as well as introducing models that fit the needs of local customers (Gale Group, 2011d). John Deere first introduced its products to Brazil in 1979 by buying 20% of the shares of Schneider Logeman & Cia., thus forming a partnership with them. While they provided Deere with their distribution and sales network, Deere could offer them its knowledge as an international leader in farming equipment (John Deere, 2011c). In 1991 John Deere signed a contract with a Polish businessman named Aleksander Grawonik to become the exclusive distributor of JD tractors in the Polish market. It was not until 2004 that Deere took full control over Grawoniks Polish branch located in Poznan (John Deere, 2011e; BBC Monitoring Service, 1991). Deere chose the safe choice when entering the Czech market in 1993, by contracting an import distributor called STROM, based in Prague. This partnership proved to be so fertile, that Deere decided to contract STROM as exclusive distributor for the Czech Republic in 1996 and until the end of this research had no local direct investment (John Deere, 2011b). In 1998 Deere formed a joint venture with AMAKO in Russia to sell John Deere equipment to the Russian market. This led to a later transformation into a fully owned subsidy starting with a marketing branch office in Moscow in 2003. Next, Deere entered the Indian market cautiously with a 50-50 joint venture in 1999 with Larsen and Tourbo Ltd., one of Indias biggest engineering corporations, to produce farming equipment suited for local needs (John Deere, 2011d). As Figure 9 shows, John Deere does not have a clear preference regarding the mode of entry but seems to prefer cautious entries. Deere seemed to some extent to favor a joint venture approach in the 1990s. The reason they entered the other markets differently is very likely a variation in country risk and will be explored in the latter part of the thesis.

33

Figure 9. Timeline of John Deere market entries and mode of entry.

JOHNSON & JOHNSON

Johnson & Johnson (JnJ) is the worlds largest consumer health products company comprised of three major business segments: consumer health care, medical devices and diagnostics, and pharmaceuticals. Today JnJ has 250 companies in over 57 countries. The company celebrated its 125th anniversary in 2011 and is currently ranked No. 40 in the Fortune 500 (FM, 2011f). JnJ entered several markets before the four decades time span analyzed in this thesis, namely Argentina, Brazil, Mexico and India (Gale Group, 2011h; 2011i). The other three markets were all entered in 1990. In 1990 the company was led by Ralph S. Larsen as chairman of the board and CEO who focused a lot of his efforts on increasing efficiency through cost cuttings and broadening the consumer health segment by massive acquisitions. Larsen had worked for the company since 1962 with only short interruptions at the beginning of the 80s and therefore was very familiar with the company when he took over leadership. He and his predecessor James E. Bruke were considered a perfect match because they had similar management styles and were both characterized as human managers, preferring an atmosphere of creative conflict and valuing subsidiarity. Larsen himself characterized the culture of JnJ as a culture of intelligent risk-taking (Deutsch, 1988). In 1990 JnJ started their operations in Poland and an administrative office in Moscow, Russia. They entered the Polish market first with a branch of their cosmetic subsidiary in the consumer health care segment, called Johnson & Johnson Poland Sp. z o.o. This startup was used as a spearhead to build up a step-by-step introduction of the entire JnJ product range,

34 which they did similarly in Russia. The Polish subsidiary is now partly operated by JanssenCliag, a Belgium based company which was acquired by JnJ in the 60s (Gale Group, 2011i). Following this first push into the former Eastern Bloc, JnJ also opened operations in former Czechoslovakia called Johnson & Johnson Czechoslovakia s.r.o. in 1991. Again they were using the cosmetics branch to develop a business platform from which they could introduce new brands and products to the Czechoslovakian market later (Gale Group, 2011i). It is quite obvious that Johnson & Johnson strongly preferred a Greenfield FDI for all of these three markets (See Figure 10). Unfortunately, all three markets were entered at the same time and are in the same region, which makes it hard to analyze JnJ's decision.

Figure 10. Timeline of Johnson & Johnsons market entries and mode of entry. JnJ could have had several reasons for entering all of these transformational markets with a Greenfield FDI. The first thing that comes to mind is of course the first-mover advantage, but JnJs Greenfield strategy is not the quickest way to enter a market. Another reason could be control and this seems more plausible. Consumer brands like JnJ rely heavily on their brand image and thus should be very sensible in regard to control over the marketing and distribution channels. A plausible explanation covering both hypotheses would be that sufficient distribution channels or reliable importers for JnJs products did not exist in these former communist countries and that JnJ simply had no other choice than building a new company to have reliable, local partners and implement new distribution channels.

35

KRAFT FOODS
Kraft Foods is the second biggest producer of food in the world. It consists of several different companies, including General Foods and Kraft Inc., which were merged under the current name in 1995. In 2000 the biscuit company Nabisco was the third large party that was merged into the conglomerate. Originally, the firm was held by the Phillip Morris group until it spun off in 2007, since then Kraft Foods is a completely independent and publicly traded company. The company just recently added another big name Cadbury to its brand range and is currently ranked no. 49 in the Fortune 500 (FM, 2011g; Gale Group, 2011j, 2011k). Because Kraft Foods comprises so many different brands that did not grow naturally out of one company but were merged in several steps, it is quite complicated to determine the time a specific market had been entered. The thesis thus will only concentrate on the two original companies: Kraft Inc. and General Foods. In 1990 Kraft entered the Argentinean market by acquiring local companies, further marketing their domestically known brands and slowly introducing its own food brands (Kraft, 2011c). Shortly after the opening of the Iron Curtain, Kraft entered the Czechoslovakian market in 1992 with a Greenfield subsidiary and thus started its campaign to quickly gain market share in the former Eastern Bloc. Kraft entered the Polish market in the same year with a Greenfield approach introducing Jacobs Coffee and soon started to acquire local brands (Kraft, 2011b, 2011d). One year later, in 1993, Kraft entered the Brazilian market with the acquisition of QRefresco S.A., a leading Brazilian beverage brand and soon acquired more local companies, using them as a hub to promote theirs and Krafts own brands regionally (Kraft, 2011e). The Russian market was entered in 1994 with the establishment of an office in Moscow. In previous years, Kraft had acquired several local brands in the region, such as Ukraine and Lithuania whose products were sold in Russia (Kraft, 2011f). As mentioned earlier the acquisition of Cadbury in 2010 opened some new very big markets for Kraft, such as the Indian market (FM, 2011g; Kraft, 2011a). Kraft Foods certainly favors high equity entries (see Figure 11). This could be either due to strategic advantages, since it normally uses those companies to piggyback its own global brands and thus needs a high level of control, or it is in general a risk taking company.

36

Figure 11. Timeline of Kraft Foods market entries and mode of entry. Nearly all markets were entered in the beginning of the 1990s, which suggests a strategic move. While all Central Eastern European operations where set up as Greenfield, both Latin American markets were entered with an acquisition. This might be due to the rushing of events in the former Comecon, which left only a short time frame to look for appropriate candidates to acquire, while the Brazilian and Argentinean acquisitions could have been planned for years. It comes as a surprise that Kraft Foods did not enter the vast Indian market earlier, but again it used an acquisition approach to ensure quick market penetration. One explanation could be the complexity of the Indian market and the enormous amounts acquisitions Kraft had to deal with since 1985.

PROCTER & GAMBLE

Procter & Gamble (PG) is the biggest consumer product company in the world (FM, 2011h). It provides a wide variety of goods from female cosmetics to batteries. PGs business is divided in three global business units: healthcare & well-being, beauty & grooming, and household care. According to its website, PG products are available in more than 180 countries throughout the globe (Procter and Gamble [PG], 2011f). PG started entering most of the focus markets by the end of the 1980s after going through major restructuring of the management system from brand-management units to a matrix approach and shifting their focus from increasing the market share to investing in high margin products (Gale Group, 2011n). John Smale was the CEO at that time, and he was

37 widely known as a very patient manager, with a clear vision of how to remodel PG and grow its revenues tremendously. In 1990 Smale was succeeded by Edwin L. Artzt as the CEO and chairman of the board who led PG until 1995 and again massively expanded the company internationally. Artzt is described in Alicia Swasys book Soap Opera as a two-faced person whose nickname was The Prince of Darkness. On the one hand he was said to be a savvy businessman getting rid of unprofitable business segments, but on the other hand was feared by his managers and employees for concentrating only on short-term results and terrorizing everybody around him depending on his mood (Swasy, 1993). PG first entered the Indian market in 1985 with the acquisition of RHL (Richardson Hindustan Limited) the Indian operational unit of VICK, a health care brand famous for its over the counter drugs. VICK had been active in India since 1951 and formed RHL as a public limited company manufacturing and distributing a wide range of VICK products in India. Through this acquisition PG not only had a very profitable branch operating in India, but also a spearhead to launch its own products in the subcontinent, which it started with Whispers in 1989. From then on P&G India was developed as a full range operational unit in India (PG, 2011b). In 1988 PG purchased Phebo S.A. a traditional maker of soap-based glycerin in Brazil and entered this market in a similar manner as it did in India, using this company as a platform to immediately distribute its own brands in the Brazilian market. This strategy was especially important as most segments of the consumer goods market in Brazil have been nearly monopolized by domestic competitors, and thus acquiring a local company simplified it tremendously for PG to overcome the market barriers (PG, 2011c). In 1990, the year that Artzt took over, PG expanded its business to the recently opened former Eastern Bloc countries, namely first Czechoslovakia. PG acquired Rakona, a laundry detergent and dishwashing liquid producer aided by government funds. PG kept the Rakona brand, which was well-known in the former socialist countries of Europe and added its own detergent and washing products to the range of brands manufactured and distributed by Rakona (PG, 2011e). A year later in 1991, PG also entered another former socialist country, Poland. In this case PG had an exclusive export-partnership with Poll, being their distributor for the first

38 three years of entering the market. After that PG built a Greenfield FDI to use Poland as a hub for its Gillette, Pampers and Oil of Olay brands in Central-Eastern Europe. Having the beauty & grooming as well as the household care business units successfully introduced in the transformational markets by the mid-90s (PG, 2011a). At the same time PG built an FDI in the very heart of the former Eastern Bloc, by starting its operations in Russia in 1991. Quickly PG built or bought production facilities to manufacture and distribute its brands locally with huge success. Today PG employs 2300 people in Russia and is a major player in the Russian market (PG, 2011f). In 1991 PG also attempted its first entry into the Argentinean market by creating a Greenfield operation. Soon PG acquired some local firms to get a better grip on the market. In 1994 it bought Alejandro Llauro e Hijos SAIC, a domestic soap maker and used its distribution networks and brands to drive its Argentinean operations to profitability (Gale Group, 2011m). Again the internationalization efforts are concentrated within a very short timeframe, similar to JnJs and General Electrics. This could mean that there was a rush to the markets to secure first-mover advantages and not be left behind (see Figure 12). However, it is certainly a sign of a top management decision, here in the form of John Smale, to go international on such a large scale.

Figure 12. Timeline of Procter and Gambles market entries and mode of entry. Similar to their big competitor, Johnson & Johnson, PG mostly entered with a direct investments approach, with the exception of Poland where a partnership was formed with an exclusive distributor. This indicates that their brand image is very crucial to them and that

39 consumer goods need more control over marketing and distribution than the other products. However, the above mentioned lack of distribution channels as in the case of Russia or closed distribution channels, protected by the local competitors, as in the case of Brazil could also explain PGs behavior. The acquisition approach does not provide any pattern; the regions and the time entered differ. In the case of India, P&G was still forced to have a local majority owner, but it could also have simply built a joint venture. This supports the hypothesis that P&G prefers controllable entrances. Any other decision on the mode of entry was entirely free of any legal obligations.

TYSON FOODS
Tyson Foods (TF) is one of the worlds largest food companies, especially in the field of processed meat products. The company was founded 1935 in Springdale, Arkansas, and today operates more than 400 facilities distributing its products to more than 90 countries worldwide (Tyson Food, 2011a). It is currently ranked No. 88 in the Fortune 500 (FM, 2011i). Tyson Foods started its major international growth between the end of the 1980s and the beginning of the 1990s, at the end of Donald Don Tysons leadership, the son of the founder John Tyson. Don had been President and CEO since his fathers sudden death in a car accident in 1966. Both Tysons had been described as a good team with John being a cautious person and Don pushing forward to expand the company. When he stepped down as CEO and President, becoming the chairman of the board until 1995, Don Tyson made sure that his progressive management style was pursued by installing Leland E. Tollet as CEO in 1991. Tollet and the company President Donald Buddy Ray, who was appointed in 1990, were both high school friends of Don Tyson and had been working with him for several decades. This ensured a consistent management style until Tysons son John Tyson took over in 2001 as CEO and President (Gale Group, 2011o; 2011p). In 2006 Richard Bond, who had been chief executive of IBP, the worlds largest beef processor which was acquired by Tyson in 2001, took over as CEO for John Tyson, who remained in the company as chairman. He was esteemed highly by Wall Street and had the image of a cost cutter while John Tyson was more of a strategist trying to acquire market share in the long term.

40 Tyson first entered one of the focus markets in 1988 by building a minority JV with the Mexican chicken producer Trasgo S.A. de CV. After building up the JV to become the third largest player in Mexicos chicken market, TF acquired a majority of the shares in 1994 and used it to build up its Mexican business (Gale Group, 2011p). One year later in 1989 Tyson opened an office in Moscow, Russia, which was mainly used to control Tysons exports from the US. The background of CEO Bond was in beef and pork, and thus it was no surprise that in 2007 Tyson entered one of the worlds most famous beef markets (Etter, Lublin, & Kilmann, 2009; Gale Group, 2011o). In 2007 Tyson formed a JV with Cactus Feeders Inc., and Cresud S.A.C.I.F. y A to enter the Argentinean beef market (Gale Group, 2011p). In 2007 Tyson also partly (51%) acquired Gordej Foods, one of the biggest poultry producers of India, to gain access to one of the worlds fastest growing poultry markets. The joint venture is called Gordej Tyson Foods (Gale Group, 2011o; 2011p). In 2008 Tyson acquired Macedo, Avita and Frangobrs, three poultry companies which put Tyson do Brasil among the five biggest producers of poultry in Brazil. While building a 50-50 JV in Argentina, they assured complete control in Brazil but also secured knowledge by keeping the family Macedo as the subsidiarys top-level management (Tyson Food, 2011b). Tyson is rather conservative in its expansion and focuses heavily on domestic growth. This becomes obvious when we look at Figure 13, since Tyson had not moved into one of the researched markets until 1988. The company then cautiously moved into the Mexican market, and even the Russian market was first entered with only a local office that should develop distribution channels, handle Tysons imports and find possible acquisition objects The 2007 cluster of acquisitions always follows the same pattern. Tyson bought a controlling share in these companies and kept the locals in place to operate the units. This seems to be the modus operandi of the then new CEO, Bond, which is strongly enforced by the fact that Tyson moved into the beef market in Argentina first and then into its core meat market, poultry, later. The almost simultaneous market entries also support the hypothesis that it is a management push for international diversification rather than picking opportunities. Tyson could move into all of these markets freely and without any law requiring it to choose a certain mode of entry earlier, but did so when Bond took over.

41

Figure 13. Timeline of Tyson Foods market entries and mode of entry.

WHIRLPOOL
Whirlpool is the manufacturer of a wide range of appliances, from dishwashers to garage organizing supplies, and is the leading producer in many of these product categories. According to Whirlpools website, its products are available in nearly every country in the world. The company has more than 47 production facilities throughout the globe (Gale Group, 2011r; Whirlpool, 2011). Whirlpool celebrated its 100th anniversary in 2011 and is ranked No. 127 in the Fortune 500 (FM, 2011j). Whirlpool began expanding into the markets in the 1970s under the leadership of chairman John H. Platts. He started working for Whirlpool in 1941 as an assembly worker and worked his way up the ladder. He was handpicked by Elisha Gray II, the second president of the company since its founding in 1911. Platts was succeeded by Jack D. Sparks in 1982, when he retired. Sparks was a sales and marketing-experienced CEO who was up to the challenge of an increasingly competitive American market and grew Whirlpool by a big internationalization initiative. He also focused on broadening Whirlpools line of products and issued major investment programs. David Whitwam took over for Sparks in 1987, carrying on Sparks 5-year global strategy. Another important manager at that time was Jeff M. Fettig, who had successfully turned around Whirlpools European divisions and was named COO in 1999. Fettig and Whitwam were both continuously driving for new markets and to increase productivity (Gale Group, 2011r). The first of the researched markets entered was Brazil in 1976 with the acquisition of Consul S.A. and Embarco S.A. into Whirlpools Brazilian holdings. Whirlpool already held

42 non-controlling stakes of Brazilian based Brasmotor S.A. in 1958, but now it had acquired two local brands that allowed it to scale up its business in the Latin American country (Gale Group, 2011q; 2011r). A joint venture with Indian-based Sundaram-Clayton Limited of Madras was formed in 1987 which enabled Whirlpool to enter the subcontinents huge appliance market. They started with producing compact washing machines customized to suit the Indian consumers preferences (Gale Group, 2011r). In the next year, 1988, another JV was formed in Mexico, with Vitro S.A., a glass producer based in Monterrey, giving Whirlpool entrance into the market of the USs big neighbor in the south (Gale Group, 2011r). With the opening of the former Eastern Bloc, Whirlpool expanded to Central-Eastern Europe in 1991 by building a joint venture with Tarmata, a former socialist producer of appliances in Czechoslovakia. Tarmata enabled Whirlpool Europe to use Czechoslovakia as a hub for all other former Eastern Bloc markets, facilitating sales in this region by its existing distribution network (Gale Group, 2011q). One year later, Whirlpool acquired SAGADA S.A. of Argentina, another local appliances manufacturer and thus entered Latin Americas second biggest market in 1992. Rather late but in 2002 Whirlpool entered the Polish market with the acquisition of the well-known appliance brand Polar S.A, rapidly introducing all of their products on the growing Polish market (Gale Group, 2011q). Whirlpool only uses acquisitions and joint ventures as mode of entry, as can be observed in Figure 14. These two approaches are very close since both preserve local knowledge when entering a market. A time cluster can be detected with the exception of Brazil, though this early market entry might be explained by previous engagement in South Americas biggest economy by Whirlpool. The cluster seems to reflect the 5-year plan of Whirlpool CEOs Sparks and Whitwam to push for international diversification. As mentioned earlier, all entries are either acquisitions or joint ventures, meaning there seems to be a preference by management for country risk.

43

Figure 14. Timeline of Whirlpools market entries and mode of entry. This could be explained by the vast costs required to build a brand image in these markets which Whirlpool wanted to reduce by using brands which are already well-known and established. This approach was already followed earlier by the company as a kind of piggyback approach to support the local brand with Whirlpool technology, which would also be displayed on the product in the form of Whirlpools logo. This ensured that consumers got to know the logo, and it provided a soft introduction of the brand. Later, Whirlpool would try to introduce its own products and slowly and safely expand its market share. Whirlpool was not forced to enter the market in any specific way; only the Indian market required an Indian minority share of ownership of about 49%.

44

CHAPTER 5 THE COUNTRIES

Now the researched countries (see Table 2 ) will be presented with respect to their country risk and in the relevant time periods when they were entered by the MNCs described above. The ICRG score will serve as a quantitative reference accompanied by qualitative data on the political, economic and financial situations at the time of entry. The description starts with an overview over the current state of each nations country risk, followed by a description of each relevant time period. This qualitative data will be summarized in a conditional analysis that shows the positive and negative aspects of country risk from the perspective of an American company at that time. These aspects will be split up into internal conditions caused by factors in the country itself, and external conditions caused by influence factors that lie outside the control of the country and its government. The ICRG data will be represented in a box that shows all four scores political, financial, economic and composite risk. The field at the end of this box shows the overall risk that is assigned to that country at that period of time in the color coding that was defined in Chapter 2, Country Risk. Table 2. List of Analyzed Countries and Clusters

ARGENTINA
In 2011 Argentina was one of Latin Americas biggest economies as well as the second most populous country on the subcontinent. Though Argentina has suffered as any other country under the current financial crisis, it remains an attractive market for American companies. Politically Argentina has had a fairly stable democracy for about three decades now, after having had quite turbulent political times, including dictatorships and military juntas since World War II (Coleman, 2011a).

45 Table 3 summarizes the state of Argentina in 2011 and shall be used as a benchmark for the historical data provided in the later analysis. This allows us to see the current endpoint of Argentinas country risk rating and compare it later with the other countries. Table 3. ICRG Ranking for Argentina 2010
Index Rating Risk Range Overall Political Risk 64.5 Moderate Economic Risk 41.5 Low Low Financial Risk 41.0 Low Composite Risk 73.5 Low

Source: Coleman, D. Y. (2011a). Argentina 2011 Country Watch Review. Washington D.C.: Country Watch Inc.

The 1980s (Relevant Years)

In 1981 the military junta was still in power, but most indications showed the decline of the systems power, and the transition into a democracy started the following year. The general economic and financial situation was rather bad, but the expectations were quite favorable (see Table 4). Table 4. Conditional Analysis of Argentina 1980s
Positive Negative (Risks) GDP growth dropped to 1.5% Strong Food Industry due to interest rate increase Government started privatization initiative Large Current Account deficit Government hinders Very liberal foreign investment companies to transfer profits laws abroad Good educated workforce Government is unstable External American Market Share had American Technology dropped from 46.6% to 16.7% superior in nearly every during the first 3 years of industry sector military junta Imports rose strongly in 1980 Internal

Unfortunately, historical data of the PRS Group is only available for the time range from 1984 until now, thus the ICRG score cannot be used in this case. The qualitative data suggest that Argentina in 1981, in general, seemed like a two-edged sword since liberalization of the market had increased significantly under the military junta, but the political system did not seem stable. Public turmoil was very likely and could have ended in a civil war, in the worst case scenario. This ambiguous situation made it hard to judge the

46 risk level for 1981, but the unstable political situation was outweighing the economic improvement, which would have suggested rather a high risk level for this year, as shown in Table 5. Table 5. ICRG Ranking for Argentina 1980s Index Rating Risk Range Overall Political Risk Economic Risk High Financial Risk Composite Risk -

Source: Coleman, D. Y. (2011a). Argentina 2011 Country Watch Review. Washington D.C.: Country Watch Inc.

The 1990s (Relevant Years)

When Carlos Menem took over power in the middle of 1989, he immediately initiated radical economic reforms, limiting the states influence and starting a second privatization wave. He also liberalized domestic and foreign economic policies and started cutting back the influence of the traditionally strong worker unions. From 1991-1992 he succeeded in defeating hyperinflation and getting the GDP to grow again (see Table 6). MERCOSUR, a free trading zone between Brazil, Uruguay, Paraguay and Argentina was initiated by him in 1991, giving the country bright future perspectives (Coleman, 2011a; The PRS Group, 1990c; The PRS Group, 1992b). Though Argentina still had some major issues at the beginning of the nineties, the development looked very good, and the country was in a high-speed process of remodeling its economy and working its way to the top of the developing countries. PRS group risk ranking in these years supports this observation, since Argentinas economic and financial risk rating improved by almost 17 points in 3 years (see Table 7), as well as the political risk ranking, which improved by 5 points (The PRS Group, 1990c; The PRS Group, 1992b). By the end of the 1990s, Menem was still president and had kept his market-friendly course throughout the decade, but he also let public spending slip, which doubled the current account deficit by the end of the decade. This and some external factors, like the Dollar

47 Table 6. Conditional Analysis of Argentina 1991 1992. Positive Negative (Risks) Internal Privatization of state-run Economic heritage from industries military junta and predecessor Strong economic policy Internal fights with orthodox liberalization Peronists First success of fighting High current account deficit inflation GDP growth is improving External Founding of MERCOSUR Dependency on IMF funding limits political options Relaxing policies towards Great Britain Pegging Argentinean Pesos to American Dollar Table 7. ICRG Ranking for Argentina 1990 1992
Index Rating Risk Range Overall Political Risk 64.0 69.0 Moderate Economic Risk 23.027.5 High Financial Risk 25.533.0 Moderate Composite Risk 56.5 64.5 Moderate

Moderate

gaining strength and low prices for natural resources, led to diminishing foreign capital flow (see Table 8). Since the Argentinean economy strongly relied on these capital imports, this consequently led to a major recession in Argentina, which lasted until 2000 (The PRS Group, 2003a). By the end of the nineties despite the growth and deregulated market, Argentina was not able to solve major economic problems that occurred at this time and plunged the country into a recession (see Table 9). However, the political circumstances differed from earlier crises, since Argentina seemed to be a fairly stable democracy by then. There was broad public support for Memens reforms which were carried on by Argentinas next President, Fernando de la Rua. The major issues for Argentina were the high current account deficit and the high corruption level. President de la Rua successfully managed to cut the budget radically and get fresh capital from the IMF but did not solve the corruption problem (The PRS Group, 2007a).

48 Table 8. Conditional Analysis of Argentina 1998 2000

Internal Positive 7 years of ongoing economic growth and prosperity Widely liberalized market Highly educated workforce Negative (Risks) High poverty and unemployment rate Extremely high current account deficit Not reformed jurisdiction system High corruption level Diminishing foreign cash flow Diminishing natural resource prices

External

Conflict in MERCOSUR over devaluation of the Brazilian Real

Table 9. ICRG Ranking for Argentina 1998 2000

Index Rating Risk Range Overall Political Risk 76.0 72.0 Low Economic Risk 42.0 37.0 Low Moderate Financial Risk 33.5 28.5 High Composite Risk 75.8 68.8 Moderate

The 2000s (Relevant Years)

In the first decade of the new millennium, Argentina went through some tough economic times. Especially during the years of 2003-2006, the Argentinean situation seemed a lot like the situation at the start of the century: High unemployment, corruption, and still a wide gap between rich and poor. However, one major change, cutting of the budget deficit, improved the situation tremendously since new defaults of the Argentinean state, as in 1999, became more unlikely. In fact, Argentinas budget balance was among the best of all countries that were surveyed by PRS between 2002 and 2006 (The PRS Group, 2007a). Real GDP growth was 4%-8%, and short-term direct investment options looked quite good. As Table 10 depicts, inflation was still a huge problem. Though the official figures showed one-digit rates, economists and the public doubted the truth of these statistics. Therefore, public clashes between the government and NGOs, such as unions, occurred on a monthly basis and threatened the economic rebound. Another serious problem for Argentina was its currency that proved to be one of the most unstable among all countries surveyed by

49 Table 10. Conditional Analysis of Argentina 2008 Positive Negative (Risks) Internal High inflation Improved current account Public unrests Highly trained workforce Wide wealth gap Stable democracy Unstable currency External Tensions in MERCOSUR with New arrangements with the Club Brazil of Paris leaving more political freedom for government. Dependency on Venezuela PRS. And despite the budget improvements, Argentinas debt service ratio was a reminder that the countrys economy heavily relied on foreign investment and technology imports (The PRS Group, 2007a). Argentina gave a somewhat puzzling picture for investors. On the one hand the improved current account and high GDP growth should improve the countrys overall rating, but on the other hand, the political situation and the speculation on much higher inflation made people skeptical at that time. Therefore, country risk was still low but the future prospects did not look as bright as they used to. PRS supports this observation (see Table 11), since it forecasted only negative trends for South Americas second largest economy, foreseeing the problems that would arise from growth financed with foreign capital and unstable political situations (The PRS Group, 2008b). Table 11. ICRG Ranking for Argentina 2008 Index Rating Risk Range Overall Political Risk 71.0 65.5 Moderate Economic Risk 40.5 39.0 Low Low Financial Risk 37.5 38.0 Low Composite Risk 74.5 71.3 Low

BRAZIL
Brazil is the largest and most populous country in Southern America and has by far the highest natural resource base. In 2011 the country was the leading economy of the subcontinent with well-developed agricultural, manufacturing and service sectors and one of the most attractive markets to American MNCs in the past four decades. As can be seen in Table 12, Brazil also has, currently, a quite low country risk which was not always the case.

50 Table 12. ICRG Ranking for Brazil 2010 Index Political Risk Economic Risk Rating Risk Range Overall 68.5 Moderate 38.0 Low Low Financial Risk 42.0 Very Low Composite Risk 74.3 Low

Source: The PRS Group. (2010a). Country Analysis. Brazil. East Syracuse, NY. The PRS Group Inc.

As with most countries of the region, Brazil has had some troubled times since World War II, going through a military ruled period from 1964 until sovereignty was given to the people again in 1985. Since then the Brazilian democracy has been quite stable and trying to solve the great issues this huge country still is facing. Nevertheless, American companies have been investing and exporting to Brazil throughout the past decades very successfully (Coleman, 2011b).

The 1970s (Relevant Years)

As already noted, Brazil was ruled by a military dictatorship since 1964; however, in the 1970s the military government was at the climax of its reign. At the beginning of the 1970s, their economic policies were ambiguous as they were protecting local companies, but at the same time Brazil was among the most dynamic economies in the world. There were no import limitations, but there were high import duties for goods that were not locally produced. Foreign investment was generally welcome, and Investment Guaranty Agreements protected American investors from expropriation and war. The GDP grew into two-digit rates and the current account looked good. However, foreign debt was at an all-time high, and the reserves were constantly declining. This triggered a rising inflation which would lead to economic stagnation by the end of 1973. Another issue that could be seen as problematic was the balance-of-payments which was slightly negative due to oil imports, but at that point in time it had not become obvious that this could turn out to be a big influence in the future. The military government encouraged technology transfer in major manufacturing sectors, and also the development of the agricultural sector became one of the main focus areas, namely expanding and modernizing the soybean, coffee and sugar business. The infrastructure was still deficient, but improving (Coleman, 2011b). As the conditional

51 analysis (see Table 13) points out, Brazil gave an ambiguous picture. Positive and negative scenarios were possible at that time, but nothing certain in the long run.

Table 13. Conditional Analysis of Brazil 1972 - 1974

From an economic point of view, Brazil was a puzzling case at the beginning of the 1970s. Some key factors looked quite good, such as the GDP and the current account, but others like foreign debt and inflation looked rather frightening. From an investors point of view, Brazil seemed to be a good market to enter, with high economic dynamics, investment friendly policies and insurability through the PIC. The political system seemed questionable but stable and thus not of any major concern for interested companies. Deducted from the qualitative data, I conclude that overall Brazil seemed rather like a market with a risk in the lower middle range, close to the low risk markets (see Table 14).

Table 14. ICRG Ranking for Brazil 1972 - 1974

Index Rating Risk Range Overall Political Risk Economic Risk Financial Risk Composite Risk -

Moderate

By 1979 the economic picture had changed dramatically. Inflation had been growing ever since 1974, foreign debt had been going up every year and the balance-of-payment was in a huge negative. The only good news was the phasing out of the import deposits which were a major hindrance to importers by 1983 and a variety of good opportunities through magnitude and growth of several manufacturing sectors (see Table 15).

52 Table 15. Conditional Analysis of Brazil 1979 Positive Internal Friendly foreign investment policy Improving import possibilities Magnitude & growth of some industries Resources Market size Easing political conditions External Insurable risk Negative (Risks) High foreign debt Very high inflation Economic stagnation Lack of skilled workers

Violation of human rights

Politically, the military dictators started to loosen their tight grip around the oppositions neck and gave them some political rights (Coleman, 2011b). As mentioned before, there is no ICRG score available for that period of time, but it can be concluded that the risk in Brazil was higher than before. A positive development was the start of a peaceful transition of power. The prospects of a democratic and liberal Brazil inspired investors confidence, despite the economic development. Therefore, it is reasonable to rank it in the high middle range, closer to high risk countries (see Table 16). Table 16. ICRG Ranking for Brazil 1979
Index Rating Risk Range Overall Political Risk Economic Risk Financial Risk Composite Risk -

Moderate

The 1980s (Relevant Years)

1988 was again a troublesome year for Brazils economy. Inflation had reached 370% by the end of 1987, and the public sector deficit was around 5.5% of the GDP. Inflation was Brazils ongoing problem, making it difficult to lower the perceived economic risk, especially when Brazil tried to solve this problem by fixing prices for certain goods. At the same time GDP growth was still in the higher one-digit numbers, and the foreign trade balance looked quite good, as can be seen in Table 17. Brazilian companies had a lot of foreign money, but they would not invest it, except for treasury bonds. This eased the

53 Table 17. Conditional Analysis Brazil 1988 Positive Internal GDP growth Foreign trade balance New democratic structures Existing funding

Negative (Risks) Very high inflation High Foreign dept Protectionist ambitions of current government Still in debt to IMF

External

worries about relatively bad economic data, while the inflation and fiscal deficit would stay a major concern for investors. Brazil had become a democracy in 1985 after a peaceful transfer of power and was still in a transition to have a popularly elected government with general votes in 1989. The economic policies of Jose Sarney, the President of the Electoral College from 1985, were rather nationalistic and backward, but it was already clear that more progressive candidates would probably win the upcoming elections. Brazils overall situation seemed not to have changed. Although the economic outlook was rather bad, political conditions had improved. It seems like Brazil is still at a high risk level. This observation is supported by the PRS risk rating (see Table 18), which reflects Brazils ambitious situation of being politically progressive, but economically weak (Coleman, 2011b; The PRS Group, 1989d; Business, Finance and Science, 1988). Table 18. ICRG Ranking for Brazil 1988 Index Rating Risk Range Overall Political Risk 68.0 Moderate Economic Risk 21.5 High High Financial Risk 29.0 High Composite Risk 59.5 High

Source: The PRS Group. (1989a). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY. The PRS Group Inc.

The 1990s (Relevant Years)

1992 started with a great achievement for Brazil, building South Americas first free trading zone with Argentina, Uruguay and Paraguay, called MERCOSUR. In the 90s MERCOSUR was the economically fastest growing free trading zone in the world. Aside from this, inflation was still a big issue and Brazil still had trouble repaying its high foreign debt. The GDP on the other hand was growing at a moderate rate.

54 The political system was stable, but the conditions were insecure due to continuing scandals among members of the government, which forced President Itamar Franco to continuously remodel his cabinet. While these scandals did not really threaten the stability of the country, there was a deep uncertainty about the ability of the government to solve the economic problems of Brazil. This was most likely one of the factors that led to the collapse at the end of 1992 of Brazils new IMF accord which had begun in February of that year. This fact and others, as shown below in Table 19, did not give great confidence for investors to put their money into Brazil. Table 19. Conditional Analysis of Brazil 1992 Positive Internal GDP Growth External Founding of MERCOSUR opened vast opportunities in South America

Negative (Risks) High inflation High foreign debt Collapse IMF accord

The composite ranking of economic and financial risk by the PRS Group is set at 63.5. This means a rise of only 4 points over 4 years despite the great expectations of MERCOSUR. Therefore, Brazil is still positioned in the lower middle risk range. However, although the economic data were looking bad, Brazil seemed to be able to grow. The founding of MERCOSUR added to political credibility and should aid Brazils export industries in the long run (see Table 20). Table 20. ICRG Ranking for Brazil 1992 Index Rating Risk Range Overall Political Risk 64.0 Moderate Economic Risk 24.0 High Financial Risk 39.0 Low Composite Risk 63.5 Moderate

Moderate

Source: The PRS Group. (1992c). The Americas. Brazil. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

In 1996 Brazil came out of a one-year recession but was still facing major economic problems. The Real was said to be overvalued by about 30-40%, and the budget deficit had surged to 5% of GDP in 1995. Though it was supposed to fall to about 3.3% of GDP in 1996, it still was quite high and a threat to the recently improving inflation problem. Brazil had

55 quasi-fixed its exchange rate to the U.S. Dollar to get control of inflation, but this move threatened its competiveness. Also the current account was at a 2% of the GDP deficit, increasing Brazils need for hard foreign currency. On the brighter side, GDP growth was improving and was about 5%, and Brazil was still attracting a lot of foreign investors, which should have provided the country with the liquidity needed to balance the current account and keep the GDP growth rate up. Inflation was down to 13%, which was a real improvement for Brazils long-time inflation issue. Also international reserves were at an all-time high with about $60 billion US in stock. The foreign investors were mainly lured into the country by the efforts of Brazils President Henrique Cardoso, who had started the so called Real Plan. This plan should solve major structural issues hindering the countrys improvement and provide a bundle of policies that should have immediate effects on the most pressing issues (see Table 21). The plan had already been working for two years and some effects could be seen, such as the drop in inflation and the privatization of key industry sectors, including the oil sector, and the removal of domestic market entry barriers for foreign companies (Coleman, 2011b; Crespo, 1996; Trebat & Petry, 1996). Table 21. Conditional Analysis of Brazil 1996
Positive GDP growth Inflation improvement International reserves Privatization of key industry sectors Liberalization of the market External Privatization great opportunity for foreign companies Internal Negative (Risks) Overvalued currency Current account deficit Threat to competitiveness by quasi-fixing the real to the US$ Dependency on international funding Volatile international capital flows

Generally the Brazilian situation seemed to have improved dramatically since 1995 which is summarized by the ICRG risk rankings in Table 22. However, it was still in a shaky state and some major issues were yet not fully resolved. The prospects overall were not bad if Cardoso could keep his brave course of opening the Brazilian market further and working out some traditional problems, like the sluggish bureaucracy. It looked like Brazils risk was shifting towards a higher range moderate risk.

56

Table 22. ICRG Ranking for Brazil 1996

Index Rating Risk Range Overall Political Risk 65.0 Moderate Economic Risk 35.0 Low Financial Risk 34.0 Low Composite Risk 67.0 Moderate

Moderate

Source: The PRS Group. (1996). The Americas. Brazil. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

The 2000s (Relevant Years)

2008 was a good year for Brazil since two of the three big rating agencies upgraded the developing country to investment grade, opening the way for many privately held funds to actively invest in South Americas biggest economy. This was primarily due to the dramatic improvements in the countrys balance sheet and a consequent fiscal discipline by President Lulas government. Foreign investment had already doubled by 2007 and provided a 3.8% rise of GDP budget surplus. Export revenues also went up, and most astonishingly domestic demand outpaced the volume of exports. All of this shifted Brazil towards a robust domestic economy, which differed from the developments of the previous decades. This was also reflected by the economys growth of about 5.8% (year-on-year base) in the first quarter of 2008. On the other hand, interest rates were still quite high in comparison to international levels and commodity prices raised sharply, increasing the fear of surging inflation. And the government seemed to leave the track of fiscal discipline with fast rising public spending, adding to this anxiety (See Table 23).

Table 23. Conditional Analysis of Brazil 2008

57 Politically, Lulas presidency is overshadowed by various scandals among the members of his government, forcing constant replacement of ministry posts and high-ranked government workers (The PRS Group, 2008a). Brazil seemed to have finally overcome its long-time dilemma of sluggish economic performance. Reforms and fiscal discipline were recognized internationally and rewarded by upgrades in the agencies rankings. Though there were still some concerns, Brazil undoubtedly had lowered its risk and moved up to an upper rank (See Table 24). Table 24. ICRG Ranking for Brazil 2008 Index Rating Risk Range Overall Political Risk 67.0 Moderate Economic Risk 38.0 Low Low Financial Risk 37.5 Low Composite Risk 71.3 Low

CZECHOSLOVAKIA AND THE CZECH REPUBLIC

In this thesis we will only consider the Czech Republic but use the scores and information on Czechoslovakia until it split into two nations in 1993. The geographical position of the Czech Republic as a crossroad for different parts of Europe makes it a strategically important country. Also, its highly skilled labor force and developed secondary and tertiary sectors provide ideal conditions for American companies. The country became a member of NATO in 1999 and gained great political security and credibility with this step. Since 2004 the Czech Republic has been a member of the European Union, as well as the Schengen Treaty since 2007, which give it unlimited access to all EU member markets. Therefore, it is not surprising that the current risk ratings are all in the low range, as can be seen in Table 25. The Czech Republic is often called the model student of the transformation countries. Table 25. ICRG Ranking for the Czech Republic 2010 Index Rating Risk Range Overall Political Risk 78.0 Low Economic Risk 36.5 Low Low Financial Risk 38.5 Low Composite Risk 76.5 Low

Source: The PRS Group. (2010b). Country Analysis. Czech Republic. East Syracuse, NY. The PRS Group Inc.

58

The 1960s (Relevant Years)

Some Western companies, like Honeywell, already started opening representative offices in the Peoples Republic of Czechoslovakia after the communist party had started a slow process of opening the country economically. However, Czechoslovakia stayed a socialist market with a very different structure from the free markets in the West, restricting the form and amount of business rigorously and thus a negligible market for the MNCs and this thesis

The 1990s (Relevant Years)

With the downfall of the communist system in December 1989 and the first freely elected government in 1990, Czechoslovakia transformed its political system with tremendous speed and was eager to transform its economy at a similar pace. The first steps were a quick privatization of the state-owned companies through a voucher auction and financial aid as an incentive to modernize the ailing manufacturing complexes. The Czechoslovakian Republic faced similar problems as most transformational economies, experiencing a tremendous rise in unemployment, devaluation of its currency and galloping inflation. Nevertheless, Czechoslovakia also had some advantages over most other Eastern European countries. Aside from Eastern Germany, the country had been the most productive and most evolved manufacturer in the Comecon and had very little foreign debt. Therefore, they had a good reputation in the international banking system and a highly skilled workforce. The strategically positive location of the country has already been mentioned above, but it also had one of the best infrastructures among the Comecon countries. One problem though was the high dependency on orders from the other former socialist countries since Czechoslovakias exports to the West made up only 20% of its total exports before the transformation. At the beginning of the 1990s, its former customer countries preferred imports from Western companies rather than from their Czech business partners. Another downside was the lack of modernized machinery. Other Eastern Bloc countries had bought this machinery prior to the fall of the iron curtain with loans from Western countries and indebting themselves in hard currency. Czechoslovakia had always strived to keep the debt in balance, and because their goods were craved by most Comecon

59 states, there seemed to be no need to modernize. Now this strategy backfired on their economy. By the end of 1990, these conditions pushed Czechoslovakia into a recession with industrial output falling by 3.7%, GDP by 3.2%, and net national income by 3.1%. This trend became even worse in the first half of 1991 with industrial output down by 13.8% and GDP down to 9.8%. The inflation rate was about 45% for the first eight months of 1990 but already declining throughout the last four months. 1992 was a mixed year. Despite the plans to have a slight surplus in budget, the overall financial budget showed a deficit of approximately $274 million US. Gross debt had risen from US $400 million to US $9.8 billion. On the brighter side, the foreign currency reserves went up to US $2.15 billion to cover at least three months of imports, and foreign companies started to invest increasingly in Czech companies through the voucher auctions. The Czechoslovakian Republic was formed in a peaceful transition of power in 1990, with the Slovakian and Czech peoples rights organizations gaining power in the first elections. The popular writer Vaclav Havel became the first Prime Minister of the new Czechoslovakian Republic. The political landscape however was still changing, and the majority of the civil rights groups turned out to be more of a movement than a like-minded party, thus splitting into new parties. Foreign investment policy was investment friendly, as Czechoslovakia tried to start a technology transfer from Western companies to its own manufacturing facilities. The most encouraging forms were Joint Ventures and cooperation agreements, meaning partnerships. The new republic had also gained most favored nation status (MFN) by the U.S. government, as well as transfer preference guarantees by the European Economic Community and Austria. One major political concern for an investor at that time could have been the political future of the two-nation republic since the Slovakian people were starting to demand more freedom, and it was not clear how the Czechs and Slovaks would arrange a possible solution (Coleman, 2011c; The PRS Group 1990d, 1991b, 1992d). Aside from this, Czechoslovakia already looked like a promising market to invest in, as Table 26 shows, and a model student of free economy.

60

Table 26. Conditional Analysis of the Czech Republic 1989 - 1992

Summarizing all these factors, the Czechoslovakian Republic had probably one of the most favorable starts into the transformational process. Not only did they have one of the best initial economic positions, but also the internal drive to embrace free market concepts and to go through the hard transformation quickly but successfully. It seems like Czechoslovakia had a middle-ranged low risk, closer to the low risk countries in this period. This is supported by the decision of the American government to take Czechoslovakia into the MFN-list and as well by PRS rankings, showing a rise in all country risk rankings, except for the financial risk (see Table 27).

Table 27. ICRG Ranking for the Czech Republic 1989-1993

Index Rating Risk Range Overall Political Risk 63.0 72.0 Low Economic Risk 34.5 40.5 Low Low Financial Risk 37.0 37.0 Unchanged Composite Risk 67.5 75.0 Low

Sources:The PRS Group. (1989b). Centrally Planned Economies. Czechoslovakia. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1994). Statistical Section Country Risk, Ranked by Composite, Political, Economic and Financial Risk. Czech Republic. East Syracuse, NY: The PRS Group Inc.

The 2000s (Relevant Years)

In 2009 the Czech Republic was going through a recession like most European countries, caused by the global financial crisis. In previous years the country had enjoyed a stable growth with an average of 5.3%, now the economy was declining by -3.4%. The major hit for the Czech Republics economy was the declining exports on which the country relied

61 so heavily, making up 80% of the GDP. Inflation was also up to around 6.6% (year-on-year rate), and the budget deficit had risen from 1.2% in 2008 to 5% of the GDP in 2009. As desperate as these figures looked, the forecasts painted a brighter picture. Analysts were sure that all of the economic problems the Czech Republic was facing in 2009 were temporary and that the country was generally in a good competitive shape. The current account deficit for example already sank in 2009 to about 2% of the GDP. Politically, the Czech Republic looked quite different (see Table 4). The minority government of Topolanek had been brought down in March 2009. It had stayed in office for much longer than anyone would have expected. Their inability to govern was reflected by the hold-up of so many important reforms of the Czech system, like the equal treatment of foreign and domestic investors. However, Topolanek still had improved the economys situation by cutting corporate taxes back by one percent, approving a big stimulus package and eliminating the value-added-tax. Another major issue was the Euro-skeptical position of the Czech President Vaclav Klaus who refused for a long time to sign the Lisbon Treaty, a substitute for the failed European constitution. This became especially delicate because the Czech Republic held the EU presidency for the first two quarters of 2009. The interim government led by Jan Fischer had no intention of solving that problem but began actively to solve some of the economic issues (see Table 28), for example, by appointing Eduard Janota, a highly-regarded financial expert, as Finance Minister (The PRS Group, 2010f; Coleman, 2011c). Table 28. Conditional Analysis of the Czech Republic 2009 Internal Positive Negative (Risks) First steps taken to improve the Inflation rising economy GDP decline Generally good competitive Huge political problems shape of Czech Economy Great dependency on exports Only temporary downturn Sinking current account deficit Most analysts giving good Pressure from the EU and other forecasts for 2010 member states to sign the Lisbon Treaty No longer Euro candidate for 2010

External

62 Overall, the Czech Republic appeared to be hit hard by the financial crisis, but the foundation of the Czech economy seemed in good shape. The political struggle was an issue, but one that was not seriously affecting the economy, as different forecast models by PRS indicate (The PRS Group, 2010f). Therefore, the risk in the Czech Republic seemed low and all signs pointed to a continuous improvement of the economy, as Table 29 shows. Table 29. ICRG Ranking for the Czech Republic 2009 Index Rating Risk Range Overall Political Risk 77.0 Low Economic Risk 31.5 Low Low Financial Risk 39.0 Low Composite Risk 73.8 Low

Source: The PRS Group. (2010b). Country Analysis. Czech Republic. East Syracuse, NY: The PRS Group Inc.

INDIA
India is the second most populous country in the world and one of the fastest growing economies. The Indian Republic was founded in 1950 and had a woeful path until recently. India is one of the future economic powers in the so called BRIC country concept and has become a very attractive market for American companies. India has a stable democratic system and a well-educated workforce; this is especially true for the IT industry. The country still faces great challenges, with multiple religious and racial conflicts as well as border conflicts with Pakistan in the Kashmir region, but during the last 15 years India has come a long way to become the influential nation it is today (Coleman, 2011d). Table 30 summarizes the current position of India as a benchmark to the historical country risk scores. It is striking that India is the only analyzed country that is still in a moderate risk range, although it is very close to the low risk range. This is mainly due to the vast and diverse economic and political landscapes that India represents and again justifies not comparing it to other countries in order to form a cluster. Table 30. ICRG Ranking for India 2010 Index Political Risk Economic Risk Financial Risk Rating 61.0 32.5 43.5 Risk Moderate Moderate Low Range Overall Moderate

Composite Risk 68.5 Moderate

63

The 1980s (Relevant Years)

In 1985 India still had a restrictive foreign investment policy, summarized in the FERA (Foreign Exchange Regulation Act) from 1973, which permitted foreign equity participation to be only 40% with few exceptions. This made it impossible for companies to make a market entrance on their own, since they needed Indian majority-partners to comply with FERA. Still, many companies entered the market and used the policy to the best advantage (Encarnation & Vachani, 1985). Moreover, India had just had a major political crisis after the Indian President Indira Gandhi was assassinated in 1984 by Sikhs, an ethnic and religious minority in India. Her son, Rajiv Gandhi, had taken over and won the 1985 elections in a landslide victory, and his general popularity seemed to stabilize the subcontinent. Unfortunately, Mr. Clean stumbled at the very end of his first period in office over two major scandals and was not reelected. Instead, Vishwanath Pratap Singh, the leader of the National Front party, was asked to build a new government. He was regarded as a good choice, but was forced to lead with a minority government making his task particularly complicated. Indira Gandhi had started some major reforms to open the Indian market to foreign investment. Key elements were a reduction in the control of foreign investment by the state, tax cuts and removal of certain quotas. Rajiv carried on these reforms which made it more attractive to invest in India. Over the next five-year period, the countrys economy did indeed thrive. Real GDP growth averaged around 5%, exports grew about 10% a year, and the stock market nearly exploded. A large part of this growth happened due to the manufacturing industry, whose output rose around 10% a year, and to increasing domestic demand by a growing middle class of around 100-200 million people. However, this growth came at a cost, namely a budget and trade deficit and inflation. In 1989 the inflation rate was around 9% per annum, which was not too bad in comparison with other developing countries, but it hit the vast majority of poor people particularly hard. Though the Indian Rupee was constantly depreciating, the country had a trade deficit of around US $5 billion and a budget deficit of around 8.1% of the GDP. These numbers and other obstacles, which are summarized in Table 31 were not an encouraging prospect and as a consequence India did not attract as many investors as other Asian countries.

64

Table 31. Conditional Analysis of India 1985 - 1989

Overall it seemed that Indias market attractiveness should have been improving, but it was nevertheless a rather hostile place for foreign investment. Macroeconomic data was indicating a crash in the near future if the Indian government did not find a quick solution. This was, however, very unlikely because they governed with a minority in the parliament. Some major obstacles were also posed by inner and external conflicts, such as the JummaKashmir conflict with Pakistan. Therefore, in 1985 the Indian market was rather at the lower edge of the middle risk range, closer to the high risk markets. The end of 1989 marked a major turning point for India, as trouble in the government and the conflict with Pakistan worsened. Though it was uncertain at that time whether their situation would improve or get worse, PRS speculated on a political crash and ranked the investment risk at a high level (see Table 32).

Table 32. ICRG Ranking for India 1985 - 1989

Index Rating Risk Range Overall Political Risk 49.0 43.0 Very high Economic Risk 32.5 31.0 Moderate High Financial Risk 29.0 27.0 High Composite Risk 55.5 50.5 High

Source: The PRS Group. (1985). Country Risk Data India 1985. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1989c). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

The 1990s (Relevant Years)

The nineties started as badly as predicted. The government of Singh had failed after only one year in office, and new elections were supposed to be held soon. This led to a major loss of political confidence followed by a down rating by PRS. Composite risk level crashed

65 to 43.5 mainly due to the political score which dropped 8 points to a total of 35 by the end of 1990, and India was ranked in the high risk country category. Major turmoil arose when Rajiv Gandhi was killed by a Tamil suicide bomber in May 1991. The commotion even threatened a collapse of the central government. At this point P. V. Narasimha Rao stepped in as an interim prime minister. His primary responsibility was to calm the situation and smooth the path for new elections. However, he quickly used his decade long wisdom of politics and strengthened his position. By the time he had won a landslide victory in his Andhra Pradesh constituency in November, he had eliminated any doubt of his intention to stay in power. At the same time India was close to a technical default since foreign reserves dropped to a level as short as two weeks of imports. Their long-time trading partner the Soviet Union had just collapsed, leaving India in a desperate economic situation. Rao saw the situation and started radical economic reforms that were said to be even bolder than the reforms in Eastern Europe. First, the IMF stepped in to prevent Indias default, and as a part of this deal the budget deficit was reduced from 9% to 6.5% of GDP, with further restrictions in the future. The Rupee was also devalued about 20% and afterwards allowed to depreciate further against the US$. Import restrictions were cut, industrial licensing was dismantled for nearly all industries, foreign direct investment was granted automatically to a broad range of industries, and an allowed equity share of 51%. Still, India was showing some dire economic data, and investors were uncertain about the Indians willingness to go along with Raos new course. This becomes clear if we look at the ambiguous picture the conditional analysis shows (see Table 33) Table 33. Conditional Analysis of India 1990 - 1991 Positive Internal Radical political reforms to open economy Very experienced new PM Declining budget deficit New foreign investment friendlier policies External IMF involvement gives confidence to investors Negative (Risks) Still bad economic data Inner conflicts could erupt into riots and even civil war Questionable willingness of the Indian people to carry the reforms

66 India seemed to be turning its fate around, but there were still some major concerns about the capability of the country to really do so. Therefore, the political risk improved, but economic doubts were still present and the reforms of Rao were sure to cause some disturbances in the short-run, which left India in the middle ranged risk, still close to the high risk countries. PRSs data supports this, with a composite risk index of 49.0, meaning a 5point rise from the previous year (see Table 34). Economic risk was rated at 25.5, which equaled a minus of 3.5 percent in comparison to 1990, and the financial risk rating was increasing to 29.0, an increase of 6 points. Table 34. ICRG Ranking for India 1990 - 1991 Index Rating Risk Range Overall Political Risk 35.0 43.0 High Economic Risk 29.0 29.0 High Financial Risk 23.6 25.5 High High Composite Risk 43.5 49.0 High

Sources: The PRS Group. (1990a). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1991a). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

The years from 1997-2001 were dominated by inner political struggle at the beginning and worsening external conflicts and natural catastrophes towards the end. At the beginning of 1997, a big coalition ended after the Congress party withdrew its support and a two-year episode of different prime ministers and coalitions began. It ended with another vote in 1999, when the BJP, a right-wing Hindu party, secured a majority with its alliance and the former Prime Minister Vajpayee took over again. His government could then finally concentrate on further reforms to keep Indias economy thriving; for example, he signed many trade agreements with neighbors, but also with the U.S. and the EU. Vajpayee further opened the Indian market for foreign investment, such as the insurance industry, and further lowered import barriers. The economic data was not too bad either. GDP growth was between 5%-6.4%, inflation came down to 4% as did the current account deficit to 1.1% of GDP (see Table 35). Troubling were the development of the relationships with Pakistan and Bangladesh, as well as some of the religious conflicts that happened during that time. By the end of 2001,

67 Table 35. Conditional Analysis of India 1997 - 2001 Positive Internal External Good economic development Further reforms to open the market Stabilizing government since 1999 Trade agreements with neighbors and U.S. and EU Negative (Risks) Unstable political situation until 1999 Natural catastrophes Riots and violent religious conflicts Conflict with Pakistan and Bangladesh

the Indian and Pakistan Army had their troops at the borders, and India had just avoided a major conflict with Bangladesh. In the same period India was hit by major earthquakes killing up to 40,000 people and leaving millions without a home. Summarizing the Indian position, the countrys market seemed to be in a middle range risk, thus more to the center of the range due to the good economic conditions and the foreign trade agreements. While economic and financial data improved, the political risk rose dramatically due to the earthquake and the ongoing conflict with Pakistan (see Table 36). Table 36. ICRG Ranking for India 1997-2001
Index Rating Risk Range Overall Political Risk 67.0 56.5 High Economic Risk 32.0 33.5 Moderate Financial Risk 39.5 40.5 Very Low Composite Risk 69.3 65.3 Moderate

Moderate

Sources: The PRS Group. (1997a). Asia and the Pacific. India. Risk Ratings. East Syracuse. NY: The PRS Group Inc; The PRS Group. (2001). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

The 2000s (Relevant Years)

Politically, 2005 was a year of external relaxation and an internal balancing act. The Indian-Pakistani relations were relaxing, especially after the heavy earthquake in Pakistan and the immediate humanitarian help for its neighbor provided by India. Even several terrorist attacks in India which could be linked to Pakistan-based terror groups did not lead to the usual rise in tensions. Manmohan Singh, the new Prime Minister since mid-2004, had met with his Pakistani colleague Pervez Musharraf in New York and since then the relations took a positive turn.

68 Singh had already been involved in the last major economic opening process during the leadership of Rao and seemed to be the perfect leader to set India on track to open its market completely. However, one obstacle was the Left Front, a coalition partner of Singh, which was actually pursuing a socialist path for India and made it hard for the Prime Minister to push through his economic visions and plans. Still, the economy was in good shape. Real GDP growth was at about 7% and inflation at about 4%, which was quite low for India (see Table 37). The government had pushed for further liberalization, despite the unwillingness of the Left Front, though of course the policies did not go as far as Singh had intended. Table 37. Conditional Analysis of India 2005
Positive Steady, big GDP growth Low inflation rate Liberalization and foreign investment friendly policies Prime Minister with good economic background and quite popular External Peace process with Pakistan Internal Negative (Risks) Current account and public budget deficit Reform hold-up by Left Force

The public budget still posed a major risk as the Union Government did not care too much about fiscal discipline and expected the central government to take care of this matter. The current account did not look too well either, as Indias growing middle class was craving Western imports and the deficit would widen even further with the increasing liberalization of the market (Coleman, 2011d; The PRS Group, 2006). Overall, Indias market risk position seems to have improved tremendously since 2001. India was now in the low risk range. PRS valued a composite risk of 71.3 out of 100 for December 2005, which fits with the previous observation (see Table 38).

MEXICO
Mexico is the second most populous country in Latin America and has a special bridging function between wealthy North America and developing South America. Mexico has abundant natural resources and is a major player in the global oil business. In the last 20 years Mexico has undergone a tremendous economic change and has embraced a free-

69 Table 38. ICRG Ranking for India 2005 Index Rating Risk Range Overall PRS Group International Country Risk Guide (ICRG) Political Risk Economic Risk Financial Risk Composite Risk 64.5 36.0 44.0 71.8 Moderate Low Very Low Low Low

Source: The PRS Group. (2005). Asia and the Pacific. India. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

market economy and modernized its industry and infrastructure at a very fast pace. In this sense, it joined the North American Free Trading zone in 1992 and strengthened its tight economic relations with the USA. Today 90% of all Mexican exports are going to the United States. Mexico has been a democracy for over 90 years, but has been facing a desperate battle against its powerful drug cartels in recent years. This has destabilized some areas of the country and shaken foreign trust in Mexicos stability. This explains the difference between current (see Table 39) and past risk ratings from not too long ago. Table 39. ICRG Ranking for Mexico 2010
Index Rating Risk Range Overall Political Risk 69.0 Moderate Economic Risk 37.0 Low Low Financial Risk 41.0 Very Low Composite Risk 73.5 Low

Source: The PRS Group. (2010c). Country Analysis. Mexico. East Syracuse, NY: The PRS Group Inc.

THE 1990S (RELEVANT YEARS)

In December 1988 Carlos Salinas de Gortari took office as the President of Mexico. This was not an easy task. There had been turmoil because of accusations of electoral fraud. Salinas had to prove and convince the Mexicans throughout his whole time in office that the PRI, the party which had governed the country for over six decades, was really making an effort to transform the voting system towards a more pluralistic and fair system. This and several corruption scandals gave his tremendous success on the economic and legal front a bitter aftertaste. Nevertheless, his time in office is generally seen as the start of a prosperous transformation of the country. From the start Salinas took radical actions at a fast pace that changed Mexicos political landscape and economy quickly. In a bold move, he immediately ordered the arrest of major drug bosses and criminal union officials. This earned him respect,

70 and he was able to outmaneuver the opposition. The revival of the Mexican economy, which was in severe stagnation, was his major concern. Two big projects were lying ahead: Salinas had to renegotiate Mexican debt with multinational organizations, such as the IMF, the Club of Paris and others, and he had to modernize Mexicos economy. His Finance Minister Pedro Aspe, an MIT-trained financial expert, headed the commission that took on the renegotiations. By the end of 1989, Aspe was successful and Mexico had secured fresh funds to take on the second task. Salinas started to heavily privatize state-owned companies. Only certain very important key industries stayed under government control. He also shrank the budget deficit of Mexico by, for example, using the new debt agreements negotiated by his Finance Minister Aspe. One of his most ambitious projects was the deregulation of foreign investment. Under his leadership, Mexico opened its markets in nearly every industry for foreign companies to own up to 100% equity in their subsidiaries. Investments below a threshold of US $100 million, outside major business centers of the country, were allowed without governmental approval, and the approval process was streamlined, with an approval guarantee if the process took longer than 45 days. Inflation had always been a problem in Mexico, and Salinas and Aspe brought the inflation rate down from 179% in February 1988 to about 10% in 1993. To reach this goal Aspe had negotiated the PECE (Stability and Economic Growth Pact) including price freezes and controlled wage adjustments. Another important step was the liberalization of the banking system, which led to improved financial confidence in the private sector. These measures (see Table 40) enabled a strong growth from 1989-1992 with annual GDP growth rates between 3%-5% and Mexicos entry into the Asian-Pacific Economic Cooperation (APEC) in 1993, and even more importantly the North American Free Trade Agreement (NAFTA) at the beginning of 1994 (Coleman, 2011e; The PRS Group, 1989e; The PRS Group, 1991e; The PRS Group, 1992e; The PRS Group, 1993b). Mexicos transition at the beginning of the 1990s is an impressive story that stands out because of its rapid and stable success, but it had its downsides as well, especially in the

71 Table 40. Conditional Analysis of Mexico 1989 - 1993 Positive Internal Rapid foreign investment policy change Rapid and stable improvement of economic key factors Privatization efforts New debt agreements External Entrance into NAFTA Need of technological transfer in order to modernize Small geographical distance Negative (Risks) Questionable attempts to make the voting system fair and pluralistic Massive corruption Organized Crime Cartels

still existing suppression of the opposition and the massive corruption. Nevertheless, from an investment point of view, Mexico seemed to be a low risk market which is also supported by the PRS data for those years, summarized in Table 41 (The PRS Group, 1993b). Table 41. ICRG Ranking for Mexico 1989 - 1993
Index Rating Risk Range Overall Political Risk 69.0 62.0 Moderate Economic Risk 27.0 30.5 Moderate Low Financial Risk 31.0 41.0 Low Composite Risk 63.5 72.0 Low

Sources: The PRS Group. (1989e). The Americas. Mexico. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1993b). The Americas. Mexico. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

Ernesto Zedillo Ponce de Len had taken over as President in 1994, and after only three weeks in office caused major economic trouble when his government lifted the exchange-band ceiling by 15%. This led to an abrupt devaluation of the Mexican Peso and a short but painful recession. By 1997 the economy had regained its strength and GDP growth was up to approximately 7%. In 1998 it slowed down to a still strong 4.8% growth, despite major cutbacks in public spending and a tightened monetary policy. A positive surprise was the stable floating rate of the Peso against the US Dollar. Even in turbulent times like 1998, during the Russian and Asian crises, the Banco de Mexico managed to stabilize its rate and even gained some ground. This led analysts to the conclusion that Mexico was much more stable and economically stronger than most developing countries and improved the countrys image. Another positive development was the recovering private consumption and the stronger demand from the U.S., Mexicos most important export partner by far.

72 On the downside, inflation went up again from 15.7% to 18.6%, as well as the current account was down from a surplus of 1.8% of the GDP to -3.8% of the GDP at the end of 1998. Politically, Len faced a heavy struggle to finally reform the electoral laws to ensure fair and transparent elections. He finally achieved a consensus in 1996, and soon the leading party, PRI, felt the change towards a more pluralistic political landscape in Mexico, since for the first time in 70 years they no longer held a majority in the second chamber. Nevertheless, the opposition kept asking for further changes, and this issue was still not closed by the end of 1998. Mexico continued having major trouble with its drug cartels, as even high officials like General Jess Gutirrez Rebollo, head of the anti-drug force, was arrested and accused of protecting a cartel boss. Lens government was also connected with heavy corruption scandals. On a more positive side, Len kept the course of his predecessor Salinas in privatizing state-owned companies and opening the Mexican market for foreign investment. He also formed several new free trade agreements with other Latin American countries, such as Chile and Venezuela (see Table 42). Table 42. Conditional Analysis of Mexico 1997 - 1998 Positive Negative (Risks) Internal Stable GDP growth Broken downwards trend in inflation Proving of the economic stability during Asian crisis Negative trend in current account Improving private consumption Ongoing criminal cartel Political successes in reducing problems the fairness deficit in the electoral process Corruption External New trade agreements with other developing regional markets Mexico did not look like a new born star at the beginning of the 1990s, but it proved itself to be a robust economy despite major setbacks like the 1994 recession. Political conditions were stabilizing, and the markets were liberalized further. The economy was growing and seemed to be carried by export as well as by an increasingly important private consumption. Overall, Mexico seemed to have a rather low risk. Thus it is surprising that all

73 PRS ratings went down and ranked Mexico with a composite score of only 69 (see Table 43). The overall risk shall be set to a moderate score, but very close to the low risk range. Table 43. ICRG Ranking for Mexico 1997 - 1998 Index Rating Risk Range Overall Political Risk 72.0 69.0 Moderate Economic Risk 35.5 35.0 Low Financial Risk 34.0 29.0 High Composite Risk 70.8 69.0 Moderate

Moderate

Sources: The PRS Group. (1997b). The Americas. Mexico. Risk ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1998). The Americas. Mexico. Risk ratings. East Syracuse, NY: The PRS Group Inc.

POLAND
Poland is the fifth largest country in the European Union and the only economy in the EU with a positive GDP growth, even during the recent global financial crisis. The country was also one of the major forces that brought down the communist regimes in Central Eastern Europe and after some struggle made a rapid and painful transition into a free market. It consequently joined NATO in 1999, the EU in 2004 and the Schengen Area in 2007. Since then Poland has become one of the most attractive markets in Central Eastern Europe with a highly developed manufacturing sector and a well-educated workforce, all of which is reflected by the low risk score Poland had in 2010 (see Table 44). Table 44. ICRG Ranking for Poland 2010 Index Rating Risk Range Overall Political Risk 79.0 Low Economic Risk 35.5 Low Low Financial Risk 36.5 Low Composite Risk 75.5 Low

Sources: The PRS Group. (2010d). Country Analysis. Poland. East Syracuse, NY: The PRS Group Inc.

The 1990s (Relevant Years)

Starting with the democratization process in 1989, Poland underwent a tremendous and painful transition until the economy showed a profound basis of growth in 1993. The first partly free elections were held in June 1989 and produced a political power vacuum after nearly all of the available seats in the Sejm (lower house) and virtually all of the Senate (upper house) seats went to the protest organization Solidarno. The communist party was disillusioned and could not assume power, while the Solidarno was unfit and did

74 not want to assume it. In August the first non-communist Prime Minister, Tadeusz Mazowiecki, took office and already in December 1989 the Sejm approved his program to transform the centrally-planed Polish economy into a free-market economy. In May 1990, Poland held its first free elections in over 40 years, which ended in political chaos because a large number of small parties gathered in the two houses. They prevented the building of a functional coalition that would last longer than 14 months, which went on until 1993. In the meantime, the leader of the Solidarno, Lech Waesa had been elected President of Poland and saw himself as the leader of the transformation. This caused a lot of friction with some of the Prime Ministers and a lot of distrust in political practices by the Polish people. While political conditions were unstable, at least one policy was kept unchanged, namely Polands radical and rapid change from a socialist economy and one-party form of government to a democratic and open-market economy. The first and most crucial step was taken with the Balcerowicz plan named after the first Finance Minister of the newly founded Polish Republic, Leszek Balcerowicz. The plan had two main goals, liberalization and stabilization, and it sought to achieve both goals simultaneously. Liberalization referred to a swift privatization of state-owned industries, except for some key sectors, and the quick opening of the Polish market for foreign investment, including a freely floating Polish Zloty and the removal of all price controls. Stabilization referred to the dire state the Polish economy was in by the end of 1989. Inflation was up to 639.6% (year-to-year) in December 1989, and the budget deficit was up to 7.1% of the GDP. GDP and export growth were both down to 0.2%, and Poland had huge foreign debt mainly in hard currency, while the Zloty was devaluing rapidly. The data got even worse for 1990, peaking with a GDP shrinkage of 11.6% and industrial growth down to -24.2%. These conditions seemed bad but the different Polish Governments turned the economy around. By 1993 GDP growth was up to approximately 3%, the 4-year inflation trend was fast decreasing down to 44.3% by the end of 1992 onwards, and the budget deficit was around 5%. Industrial growth was also seen for the first time in 1992 with 4.2% and a rising trend. An encouraging factor was that Poland had already started to modernize its industrial production in 1988. Other indicators had previously raised hope for an economic turnaround, and the Polish future looked brighter by the end of 1992. Poland could

75 concentrate on its stabilization efforts, especially thanks to the new debt agreements they had negotiated with the IMF and the U.S. Still, Poland had seen a sharp increase in unemployment of around 14%-15% in 1993 and a further devaluation of its currency. Therefore, as bright as the future looked, there were still some doubts that Poland had already hit the bottom. The conditional analysis in Table 45 summarizes this promising but challenging future of the young Polish republic. Especially the political situation will continue to be a problem for Poland for a long time.

Table 45. Conditional Analysis of Poland 1989 - 1993

Summarizing this development, Poland seemed to be on its way to become a stable and uprising economy, which leads to the impression that their risk was still in the mid-range throughout most of the period, and even in the low risk-range by the end of 1993 (See Table 46). The PRS risk rating trends show exactly that with an impressive upward trend in 1993 (The PRS Group, 1989c; The PRS Group, 1990b; The PRS Group, 1991c; The PRS Group, 1992a; The PRS Group, 1993a; Coleman, 2011e).

Table 46. ICRG Ranking for Poland 1989 - 1993 Index Political Risk Economic Risk Financial Risk Rating 62.0 74.0 21.5 35.5 23.0 36.0 Risk Low Low Low Range Overall Low

Composite Risk 53.5 73.0 Low

Sources:The PRS Group. (1989c). Centrally Planned Economies. Poland. Risk Ratings. East Syracuse, NY: The PRS Group In; The PRS Group. (1993a). Europe. Poland. Risk Ratings. The PRS Group Inc. East Syracuse, New York.

76

The 2000s (Relevant Years)

Since 1999 Poland has been a member of NATO, and in 2000 President Kwasniewski, member of the social democrats, was reelected, bringing some stability to the fluctuating political landscape of Poland. The 2001 elections again did not provide any clear victor, leaving the government in a rather unstable coalition between social democrats (SDL), the labor party (UP) and the peasants party (PSL). Consequently the coalition collapsed in 2003, and the leading SDL got into a huge corruption scandal, giving no rest to the young democratic system in Poland. In 2001 Poland was also hit by an economic slowdown causing spiking unemployment rates and also causing trust issues in the polish balance of payment after years of lax fiscal policy. The governmental debt rose up to approximately 50% of GDP, leaving a budget deficit of about 5.1% of GDP by the end of 2002 with only little hope for improvement in 2003. Privatization had already slowed down under the new government in 2001. The overall GDP growth was at a very low 1.4% in 2002 but improving for 2003 to an encouraging 3.8%. On the brighter side, the inflation rate was sinking tremendously, leveling at 1.9% by the end of 2002 and giving more certainty about the monetary policies. At the same time productivity had been growing strongly, which boosted the Polish competitiveness. Another positive outlook was the invitation to join the European Union, which added to the long-term perspectives of Poland (see Table 47). Table 47. Conditional Analysis of Poland 2000 - 2003 Positive Internal Low inflation Stable monetary policy Strong productivity growth Start of negotiations for membership in the EU External New member to the NATO Negative (Risks) Low GDP growth Political instability High budget deficit High public debt High unemployment

After an impressive first decade, the Polish free economy seemed to have been hit hard by an economic downturn. The unstable political conditions did not help the dire situation, but EU membership and a stable monetary policy smoothed some of these effects.

77 In general, Poland gave a stable economic impression despite some of the trouble it had to go through with a low risk score (see Table 48). Table 48. ICRG Ranking for Poland 2000 -2003 Index Political Risk Economic Risk Financial Risk Rating 78 77 38.5 35.0 34.0 39.5.0 Risk Low Low Low Range Overall Low

Composite Risk 73.8 75.8 Low

Sources: The PRS Group. (2000a). Europe. Poland. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (2003b). Europe. Poland. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

Poland was through the worst of the economic backlash 2003, but there were still some concerns about the high unemployment rates peaking with over 19% in the middle of 2004, making it difficult to cut back on public spending. A serious conflict arose when government officials tried to push Polands National Bank and its institutions to alter their strict monetary policy in order to let interest rates decrease and fuel economic growth. Fortunately, no such actions were taken and its discipline earned the National Bank a high level of respect. Poland had been officially invited to join the EU in 2002, and a 2003 referendum sealed Polands membership starting in 2004. This also marked a major increase in investment in Poland and spurred exports. However, political instability made it hard for Poland to immediately use its improved geopolitical conditions, as Prime Minister Miller stepped down only one day after the country had joined the EU. He left the government to the unwilling interim Prime Minister, Marek Belka, who faced opposition even within his own coalition. As former Finance Minister of Poland, he furthered the course of Miller to comply with EU open-market policy, especially in respect to privatization and building a regular budget for 2005. In September 2005, Poland elected two new leading parties, the Christian-Nationalistic PiS and the Liberal-Bourgeois PO, while the former government party SDL suffered a severe defeat. Lech Kaczynski of the PiS became the new President and, after PiS had tried unsuccessfully to govern with a minority in the Sejm. A big problem for foreign investment was the PiS nationalistic, anti-open-market and euro-skeptical positions and their reliance on two extremist parties as coalition partners. The first PiS Prime Minister resigned in July 2006, and Lech Kaczynski appointed his twin brother Jarosaw as the new Prime Minister, which made the partys political intentions even more questionable.

78 Economically, Poland boomed after becoming a member of the EU. GDP was up to 6.1% at the end of 2006 and inflation averaged around 1%. The current account also came down to around 2.6% in 2006 and represented an overall well balanced economy. Poland was no longer relying on exports alone but also on private consumption, which further supported a robust economy. The Polish Zloty floated freely and aside from some small shocks performed quite well. Furthermore, Poland was supposed to become a member of the European Monetary Union within the next few years. Overall the Polish market seemed to be even stronger than in the mid-1990s . However, unemployment was still a critical issue. Poland from 2003-2007 gave a hopeful picture, as it started in rather chaotic conditions but made its way back to a stable and healthy market growth towards the end. The political situation was puzzling, but as the economy grew despite these conditions Poland seemed to be rather a low risk market. This is supported by the PRS rates for Poland throughout the time span between 2004 and 2007 (see Table 49 & 50). Table 49. ICRG Ranking for Poland 2003 - 2007 Index Rating Risk Range Overall Political Risk 77.0 73.5 Low Economic Risk 35.0 39.0 Low Low Financial Risk 39.5 38.0 Low Composite Risk 75.8 75.0 Low

Sources: The PRS Group. (2003b). Europe. Poland. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (2007b). Europe. Poland. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

Table 50. Conditional Analysis of Poland 2003 - 2007

Positive Great comeback from backlash at the beginning of the 2004 High GDP growth Good inflation data Good current account data Balanced market External Member of the EU Future member of the EMU Internal Negative (Risks) High unemployment rate Unsecure political conditions Slowing privatization process

RUSSIA
Russia is the largest country in the world by geographical size. It reaches from Norway to China and from the Black Sea to the Bering Strait. Russia has vast natural resources: It has the worlds largest natural gas reserves, the second biggest coal reserves and

79 16% of all crude oil on earth is located under Russian territory. Russia had hardly any experience with capitalism when it opened its markets in 1991 and has had one of the roughest paths out of the socialist-planned economy. It still struggles with some traditional Russian problems, like the high corruption and its guided democracy, but nevertheless Russia is a market international companies cannot ignore (see Table 51). Table 51. ICRG ranking for Russia 2010 Index Rating Risk Range Overall Political Risk 64.0 Moderate Economic Risk 38.5 Low Low Financial Risk 44.5 Very Low Composite Risk 73.5 Low

Source: The PRS Group. (2010e). Country Analysis. Russia. East Syracuse, NY: The PRS Group Inc.

The 1970s (Relevant Years)

Some American companies had begun opening representative offices in the Soviet Union by the mid-1970s, starting a first economic exchange. This period cannot be considered as a true market entry as the Soviet Union allowed Western companies only very limited access to its markets with huge restrictions about the mode of entry and conduct of business. Often the socialist countries did not even pay with hard currency but exchanged goods for goods. Overall, the revenues were negligible, but some companies already had their foot in the door, such as ADM and Honeywell.

The 1990s (Relevant Years)

On the 31st of December 1991, the last flag of the Union of Soviet Socialist Republics was pulled in on the roof of the Kremlin. In the turmoil of the previous month, the newly elected President of Russia, Boris Yeltsin, had seized control over the transformation process and the Russian Federation broke free as the single biggest successor of the Soviet Union. Yeltsin preferred to take a fast-track to free markets, like so many former Eastern Bloc countries had done in the previous three years. He was however heavily opposed by former members of the communist party and moderate forces in the newly elected Russian Congress. The struggle went on as Congress opposed Yeltsins protg, Yegor Gaidar, a strong advocate for the radical rush for free markets, as new Prime Minister and instead the President had to accept Viktor Chernomyrdin, a moderate candidate as a compromise. Still,

80 the communist-dominated Congress blocked many of the economic reforms until the dispute became so intense that Yeltsin suspended the Congress and tried to implement a bicameral federal assembly in September 1993. He even used police and armed forces to oust the parliamentarians on their refusal to dissolve the Congress. After he dismissed the Constitutional Court, he held a referendum on the new federal system and an election for the new parliaments on the same day. The new constitution extended the Presidents power and strengthened Yeltsins position against increasing anti-Yeltsin protests. Yeltsin now had the power to pursue his fast-track solution, but already in January 1994 close followers started resigning, such as Yegor Gaidar and Finance Minister Boris Fyodorov. Yeltsins rapid rush into free-market economies had come to an end. During this year, more pressing issues mattered because Russia started a war against its rebellious province Chechnya, and the criminal situation got out of control. At the end of 1994, Yeltsins Russia was in desperate political shape. While all these political struggles were happening, Russias economy was in a downward spiral of high inflation, decreasing productivity and wages, strong devaluation of the Russian Ruble and surging foreign debt, as well as a skyrocketing increase in criminal involvement in business. Though Yeltsin had initiated tremendous changes in the Russian economic system, he had substantially underestimated the hardship this would put the Russian people through and the tremendous amount of hard currency needed to succeed in this task. Privatization was on its way, and so were policies to open the Russian market to foreign investors, but with GDP decreasing 2% in 1990 and a widening budget deficit that was mainly financed by money supply expansion, these attempts were rather counterproductive. In 1992 the industrial output had fallen by 23% in comparison to 1991. A drop in the oil export had soured the current account even more, and Russia was still short of hard currency of which 60% was provided by the crude oil business. Basic food prices had risen by 33% in the first month of 1993 alone, and the unemployment rate was exploding. The following years were no better, and by the end of 1994 the GDP was still declining at an average of -15% in 1994, and real wages fell by 4% in the first quarter of 1995. Investment in Russia also dropped by nearly 24% in the first quarter of that year and industry output fell by 4.5% at the same time. By the beginning of 1995, some positive development started building up. Inflation seemed to be under control at a level of 8%-11%

81 coming down from a 230% average in 1994, and the budget deficit of 3.3% of the GDP was well under the ceiling of 5%. This and Russias fast, but chaotic privatization gave hope to investors that the country could turn around its current state (see Table 52). Table 52. Conditional Analysis of Russia 1991 - 1995 Internal Positive Calming of inflation Controlled budget deficit Highly educated workforce Fast privatization Negative (Risks) Increasingly dramatic economic conditions High crime rate Business criminality Dropping investments Steadily falling wages Political turmoil War in Chechnya

External

The Russian Federation showed a fierce picture and little for hope of improvement during the period of 1991-1995, whether it was the desperate interior and external political situation or the economic collapse of the former Soviet economy. Nevertheless, Russia was on its way to improvement, and the vast opportunities of this country seemed to justify a middle ranged risk. PRS composite risk rating supports this conclusion (see Table 53). Table 53. ICRG Ranking for Russia 1991 - 1995 Index Rating Risk Range Overall Political Risk 49.0 58.0 High Economic Risk 21.5 42.0 Very Low Financial Risk 32.0 29.0 High Composite Risk 51.5 64.5 Moderate

Moderate

Sources: The PRS Group. (1991d). Europe. Russia. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (1995). Europe. Russia. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

The 2000s (Relevant Years)

For Russia, the beginning of the new millennium is marked by Vladimir Putin coming into power. He was first appointed Prime Minister by Yeltsin in August 1999 and then deployed as interim President when Yeltsin stepped down surprisingly in December 1999. This very questionable maneuver made Putin the winner of the elections which were held three months later and thus the legitimate successor of Yeltsin, whom he granted political immunity for all his actions as President. This kind of cliquish behavior was not only typical for Yeltsin, but also for Putin and is part of their perspective on Russias managed

82 democracy. This vision sees one strong and powerful leader at the head of the state, leading Russia back to world-political power, but has little resemblance to a real democracy. In this sense Putin also found a new way of managing Yeltsins network of businessmen, government and criminal elements, promising both non-political parties to leave them alone if they would leave him alone. He was also determined to take quick action when someone was not complying with an agreement, and prosecuted two major oligarchs in 2001who did not flee the country in time, Of these two oligarchs, the most well-known is the former Yukos boss Khodorkovskiy who was prosecuted and jailed in 2003. Though Putin often promised to make important economic policy changes to further open the market, he instead used the oligarchic structure of key sectors as a political instrument. One important exception is the land code which was approved by Putin in 2001 and allowed foreigners to buy land and which explains the legal rights of landowners. However, Putin also reformed the tax system sustainably and kept tight budget discipline to get Russia out its economic misery. Internationally, Putin cleverly used the fight against terror to justify the war Russia had begun in 2000 with Chechnya. Though Putin had declared victory in Chechnya, acts of terror from Chechen groups shocked the country regularly and kept the Russian people in fear. However, he also formed alliances with the EU and the U.S. as well as with NATO and thus gave Russia more international power. Economically, Russia was thriving. Although Putins democracy seemed more like a mild dictatorship, it provided political stability and calculability. Real GDP growth was between 4.3%-7.1% from 2001 to 2004, while inflation was constantly going down from 20.8 in 2000 to 10.9 in 2004. Due to its rich natural resources, the current account was in fantastic shape with surpluses of 18.5% in 2000 to 10.3% in 2004. This provided Russias national bank with hard foreign currency, and in 2000 the budget registered a surplus for the first time. Even when huge surpluses arose, for example, from windfall revenues by crude oil export, Russia kept its budget balanced and even built reserves which could be used for tax relief efforts and to reform the welfare and health systems (see Table 54). Overall, Russias economic turnaround was very impressive, and though Putins vision of democracy is not compatible with Western democracy, it provided stability for the country. Putin also reformed the chaotic tax system, kept budget discipline and formed alliances with the most important geopolitical powers. Still, Russia had to face many internal

83 Table 54. Conditional Analysis Russia 2000 - 2004 Positive Negative (Risks) Internal Democracy deficit Impressive economic growth Intervention of government Improving inflation into business Stable political status Threat of terrorism Tax reform Land reform Budget discipline External War with Chechnya Political and economic alliances with the EU and the Conflict with Georgia U.S. Military partnership with NATO and the U.S. and external conflicts which might not damage the nation, but undermined the trustworthiness of its government, especially looking at the Khodorkovskiy case. It seemed as though Russia was an overall low-risk-country, even though the situation of Russia is puzzling. The PRS Group data reflects the ambiguous development of business and government with high economic data and low political risk (see Table 55). Table 55. ICRG Ranking for Russia 2000 - 2004 Index Rating Risk Range Overall Political Risk 55.0 67.5 Moderate Economic Risk 39.5 42.5 Very Low Low Financial Risk 38.0 44.5 Very Low Composite Risk 66.2 75.3 Low

Sources: The PRS Group. (2000b). Europe. Russia. Risk Ratings. East Syracuse, NY: The PRS Group Inc; The PRS Group. (2004). Europe. Russia. Risk Ratings. East Syracuse, NY: The PRS Group Inc.

SUMMARY, ANALYSIS, FINDINGS, SUCCESS STORIES AND CONCLUSION

Now that we have gathered all relevant data, I will sum them up, analyze and discuss the findings. Due to insufficient data on the other seven cases, the discussion on the success rate will be limited to three cases. However this will not affect the validity of the findings as these three cases give a comprehensive picture of the success of American MNCs in developing countries.

84

CHAPTER 6 SUMMARY
The following chart (see Figure 15) provides an overview of the mode of entrance of the ten MNCs in the eight countries over the last four decades with the known color codes. As assumed there was a multitude of entry modes chosen by the MNCs, though wholly owned subsidiaries seem to have been preferable for most corporations. Country risk was fluctuating across time, though only in a few cases it got into the moderate and high risk range.

Figure 15. Timeline of all market entries and modes of entry.

85 The overview reveals that a lot of the MNCs entered the relevant markets between 1985 and 1995. This is consistent with the start of the transformation of the former East Bloc. In addition, it is also the timespan of the Uruguay Round, a multilateral trade negotiation, which led to the formation of the World Trade Organization in 1995 (dos Santos, Farias, & Cunha, 2005). This period of time therefore marks a general phase of opening and liberalizing markets of developing countries. Every market that was entered after 2000 was entered with an acquisition, meaning a wholly owned subsidiary, which is consistent with the trend described at the beginning of Chapter 1, Definition of the Problem. However, the analysis should not be flawed by these circumstances, since political and economic events always shape the decisions of companies in some way, but over such a long period of time these effects should be smoothed out. Some countries also seem to have certain patterns over time. Mexico for example was only entered by JVs, while Argentina was consistently entered with acquisitions and Greenfield approaches. The following analysis will explore if these patterns can be explained by country risk. In some cases these could mean that there is a country-specific pattern. However, this thesis will take a closer look in Chapter 8, whether this is the case or not.

86

CHAPTER 7 ANALYSIS
All gathered data will now be displayed as a matrix in Figure 16. The x-axis represents the eight developing countries, and the y-axis lists the companies, sorted according to their industry cluster. Each rectangle within the matrix represents a case, and each case is divided into two triangles. The upper right part represents the companys choice of how to enter this market, and the lower left part represents the country risk at the particular time of entry. The same color codes that were used throughout the thesis mark the three different levels of country risk and the five different modes of entry. The matrix enables us to compare a companys choice of entry mode in each country and the country risk ranges concurrently, while giving a graphical overview of the companies choices and country risks over time. However, it does not give a chronological overview. The case classifications below determine if there is a right match according to the hypothesis or if another case appears and how this thesis categorizes it. The legend beneath, Figure 17 will again explain the color coding. There are four different combinations that would suggest that country risk is the most significant variable when deciding how to enter a foreign market: 1. Perfect fit: this case is the right match. It appears when the color code of the mode of entry is the same as the color code of the risk level. Country risk is green + mode of entry is light green/green Country risk is yellow + mode of entry is yellow Country risk is red + mode of entry is orange/red

2. Overprotection: overprotection means that the mode of entry is more secure than the country risk would imply. This means that the company took an entry mode that required less resources than the country risk would allow them to invest with a low probability of failure. Meaning in all cases: Country risk is green + mode of entry is yellow/orange/red Country risk is yellow +mode of entry is orange/red

87

Figure 16. Overview of matching mode of entry with country risk.

88

Figure 17. The color coding legend.

3. Chance strategy: In cases where the country risk is moderate in a close range to the low rate and companies choose to enter through a wholly owned subsidiary this thesis will consider the requirements of the perfect fit fulfilled. A decline in country risk in the future was already assumed and the companies chose the riskier way to enter the country. Thus the MNCs risked more, but at the same time were able to take full advantage of the control provided of a high resource mode. Each case will get individual consideration and be tested for this behavior.

Country risk is yellow + mode of entry is light green/green

4. Different decision: In every other case the hypothesis is not fulfilled, and there will also be a consideration why companies chose to enter a market the way they did in a single case consideration. This case appears when:

Country risk is red + mode of entry is yellow/light green/green

89

CHAPTER 8 FINDINGS
Out of the 51 cases, 20 are perfect fits and 10 are overprotection cases. This means that in about 60% of all cases the country risk does sufficiently explain the MNCs behavior. Fourteen cases are in the category of chance strategy and will be analyzed individually in the following section to determine whether they can be counted as a perfect fit or as a different decision. Each of the chance strategy cases will be analyzed to see if propositions 2, 3, 8 or 9 of the eclectic model of Hill et al (1990) can explain the corporate decisions. If not, chance strategy will be thought to be a perfect fit since we assume that the MNC had a different assessment of country risk, or it was making a bet on improving the country risk situation in the future . Only 5 cases are different decisions, meaning that just 9% of all entry decisions can definitely not be explained by country risk in the sense of the eclectic model

THE CHANCE STRATEGY CASES

Only 9% of all analyzed cases can definatelly not be explained by country riks, but there are still some cases which were identified to fall into the chance-strategy-category. These cases do need an individual in-deepth analysto check wheather country risk is also the significant driver behind the managements decission or if other factors influenced the mode of entry.

ADM in Argentina
Archer Daniels Midland chose to enter the Argentinean market with a sales office, meaning a Greenfield approach, despite the moderate risk level in 1999. The medium risk range is largely due to the economic turbulence in the years after the entrance, while the risk rating was still in the low risk range prior to the millennium. This could be one explanation that would be in compliance with the hypothesis of this thesis. In this sense this case is a perfect fit.

90

ADM in Brazil
The company chose to enter the market with an acquisition in 1976. Dwayne Andreas was forming his soy empire, and Brazil is a vast country offering the perfect climate for growing soy beans. Andreas liked being in control but at the same time seemed cautious enough to understand the importance of local contacts in a military junta and thus entered the market via an acquisition. The decision seemed to have proven wrong since ADM transformed the operation into a JV with Nestle only two years later, which again would fit with the country risk of Brazil at this time. This would indicate that the risk of this business was too high for ADM, and they wanted to share it with a partner. As ADM was already experienced in acquisitions and in the soy market, the most logical explanation is that the country risk was too high and ADM should have chosen the fitting JV approach from the beginning.

Kraft in Argentina/Brazil
Both markets were in a phase of positive economic and political development. This might have supported a rather risky entry which provided the control Kraft needed over its brands as a global player-conglomerate. Its brand image is too valuable and it could therefore not risk that a partner or importer might ruin it. The other possible explanation is the possibility of fast penetration by acquisitions in a saturated market. While Greenfield approaches take a lot of time, acquisitions allow to quickly piggyback ones own brands, which would be still foreign to the market with the acquired domestic brands. Thus, this decision was more influenced by strategic factors than by country risk.

Kraft in Russia
Like others, Kraft entered the Russian market shortly after the fall of the Soviet regime by setting up an office in Moscow. Although this is considered to be a wholly owned subsidiary in this thesis, it is much less risky than setting up a plant or acquiring an existing company. Therefore, this approach should be rather seen as an entry with mediocre risk and in this sense as a perfect fit. This explanation is supported by the fact that Kraft acquired companies in other former socialist markets which were exporting to Russia, like Lithuania and the Ukraine but not in Russia itself.

91

Tyson in Russia
Tyson entered the Russian market while the USSR was still in place in 1989 with a sales office. At this point in time there was no other approach of making business in Russia than through exporting, but to build and organize a distribution network and obtain all the permits necessary from the socialist administration a local office was necessary. Thus Tyson had no other possibility than to enter the market with a wholly owned subsidiary. This is the explanation for this choice.

JnJ in Russia
As with the previous case of Kraft, JnJ entered the Russian market in 1990 with a representative office. Although it is an approach that requires a lot of resources, it does not present a huge potential loss for JnJ, and it did not have any sales function but was rather an outpost anticipating the political and economic changes in the USSR in order to gain a firstmover advantage as soon as the market would open as in other socialist countries, like Poland and Czechoslovakia. In this case the wholly owned subsidiary represents only a mediocre equity approach, which fits with the middle ranged risk rating. Therefore, it is in compliance with the assumption of this thesis and is to be considered as a perfect fit.

P&G in Argentina/Russia
In 1991 P&G entered the Argentinean and Russian markets with a Greenfield operation with both quickly merging with local companies. Choosing this mode of entry provided P&G a quick market penetration and local brands to facilitate the introduction of P&Gs own brands. This strategic advantage was most likely the reason for their choice. This is supported by the fact that P&G entered both markets in the same year with the same entry mode despite the risk level, which according to our hypothesis would have required a lower resource approach. In the case of Argentina, improving country risk data also supported this decision, since the Russian market became riskier.

Cummins in Brazil
When Cummins entered the Brazilian market, they did so with a governmental contract to build Diesel engines. These contracts could be insured through PIC insurance at that time, meaning that Cummins was financially backed up, for example, in the case of

92 expropriation. The Brazilian junta also made it quite unattractive to import products with extremely high import duties, which made it economically necessary for Cummins to produce locally. Most likely these two factors determined the decision for the chosen entry mode.

Honeywell in Russia
Honeywell had been present in Moscow since 1974 with a representative office. The problem is that there was no steady business going on with the Soviets, thus the real market entry into Russia occurred with the change of the representative office into a sales office organizing exports in 1991. Like in the case of JnJ, Honeywell had to be at the local spot to build a distribution network and ensure frictionless importing of their products. However, the sales office only needed relatively low resources, which is in compliance with the country risk, meaning it is a perfect fit and thus supports the significance of country risk.

Whirlpool in Argentina
In 1992 Whirlpool acquired SAGADA S.A. to enter the Argentinean market. This was part of Sparks 5-year global strategy and therefore is explained by proposition 2.

Whirlpool in Brazil
This case is similar to the case of ADM in Brazil, since Whirlpool entered the Brazilian market by acquiring two local brands which were consequently added to their holding. The risk was actually too high for this kind of entrance, but proposition 9 could give the explanation. Whirlpool products are sophisticated technical equipment and their tacit knowledge needs to be protected; in this sense a wholly owned subsidiary seemed to make more sense to management than considering the country risk. Another explanation could be the high import duties for non-locally produced goods to Brazil, which might also be an incentive to make such a decision.

RESULTS
This leaves us with a total of 27 perfect fits, 11 cases of overprotection and 14 cases in which country risk was not the most significant influence factor. In this sense 73% of all cases can already be completely explained by country risk, making it the most significant factor for corporate entry mode decisions in the last four decades. Only in 27% of all cases of

93 country risk cannot sufficiently explain why the companies chose the specific entry mode they had taken.

94

CHAPTER 9 SUCCESS STORIES

The final step of the analysis of this thesis is to compare whether the companies that picked a perfect fit or overprotection were more successful than those whose decisions were more significantly influenced by other factors. There are many different ways to measure success, objective data like market share (Buckley, Pass, & Prescott, 1988; Burke, 1984) or subjective like self-assessments (Anderson & Zeithaml, 1984; Douglas & Rhee, 1989), both of which are consistent with each other (Wong & Saunders, 1993). I will use an objective indicator of success, since the cases analyzed go back forty years and can hardly be assessed by self-evaluation of the companies today. In other words, we will consider a high growth in sales as an indicator for success. This is consistent with Rasheed (2005), who argued that though many papers prefer profitoriented measures, productivity-oriented measures are better suited for this task. Profitoriented data often is only published on an aggregate level, while productivity-oriented measures can often be narrowed down to a unit level (Geroski, 1998; Nickell, 1996;). However, due to the long time-range of the analysis and the incompleteness of the published information sources, the only data that could be gathered is in a qualitative form. The relevant time range to determine if a company was successful is set to a two-year period and in this sense represents an average short-term planning cycle.

ADM
In 1997 approximately one year after the joint venture between Gruma and ADM was formed Molinera de Mexico had already doubled its size by strategic acquisitions. Within the same timespan the Mexican parent company Gruma raised its operating margin from 7.2% to 8.2% and sales went up by 20%. Today Molinera de Mexico is Mexicos biggest producer of wheat flour (Gruma, 2011; Trotta, 1997; Whitaker, 1997a, 1997b). ADM had a promising start at the turning point of the Soviet Unions transformation into Russia. They had entered the market with several products, such as veggie burgers, for

95 which sales alone in Moscow doubled from 1991 to 1992 with a bright outlook for further growth. However, in 1994 ADMs hopes had gone down mainly due to the unstable economic situation in the country, but this seems more like the result of failure of the strategic management and marketing department than one caused by the wrong mode of entry (Bosworth, 1992; Fargo, 1992; Mooshil, 1994; Robert Estill Copley News Service, 1991).

GENERAL ELECTRICS
After entering the Czechoslovakian market in 1990, GEs aircraft division signed major contracts with local companies and also established cooperation with CKD Lokomotiva, a locomotives manufacturer. In a two-year span they had received orders from Czechoslovakian aircraft producers that accounted for more than $3.5 billion. Therefore, the Czechoslovakian market was one of the most important to GE in Central Eastern Europe and subsequently led to the formation of joint ventures with local companies in order to reinforce GEs position in this geographical area (BBC Monitoring Service, 1990; CTK Business News, 1990; CTK Business News, 1991; Financial Times, 1991; General Electric, 2011d; Reuters News, 1991; Reuters News, 1992a; The Wall Street Journal [WSJ], 1991). After entering the Polish market rather late by 1992, GE struggled to position its products, such as their Hungarian light bulbs, in the Polish market and only had some agreements of minor importance with Polish companies. It was not until 1994 that GE started to make full use of the second biggest transitional market. By then the first multimillion dollar agreements in the Polish market were made by GE Silicon and Sarzyna Chemical (Chimica e lindustria, 1994; Henley, 1993; Reuters News, 1992b; Reuters News, 1995;). In Mexico GE has a 50:50 JV, called Polimar, with ICA Plasticos producing locally since 1991. A year later GE Capital entered the Mexican market by a JV with SERFIN. In 1994 around 70% of $1.4 billion sales came from the plastic unit. Later GE invested heavily in all kinds of JVs all over Mexico, from entertainment to leasing, in order to penetrate the large Mexican market rapidly (Informations Chimie Hebdo, 1991; Langfield, 1994; PR Newswire, 1992a; Reuters News, 1994; Whitmore, 1991).

96

HONEYWELL
After nearly three decades of trade with Poland that was restricted by the communist system, Honeywell rushed to open a branch office in Warsaw in 1990. The positive trend of European business with the huge growth opportunities in Poland led the company to remodel its presence in the Polish market to an affiliate branch after only two years of free trade (PR Newswire, 1992b; The Wall Street Journal Europe, 1992). Although Honeywell had been present in Russia for many years through its Austrian affiliate, the first true American entering occurred in 1994. Honeywell simply figured that the market was too significant to be ignored and started with small investments, public contracts and partnerships that gave it a strategically good position in the Russian market. HW managed to grow in an above average and stable way with some prestigious contracts, such as a new heating system for the Hermitage and the further development of GPS systems in the region (Global Positioning and Navigation News, 1995; Keatley, 1994; PR Newswire, 1993; WSJ, 1994).

JOHN DEERE
Deere did not enter the Russian market directly in 1995. Instead they made big leasing contracts with public or post-Soviet institutions and distributed their agricultural machinery through an importer. John Deere continued this concept and gained huge contracts from the government and regional administrations. In 1998, for example, they signed a lease with the Russian agricultural ministry worth about $1 billion and they had orders of 250 harvesters from the Rostov region in Southern Russia. In addition, they set up a network of service stations worth $100 million with one of their Russian partners. However, the attempt to build a JV with Rostselmash failed in 2000, and until 2004 JD had no production facilities in one of its biggest markets (BBC Monitoring Service, 1998; Bloomberg News, 2003; Prime, 1995; Prime-TASS News, 2004) After forming a JV with Larsen & Toubro near Prune and the failed acquisition of HMT in 1998, Deere decided to take a slow approach for the Indian market. However they doubled the capacity of their plant by 2000 although they had been the 12th player to enter the Indian highly competitive tractor market. By 2002 the Prune facility was the largest

97 production plant of Deere worldwide and exported to other countries like Mexico and the U.S. (Business Standard [BS], 1995, 2000, 2002, 2003; Herald, 2002).

SUMMARY OF SUCCESS RATE

In 88 % of the shown cases a perfect fit or overprotection approach did lead to great success in the market at the entry phase. This strongly supports the hypothesis that choosing the matching entry mode for the level of country risk is vital for a companys success in the new market. Unfortunately no data could be found for the cases in which country risk had not determined the mode of entry to build a benchmark. Therefore, the only conclusion that can be drawn is that companies that have chosen the fitting approach to enter a foreign, developing country are generally performing very well. However, in one out of nine cases the company was not successful although it had chosen the right mode of entry. In the case of GE in Poland, it seems as though the MNC had missed the right spot to enter this market. Other competitors such as Phillips had been faster, also using a perfect-fit-strategy and were thriving. Thus there appears to be other variables that influence the success, but that does not weaken the significance of country risk.

98

CHAPTER 10 CONCLUSION AND LIMITATIONS OF THE THESIS

Overall, the thesis shows that country risk is the most significant influence factor for the choice of American Multinational Corporations when deciding how to enter a developing country within the last four decades. This proves a certain superiority of proposition 4 of the eclectic model chosen as a framework for this thesis. In certain cases other factors can overrule the country risk factor. In these cases most of the time control is the driving factor behind a companys decision to enter a market with a different approach than appropriate for the level of country risk. However, the high significance of country risk is undeniable. In this sense the eclectic model stays intact, but would need a probability readjustment for the propositions. The thesis also shows that choosing the right mode of entry according to country risk has a positive effect on success in the foreign markets. Nevertheless, a correlation between the match of country risk and mode of entry and the success probability of a company in a developing country cannot be proven. This is mainly due to insufficient secondary data. This is also the main limitation of this thesis. In order to keep the analyzed types of data consistent, a lot of data on single cases could not be used or had to be analyzed on a qualitative level only. Although from a case theory point of view this is a sufficient way of analyzing data, the thesis lacks thorough statistical analyses. Therefore, it would be advisable to repeat the study with primary data that could be gathered in a survey. Another limitation of the thesis is the absence of a thorough analysis of the decision process that led to the choice on the mode of entry itself. This process could reveal individual factors of each case that cannot be observed by secondary research. However, the gathering of the data necessary for such a thesis might prove to be impractical since the time range of the survey covers four decades and the probability of all decision makers still being in office and having accurate memory on each specific case is practically non-existent. In this sense this thesis is a practical middle ground between feasibility and my own scientific standards.

99 In the end, the thesis delivers a hands-on guide for practitioners on how to enter a foreign market. All cases have been thoroughly analyzed, and therefore an applicable example for real business has been built. The PRS ratings are also easily available and together with the shown qualitative analyses of a countrys risk situation can be used to determine the country risk. This is sufficient for companies to make an educated decision on how to enter a developing market properly.

100

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112

APPENDIX ADDITIONAL INFORMATION ON THE ECLECTIC MODEL

113 Table 55. The Relation of the Proposition and Entry Modes After Hill et al. Force Variable Licencing Proposition 1 Control Resource commitment Proposition 4 Proposition 5 Proposition 6 Proposition 7 Dissemination Risk

Joint Venture Wholly owned subsidary

Proposition 2 Proposition 8 Proposition 3 Proposition 9 Proposition 1: Other things being equal, firms that pursue a multi-domestic strategy will prefer low-control entry modes Proposition 2: Other things being equal, firms that pursue a global strategy will prefer high-control entry modes Proposition 3: Other things being equal, when the need for global strategic coordination is high (the global industry is an oligopoly) MNCs will favor highcontrol entry modes Proposition 4: Other things being equal, when country risk is high MNCs will favor entry modes that involve relatively low resource commitments Proposition 5: Other things being equal, when perceived distance is great MNCs will favor entry modes that involve relatively low resource commitments Proposition 6: Other things being equal, when demand is uncertain MNCs will favor entry modes that involve low resource commitments Proposition 7: Other things being equal, the greater the volatility of competition in the host market, the more MNCs will favor entry modes that require low resource commitments Proposition 8: Other things being equal, the greater the quasi-rent stream generated by a MNCs proprietary know-how, the greater the probability that the MNC will favor an entry mode that minimizes dissemination risk Proposition 9: Other things being equal, the greater the tacit component of firmspecific know-how, the more a MNC will favor high-control entry modes

Source: Hill, C. W., Hwang, P., & Kim, W. C. (1990). An eclectic theory of the choice of International Entry Mode. Strategic Management Journal, 11(2), 117-129.

114 Table 56. The Characteristics of Different Entry Modes

Constructs Entry Mode

Licensing Joint Venturing Wholly owned subsidiary Control Low Medium High Resource Commitment Low Medium High Dissemination Risk High Medium Low

Source: Hill, C. W., Hwang, P., & Kim, W. C. (1990). An eclectic theory of the choice of International Entry Mode. Strategic Management Journal, 11(2), 117-129.