The entry strategy chosen for Emaar is FDI or foreign direct investment. This strategy was selected due to the specific economic state of Kazakhstan, which will supposedly soon enjoy steady economic growth but remain to be a developing country. For Emaar, a company that is present in more than 30 countries, it would be safer and more profitable to choose foreign direct investment over any other type of entry strategy due to particular reasons that will directly influence its functioning in Kazakhstan.
Exports as an entry strategy per se can only be useful if it is used in the context of the Uppsala model, i.e. when a company starts its internationalization via exports but then proceeds to foreign direct investments, thus establishing a learning-by-doing process. Franchising is inappropriate due to its lower levels of control since the managerial processes are controlled by the franchisee, whereas Emaar’s expansion would be more efficient if it had a particular degree of control over the organization or unit it aims to work with (Buljubašić & Borić 2014).
Licensing is a less desirable option for Emaar because Emaar Industries & Investments is a subsidiary that primary objectives are investments in foreign organizations in the business of construction, not sales of licensed products (Hytönen et al. 2012).
Factors that influence entry mode are the following: internal, external, desired mode, and transaction-specific. The firm is large and operates in more than 30 countries with different available resources; its international experience is solid, as well as the knowledge of markets. However, its psychic distance to the host country can potentially worsen the effectiveness of entry, but Emaar’s experience in entering foreign markets might mitigate the risks connected to it.
External factors that have to be considered are a country risk, demand uncertainty, and political and economic factors, market size and growth, trade barriers, and competition. Due to the expected slowly recession of Kazakhstan’s economics, country risk and demand uncertainty can be considered as low to moderate. Large segments of the economy are controlled by Kazakhstan’s officials, which can be considered as negative political and economic factors.
However, steady but slowly market growth and consumer price index can provide Emaar with a sufficient base for entering the market. Improvement of the transport sector is desirable to remove trade barriers crucial for Emaar, as well as accurate regulation of border controls (ITC 2013). Kazakhstan’s involvement in free trade agreements increases market competitiveness but there are few companies with experience equal to Emaar’s present in the market.
If Emaar’s desired mode characteristics are control and regulation, FDI is a desirable option due to its ability to provide the company with enough control over the subsidiary. Furthermore, due to specific skills that are difficult to articulate, the company can choose the hierarchical model that will align with its aim to control the subsidiary to a greater extent.
By choosing FDI as an entry strategy, Emaar will be able to enter a cheap labour market (compared to the majority of other countries where Emaar operates). Furthermore, resource availability will also be seen as an advantage since more than 90 kinds of natural resources are present in the country, including such economically valuable resources as coal, oil, iron, lead, gold, etc. (Kazakhstan natural resources n.d.).
New anti-corruption legislation will ensure the company’s investment protection and promotion if followed and implemented correctly by the state. As Birdsall (2012, p. 122) notices, “under reasonably competitive conditions, with safeguards against corrupt payments, environmental violations, and abuses of labour standards, FDI can be a powerful force for development”. If Emaar uses the Uppsala internationalization model, it will (possibly) start with simple export and eventually come to FDI.
FDI is not only beneficial for Emaar but Kazakhstan as well, because FDI can boost the economic growth of the country via capital accumulation, use of innovative technologies and their diffusion, and productivity efficiency (Sbia, Shahbaz & Hamdi 2014). What is more, FDI is also useful for the country’s workforce because it fosters training and skill acquisition.
Possible challenges should be addressed as well. The state of associational and organization rights in Kazakhstan is far from satisfactory because, in 2015, president Nazarbayev passed new labour legislation that weakened employees’ rights (Freedom House 2016).
The Uppsala internationalization model is suitable for Emaar business expansion for the following reason: it is not necessary for Emaar to use the first steps (export) when entering the new market due to its serious experience with other international markets. Emaar’s market knowledge will allow it to enter Kazakhstan’s market despite the possible psychic and geographical distance that would be crucial if Kazakhstan was Emaar’s first market for expansion.
Furthermore, Emaar’s perfect knowledge of and experience in working with international markets will help it acquire market commitment via commitment decisions. The Uppsala internationalization model will allow Emaar to gain experiential knowledge not only about the Kazakhstan market but also about those markets located near the host country. The Uppsala internationalization model implies that the knowledge about the market can only be collected when operating abroad, and the process is usually time-consuming (Tykesson & Alserud 2011).
The Uppsala model stresses the importance of market environment and its possible immutability, as well as risk uncertainty that the investing company has to consider. Therefore, Emaar will be able to have more control over its operations in Kazakhstan via FDI than any other entry strategy. At the same time, possible risk factors will be mitigated by the company’s knowledge of foreign markets, long-time experience, and high involvement via FDI. As can be seen, FDI and the Uppsala model are valid choices for Emaar’s entry.
Reference List
Birdsall, N 2012, The White House and the world: a global development agenda for the next US president, CGD Books, New York.
Buljubašić, I & Borić, M 2014, ‘The impact of promotion in franchising’, Ekonomski Vjesnik: Review of Contemporary Entrepreneurship, Business, and Economic Issues, vol. 27, no. 2, pp. 285-296.
Freedom House 2016, Kazakhstan. Web.
Hytönen, H, Jarimo, T, Salo, A & Yli-Juuti, E 2012, ‘Markets for standardized technologies: patent licensing with principle of proportionality’, Technovation, vol. 32, no. 9, pp. 523-535.
ITC 2013, Reducing barriers to trade in Kazakhstan. Web.
Kazakhstan natural resources n.d. Web.
Sbia, R, Shahbaz, M & Hamdi, H 2014, ‘A contribution of foreign direct investment, clean energy, trade openness, carbon emissions and economic growth to energy demand in UAE’, Economic Modelling, vol. 36, no. 2, pp. 191-197.
Tykesson, D, & Alserud, M 2011, The Uppsala model’s applicability on internationalization processes of European SMEs, today- a case study of three small and medium sized enterprises.