Table of contents:
1 Executive Summary
3.1 Occupational training as successful business idea
4 Strategic Issues in RFH as non-for-profit company
4.1 Strategy evaluation in non-for-profit organisation
5 Why companies go international?
5.1 Which foreign market to enter and on what scale?
5.2 The choice of Bosnian market for foreign expansion
5.3 Why is FDI the best mode of entry a foreign market for RFH?
5.4 FDI by acquisition as successes factor for RFH in Bosnia
6 Economic overview, Educational Sector and Investment Climate in Bosnia and Herzegovina - Market blue sheet
6.1 Current political background and economic situation overview
6.2 Critical discussion of political situation and structure
6.3 Critical discussion of macroeconomic situation
6.4 Educational sector – Vocational Training and Adult Training
7 Legal basic conditions
7.1 Capital Investment Law
7.2 Corporation Law / Legal forms of organizations
7.3 Tax - / Fiscal Law
7.4 Taxation incentives in Federation of Bosnia and Herzegovina
7.5 Taxation incentives in Republika Srpska
7.6 Sales tax
7.7 Labour legislation / Social insurance regulations
7.8 Employment of foreigners
7.9 Social Security Law
7.10 Foreign Exchange regulations
7.11 Legal conditions in Republika Srpska versus legal conditions in Federation
7.12 Business related indicators overview
8 Key successes factors for FDI
8.1 Analysis of the competitive industry environment in Bosnia
8.2 Five Forces analysis of educational and vocational training sector in Bosnia and Herzegovina
8.3 What RFH can do, to develop sustainable competitive advantage?
8.4 Failure factors in the foreign business
9 Determination of suitable business location in Bosnia and Herzegovina as key success factor for RFH
9.1 Analysis and specification of the business location
10 Prudential financing policy as key success factor
10.1 Capital requirements and profitability
10.2 Profitably work – what does this mean?
10.3 Approach for the determination of the turnover
10.4 How can RFH raise the turnover and save the costs?
10.5 Financing of business – Total capital requirements for FDI in 2006
10.6 Financing scheme
11 Controlling and forecast calculations as key success factor
11.1 Bar graph projected turnover overview 2006 - 2009
11.2 Projected ROI and ROCE on the end of the year
11.3 Liquidity projection 2006 -2009
11.4 How can RFH make efficient liquidity policy?
12 Legal issues and choice of appropriate legal structure of the company as key success factor
12.1 Specifics regarding legal form for subsidiaries founded by German non-for- profit organizations
12.2 Arbitration board for disputes in Bosnia
13 Appropriate marketing strategy as key success factor
13.1 How can RFH fulfil the wishes of future customers?
13.2 How can RFH win customers and build customer retention?
13.3 Ways to successful customer retention
14 Suitable pricing for services or products as key successes factor
14.1 Basic price strategy approaches
14.2 Possible mistakes with the pricing
14.3 An example of the service and trade price calculation for RFH
14.4 Price as key success factor for RFH
15 Organisation, HR and Control of foreign business as key success factor
15.1 Organization of the subsidiary of the RFH in Bosnia
15.2 HR management and control of business in Bosnia
16 Foreign business coverage and hedging as key success factor
16.1 Assistance programmes
16.2 Public Private Partnership (PPP)
17 Conclusion and Recommendation
19.1 Bibliography and Articles:
19.2 Publicly and web available sources:
19.3 Statistics, Economic and Business Indicators - Sources
19.4 Education in Bosnia and Herzegovina - Sources
1 Executive Summary
International expansion present new opportunities for companies to generate extra value added and have become a vital aspect of corporate strategy development and implementation. Nowadays most European Foreign Direct Investments (FDI) within European continent outflows towards Eastern Europe in the countries like Hungary or Czech Republic. Each nation-state will have some competitive advantages. Why should non-for-profit company like RFH choose to enter just Bosnian market, the country which was destroyed by the war a few years ago and where progress is still needed in many areas and not some of markets mentioned above? Which special strategic and legal issues non-for-profit organisation must consider in such case? Why choices of investment locations, mode of entry and initial pricing strategy have critical impact on value added to the firm's competitive advantage?
This report will give answers on these and further arising questions. It concerns Information technological (IT)-Centre of one German non-for-profit organisation (RFH), and its attempts to benefit of global capital while diminishing the negative effects of economic swings in the home country. On studying and analysis of the literature relevant and reliable sources of information, to invest in Bosnia and Herzegovina in the vocational training and educational sector is nowadays moreover absolutely a recommendable commercial decision. All economic indicators argue for it. The analysis determinate four main reasons for it:
- Improvement of vocational Training and Adult Training sector is one of the emergent sector priorities settled in governmental Poverty Reduction Strategy Paper and European Commission “Feasibility Study” as a precondition for cooperation between EU and Bosnia.
- Local competition in the area of Vocational and Adult Training is extremely weak (currently there are existing only 2 private companies similarly to RFH).
- Bosnian market offers enough potential customers which may use Vocational and Adult Training offers. These customers are local industry as well as students, scholars and unemployed people (Rate of unemployment in Bosnia amounts to 43%).
- A row of investment incentives and financial incentives are offered by European Union (EU), Bosnian government and Germany they reduce risks of FDI in Bosnia.
The idea of the expansion is interesting for every company, but, nevertheless, it requires detailed analysis of foreign market. This report includes determination and analysis of basic FDI conditions, competition analysis and development of key success factors for FDI in educational sector in Bosnia. Furthermore, the analysis in this work determines how the RFH is affected by local business conditions and what are its strengths and weaknesses on the Bosnian market.
The following major points can be ascertained from the report:
- Analyses have shown that FDI is as the best mode of entry for company which offers separable services on the Bosnian market, in educational sector.
- Foreign firm performance is determined not only by firm-specific characteristics, but also by location. Investigations have indicated that Banja Luka compared with Sarajevo has more favourable investment conditions with regard to expenses and legislation within the single entities in Bosnia.
- Ltd. is the most appropriate company legal form for RFH subsidy in Bosnia.
- Pricing and product differentiation combined with response to local needs are the source for competitive advantage.
- Most favourable source for financing of international business by credit is the offer by KFW (German Loan Corporation for reconstruction).
- Recommended assistance sources for RFH are offers by the German government, the so-called PPP (Public Private Partnership) and offer by EU, so called CARDS-Program.
- Combination of incentive systems and control of subsidiary in the form of output control is most appropriate initial way for RFH to conduct the business abroad.
- RFH benefits of choose of international division structure.
I should like to thank:
- My tutor Prof. Dr. Hans Wilhelm Müller for his supervision, for his effort and advice during the time that I was planning, developing and writing this report
- The Manager of IT – Centrum of the RFH, Prof. Dr. Dieter Hein for his support and who allowed me time to discuss my report with him and provided me with access to necessary records
- My family, especially my wife Ioana, my mother Elza and father Mirko for all the help and support they have provided during my studies
The aim of the work is to investigate and examine the successes factors and conditions for Foreign Direct Investment (FDI) in the educational sector, in South Eastern Europe for Western European enterprises, with country focus on Bosnia and Herzegovina.
This work deals with considerations and intention of Information technological (IT)-Centre of one non for profit company (RFH) to set up the branch in Bosnia, which should offer occupational and vocational training courses. This FDI activity is considered to be used as possible alternative way of funding.
RFH is non-for-profit organisation, private university in free sponsorship. The responsible body RFH (Incorporated Society) is responsible for the establishment, the maintenance and the organization of the university (RFH, 2005). University is sponsored financially partly by the state. RFH works with long-standing experience in the area of the IT-services as well as the continuing education and vocational training in different areas, inter alia the areas of usage of the topical industrial software applications. RFH provides among other things certificate-linked courses as for example Cisco Network Academy courses (certificated continuing education in the IT area), Catia V5 courses (construction software for the automobile industry), E-Plan courses (Certificated continuing education in the area of computer aided engineering) etc.. For instance, Eplan application is used for all computer-assisted electrical engineering tasks, both prior to and during the development of a product and is most-used industrial engineering software globally (Eplan, 2005). The kinds of courses which are provided by IT-Centre of RFH in Germany are very popular at the home market, what doesn’t justify assumption at all that these will be accepted on foreign market. Entering new markets with new or existing products is fraught with challenges (Koudal, 2005). Thus precisely investigations of foreign market are necessary.
Bosnia and Herzegovina have got out a little from the vantage point in the euphoria around the EU Eastern extension (Bfai, 2004). It led to interesting development of business conditions in certain areas. While some of the sectors like Training and Adult Training sectors are underdeveloped in Bosnia (PRSP, 2004), in the same time developing sectors, like local automotive and IT industry has a huge demand for skilled labour, products and services. Due to lack of suitable know-how on the local-market a local Bosnian companies often concluding the contracts and place an order to Croatian, Serbian or even German companies (Lorenz, 2003). Improvement of educational sector in Bosnia, especially vocational Training and Adult Training sector is one of the emergent sector priorities settled in Bosnian governmental Poverty Reduction Strategy Paper and European Commission “Feasibility Study” (IBF International Consulting and the British Council, 2004) as one of the steps “ to be taken by Bosnia and Herzegovina to prepare for a Feasibility Study on opening Negotiations on a Stabilisation and Association Agreement“ (Commission of the European Communities , Report from the Commission to Council , 2003). Vocational education in Bosnia must enable its recipients to use the skills they have acquired at school and to swiftly enter the labour market. It is of “utmost importance to ensure that vocational education and training correspond with labour market needs” (OSCE, 2005).
My research will rely on resource-based theory and partly on eclectic theory. At the beginning I’ll investigate and theoretically analyse three basic decisions that firm contemplating foreign expansion should make (Lynch, 2003): which markets to enter, when to enter those markets and on what scale. In this work I’ll also deal with the question of choosing of the most suitable expanding strategy, entry modes as well with the main strategic issues in non-profit organisations. I’ll evaluate theory and current trends in co-ordinating of the subsidiary in Western Balkan.
Specific focus will be given to determination of organizational structure. As stated by Campbel, Goold and Alexander (1995), if there is a fit between parent and its business, the parent is likely to create the value. In this work I’ll asses fit between RFH (corporate parent) and its business (subsidiary in Bosnia). This can help to identify opportunities of parenting, particularly if e.g. business-unit mangers in subsidiary abroad lack the time and skills to become expert in engineering and technical issues, parent company (an expert) can create values by helping the business unit raise technical standards. I’ll analyse furthermore, all aspects they have impact on choice of business location, because determination of business location (Bishop, Gripaios and Gillian Bristow, 2003) and choice of new location supports not only the company’s survival, but also its ability to continue to grow (Hsing, 2003). Location also influences development of customer retention strategy (Laurino and Lindel, 2004). Identification of appropriate means of control and coordination (Smith, 2002) as well as development of suitable financing policy and enabling policies (Pastakia, 2002) are further aspects they contribute to creation of competitive advantage. In this work I’ll analyse them and will give according to analysis certain recommendations to RFH. I’ll develop framework with basics of marketing and pricing policy, specially tailored for RFH international business in Bosnia. I’ll also deal with legal issues concerning international and national business (e.g. legal specialties concerning non-for-profit organizations), considering questions like choice of most appropriate legal form for subsidiary in Bosnia or choice of legal business representatives. Furthermore, it will be necessary to design the framework of decision-making responsibilities within the organisational structure and to establish integrating mechanism in order to coordinate the activities of the subunit in Bosnia. In addition I’ll develop forecasting scheme in order to develop basics for financial policy and financial controlling of subsidiary on the Bosnian market. At least, alternatives for reduction of risks of international expansion will be illustrated as well as possibilities for foreign business coverage. In all mentioned issues concerning key success factors I’ll refer to possible failure factors and sources of failures occurring in foreign business. In order to make idea of this work in short time feasible I will to descry necessary steps for successful FDI in Bosnia and Herzegovina, and give recommendations what are the main issues and problems to look up. To do that I’ll critically review existing theoretical and practical approaches and apply them. The work should be also a general example for the company concerning the most important issues to look up, in the case of international expansion in South-Eastern Europe. This Management Reports is developed according to the guidelines UEL (Cocking, 2004) which contains predetermined structure and description how Management Report (MR) is commonly to be written. I used also further reading about how to write MR, especially the book Research Methods for Business Students from Saunders, Lewis and Thorhill (2003).
3.1 Occupational training as successful business idea
The globalisation of the markets concerns not only the industries produce the tangible products (Hodgetts and Rugman, 2003) as for example automobile industry or textile industry, which mostly move its production plants because of good wage conditions, in the cheap wage countries. More and more service suppliers like banks ,assurances, IT companies or educational institutions see a chance to achieve superior financial position through capture of the new finance markets (Martin, 2004) by e.g. the establishment of new subsidies in the cheap wage and poor countries in Eastern- or South Eastern-Europe, which above all make them available very good manpower (Bfai, 2003). A job can be seen as the start on the road out of poverty (Kemp, 2005), and the questions how one can get a good workplace or maintain it, are arising not only from people in the developed economic nations, but particularly also in the countries affected by the globalisation. Most people do need to acquire new skills if they want to remain competitive, or even employable, in the workplace (Hubbard, 2005). Computer training goals and software skills of employees should be updated and reviewed on a regular basis (Welch, 1993).
The times of the socialist system in many countries, as for example in the East-European or Southeast-European countries, where almost every one had established post, are over. The fall of Communism is sharply boosting global competition and creating new markets (Manzella, 2004). The people (employers and employees) have realized that they are individually responsible for themselves and they career advancement and less the state. Hence, many people try to reach the career purposes by continuing education (Suarez-Orozco and Baolian Qin-Hilliard, 2005).
As stated by Manzella (2004) unemployment is lower among workers with higher levels of education , thus the companies they offer occupational training courses gain governmental support as a part of unemployment reduction strategy as well as a big customer base (especially in countries with high level of unemployment like Bosnia) which allows educational institutions to achieve superior financial results through internationalisation of they curriculum (Wynne and Filante, 2004). An essential and global need of people for constantly education in order to achieve the career purposes, gives reason to educational institutions to set up subsidiaries in emerging markets and to float a business. Companies look to hire the best and the brightest and then give them the experience and education they need to advance through the ranks or to educate existing employees and retain its talent. Along with irreplaceable on-the-job experience, many experts have identified advanced education as an important way to improve skills and gain knowledge and exposure to new ideas (Fenton, 2004). Bommer (2004) explains that training is one of the most crucial aspects of the firm’s strategy. As stated by Zorn (2004) entrepreneurial capital (composed of human and social capital) is the most important factor for entrepreneurial success. Companies’ productivity hinges on employees skills development (Young, 1999). Training is an excellent tool to recruit the best and brightest employees and to retain them. Furthermore, it ties directly into firm’s strategy by helping employees increase productivity and develop personally and professionally into future leaders of the firm. According to research by Zwick (2005) external courses (in special educational institutions) have the largest positive impact on productivity while self-induced learning, participation at seminars and talks and job rotation do not enhance productivity and training on the job has a negative productivity impact. Most employers consider their employees an important investment both to accomplish the organization's current goals and to have the right people in place for the future (Rasmussen, 2005) and by that reason they (financially) support they education. Many of the courses that RFH offers in Germany are visited very well. It appears that occupational training and providing of certified courses is a successful business idea, which can be conveyed to other markets, especially to emerging countries. From this point of view potential customers, which are willing to educate themselves in order to achieve they carrier goals will be likely to find also on the foreign market.
4 Strategic Issues in RFH as non-for-profit company
“Twenty years ago, management was a dirty word for those involved in non profit organizations. It meant business, and non profits prided themselves on being free of the taint of commercialism and above such sordid considerations as the bottom line. Now most of them have learned that nonprofits need management even more than business does, precisely because they lack the discipline of the bottom line”
P.F. Drucker (1989) in Harvard Business Review, as cited by Speckbacher (2003), p. 267
According to Peter F. Drucker (1989), as one of the world's most influential writers on management and organization, management is a crucial and vital component to all organizations in society. Non-for-profit organisation gain benefits inter alia of effective marketing management and public relations in communities and in the same time they are obliged to maintain public trust (Clarke, 2005). The sole reason that non-for-profit organisations account for average 1 in every 20 jobs in nations throughout the world (Economist, 1998) affirms that knowledge of non-profit organisations is important. Typically non-profit organisations can be both private and public organisations (Wheelen, 2004), and are usually founded for reasons other than commercial considerations as for example welfare, research or education or wealth-care. The non-for-profit sector is important for two reasons (Lynch, 2003). On the one side from society perspective because society desires goods and services that profit-making companies cannot or will not provide as for example paved roads, museums, schools etc. On the other side from non-for-profit organisational perspective, because private non-profit organisations tends to receive benefits from society that private profit-making firm cannot obtain, like preferred tax status to non-stock corporations, or exemptions from various other states, local and federal taxies. In Germany, for instance, non-for-profit associations are released from the sales tax and corporation tax because they serve the general good. But advanced governmental considerations like to allow nonprofits groups to sell tax-exempt bonds to purchase land and then use revenue from selling like in USA (Enochs, 2005) do not existing in Germany. The German (Bürgerliches Gesetzbuch) civil law code (BGB = Civil Code) makes a distinction between economic and to the not economic (ideal) association. The objective is determining. For example RFH as not economic (ideal) association and private non-for profit organization, is released from:
- The corporation tax - §5 paragraph 1 No. 9 KStG (corporation tax law)
- The trade tax - §3 No. 6 GewStG (trade tax law),
- The property tax - §3 paragraph 1 No. 12 VStG (withholding tax),
- The inheritance and donation tax - §13 paragraph 1 No. 16 ErbStG (Capital transfer Tax) and
- The real estate tax, provided if the property is used for non-profit, charitable or ecclesiastical purposes (§3 paragraph No.1 , No. 3b and 4 GrStG (Real estate Tax Law)). Also they need to pay only the half one of
- Sales tax (nowadays 7%) (§12 paragraph 2 No. 8a UStG (salex tax law).
All these benefits are allowed (as in many countries throughout the world) because private non-profit organisation are service organisations which are expected to use any excess of revenue over costs and expenses (a surplus rather than profit) either to improve service or to reduce the price of their service for society. But on another side non-for-profit organisations do not have access to capital equity market (Wareham, 2004) and need to find alternative funding sources because governmental funding is usually not unlimited !. Also selling an intangible product has challenges: There are no fancy product shots to grab people's attention, because company can’t increase sales by offering a lifetime warrantee (Sausik, 2005).
Till recently traditionally studies in strategic management have dealt with profit-making companies to the exclusion of non-profit or public governmental organisations (Wheelen, 2004). But these tendencies are changing because public service and non-for-profit organisations depends heavily for financial support either on government founds or on private donations, assessments or dues like tuition fees as in the case of RFH. Every nonprofit may not be able to generate all it’s funding through revenue-generation, but every nonprofit certainly can generate a greater percentage than it is doing now (Shuman and Fuller, 2005). Thus, non-for-profit organisations need to recognise the impact on they market orientation and to develop sustainable competitive advantage in the sense to compete for finance from potential providers (Kara, Spillan, DeShields, 2005). Many of strategic management concepts can be equally applied to business and for non-for-profit organisations, where others cannot. As stated by McGill (1988) mission statements, SWOT analysis, stakeholder analysis and corporate governance are, however, just as relevant to a non-for-profit as they are to profit-making organizations.
4.1 Strategy evaluation in non-for-profit organisation
In the public governmental units and non-for-profit organisations, the criteria need to reflect the broader aspect of their service or contribution to the public. The best strategic way always depend on the nature and needs of the business (Campbell and Goold,1987), thus different decision-making processes and beliefs that motivate many organisations make evaluation of strategy options in not-for-profit organisations more diffuse and open ended (Lynch, 2003). Decision-making methods traditionally employed by public sector agencies are inadequate for dealing with the demands facing (Smith and Stupak, 1994). The key criteria for strategy development in non-for-profit organisations is the pressure on such organisations, to provide more services than sponsors and clients can pay for, and to develop strategies to help them meet their desired service objectives (Wheelen, 2004) . Non-for-profit organizations often rely on volunteers (Ratje, 2003). “Some smart nonprofits are letting others do the work for them” (Fielding, 2005), by use of e.g. college students as volunteers in order to keep costs low brings financial benefits (Farrell, 2005) but it is usually heavy, because such a resource needs to be handled with care, by reason that perceptions of their status can affect their ability (Watts, 2002) and some need to be given greater degree of freedom that would be appropriate in commercial organisation. Thus non-for-profit organisations are often choosing strategies of piggybacking, mergers and strategic alliances to reduce its costs and to find new sources of funding (Wheelen, 2004). Nielsen (1984) explains the term of strategic piggybacking as the development of a new activity for non-for-profit organisation that would generate the funds needed to make up the difference between revenues and expenses. This strategy is not new and companies are often trying to jolt sales by piggybacking ( Reynolds , 2004). The purpose of the strategy is to help subsidize the primary service program, as a form of diversification around the core business (concentric diversification) engaged only for money-generating value ( Rijamampianina, Abratt and February, 2003). The organisation invests, in new, safe cash cows to fund its current cash-hungry, question marks and dogs, in an inverted use of portfolio analysis. According to research of Bacon (1995), 70% of colleges and universities now offer “auxiliary” services, such as bookstores, conference rooms, computer centres or stores outside of the main building or even allowing of the companies name to appear on products as source of income. The critics as for example U.S. Internal Revenue Service (IRS) (2005) (http://www.irs.gov/) advises that non-for-profit organisations engaged in a business not related to the organisation’s exempt purposes (central mission) may jeopardize its tax-exempt status, if income exceeds approximately 20% of total organisations revenue. In Germany the taxation border for corporation tax and trade tax is 30678 Euro. If the gross incomes is higher as the taxation border of 30.678 Euro (§ 64 paragraph 3 AO = Abgabenordnung (German Fiscal Code)), and the profit lies more than 3.835 Euro, corporation tax has to be paid. According to law, corporation tax results only in the area of the economic business concern. It results not in the ideal area e.g. if the association works for instance in scientific, artistic, beneficent, sporty, sociable one or ecclesiastical tasks and in the area of the administration of property. It follows: even if the economic business concern serves merely to finance the non-for-profit activity, the profit while crossing of above mentioned taxation borders are paid tax on.
Even though, strategic piggybacks can help non-for-profit organisations better use their resources and self-subsidize their primary mission. As stated by Nielsen (1986) there are several potential drawbacks. For instance, the venture could subvert, interfere with, or even take over the primary mission. Or the public, as well as other sponsors, could reduce their contributions because of negative responses to such “money-grubbing activities” or because of mistaken belief that the non-for-profit organisation is becoming self-supporting. Research by U.S. National Association of College and University Business Officers (1995) predicts that 90% of U.S. colleges and universities will use strategic piggybacks and for other non-for-profit organisations similar trends are expected. Usage of the strategy heavily relies on donations and taxpayer support for non-for-profit organisations revenue.
As stated in Wheelen (2004), based on experiences of Edward Skoolt, an consultant to not-for-profit organisations, not-for-profit should have five resources before engaging in strategic piggybacking: something to sell (people my be wiling to pay for services and goods closely related to organisations primary activity), critical mass of management talent (most competent not-for-profit professionals don’t want to be managers), trustee support (trustees can have strong feelings against earned-income venture like in the case of licensing of Sesame Street to toy companies by Children’s Television Workshop), entrepreneurial attitude (Non-profit-organisation must have able management who can combine interests in innovative ideas and businesslike practicality) and venture capital (because it takes money to make money). Further corporate level strategic alternatives for non-for profit organisations are strategic alliances and mergers and acquisitions. Increasing number of non-for-profits consider mergers and acquisitions as a way of reducing costs (Collins, 1993). According to Hiland (2003) reasons for nonprofits to consider merger are numerous but the primary drivers, however, are financial and include the desire to grow or to strengthen market share. Rugman (2003) defines strategic alliances “as a business relationship in which two or more companies work together to achieve collective competitive advantage”. Strategic alliances is an term often used to embrace a variety of arrangements between potential or actual competitors including licensing agreements, formal joint ventures or informal cooperative arrangements (Hill,2005). As stated by Provan (1984) and Pointer (1989) strategic alliances are often used by not-for-profit organizations e.g. in Health Care industry, as a way to serve clients, to acquire resources while still enabling them to keep their identity or as a way to enhance their capacity. But already business corporations are forming alliances with universities to fund university research and gain value of partnering (Whitaker, Henderson and Altman-Sauer, 2004), in exchange for options on the result of that research or to educate their employees. An example for such kind of alliances is collaboration between RFH and Ford Company in Cologne. Business firms find it cheaper to meld the right resources (Leonavičienė and Ilonienė, 2005) thus to pay universities to do basic research, or to educate their employees on the universities than to do it themselves. In return, universities receive research funds to attract top professors and to maintain expensive labs.
Such kind of alliances of convenience is being criticized, but they are likely to continue (Wheelen, 2004). Strategic alliances have risks because organization can give away more than it receives. The failure rate for international strategic alliances seems to be high. According to Ernst and Bleeke (1991) research including 49 international strategic alliances, 33% are ultimately rated as failures. In order to make strategic alliances efficient is to select the right ally, which can achieve the firm’s goals or shares the firm’s vision without to try to opportunistically exploit the alliance for its own ends. As stated by Perks (2004), value in long-term co-development derives from the enduring exchange processes developed throughout the collaboration. In foreign business, intercultural business competence is related to the quality of long-term relationships (Huang, Rayner and Zhuang, 2003). Very important factor in the case of international business deals with sensitivity to cultural differences, which requires building interpersonal relationship between the firm’s managers (Hill, 2005). Impact on strategy implementation in non-for-profit organizations and complications to implementation are possible, because decentralization in non-for-profit organization is complicated. The company heavy depends on sponsors for revenue support and the top managers of the non-for-profit organization must always alert to the sponsor’s view of an organizational activity, even though decentralization allows the introduction of flexible HR systems and practices (Shim, 2001). Further problems in such organizations can be that executive development and job enlargement can be restrained by professionalism (Lynch, 2003), because the difficulty is that there is much confusion about the definition of quality among the professionals (Milliken and Colohan, 2004). According to Wheelen, (2004) organisations that employ large number of professionals, like in universities or hospitals, must design jobs that appeal to prevailing professional norms. Because professional often see managerial jobs as nonprofessional, promotion into management position is not always vied positively. Furthermore special needs arises for people in buffer roles, like Dean of External Affairs they are often judged on basis of they ability to rise extramural support from funding agencies and other benefactors (Cronin and Crawford,1999). They have to relate inside and outside groups, especially when sponsors are diverse (e.g. federal funds, membership fees and donations) and service is intangible like “good” education.
Information systems have as well impact on non-for-profit organization. According to Malik and Goyal (2003) information’s systems and internet may bring competitive advantage but, for most, it becomes a need for survival. Ravichandran and Chalermsak (2005) argue that f irm's performance can be explained by how effective the firm is in using information technology to support and enhance its core competencies. In order to stay competitive and to allure more potential clients, non-profit organizations are establishing internet services and enable clients to accesses knowledge of specials or to accesses libraries in distant locations. Sustainability of IT-based competitive advantages depends on the nature of IT systems whereby stand-alone based IT systems are not sustainable (Makido, Kimura and Mourdoukoutas , 2005). Most of every non-for-profit organization and universities today have its own Web site providing services or offering complete courses and degree programs over Internet like University of Phoenix Online (http://www.uopxonline.com/) or open, distance University of Hagen (http://www.fernuni-hagen.de/) in Germany.
5 Why companies go international?
In today’s world, growth and creation of value usually has international implications. In an era of keen global competition, firms realise that the effective use of global sourcing contributes significantly to their market performance (Murray, 2001). For some companies from today, globalisation and international expansion have become a vital aspect of strategy development and implementation. Segal-Horn (2002) explains that one of the most far-reaching benefits available to global firms is that they can locate different bits of their business activities wherever in the world it is most efficient for them, thus they can disaggregate their value chain of business activities. International expansion present new opportunities to generate extra value added and sustainable competitive advantage. As stated by Lynch (2003) corporate strategy seeks two main opportunities from international expansion:
1. Market opportunities and
2. Production and resource opportunities.
The market opportunities should deliver new sales, especially as barriers to trade have been reduced over the last 50 years and the production and resource opportunities should arise in some countries because of special resources in concerning countries, such as the availability of low-cost, natural resources and special skills. According to Delios and Beamish (1999) rEvery firm can select between several strategic options like “market penetration, product expansion, market expansion etc.” (Aaker (1995) cited by ), the most appropriate approach for it to use in entering a foreign market or establishing subsidiaries in another country. The options of implementation vary from simple exporting to acquisitions to management contracts (Wheelen, 2004). Besides the pre-eminent goal of the firms to maximise long-term profitability there are further reasons why companies go international. Rugman and Hodgetts (2003) argue that some of the reasons for companies are to diversify themselves against the risks uncertainties of the domestic business cycle. As stated by (Geringer, Tallman and Olsen , 2001) international diversification is argued to provide new markets in which to sell similar products or to apply knowledge developed in old markets, while simultaneously reducing diversifiable risks (Kim, Hwang, and Burgers, 1993). Thus for international company it is possible to diminish the negative effects of economic swings in the home country. According to Quian (2000) potential for risk reduction from diversification may be more meaningful in developing countries (like Bosnia) than in developed countries . The reasons for it are according to Quian (1994) “greater differences across the business cycles of the domestic market and developing country economies than across the domestic market and other developed country economies”. Jones and Hill (1988) argue that increasing levels of diversification can; in general, also raise the cost of governing the firm. According to research by Kogut's (1985) and Buhner's (1987) “geographic diversification” helps firms take advantage of economies of scope, scale, and experience through offer of new products and services. As stated by Rugman (1979) imperfections of international market provide opportunities for internationally diversified firms to achieve high levels of profitability. Levitt (1983) and Yip (1989) argued that geographic diversification make possible a firm to diminish costs by standardizing services and products as much as possible among the countries in which it acts. In order to balance local demands and global vision companies have at least four options for its international expansion (Prahalad and Doz, 1986). According to Hill (2005) four basic strategies to enter and compete in internationally environment are: an international strategy, a multidomestic strategy, a global strategy, and a transnational strategy. In the literature transnational strategy is often called as “third hybrid strategy” and international strategy is often used as generic term for multidomestic, global strategy and a transnational strategy (Harzing, 2002). As stated by Yadong (1999) after controlling for size, cultural effects and equity effects, it is found that strategy type is important for the overall performance of international expansion. Domke-Damonte (2002) considers international entry decisions by service firms (like RFH), and develops following hypothesis: the more multidomestic a firm's strategy, the greater the preference for low control entry modes (like franchising) and the more global a firm's strategy, the greater the preference for high control entry modes (like subsidiaries). Low-control entry mode provide flexibility and control while also offer some pooling of risk. As posited by Kogut (1984) using international strategy, internationally diversified firms can gain greater bargaining power and increased flexibility that result from a multidomestic network. According to Hill, Hwang and Kim (1990) international strategy suggest that a firm's choice of international entry mode is dependent upon the company’s expectation about the role that a particular country will play in the overall firm’s strategy. This strategy is inappropriate in manufacturing industry with high cost pressure (Hill, 2005). They also argue that a firm that follows a multidomestic strategy will prefer low-control entry modes to maintain greater global flexibility. According to Bartlett and Ghoshal (1992) and Harzing (2000) within the multidomestic strategy international subsidiaries of the company are relatively autonomous and are allowed to be very responsive to the local market. Yadong (1999) argues that multidomestic strategy is positively associated with local market expansion but comes at the expense of high uncertainty, while an organization following a global strategy will prefer high-control entry modes (Hill, Hwang and Kim (1990) cited by Domke-Damonte (2002)) and global strategy suffers from loss of growth opportunities in an emerging market and is systematically related to low risk. According to Hout, Porter, Rudden (1982), global strategy implies the existence and coordination of scale and scope economies. Global strategy is inappropriate by high demands for local responsiveness (Hill, 2005). Transnational strategy increases operating flexibility and outperforms other postures in aligning with a dynamic emerging market and attaining benefits from both country-specific and ownership-specific advantages (Yadong, 1999). Hill (2005) argues that transnational strategy make sense, when organisation faces high pressures for cost reduction, for local responsiveness and where there are opportunities for leveraging valuable skills within global network of operations.
Based on the above discussion, I formulate the following hypotheses related to emerging markets (like Bosnian market): The decision about most appropriate way company should enter the internationally and geographically diversified emerging market, depends upon dynamism of the emerging market, preference for control and of companies business portfolio (service company / manufacturing company). Transnational strategy with simultaneous achieving of costs and differentiation advantages would make sense for the company with high need and pressure for national and global responsiveness. Global strategy would mean standardization of the product and choose of the low-cost market, because of low pressure for national responsiveness. Multidomestic strategy would make sense for companies they want to gain little from global activity by high local responsiveness and international strategy make sense for services companies (no need for duplication of manufacturing facilities) they face neither of the pressures for cost reduction or for national responsiveness but still see opportunities to sell their products or services internationally.
If e.g. expanding company has a high preference for control (it depends of the market conditions as e.g. legal conditions for acquisitions) and offers unique products and services with low pressures on the local market the most appropriate strategic option for international expansion is international strategy with setting up of international subsidiary.
5.1 Which foreign market to enter and on what scale?
Each nation-state will have some competitive advantages, based on its resources as for example physical location, such as Singapore’s position on shipping routes between Europe and Asia (Lynch, 2003). Generally, strategists are agreed that analysis and understanding of environment is an essential element of development of corporate strategy. Qian (1994, 1996) pointed out that it is largely suggested that effective international operations of a firm depend on the ownership advantages it possesses and the local environment host countries provide. The goal of external environmental analysis is that organisations should perceive opportunities that might be explored and threats that need to be contained (Andrews, 1987). As stated by Porter (1980), study of the environment will provide information’s on the nature of competition as a step to developing sustainable competitive advantage. Johnson (2002) argues that a wide range of environmental influences and factors can affect organisational strategies and performance. These factors are to be explored in the host market in order to be able to develop suitable strategy and structure of international business. The results of Walsh (2005) research, suggest that a better understanding of the performance of companies within a changed environment can be achieved using of a so called PESTEL analysis. According to PESTEL framework, influences and factors they affect performance of companies are:
- Political factors like government stability, taxation policy etc., or
- Socio-cultural factors like consumerism, levels of education, income distribution etc.,
- Economic factors, like inflation, unemployment, present wealth etc., or
- Environmental factors like waste disposal etc. or
- Technological factors like rates of obsolesce, speed of technological transfer etc. or
- Legal factors, like monopolies legislation, employment law etc.
This factors relating to Bosnia and Herzegovina will be analysed later on in this work. Hill (2005) argued that, any firm contemplating foreign expansion must first struggle with the issue of which markets to enter as well as the timing and scale of entry. The choice which markets to enter should be ultimately driven by an assessment of relative long-run growth and profit potential. For example Diebold (http://www.diebold.com/), an company which produces automated teller machines, has decide to enter developing markets as Brazil, India and China because of its assessments that long-term demand for the automated teller machines in these countries would be high (Arndt , Engardio and Goodman, 2001) . Generally some markets are very large measured by number of consumers, but limited purchasing power and lower world interest rate (Guest and McDonald (2004) will cause a loss in living standard and therefore will have negative impact on economic and business terms. Some countries are political stabile developed with free market system, with well economical key indicators like no dramatic upsurge in either inflation private sector debt, another not. But companies are entering (with success) also markets in countries they are not absolutely political stabile and are not economically advanced. There are many examples for such firms like Coca-Cola, which has subsidiaries in huge number of developed and developing countries among others also in Bosnia and Herzegovina. As stated by Tilles (1998) future of Bosnian consumerism, rests largely in the hands of foreign companies, such as Coca-Cola, Wrigley’s, Henkel, and Electrolux. Another example for the Western Balkan is the successful strategy of Austrian Raiffeisenbank (REB). Raiffeisenbank is now market leader in banking sector in South-Eastern Europe. Obviously the awkward political situation in the area of former Yugoslavia was not obstacle for the company to act on this market. The drivers of the expansion were others, inter alia underdeveloped banking sector and the appropriate timing of entry (RZB, Reiffeisen central bank, 2001) before other foreign firms have already established themselves. According to Karl Sevelda, CEO of the REB, success came by duly recognition of the chances in South Eastern Europe and adaptation to local circumstances. He said: „This was and is also a secret of our success in this region. It would be wrong to be thought that we must still teach everything these countries and force our enterprise culture“ (Feldkirch, 2004). A further issue that an international business needs to consider is the scale of entry. As stated by Hill (2005), there are two possibilities, to enter the market. These are: entering the market on large scale or on small scale. Large scale mode involves commitment of significant resources but implies rapid entry. The rapid large scale market entry can have important influence on the nature of competition on the market and it is very interesting option for RFH, because of small competition and probably small commitment of resources needed. Small scale entry allows firms to learn about foreign market and reduces the risks, but it makes more difficult to build market share and to capture first-mover or early mover advantage.
5.2 The choice of Bosnian market for foreign expansion
A nowadays expansion trend in East Europe goes towards Hungary or Czech Republic. Considering the trends, the question comes up why should RFH enter Bosnian market and not some of these markets, or other markets in the region? Cohen and Carey (2000) pointed out that according to research by Deloitte & Touché Consulting Group customer sharply focuses interest in greater demand for convenience, and that demand for specific product/service increases exponentially at certain points (trigger points) in a country’s development. Identification of this trigger point of demand is therefore a critical factor of determination of best time to enter emerging markets. This trigger point is the time when enough people have enough money to buy what company has to sell, before competition is established (Wheelen, 2004). Companies are scared to make first step to enter instable markets but they are strongly influenced by entering strategies of other companies. Many investors have been deterred because of the country's continued political uncertainty (Barnard and Ladika, 2000). As cited by Platt (2002) “ investors from Austria and Germany have stated that without the presence of a large multinational such as Coca-Cola, they would not consider investing in Bosnia and Herzegovina”. The reality today is that Coca-Cola is the market leader in Bosnian and other companies with similar portfolio play only a secondary role. The answer to the question, why should RFH enter just Bosnian market deals exactly with the strategy of companies like Coca-Cola, Interbrew (Belgium's biggest brewer) or Austrian Raiffeisenbank (REB)! Hypothetically I argue that REB (like Coca-Cola and other companies) saw behind underdeveloped banking sector, improved business conditions in Bosnia also mentioned trigger point as drivers for they investment. Comprehensive, descriptive term for they investment strategy is so called first-mover or early mover advantage strategy. According to information’s of German Chamber of Foreign Trade in Sarajevo (AHK) (2005) and British Chamber of Commerce (2005), in Bosnia and Herzegovina currently doesn’t exist the companies they work in the area of certificated continuing education of computer aided engineering like E -Plan or Catia V5. According to FIPA (2005) and my online research, there are only two private competitors they offering CISCO occupational training courses in IT area. These are “CCED” (http://www.cced.ba/) in Sarajevo and “IT Professional” in Banja Luka (http://www.itprofessional.org/). Local Bosnian companies but often concluding the contracts and place an order to Croatian, Serbian or even German companies due to lack of skilled labour and know-how in the local market (Bfai, 2003). In the year 1998 Siemens Private Communication Systems group was active in both Slovenia and Croatia, selling mainly they systems to corporate customers, and was beginning to look at Bosnia-Herzegovina (Biddlecombe, 1998).Today they are represented with three companies in Sarajevo, Banja Luka and Mostar and they are market leader in the telecommunication area (Siemens, 2005). It signifies, that there is existing a high demand inter alia for IT education, but there are not enough companies (underdeveloped educational sector) they can meet the demands. The mentioned trigger point seems to be now.
According to Tallman (1991) the value an international business can create in a foreign market depends on the suitability of its products offering to that market and nature of indigenous competition. If the international business can offer a product and services that has not been widely available in that market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if international business simply offers the same type of products that indigenous competitors and other foreign entrants are already offering (Hill, 2005).
With the variety of the product and services RFH offers, which is much bigger as these of the competitors (evidentially due to analysis of competitors websites), and with know-how and technology it disposes, RFH could create very quickly (at least for short time period) sustainable competitive advantage. Furthermore with the ability to preempt rivals and capture demand by establishing a strong company and brand name as well as with ability to build sales volume and ride down the experience curve ahead of rivals giving cost advantage over later entrants, RFH may now use the first mover advantage in order to offer its products and services for cheap price by good quality . For later entrants (competitors) it might be very time and cost consuming to outbalance the business position of the RFH as first mover.
5.3 Why is FDI the best mode of entry a foreign market for RFH?
The choice of entry mode into foreign markets has received a lot of attention from international business researchers in recent decades (Harzing, 2002). An inappropriate entry mode may block opportunities and substantially limit the range of strategic options open to the firm (Alderson (1957) cited by Ekeledo and Sivakumar, (2004)). A mode of entry is a way of carrying out and organizing international business transactions and it is an institutional arrangement that a firm uses to market its product in a foreign market in the first three to five years, which is generally the length of time it takes a firm to completely enter a foreign market (Root, 1987; Root, 1994). Setting up a wholly-owned subsidiary is usually “the last stage of doing business abroad” (Rugman, 2003). Many studies have investigated factors that might influence the choice for different entry modes (Harzing, 2002) between equity-based entry modes, in which the local enterprise is either partially or wholly owned and non-equity entry modes such as exporting through agents and licensing, usually with underpinned argument that framework of Ownership -Location- Internationalization and transaction cost theory have major impact on the decision (i.a. Arora and Fosfuri, 2000; Hill, Hwang and Kim, 1990; Anderson and Gatignon, 1986; Caves, 1982). Brouthers (1995) hast pointed out that the perception of international risk plays a large role in the manager's strategy selection process of entry mode. According to Hill (2005) companies can use six different modes to enter foreign markets: These are: exporting, turnkey projects, licensing, franchising, establishing joint ventures or setting up a new wholly-owned subsidiary in the host country or strategic alliances. Entry modes vary in the degree of control (Anderson and Gatignon, 1986) that the firm entering the market has over the decision making, resources, and rents associated with the business in the new market. Licensing and franchising the lowest degree of control, and Foreign Direct Investment (FDI) (joint ventures, acquisitions, mergers, and new, wholly owned subsidiaries) with substantial equity participation, e.g., wholly owned subsidiaries, provide the most control (Domke-Damonte, 2002). A strategic alliance is common strategy of non-for-profit organizations and it was analyzed within the scope of analysis of strategies in non-for-profit organisation. In case, if an equity mode of entry into a foreign market is chosen, company can choose between options to establish a wholly owned subsidiary in a host country by building a subsidiary from the ground up, the so-called Greenfield strategy, or by Acquiring or Merger an enterprise in foreign market. A remarkable number of studies have investigated factors that might influence the choice between these two options (i.a. Cho and Padmanabhan, 1995; Caves and Mehra, 1986; Wilson, 1980; Hennart and Park, 1993). According to Harzing (2002) research, by multinational companies, international strategy has impact on the choice between Greenfield’s and Acquisitions, whereby acquisitions are more likely for multidomestic companies and Greenfield’s are more likely for global companies. However, companies might be "forced" to accept a non-preferred entry mode, for instance company might follow a global strategy to acquire an existing company because of (temporary) lack of managerial resources or government regulations in particular countries preventing new entries. According to study of Desai, Davis, and Francis (2000) business unit strategy was not a significant determinant of entry mode choice, but corporate-level strategies such as global integration. All of these mode types have their advantages and disadvantages (Hill, 2005). Research by Daniels and Bracker (1989) shows “that in terms of the performance implications of internationalization, evidence supports the idea that foreign market entry, regardless of mode, significantly increases returns on sales and assets” (Rasheed, 2005).
Analysis in this work will show why just FDI in form of Greenfield strategy or by Acquisition is the best entry mode is for RFH. As stated by Rugman (2003) the typical process by which a firm will seek initially to involve itself in a foreign market is:
- to license, than
- to export via agent or distributor, than
- to export through own sales representatives or sales subsidiary, than
- to establish local packing and/or assembly, and
- at least to do FDI (defined as the long-term investment by company in the technology, management skills, brands and physical assets of a subsidiary in another country (Economics, 2005)).
This process relates to firms producing standardized products. As stated by (Ekeledo and Sivakumar 2004) most research studies on entry mode strategies have focused exclusively on manufacturing firms but the question of whether findings from these studies are applicable to the service sector has not been empirically investigated (Ekeledo and Sivakumar, 1998). Accoring to Anderson and Gatignon (1986) transaction costs theory views each choice of entry mode as an individual transaction that involves trade-off between resource commitment and a control. Entry mode involves two interdependent decisions-location and mode of control (Rasheed, 2005). Accordingly foreign licensing is foreign located and is controlled contractually; exporting is located domestically and is controlled administratively; and FDI is foreign located and is controlled administratively.
The RFH does not produce some tangible product; it will offer the services on foreign market. In that case every type of exporting or local assembling would not be appropriate or possible because it is about services. Boruthers and Brouthers (2008) suggest that organizations that have developed strong intangible capabilities may be able to more readily leverage these capabilities through greenfield start-ups. According to Lu and Beamish (2001) both non-equity and equity- based modes of entry have the capacity for increasing financial performance, exporting had a negative effect on financial growth. Licensing would be in case of RFH unwise, because to give another firm access to proprietary information such as know-how, technological expertise etc. means possibility of loss of control over know-how, its technology etc. by licensing it. Many firms, like RCA Corporation (www.rca.com), once licensed its technology to Japanese firms, have made mistakes of thinking they could maintain control over know-how within the framework of a licensing agreement (Hill,2005). For RFH, technological know-how as well as long-standing experience in the area of the IT-services, constitutes basis of firms competitive advantage. The local licensee or other local firms, like in case of RCA Corporation, could quickly assimilate the technology and know-how; improve on it, and use it to spread on the local market. Of course there are the ways of reducing the risks of licensing. Hill (2005) explains the practices of several firms they develop the ways of reducing the risk by licensing. Thus, the U.S. biotechnology firm Amgen (www.amgen.com) has made so called cross-licensing agreement with Kirin, the Japanese pharmaceutical company and has licensed one of its key drugs (Maggon, 2003) . Cross-licensing agreement enables firms to hold each other hostage, which reduces the probability that they will behave opportunistically toward each other (Williamson, 1985). Thus, the firm can license some valuable intangible property to a foreign partner, can claim a royalty payments, and might also claim that the foreign partner license some of its valuable know-how to the firm.
Further possibility of reducing the risk is the model of Fuji-Xerox. They form J oint Venture in which licensor and licensee take important equity stakes (Deogun and Hechinger , 2001), in which both companies would become"the document company", viewing documents of each other as a medium that conveys information and knowledge (Umemoto , Endo and Machado, 2004) . The interests of both are aligned, because both have a stake in ensuring that the venture is successful. According to evidence provided by Mosakowski (1988), for service firms joint ventures perform better than internal arrangements and licensing; research and development (R&D) joint ventures perform worse; sales joint ventures' performance falls between the two; and licensing detracts from performance when compared to using internal arrangements.
But in the case of RFH a cross - licensing agreement and joint venture with Bosnian company seems to be currently not possible because, one finds no suitable company which could license the RFH know-how or technology and as a consideration (quid pro quo) could bring valuable know-how which the RFH could use. According to German Federal Agency for Foreign Trade and Payments (Bfai, 2003) in Bosnia and Herzegovina there are only few Bosnian companies they export to foreign countries and EU, as for example the company „Aluminum Mostar “ (Aluminum manufacturer). Furthermore there are some smaller companies they produce and export the niche products like Ajvar, soft fruits, ready salads, tea and mushrooms. All these companies can give no suitable license to the RFH in return for licensing of RFH’s know-how in the area of the IT-services and vocational training which the RFH could use, never mind, according to my personal observation possibly none of Bosnian companies would be ready to pay additional royalty payment (as in the case of cross-licensing agreement). In addition, these few Bosnian exporters come from quite different business area as RFH. Possible agreements RFH could made with e.g. foreign companies of similar type like e.g. Goethe Institute in Sarajevo (http://www.goethe.de/ins/ba/sar/ lhr/sem/deindex.htm) which operates in educational business area but it offers some niche products/services, for instance language courses for student they want to study in Germany. Turnkey projects, as further possible entry mode, are appropriate and most common for companies they have specialized in the design, construction etc. like chemical, pharmaceutical or metal refining industries, all of which use expensive, complex production technologies. Because of the business type which RFH does (educational sector), it is obvious that this entry mode isn’t suitable. Franchising is similar to licensing, a form of licensing agreement in which the contractor (franchiser) provides the licensee (franchisee) with pre-formed package of activity. Franchiser is responsible for the brand name, marketing and probably training and franchisee is responsible for distribution, selling etc. (Johnson, 2002). The RFH has a franchising agreement with Cisco Network Academy, and it is authorized to provide certificated continuing education in the IT area. The RFH has advantages of it like, that some of the basic tests of business proposition were undertaken by franchiser and through it; the RFH is relieved of the risks and costs of opening a foreign market on its own. But Cisco-courses are only one of the wide ranges of services in educational sector the RFH could provide on Bosnian market. So the franchising is possible entering mode but not completely solution.
Extant option if an equity mode is chosen is FDI by establishing of a wholly owned subsidiary (Greenfield venture) in Bosnia or FDI by Mergers or Acquisitions. FDI is a more competitive way than exporting for operating in international markets because the value of FDI was greater at later stages (Lu and Beamish (2001) cited by Rasheed (2005). Mathematical based model by Tang and Yu's (1990) so called “revenue maximization model” concluded that a wholly owned subsidiary is the optimal strategy because it generates the highest level of economic profit and maximizes control of critical knowledge indefinitely. This model “determined transfer prices in other entry strategies are higher than marginal costs, making subsequent operations inefficient”. According to Rasheed (2005) international revenue growth is higher for equity-based modes (local enterprise is either partially or wholly owned) when foreign market risks are high. Bosnian market is according to Moody's rating agency improved but still risky (Raffeisenbank, 2004). Mergers and Acquisitions (M&A) are similar to each other, whereby mergers are in the sense of two companies combining. On the other hand, acquisition is where an organization develops its resources and competencies by taking over another organization (Johnson, 2002). According to Lynch (2003), mergers arise because neither company has scale to acquire the other company on its own, and has potential benefit of being more friendly, but requires special handling if the benefits are to be realized. But if the scale is given, the acquisitions have significant advantages: they may reduce competition from a rival. Behind that they are quick to execute and managers may believe that acquisitions are to be less risky than Green-filed ventures, because the revenue and profit stream that a Greenfield Ventures might generate is uncertain because it dies not yet exist (Hill, 2005). The advantage of the Greenfield Venture is that it gives a firm greater ability to build subsidiary company in the way it wants but the establishing of Greenfield companies is much slower. Important disadvantage of a Greenfield Venture is possibility of being outdistanced by more aggressive competitor who enters or exceeds the market (if local company acquires its competitor) via acquisition.
Ekeledo and Sivakumar (2004) have investigated how firm-specific resources interact with the nature of the product (goods versus services) and may influence choice of entry mode. They distinguish between non-separable and separable services, whereby separable are “such services, as e.g. musical entertainment, college education and television programs, they allow production and consumption to be decoupled” and non-separable services (like e.g. hospitals and restaurants) require close physical proximity with the service provider and simultaneity of production and consumption (Sampson and Snape, 1985 Erramilli, 1990; Boddewyn et al., 1986; Erramilli and Rao, 1990;). This analysis contributes to hypothetical findings, why FDI is generally the best mode for RFH as company which offer separable services enter Bosnian market. They pointed out that “(1) the resource-based theory has good explanatory abilities for entry mode strategies; and (2) entry mode concepts and practices in the manufacturing sector are not always generalisable to service firms”. They findings support contention of Erramilli and Rao (1993) according to the unique characteristics of services affect a service firm's choice of entry mode in a foreign market, as in the case of RFH and the unique characteristic of the services they offer.
The considerations about most appropriate entry mode for FDI in Bosnia rely mostly on resource-based theory but partly also on eclectic theory considering location advantage, ownership advantage, and internalisation advantage (Dunning 1980) as its key components. According to theory (Pisano et al., 1997; Peteraf, 1993; and Barney, 1991) competitive advantage resides in the resources available to the firm and the resource-based theory views the company, not the industry, as the source of competitive advantage (Capron and Hulland, 1999).
Based on previous discussion, I argue that application of relevant theory about entry mode depends on conditions on the entering market. A turnkey projects, licensing agreements and joint ventures seem to be inappropriate for RFH because of market conditions and companies portfolio respectively. According to the fact that the two competitors in Bosnia are well-established incumbent companies, the easiest and fastest way might be to eliminate competition by FDI by acquisition. This choice will be deeply analyzed in following chapter. As noted previously, mathematical based model by Tang and Yu's (1990) recommend but the Greenfield strategy as optimal entry mode. Thus, the establishing a wholly owned subsidiary including simultaneous or subsequently franchising agreements (because of nature of the product that RFH offers – i.a. franchising Cisco courses) might also is an appropriate choice of entry mode for RFH. The resource-based approach suggests that appropriate entry mode is one that balances cost efficiency with effective marketing and decision makers should recognize the impact of inseparability of production and consumption in evaluating entry modes (Ekeledo, Sivakumar 2004). Based on considerations discussed above, the final choice will have been driven by managerial implications of RFH managers and they considerations based on of firm-specific resources that afford their firm competitive advantage in the target foreign market with its specific conditions.
5.4 FDI by acquisition as successes factor for RFH in Bosnia
Many companies are making strategic moves into emerging or overseas markets. There are many examples of acquisitions in Bosnia, among the others Interbrew company, Belgium's biggest brewer. With acquiring 51 percent of Uniline Brewery in September 1999, it became one of the first foreign investors in Bosnia-Herzegovina (Barnard and Ladika, 2000). The acquisition occurred in the time of weak competition in brewing sector in Bosnia. Reason for they acquisition was according to Christian Plingers, corporate affairs manager for Interbrew, “increase of market share and minimisation of competition”. According to Barney (1991) there can be no sustainable advantage to the entry strategy, per se, unless firms have inimitable resources, because the entry strategy itself is perfectly imitable (Boulding and Christen, 2003). As already stated in the text, in the area of vocational training in IT area and industrial software application area (like Eplan, Catia etc.), currently there is almost no competition for RFH in the Bosnia and Herzegovina. There are two mentioned local potential competitors offering the Cisco courses: IT Professional - Microsoft and Cisco IT Academy in Banja Luka and “CEED”, they differ in they legal nature. IT Professional is private licensed company and “CEED” is company working closely with the University of Sarajevo sponsored by United Nations Development Program (UNDP) and the World Bank Group, offering the courses mostly for the students of the Sarajevo University. Sarajevo and Banja Luka are two biggest towns in Bosnia, and are placed geographically quite far away form each other. According to information’s of the competitor in Banja Luka, waiting period for the courses takes some months. This signifies a huge demand and high volume of contingent customers. Acquisition of the sponsored Academy at the University of Sarajevo seems to be not possible because of governmental obstacles, but to acquire the competitor in Banja Luka is possible according to the business nature of the company. Such acquisition would mean for RFH to have (al least for a short time) no competitors in the region! Competitive environment in practice is constantly changing, thus faced with changing economic environment companies will need to chart new strategies if they are to win a share (Williamson, 2005). Strategic management should involve the study of firms in the context of their market situation as one of the key successes factors for company (Jenkins, 2005) , thus one or more immediate competitors I’ll analyze in depth (competitor profiling) within the scope of defining of successes factors for FDI in Bosnia in educational sector. In the case of aimed business of RFH, to enter Bosnian markets in educational sector by acquisition and to reduce or even eliminate competition, ones can refer to first-mover advantage. As stated by Hill (2005), according to new trade theory, firms that establish a first-mover advantage with regard to the production of particular new product or new services (as in the case of RFH and their offering of vocational training in the area of topical industrial applications) “may subsequently dominate local trade in that product and or offering of service”. For RFH the clear massage is that it should pay to invest financial resources in trying to build a first-mover, or early mover, advantage through acquisition of the two existing competitors.
An extensive empirical and theoretical literature as for example (Golder and Tellis 1993; Lieberman and Montgomery 1988 etc), investigates the effects of the market entry order. Study by Boulding and Christen (2003) replicates the typical demand-side pioneering advantage but finds an even greater average cost disadvantage, which is the source of the pioneering profit disadvantage. “There can be no pioneering advantage without heterogeneity in resources across firms” (Barney, 1991). According to Shaver, Mitchell and Yeung (1997) pioneering costs are “costs that an early entrant hast to bear that a later entrant can avoid”. These pioneering costs must not be so high for RFH because “first entrant can also benefit from a period of monopoly profits that are eroded over time as later entrants make inroads” (Boulding and Christen, 2003). These costs occur due to ignorance of the foreign environment (Hill, 2005), when the business system in foreign country is so different from that in a firm’s home market and firm has to devote considerable effort, expense and time to learn rules of the new business system. Because of international presence in Bosnia and Herzegovina and presence and EU Special Representatives, the Bosnian economy and law are gradually adapted to European standards. They have prioritised justice, rule of law and economic reform and stressed the need for a properly functioning State administration (European parliament, 2003). Also the summary of state-level laws related to Foreign Direct Investment (Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina, 2004) shows that Bosnian FDI law is modernized at European level. Thus, the risks of pioneering cots might be very low. Johnson (2002) explains some of the disadvantages of acquisition behind the pioneering costs and these are that the acquirer pay too much or might be unable to add value to its purchases. The predicted synergistic benefits are often not realised because of the “inability to integrate the new company into the activities of the old”. The synergistic effects are difficult to measure using the historical data of the companies involved. The problems can also occur due to of clash of national cultures particularly where target “foreign” (Hill, 2005; Hofstede, 2004). Furthermore, the costs of the acquiring companies must be exactly calculated, which is often the problem because acquiring firms often overpay for the assets of acquired firm. There are different ways to determine value of the acquired firm, like e.g. “chop-shop” approach or Break-up value first proposed by Dean Lebaron and Lawrence Speidell (1987) of Batterymarch Financial Management . However, if the RFH is going to make an acquisition, expectably its management must be cognizant of the risks associated with acquisition and consider these when determine the company to purchase. According to Carpenter and Nakamoto (1989) when product quality is ambiguous to customers the order of entry affects preferences in a way that favours pioneers, therefore pioneering should be more advantageous in markets where customers are unmotivated and/or unable to learn about alternatives after initial trial of the first-mover's product. In sum behind the analytically supported idea, the timing of entry is significant. Managers they evaluate an entry timing strategy (trigger point), might give precisely consideration to how and why the strategy will provide a sustainable advantage.
Based on discussion above, the option of international expansion by using international strategy seems to be at the moment appropriate for RFH considering the fact, that Bosnian market is currently not dynamic and diversified in such scale like China’s market and that RFH has a high preference for control and could offer unique services (and have no need of establishing of manufacturing facilities because of intangibility of products). Mentioned trigger point, thus the best timing for investment in occupational training sector seems to be achieved. RFH faces low pressure for cost reduction (partly funded by government) and has medium need for national responsiveness (needs occurs due to partly dependency of governmental financing sources and they decision-making impact) but still see opportunities to sell their products or services internationally and wants to benefit of global capital while diminishing the negative effects of economic swings in the home country. On consideration based analysis indicates that the Foreign Direct Investment activity by Acquisition could create an short-term advantages for RFH like, subsequently domination of local market, protection of technology and know-how (as constitutes basis of its competitive advantage) or ability to realize location and experience economies. But also this way would bring disadvantages like high costs and risks.
According to Rugman (2003) finale stage of foreign involvement comes when the firm has generated sufficient knowledge about host country to overcome its perceptions of risk. Thus, in order to consider the Foreign Direct Investment activity, it is necessary for RFH to have key economical information’s about Bosnia and Herzegovina as well as necessary information’s about investment climate in educational sector in Bosnia and Herzegovina. Key economical and business indicators related to FDI in Bosnia, economic policy etc. I’ve investigated in the following chapter.
6 Economic overview, Educational Sector and Investment Climate in Bosnia and Herzegovina - Market blue sheet
6.1 Current political background and economic situation overview
Bosnia and Herzegovina (BaH) lies at the heart of South-East Europe (please see picture below) and borders in the East and Southeast on Serbia and Montenegro and it shares its borders in the North and the West with the Republic of Croatia. 12 km long Adriatic Coast in the Southwest offers the only access of the land to the sea. With a territory of 51,129 square kilometres, BaH is approximately 7 times smaller than Germany. In July 2005, the population was estimated at 4,025,476 million. The capital and largest city is Sarajevo with approximately 350,000 inhabitants. Other important cultural and commercial centres are: Zenica, Banja Luka, Mostar and Tuzla. The currency in Bosnia is Convertible Mark (BAM=KM) which is linked at a fixed rate of 1, 9558 to Euro (CIA -The World Fact Book, 2005).
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Source: Adapted from Raiffeisenbank Austria (2004), Financial centre Bosnia and Herzegovina - Report, December 2004, p.1
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- University of East London – East London Business School (ELBS), Elektrotechnik
- foreign direct investment strategic management western balkan non-for-profit educational sector