Risks of multinational expansion: XYZ Corporation's potential investment in Ecuador's oil industry

¶ … Risks of Trading and Investing:

Involving a Developing Country with a Developed Country's Business

Description of XYZ Corporation

It will be the assumption within this paper that the multinational corporation depicted resides within the United States, a developed country, while it is trying to generate business with Ecuador, a developing country. A multinational corporation is a corporation that operates by supervising or transports products or services to more than one country. XYZ Corporation is a competitive multinational corporation deeply interested in expanding its business to countries in which they have not already established business in. The company currently focuses on the manufacturing and the wholesale of products in the oil and petroleum industries. Most of XYZ Corporation's foreign entities are located in the Middle East. Recently, a member of the XYZ team has given vital information to corporate executives explaining that Ecuador has enormous oil and petroleum potential that could greatly benefit the company. XYZ Corporation chief executive officer is now requesting information to assist in the assessment of exporting from or having direct foreign investment within Ecuador's oil and petroleum industries.

1.1 Explanation of Opportunity at Hand

XYZ Corporation has been fortunate enough to have the opportunity to choose to export from Ecuador, have direct foreign investment with Ecuador, or a combination of the two. XYZ Corporation has been searching for a new international location to expand to. Ecuador's crude oil has become its number one export to America, at somewhere near eighty percent of its exports and roughly $7.1 billion. Petroleum products have developed to be Ecuador's fastest growing export to America, with an enormous increase of 87.3% and $157.4 million (EcuadorExpolorer.com, 2009). It is important for XYZ Corporation to seriously consider involving itself immediately in the Ecuadorian oil and petroleum industries during this time of vast potential.

2.0 Ecuador's National Business System & Cultural Conditions

When two companies in separate countries decide to partake in business with one another, there are an assortment of situations and choices the multinational corporation must consider. When a multinational corporation has made the decision to enter a different country, it has a certain amount of ethical and social responsibility to uphold to the home and the foreign countries.

Ethics are defined as the "process of distinguishing the right and the good from the wrong and the bad (Godiwalla & Damanpour, 2006)." A multinational corporation has an ethical duty to uphold the right and good when entering another country. This is for the sake and protection of both parties. In some instances, cultural differences can blur the lines between good ethics and bad ethics. Perhaps what deems polite and proper in one country may be considered bribery or immoral in another country. At the time XYZ Corporation has determined whether or not to enter a different country for business, the company must be fully aware of what its ethical obligations are, as well as its social customs (Godiwalla & Damanpour, 2006).

In order for XYZ Corporation to gain proper respect from its shareholders and from the public, the multinational corporation will want to practice social responsibility within the newly occupied culture. According to Archie Carroll, corporation social responsibility professor at the Florida State University, there are four levels of to the pyramid of corporate social responsibility that a multinational corporation must thrive to obtain (Godiwalla & Damanpour, 2006).

The first level of responsibility that an MNC holds is economic responsibilities (Carroll, 1991). Historically speaking, business organizations were created in order to produce goods and services that consumers needed and wanted. As time progressed, companies began changing their profit goals in order to produce the largest profit possible. Because the other company goals are based on the economic responsibility of the time, it must be considered in all decision making processes (Carroll, 1991).

The second level of responsibility that a multinational corporation must abide to is legal responsibility. With focus on economical responsibility, many businesses lose focus on complying with local laws and regulations (Carroll, 1991). In order to gain respect from the shareholders and the public in either country, a multinational corporation must take action to comply with local laws. Where there are clear ethical gaps in the local government systems, the multinational corporation has the opportunity to make an ethical decision to practice the right actions, despite the lack of the government forcing the company to act (Carroll, 1991). If a company wants an ethical decision to be long lived, a company may write the practice into their policy.

At the third level of the pyramid, a multinational corporation must abide by ethical principles. Though choosing proper actions may not be directly profitable, choosing immoral decisions may disgust potential investors or customers. In following expected ethical responsibilities, a company is embodying standards, norms, and expectations that are of concern as well as upholding the rights to those involved with the company, including consumers, employees, shareholders, and the community (Carroll, 1991)

Finally, the last level that Carroll's pyramid regards is that of the multinational corporation's philanthropic responsibilities. In order to reach the fourth level of the pyramid, the corporation must reach the first three levels of responsibility. Once reaching the first three levels, the company has met all of its organizational performance needs and is able to focus on the fourth and final level (Godiwalla & Damanpour, 2006). To attract customers and shareholders, a company will want to complete market research on what organizations or issues their target demographic is concerned with most. Acting upon the concerns of involved parties will show corporate social responsibility, philanthropic responsibility, and create a potential for profit by gaining consumer and shareholder attention (Hill, 2007).

It is very important for any multinational corporation entering a different country or culture to be fully ethically aware of the views of their home country and the new country they are entering. By assessing the cultural conditions, the multinational corporation will be more capable of successfully entering any national business system.

3.0 Assessment of Trends and Patterns

Ecuador has become known for its petroleum and crude oil exports, but has recently come to be successful in the exportation of other products, including cut flowers, fish, shellfish, fruits, and cocoa beans, each of which have helped Ecuador stabilize its otherwise weak economy. The United States and Ecuador are already familiar trading partners, both aware of imports and exports from one another. In 1998, America provided nearly thirty percent of Ecuador's total imports, while taking about forty percent of Ecuador's exports. These transactions have made America the leading trade partner with Ecuador (Workman, 2009).

The company in question would financially benefit by generating business within Ecuador. Ecuador is a leading producer in the petroleum and crude oil sources, and XYZ Corporation is one of America's oil manufacturers. Not only is oil the top export from Ecuador to America, but Ecuador succeeds in producing other petroleum products as well. The two products combined have constituted over $7.2 billion from America to Ecuador. This number has increased 62.9% since 2007 (EcuadorExplorer.com, 2009).

Ecuador is a country that thoroughly enjoys doing business with other countries. It thrives for doing business with countries like America, Chile, Venezuela, and Paraguay. Such countries are most favorable to Ecuador after the signing of the International Investment Agreements. These agreements, each individually designed by the countries involved, help protect both parties against such risks as: Inconvertibility of foreign currency, political violence, and suspension of payments to agents abroad (HipEcuador.com, 2007). Ecuador began initiating these agreements in the early 1990s in an effort to guarantee fair treatment to their foreign investors and inform those investors about certain controversies, reasonable compensation for expropriation, and the enforcement of agreements, among other actions (HipEcuador.com, 2007).

3.1 Protection Measures Against Imports and Foreign Investment

Having established foreign investment measures in enforcement would be most beneficial if the company decides to invest in Ecuador. The Foreign Investment policy would allow Ecuadorian partners to trade with XYZ Corporation without feeling any sort of financial threat. Conversely, the American base would be protected by the same level of comfort with the Ecuadorian counterpart. With an agreement set up, risk has been reduced by a considerable amount.

4.1 Potential Risks for XYZ Company

Currently, no economically strong countries are using the fixed exchange rate other than those that are using the euro and the Chinese Yuan, so there currently are not realistic options in using this method. Using the flexible exchange rate would most likely be what the American to Ecuadorian interactions would use (Ecuador.us, 2009). Within the last year, the Ecuadorian currency has not changed its value to the American dollar, which displays that risk for transacting in or with Ecuador could be quite small.

5.0 Analysis of Exporting

Because America has already become familiar trade partners with Ecuador in terms of oil and petroleum products, it would be a bit simpler for the company to penetrate the industry. Exporting products from Ecuador would help the Ecuadorian economy, as oil has played a significant part of their economy for nearly four decades (Ecuador.us, 2009). For the reason that Ecuador has an agreement in place with America, the legalities of which XYZ Corporation must uphold have already been established and must simply be reviewed before exporting from or investing in the country.

5.1 Analysis of Foreign Direct Investment

To use direct foreign investment would also be a quite simple process, considering that International Investment Agreements have already been established. Ecuador thoroughly welcomes and encourages direct foreign investment into their economy (HipEcuador.com, 2007). Directly investing would uphold our company's required economic responsibility through the hiring of Ecuadorian's at local facilities.

5.2 Assessment on Using Exporting/Foreign Direct Investment

America has already invested billions into Ecuador's oil and petroleum industries for a number of decades. It would be a significant business opportunity for XYZ Corporation to be involved in both the export of and the direct foreign investment of Ecuadorian oil and petroleum products. As the export would provide a quick result and the direct foreign investment has potential to yield in the future, a combination of the two would provide the most potential for our company.

6.0 Political Risks

In order to determine political risk, it is important to analyze Ecuador's political past, determine if it is possible mistakes will be repeated, and identify if current politics may affect the business. Ecuador is one of the least politically stable countries in Latin America. It has had eighty six governments and seventeen constitutions written in a period of 159 years of independence. A handful of the elections had been arranged, nullifying the purpose of the voting process. In the late 1940s through the 1960s, Ecuador finally saw democratic stability with four democratic politicians, but saw dictatorship throughout the 1980s. Upon the death of the dictator, Jaime Roldos Aguilera, Ecuador saw a restoration of their government, but it is still a bit unstable. Political Scientist John D. Martz stated that his opinion of the vulnerability the government has to transition types of government, "little reason to believe that the fragile democratic system in Ecuador had been strengthened, nor that the historic pattern of instability had been fundamentally reversed or modified (U.S. Library of Congress, 2011).

The main conflict between the rivalries that the political parties have are in development projects, however, it is most often in argument of road construction; the oil and petroleum would only minutely be affected.

7.0 Conclusion

XYZ Corporation, an American company, is already involved in the manufacturing and wholesale of oil and petroleum. In these two industries, Ecuador has a lot to offer XYZ Corporation. The country has been a generous exporter of oil and petroleum to the United States for almost four decades. Before XYZ Corporation decides whether or not to generate business in Ecuador, it must ensure that it is capable of upholding their ethical, economical, and legal responsibilities to Ecuador and its people. Next, Ecuador will want to look at any trends or patterns Ecuador has in its trading practices and how they may be able to protect against imports and foreign investment. Fortunately, International Investment Agreements play a large part in protecting Ecuador and America against controversies, reasonable expropriation compensation, and agreement enforcement. The risk that XYZ Corporation has with exchange rates appears to also be of little risk. With the falling economy, America and other countries have experienced a weakening in their individual currency