ASSIGNMENT COVER

Course code: MBA 510

Course name: Law and Economics for Global Business

Assignment title: Country Report – The expansion of BCD in FYROM

Instructor’s name: Mr. Vesselin Todorov

Student’s name: Georgia Lalakou

Date: April 21, 2014

Comments:

Grade: /100

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Country Report

Georgia Lalakou

g.lalakou@cityu.gr

MBA 510, Law and Economics for Global Business

Vesselin Todorov

Country Report

April 21, 2014

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Contents Page

1.0 Introduction 4

2.0 Evaluation of the Market of Skopje 5

3.0 Advantages and Entry Opportunities in the Market of Skopje 12

4.0 Selections of the Entry Strategy in the Market of Skopje 14

5.0 Emerging Market Potential Index 17

References 20

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1.0 Introduction

This paper focuses on the process of FDI through the study of the company BCD

Travel and its intention to enter the market of Skopje. Essentially this essay will be a

country report, which will seek to identify and evaluate the specific intent of the

company to enter this market. Specifically, the development of this theme will be based

on four sections of analysis.

The first section will study the external environment of the country, with special

reference to the economic and political data to be taken into account by the company in

order to enter the market. The second section will discuss the advantages and

opportunities of company by expanding its activities in the selected country. Then, there

will be an evaluation of the selected method of entering the market and of the risks that

need to be considered by engaging in this country. Finally the author will describe all

the elements that will influence the final decision to enter the market.

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2.0 Evaluation of the Market of Skopje

The market analysis of Skopje which will describe the economic and legal conditions

of the market to be taken into account before the company enters the market of Skopje

is the STEP analysis. Specifically, according to this model, the Skopje market is

analyzed as follows (Thompson, & Strickland, 2001):

Economic environment: Initially and before the analysis of the economic factors

affecting the operation of the market, a table with the key financial figures of the

country for the years 2012-2013 will be presented, which should be taken into account

by the company when entering the market of Skopje.

Table 2.1 Key financial figures of the market of Skopje

Skopje EU

GDP 462,8 16,584

GDP growth rate -0.3% 0.1

Industrial production

growth rate

-7,4% -1.6%

Unemployment 28,7% 12.1%

Revenue budget in dinars

and Euros

138 dinars

2,23 Euros

139 540.5

Source: Secretary of Finance and Trade, Greek Republic (2012). Annual Report for the

Economy of FYROM and it Bilateral Economic Relations with Greece. Retrieved from

the MFA website:

http://www.agora.mfa.gr/agora/images/docs/rad25B75etisia%20ekthesi%202012.pdf

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0 200000 400000 600000 800000 1000000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

100000

600000-800000total w orforce

400000-employed persons

200000-unemploed persons

Figure 1. Correlation among workforce, employed and unemployed persons,

Source: State Statistical Office in the Republic of Macedonia, Labour Force Survey 2000-

2013

Figure 2-Unemployed persons in regions in Republic of Macedonia by gender, 2013

Source: State Statistical Office in the Republic of Macedonia, Labour Force Survey

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According to the above, it is observed that the economy is experiencing a relative

growth but of course there is still much room for improvement. The key is the

relationship between dinar-dollar, yen-dinar, dinar-euro, and dinar-ruble. Specifically

these are the following:

Table 2.3- Currency exchange rates with major currencies

Dinar - Euro 1=0.0163

Dinar - Dollar 1=0.0225

Dinar - Yen 1=0.80

Dinar - Ruble 1=2.36

Based on the table above, at all exchange rates with countries that the examined

company BCD can have an activity, the currency exchange rates are in favor of the

interests of its customers at the level of corporate and business trips. Specifically, the

cost of accommodation, food, rooms and everything else that the company may need to

organize such activities is very low for the guests, and so there is a direct interest for the

companies that organize such trips for their employees if they choose Skopje as a

destination.

The country showed a continuous growth until 2008 that reached about 5%. In 2009

everything changed since the country was affected by the crisis resulting in a recession

rate of 0.9%, which continued until 2011. In 2012 the GDP decreased by -0.3% (KPMG.

2013).

The country’s economy was badly affected in relation to the private sector, where

many companies were driven into bankruptcy, which affected the overall operation of

the domestic market, reducing the market dynamics for a company like BCD regarding

the organizing of conferences for the companies that are already active there. The level

of unemployment in the country is 30.6%, which is an incentive for the country in

relation to foreign direct investment in order to allow entry to foreign companies to

invest there and create jobs that would support the domestic economy. The wages are

low and the basic wage does not exceed 342 Euros, while there is a good level of

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education, especially in large cities (see Table 2.3) (KPMG. 2013; PWC. 2014).

Table 2.3- Financial data 2009-2012

Economic indicators 2009 2010 2011 2012

GDP $ M 9313.6 9338.7 10395.2 9617.4

Growth of GDP % -0.9 2.9 2.8 -0.3

Inflation (CPI) % -0.7 1.6 3.9 3.3

Unemployment % 32.2 32.0 31.4 -

Foreign direct investment % of GDP 2.8 3.2 4.8 3.4

Export growth % -15.8 23.6 11.3 -

Import growth % -14.3 9.5 14.1 -

Current account balance $ M -609.6 -197.8 -310.6 -385.2

Public debt % of GDP 23.8 24.4 28.2 33.3

External debt $ M 5696.0 5986.4 6286.4 -

Total debt service $ M 552.3 652.5 948.5 -

Cash surplus or deficit % of GDP - - - -

Tax Revenue % of GDP - - - -

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Economic indicators 2009 2010 2011 2012

Government consumption % of GDP 19.1 19.1 18.3 18.3

Public expnd. on edu. % of GDP - - - -

Public expnd. on health % of GDP 4.2 4.1 4.0 -

R&D expenditure % of GDP - - - -

Military expenditure % of GDP 1.7 1.4 1.3 1.4

Source: KPMG. (2013) Investment in Skopje. Retrieved from

http://www.kpmg.com/MK/en/IssuesAndInsights/ArticlesPublications/Documents/2013

-Investment-in-Macedonia-website.pdf

The country now attracts many companies from around the world and especially

from Greece and in general the Balkans. Many large and well known companies such as

major banks (i.e. Piraeus), telecom companies (i.e. Vodafone), large Supermarkets etc.

invest in the country (Euro Business Center-Skopje, 2012). This means that BCD, despite

the economic problems plaguing the country and the wider disadvantages from the

crisis, has the opportunity to enter the market and the perspective of cooperation and

development in relation to its action area since the country’s economy presents the

necessary entry conditions. Based on the above, the key elements that the company is

required to consider before and during the entering of the market are as follows (ΒΤΙ.

2014):

1. High unemployment, which drives the country to provide benefits to companies

that entering the market, like low taxation, specific areas for the establishment of

business with low rents, etc. The 30% unemployment leads the government of the

country to provide special opportunities for companies in terms of employee insurance.

What needs to be given weight is that 75% of the workers in the country are members of

labor unions with which the company must establish good relations in order to avoid

problems.

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2. The country provides opportunities for investment and large companies take

advantage of this when entering the market. Despite that the private sector is in

recession, continuous investments provide the right opportunities for BCD to have a

market for engagement in this country.

3. Finally, all currency exchange rates are favorable for the company in relation to its

activities, since it can provide affordable packages to the companies in the market for

cooperation and organization of business trips.

Political environment: The state consistently promotes foreign direct investments

with special and relative bills. Specifically, in Skopje the tax on corporate profits is 15%

and the government has announced that it will further reduce it, following the example

of Serbia (ΒΤΙ. 2014). At the same time the state has set the so-called free economic

zones with tax exemption of ten years for corporate profits, value added taxes, duties

and other charges. According to the Agency for Foreign Investments in FYROM

(MacInvest), the country offers some the most competitive labor costs in Europe, in

addition to the skilled and trained workforce. The basic facts at the political level that

should be taken into account by a company when entering this market are the following

(Kosmos, 2013):

1. The high investment and political risk in FYROM, was offset by the effects of

privatization of strategic enterprises of the state sector, which constitute a major

percentage of FDI attracted by this country in recent years.

2. In an effort to strengthen the market, the Government has passed a bill that allows

entrepreneurs who invest over 40,000 Euros a year to be able to apply for citizenship,

while those who invest over 400,000 Euros and employ more than 10 employees are

granted citizenship and passport.

3. The state is in turmoil given the conflicts between the political factions, the

problems with the minorities and of course the name issue, which causes instability in

the country (Fuere, 2013).

4. There is also a problem in transportation, with non-frequent flights, lack of

accessibility of various countries, inadequate air flights, and generally the country lags

behind in infrastructure.

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Social Environment: In terms of social environment, the country is constantly

showing improvements at the social, cultural and tourism level, with local regions to

have emerged as international tourism destinations. In 2012, tourism influx exceeded

the 660,000 tourists. The country has 2.2 million residents who speak the south-Slavic

and the Albanian language. The main problem of the country is its many nationalities,

lack of identity and the existence of many nationalities including Turks, Romanians,

Greeks, Bosnians, and Albanians. In general the standard of living has been improved.

The company can take advantage of the multi-ethnicity character of the country and

make Skopje the center of the Balkans and a host country of companies from around the

world at the level of conferences, business meetings, conventions, combining vacation

and work that many companies would prefer. The residents are open towards foreigners

and seek to support the local communities and their country in general (PWC, 2014).

Technological environment: The country is technologically developed, but lags in

several areas that would be of major interest for the entry of foreign companies. The

country’s accession in pipeline agreements would help meet the energy needs and

strengthen the country and help it at the financial level, lead to growth in terms of

telecommunications and the entry into the market of large companies would help to

upgrade the Internet etc. This means that if the company decides to establish a unit

there, it will be able to have a relatively good communication with the target markets.

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3.0 Advantages and Entry Opportunities in the Market of Skopje

Having analyzed the market, there will be a brief presentation of the company before

making reference to the advantages and opportunities of the market entry. The company

covers all the needs and demands for professional/business travel individually or in

groups. There is also the ability of organizing meetings, conferences and corporate

incentive trips.

The company may also offer consulting in regards to travel services, helping the

customer to develop and better understand the costs and the procedures of a journey.

The company is the intermediary for any service that can be requested concerning

travels or be connected to it. It is a travel management company (air, ship, train, hotel,

car, food, transportation, etc.) (BCD, 2014). The advantages of entering this market are

the following (PWC, 2014):

1. Low tax rates, economic zones without taxation and other charges.

2. Low labor costs and reduced insurance rate to be paid to the state by a company,

which helps to reduce operating costs and to provide low prices in the market.

3. Good workforce that has been trained in tourism services, which means that the

company can have access to qualified staff and develop its activities in the country.

4. Large companies that have already entered the market constitute potential

customers.

5. Benefits to companies that invest in financial terms, granting of citizenship.

6. Multiculturalism may cause turmoil in the country, but it can also turn into an asset

for a company since the country can become the center in the Balkans.

The opportunities for the examined company from entering this market are the

following:

1. Skopje is a growing market and although strongly influenced by the crisis and

especially the private sector, it slowly reverses this unfavorable situation, and the need

for greater financial support with the vision to enter the European Union, certainly

shows a market with perspectives.

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2. Improvements in the future in terms of the transportation infrastructure in the

country, will give additional investment incentives to companies already operating

there.

3. Skopje is a host country of foreign investment, given the additional measures for

foreign direct investment that have been implemented by the government. The entry of

large companies means more potential customers for the examined company, companies

that will want to organize conferences, business meetings and business trips to and from

Skopje. Especially companies with branches there, would want to cooperate with local

companies that know the market, and so BCD would benefit from establishing activities

in this country.

4. Another future opportunity is the development of tourism, which will make the

country known worldwide, and raise the motivation of companies to organize their

business trips there, combining work with professional obligations.

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4.0 Selection of the Entry Strategy in the Market of Skopje

Internationalization is the business process by which a company commences its

international economic activities (Source: article notes). Internationalization of the

markets requires radical changes in the perception of the businesses regarding the

overall image of their products. The base, the core of operations of an international

business is the product or the service.

The final success of the business relies on the quality and the ability of differentiation

from the competing products – services (Levitt, 1980). A company is led to the

international arena when there are opportunities for high profits, to increase the

customer base, to establish large economies of scale and to minimize risks. Decisions in

International Marketing are defined by the following steps (Kotler, 2001):

Figure 3.1 The key decisions in international marketing

Source: Kotler P.(2001) Marketing Management: Analysis, Planning, Implementation

and control, 11h edition. Prentice Hall

The company has decided to internationalize by entering the market of Skopje,

seeking to serve as a company that organizes meetings, conferences and provides travel

services. At the same time, it will provide travelling services as a consultant again to

businesses or organizations, like arranging transportation, accommodation, the

organization of activities on behalf of the local companies and businesses that intend to

develop such activities in the market of Skopje, given all the facts mentioned above and

in relation to Skopje and the country’s progress in the recent years.

In this section we will determine the most appropriate entry strategy for the company

so as to achieve its objectives and to implement this entry strategy with success. Given

the three stages of internationalization that characterize every entry strategy of a

company into a market, and also because the company provides B2B services, it is

Selection of a market

to enter

Selection of the entry

method

Decision on the marketing

plan

Decision on

internationalization

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suggested that the company should spend some time in getting to know the domestic

market, finding a travel agency there and develop a partnership in providing the services

in the country and then, after about a year of having acquired the full picture, the

company could proceed in making a foreign direct investment (Robins and Coulter,

2002). The options at the level of foreign direct investment are as follows:

1. Wholly owned subsidiary: The wholly owned subsidiary is a new company created

by the parent company in a foreign market. The subsidiary can refer to an entirely new

business or an existing acquired local business (Mayrhofer Ul, 2004). The parent

company retains the full control of the subsidiary, an element often crucial to the

decision of the parent company between the methods of penetration in the global market

and international expansion (Papadakis, 2007).

2. Acquisition: Acquisition is the purchase of the ownership of an existing business

entity at a percentage sufficient to confirm the change of control of the company, with a

minimum of 10% ownership. The acquisition method is the fastest method of entering a

foreign market, since the acquired company is been operating, normally, in the business

sector of the acquiring company. Therefore, no major capital investments are required

for the operation of the acquired company under the new management.

3. Joint Venture: Joint venture is the collaboration between companies or groups of

companies of the same or different nationalities, to establish a new or to acquire an

existing business. It is an alliance in which the partners contribute inputs that usually

make up their competitive advantage, and share, not necessarily on an equal basis, the

assets. It is, namely, the collaboration of different forces to achieve a common goal in a

target market, which is probably unfamiliar to the parties of the agreement (Prahalad and

Lieberthal, 1998).

Strategic Alliance: Strategic alliance is a cooperation agreement between two or more

independent companies that adopt a perspective of mutual benefit and contribute the

necessary funds or other resources for its success. Essentially, this is a kind of a longer-

term joint venture with a strategic nature. The shared ownership that is established by

strategic alliances, may involve ordinary productive and financial resources, exchange

of shares or even mutual ownership.

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Based on the above and in order for the company to exploit the market dynamics, the

absence of taxation, the low labor costs, the general lower management costs within the

company but also in terms of the organization of the business trips, which will create

profits, it should be introduced in the market with the safest entry strategy which is to

acquire a local business. The company should retain the staff and the manager, and in

this way it will enter the market directly through the market knowledge of the local

workforce, will utilize the existing clientele and the government directives in relation to

taxation and the benefits the government provides to foreign companies that invest in

the country and hire staff helping to reduce unemployment. The advantages of this

strategy for the company are the following (Cavusgil et al., 2011):

1. The company will have full control of the subsidiary in the market there by

utilizing the resources, staff, clientele, market share.

2. The company will fully take advantage of the local company’s profits, which

cannot be done with the original alliance, which will be developed temporarily and only

in order to know the local market.

3. Given the knowledge of the global market its existing strategy will be diversified

and the company will be able to differentiate itself from the wider competition.

The disadvantages refer to the cost of the investment which will be high for the

company, but given that this type of strategy will better help the company to achieve its

goals and realize the benefits provided by the state, the cost of this investment will be

covered over a reasonable period of time and the company will achieve direct profits.

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5.0 Emerging Market Potential Index

This section, based on the Emerging Market Potential Index, the decision to enter this

market will be evaluated. In particular, the variables of this standard evaluation method are as

follows (Cavusgil, 1997):

Table 5.1 Emerging Market Potential Index

Dimension Weight Measures Used

Market Size Urban population (million) -2011 (World Bank )

Electricity consumption (billion kwh) – 2010 (U.S. Energy Information Administration )

Market Growth Rate

Average annual growth rate of primary energy use (%) - between years 2006-2011 (World Bank )

Real GDP growth rate (%) – 2011 (World Bank )

Market Intensity GNI per capita estimates using PPP (US Dollars) - 2011

Private consumption as a percentage of GDP (%) - 2011

Market Consumption

Capacity

Percentage share of middle-class in consumption/income (2010) (Kharas, 2011)

Commercial Infrastructure

Main Telephone lines (per 100 habitants) – 2011 (International Telecommunication Union )

Cellular mobile subscribers (per 100 habitants) - 2011

Number of PC's (per 1000 habitants) - 2012

Paved road density (km per million people) - 2012

Internet users (per 100 habitants) - 2011 Population per retail outlet – 2012

(Euromonitor International ) Percentage of Households with TV - 2012

Economic Freedom Economic Freedom Index – 2013 (Heritage Foundation )

Political Freedom Index – 2012 (Freedom House )

Market Receptivity Per capita imports from US (US Dollars) - 2012

Trade as a percentage of GDP (%) - 2011

Country Risk Country risk rating - 2012

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Source: Cavusgil S.T.(1997) Measuring The Potential of Emerging Markets: An Indexing

Approach" -, Business Horizons, Vol. 40 Nο.1, pp.87-91

For each of the above indicators we will present evidence below that will justify the

ratios that characterize Skopje (the indicators are rounded in the larger or smaller

figure).

1. Market Size: Skopje, based on the latest data, has a population of 2,200,000

residents, while the level of the net consumption of electricity is 2.55. In combination

with the low index in the population, the country’s ratio is close to 3/50.

2. Market Growth Rate: This indicates the average of primary research in Skopje

which is 6.95 in combination with the real GDP growth rate which is 6.892, the average

is 6.921, which means that the ratio is about 7/50 .

3. Market Intensity: Based on data from 2011, the index is 11.540 compared to GNI,

while with respect to the GDP the index is 9.613, the average is 10.57, which means that

the ratio is 11/50.

4. Market Consumption Capacity: The ratio is 9/50.

5. Commercial Infrastructure: By looking at the International Telecommunication

Union indicator, the ICT Indicators, Euromonitor International, Global Market

Information Database, we have the following data:

Main Telephone lines (per 100 habitants) 2011 (International Telecommunication Union )

1.9

Cellular mobile subscribers (per 100 habitants) 2011

1.06

Number of PC's (per 1000 habitants) 2012 0.7

Paved road density (km per million people) 2012

-

Internet users (per 100 habitants) 2011 0.7

Population per retail outlet 2012 (Euromonitor International )

0.5

Percentage of Households with TV 2012 1

Based on the above, the ratio is 2/50.

6. Economic Freedom: According to the indicators of Economic Freedom, the index is 6

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and the political Freedom is around 5, the average ratio is 5/50.

7. Market Receptivity: The GDP is at 1.3, while the average index of import is around 5.6,

the average here is 4/50.

8. Country Risk: The country risk is at 4.2, which is not very high.

Table 5.3 presents the Emerging Market Potential Index of FYROM on the basis of the

above:

Dimension Weight

Market Size 3/50

Market Growth Rate 7/50

Market Intensity 11/50

Market Consumption Capacity 9/50

Commercial Infrastructure 2/50

Economic Freedom 5/50

Market Receptivity 4/50

Country Risk 4/50

It is observed that the country has generally low indicators, does not have particular

dynamics in the global market, but presents some advantages like the low risk, the growth

potential of the market, and in general it is an economy geared towards growth. The market is

small but for the company it can turn out to become the center for the wider Balkan market,

at attracting companies in connection with the organization of business travels. Skopje is a

country with future perspectives for the considered company and given the analysis so far,

the evaluation of the investment decision is regarded as positive for BCD.

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References

BCD.(2014) Profile of the Company, Retrieved from http://www.bcdtravel.com/

Cavusgil S.T.(1997) Measuring The Potential of Emerging Markets: An Indexing Approach" -,

Business Horizons, Vol. 40 Nο.1, pp.87-91

Cavusgil, S. T., Ghauri, P., Knight, G., & Riesenberger, J. (2014). International business: Global

edition (3rd ed.). Upper Saddle River, NJ: Pearson Prentice-Hall

Euro Business Center-Skopje. (2012). 200 Largest Companies. [spreadsheet]. Retrieved from

http://www.eurobc.com.mk/download/vk_lista_najgolemi_2012_EN.xls

Euromonitor International, 2014, Global Market Information Database

Freedom House, Survey of Freedom in the World, 2014

Fuere, E. (2013, September 13). Macedonia – A Country in Crisis (No. 299). Retrieved from CEPS

website: http://www.ceps.eu/book/macedonia-country-crisis

Heritage Foundation, The Index of Economic Freedom, 2014

International Telecommunication Union, 2014, ICT Indicators

Kharas, H.(2011) The Emerging Middle Class in Developing Countries, Brookings

Kosmos.(2013) Residence permit to foreigners who invest in property and citizenship to those who

make large investments, Retrieved from: http://www.iefimerida.gr/apenews

Kotler P.(2001) Marketing Management: Analysis, Planning, Implementation and control, 11h

edition. Prentice Hall

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KPMG. (2013) Investment in Macedonia. Retrieved from

http://www.kpmg.com/MK/en/IssuesAndInsights/ArticlesPublications/Documents/2013-

Investment-in-Macedonia-website.pdf

Levitt, T.(1980) “Marketing Success through Differentiation of Anything”. Harvard Business

Review, Vol.58

Mayrhofer Ul. (2004), The Influence of National Origin and Uncertainty on the Choice between

Cooperation and Merger-Acquisition: an analysis of French and German firms, International

Business Review, Vol.13, No.1, pp. 83-99.

Papadakis M.V. (2007), Corporate Strategy: Greek and international experience, Vol. A, 5the ed.,

Benos Publications, p. 397.

Prahalad C. K. and Lieberthal, K., (1998), The End of the Corporate Imperialism, Harvard

Business Review, pp. 83-99.

PWC. (2014). Guide to Doing Business and Investing in Macedonia. Retrieved from

http://www.investinmacedonia.com/sites/invest/files/content_resources/PwC%202014%20-

%20Guide%20to%20Doing%20Business%20and%20Investing%20in%20Macedonia%2020

14.pdf

Robins S.P. and Coulter M.(2002) Management, Prentice Hall, 7th edition

Thompson, A.A. & Strickland, A.J. (2001): Strategic Management, McGraw-Hill, Irwin.

U.S. Energy Information Administration, International Energy Annual

World Bank, World Development Indicators

ΒΤΙ. (2014). Macedonia Country Report. Retrieved from http://www.bti-

project.org/reports/country-reports/ecse/mkd/index.nc?tx_itaoreport_pi1[action]=show