Topics: Investment, Economy, Economics Pages: 5 (1438 words) Published: October 17, 2013
Spain’s Telefonica

1. What changes in Political and economic environment allowed Telefonica to expand globally?

The changes that were involved in the political and economic environment, which allowed Telefonica to start expanding globally, were privatization and deregulation. In addition economic growth, removal of many restrictions on FDI and programs that opened to foreign investors made some countries more attractive to Telefonica for expansion. Spain’s Telefonica was established in the 1920s being a state-owned national telecommunications monopoly. Soon, the Spanish government privatized it, as well as deregulated the market for Spanish telecommunications. Due to these changes, Telefonica has a reduction in workforce, rapid adoption of new technology and began to focus on the increasing profits. Telefonica began to grow and expand globally. Hence a general shift towards democratic political institutions and free market economies encourages Telefonica to invest in different nations especially in developing nations such as countries in Latin America.

2. Why Telefonica initially focused on Latin America? Why was it slower to expand in Europe even though Spain is a member of European Union?

While changes were being made, Telefonica was looking for growth. The choice of a firm to engage in FDI occurs logically and empirically prior to the decision about where to locate. The major determinants for choosing a location for FDI are markets that have strong potential for growth, openness of recipient country to foreign trade, production cost in recipient countries, trade agreements, similarities in culture and language and the like. The markets were growing rapidly in Latin America and Telefonica acquired many companies, which were once part of state owned telecommunication monopolies. Latin America was also experiencing a rapid change of deregulation and privatization across the region. Moreover, Telefonica focused on Latin America because of similarities in the development of the market, shared common language and deep cultural and historical ties with Spain. Latin American markets were also increasing the adoption rate and usage, including Internet and mobile phones. Since Regional trade agreements are important determinants of FDI. Telefonica was slower to expand in Europe because there had been an implied agreement between the national telecommunications companies that they would not invade each other’s markets. By 2005, this agreement broke down when France Telecom entered Spain.

3. Telefonica used acquisition rather than greenfield ventures as its entry strategy. Why do you think this has been the case? What are the potential risks associated with this entry strategy?

Strategic alliance
Strategic alliance refers to cooperative agreement between potential or actual competitors. It may range from a short-term contractual agreement for cooperating on a particular task to formal joint ventures in which two or more firms have equity stake. This helps to circumvent entry barrier, share fixed costs of developing new product or processes and to bring together skills and assets that companies would not do separately. However, strategic alliances or joint ventures allow competitors a low cost route to new technology and markets. In short-term strategic alliance may generate profits but in long term it hollow out firms leaving them with no competitive advantage. If firms are not careful they may end up transferring more of it knowledge and skills without receiving much benefits.

Why firms choose Acquisition instead of licensing
A company that possesses an intangible asset (e.g. proprietary technology) enjoys a potential ownership advantage over other companies in foreign markets. Under these conditions the firms may consider maximizing the benefits of its ownership advantages by licensing a foreign company to produce its goods and services. Nevertheless, if there are high transaction costs associated with...
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