By Advisor Aktham Fayoumi
One of the core responsibilities that guide the direction of investment institutions is the classification of legitimate versus illegitimate investment activities.
This classification plays a crucial role in reducing the uncertainty that typically accompanies investment in new global markets.
However, when considering the cost factor, business operation costs are essentially transaction-related expenses,
also known as transaction costs, which are largely driven by economic uncertainty.
In emerging economies, investments are often subject to the control of local institutions.
This reality creates hesitation among international investors when considering entry into such markets.
It also fosters a perception that local investors in the host country hold a competitive advantage over foreign investors.
To address the fears and challenges associated with global market entry, Binding International Commercial Arbitration (BICA) has emerged as a third-party mechanism offering solutions to what often appears to be an unsolvable issue.
Hence, the importance of establishing a stable institutional framework governed by clear, transparent commercial laws has become paramount.
Nevertheless, strategic decision-makers must also consider the nature of institutional frameworks during periods of institutional transformation.
Just as change is a constant in life, institutions are not immune to transformation. Institutional shifts involve fundamental changes in the formal and informal rules of competition, which directly affect investors as market players.
Among the factors that influence market entry strategies in emerging economies is the foreign investor’s need for various local resources.
This need creates a dynamic of simultaneous effects—balancing the acquisition of local resources while managing the implications of foreign investor entry.
This interplay can significantly impact market efficiency, especially as international investors increasingly seek access to both tangible and intangible local resources.
Another major barrier to market entry is high sunk costs—expenses that cannot be recovered if the investor or firm chooses to exit the market.
Examples include capital inputs tied to a specific industry with no resale value, such as marketing, advertising, or research costs.
These high costs, including exit costs, act as a deterrent to new entrants. Investors risk incurring substantial losses if they are forced to withdraw.
A practical illustration of this risk occurred when British Telecom (BT) announced the cancellation of its loss-generating joint venture with American telecom giant AT&T in 2001.
The closure led to a reduction of nearly 40% of BT’s workforce, a decline in market value, and a surge in restructuring costs.
In conclusion, the strategic takeaway is clear: when entering a new market, conduct thorough due diligence, invest in understanding cultural differences,
and integrate ethical decision-making into the organization’s strategic processes.
This approach enhances long-term resilience and minimizes the risks associated with unfamiliar and complex markets.
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