Analysis of MNC
ANZ is a multinational banking company based in Australia which was established on October 1951 as the bank of Australasia merged with the Union Bank of Australia forming ANZ bank (Anz Official, 2017).
ANZ started its foreign investments in Honiara, Solomon Islands on 1966 as it commenced operations there. ANZ gradually started expanding their foreign investments as they established representative office in Tokyo, Japan in 1968, and shortly after, in the United States, Europe, and some Asian countries. Recent financial record published by ANZ shows that the company earns a revenue of over 21 billion AUD in 2015 from its operations in more than 34 countries in the world, employing a total of more than 50 000 people worldwide (Shareholder ANZ, 2015).
ANZ first established its existence in Indonesia in 1973, by opening a representative office. ANZ then took over Westpac’s 85% stake on its joint venture with Panin Bank, and changed its name from PT Westpac Panin into PT ANZ Panin Bank, which was increased to 99% and renamed to PT ANZ Bank Indonesia in 2011 (Kea New Zealand, 2015). ANZ currently has 28 branches in 11 cities across Indonesia under its own name, providing customers with services such as credit cards, mortgages, and personal loans (ACICIS, n.d), while also holding 39 percent stake in Indonesia’s Panin bank (Koh and Somasundaram, 2015).
Uppsala Model:
Internationalisation of ANZ started in 1966 when it commenced operations in Solomon Islands. This internationalisation of ANZ can be further explained using Uppsala’s model.
Uppsala’s model argues that firms start internationalising by gradually increasing their activities in foreign market by starting their investments in countries that are similar to that of the host country, or are geographically close in distance in order to gain knowledge about the market, make commitments to the market, and make commitment decisions (Johanson and Vahlne, 1977).
ANZ started its internationalisation by commencing operations in Solomon Islands, which is geographically located very close to Australia. ANZ then started investing in United States, where it shares similar culture to Australia, its home country (Figure 1: Hofstede's Cultural Dimensions). Soon after, ANZ started establishing branch in Singapore, entered Indonesian market through joint venture, and started to expand its investments around Asia as it opened branches in Vietnam and China. This indicates how ANZ attempt to start internationalising by investing in a nearby country and a country of similar culture, to understand the market before moving to invest in a more distant and culturally different country gradually.
Hence the findings above specified on how ANZ’s internationalisation process could be explained using Uppsala’s model.
Host Country Analysis
Indonesia is the 4th most populated country in the world, with over 260 million people living in the country, which 74 million are considered as middle class (Sharpe,2014). Moreover, Indonesia has the world’s 16 largest economy, and southeast Asia’s biggest economy with a nominal GDP of over 932,000 US Dollars (World Economic Outlook Database, 2016). Indonesia’s economy gradually grew in the period of 1967-1997, with an average GDP growth of 6.9%(Van Der Eng, 2008). However, Asian financial crisis in 1998 led to a drastic decrease on Indonesia’s GDP. Despite the decrease, Indonesia has regained its growth with over 5% of GDP growth each year since 2004, and is expected to grow even more in the upcoming years.
HDI
Indonesia has a Human Development index score of 0.69 in 2015, with an average annual growth of 0.94% (Knoema,2015). This result indicates that Indonesia has a medium human development
Porter’s Diamond Theory
The Porter’s diamond theory would further justify on whether Indonesia provides ANZ with regional advantage in terms of its political economy.
Factor condition: Indonesia has a population of more than 260 million with over 70 million middle class, which is expected to grow to over 141 million by 2020 (ICEF Monitor, 2017). Hence would allow ANZ to give loans to more people and thus, would be able to receive more revenues.
Demand Condition: Indonesia’s geographic is very complex, with over 18000 islands and 260 million people spread throughout the archipelagic country, would increase the chance of foreign banks like ANZ to compete with commercial banks by opening branches in certain islands and provinces that are not within reach by other banks.
Firm strategy, structure, and rivalry: Global Business Guide Indonesia (2016) stated that Indonesia currently has over 120 conventional banks, 10 foreign banks, 16 join ventures banks, 32 non foreign exchange banks, 35 foreign exchange banks, 26 regional development banks and hundreds of secondary bank in agrarian areas. Despite having hundreds of banks, the top ten banks dominate the market with a market share of 80%. However, the financial services authority of Indonesia is looking to reduce the number of conventional banks to 60, which would allow foreign banks to compete and invest in the banking industry in Indonesia. (Global Business Guide Indonesia, 2016).
The Porter’s Diamond model analysis above shows that ANZ does have a regional advantage in Indonesia due to the country’s political economy factor by having three conditions that satisfy the needs of ANZ as a banking company.
Foreign Entry Strategy
Foreign entry strategy is one of the most important strategic decision when a company decides to enter a foreign market as it plays a very important role in the success of the company in the future. There are a number of strategies a company could use to enter a foreign market, which vary with cost, risk, and degree of control which can be exercised. Some examples of strategy firms can use to enter a foreign market are: Joint Ventures, Exporting, and Subsidiaries
ANZ enters Indonesian market through Joint Venture, where it shares ownership and control over property rights and operation with one of Indonesia’s top performing bank, Panin Bank, which has total assets of over 19 Billion AUD (Panin Bank, 2016).
The joint venture mode requires lower investments and thus risks, return, and control are divided to the extent of equity participation of firms in the joint venture (Agarwal and Ramaswami, 1992). In the case of PT Bank ANZ Indonesia, 99% of the shares are owned by ANZ, and only 1% owned by Panin Bank.
Furthermore, firms entering a foreign market through Joint ventures are more likely to succeed, as the firm would be working with a prominent brand that would be able to promote the firm entering (Business Town, 2017).
However, there are a few challenges that exist in Joint ventures. For instance, it would be challenging for parties in the agreement to deal with different working cultures, arrangements, and management styles between the parties involved. Moreover, when one of the parties made a poor decision for the joint venture, the outcome of the project could be highly affected and hence would affect revenues received and relationship between the parties (Legal Vision, 2016).
OLI-Framework
The OLI framework could be used to further analyse on why ANZ decided to enter Indonesia’s market and why they chose Joint Venture as a strategy to enter.
Ownership Advantage
ANZ is one of the biggest banks in Australia, having total assets of 889.9 Billion AUD (ANZ Shareholder, 2015). When ANZ first acquire 85% of PT WestPac Panin bank’s share in 1993, ANZ has a competitive advantage over other Indonesian banks in terms of its total assets and the joint venture with Panin Bank would assist ANZ in achieving a higher brand recognition in the country.
Location Advantage
ANZ’s joint venture in Indonesia was established in 1993 by purchasing 85% shares, with the remaining 15% being owned by Panin Bank (Kea New Zealand, 2015). The decision ANZ made to stimulate their performance on the Asian market through Indonesia was an excellent decision in terms of location, as Indonesia’s economy is expected to grow much more for at least the next few decades due to demographic factors such as its median age of 28 which is 10 years younger than in most major advanced countries, and the rise of working age population (Elias and Noone, 2011). Moreover, Indonesia is claimed to have one of the world’s fastest growing middle class, with 90 million Indonesians expected to be in the consumer class by 2030, and hence would increase Indonesia’s annual spending to $1 Trillion (Emerhub, 2017).
Internalisation Advantage
Management of company is relatively not complicated as ANZ currently holds 99% of the share and would enable them to manage most of the company due to the major share they hold. Considering that ANZ has a huge ownership advantage, it would not be difficult for them to manage their investments in Indonesia.
Conclusion
Indonesia has a very profitable market and companies all over the world are looking to invest in various sectors of Indonesia’s market. The OLI framework indicates on why ANZ went on to invest in Indonesia’s banking industry, after looking at the fact that it has all three advantages: Ownership, Location, and Internalisation present in Indonesia.
Key International Business challenges for ANZ
International business challenges could affect the performance and growth of multinational companies investing in a foreign host country. Two key International Business challenges ANZ could face with its investments in Indonesia are Foreign laws and regulations, and Currency Rates of Indonesia.
Foreign laws and regulations
Indonesia’s government tends to embrace in a policy that would benefit domestic industries from foreign competition when the economy is doing well (Brown,2012). Hence it could be possible that the Indonesian government would reduce the current 99% shares foreigners are allowed to hold in Indonesian banks, which would affect investments ANZ has in Indonesia, forcing it to sell certain amount of its shares to domestic parties.
Currency Rates
Currency rates is a very important source of revenue of banks, as banks provide services such as foreign exchange dealing services, and transferring of money in different currencies (Rationalfx, 2017). Indonesia is currently looking at a plan to redenominate its currency, and this would be a very high risk as massive devaluation of currency might occur if the country fails to maintain a low inflation rate, stable economic growth, and domestic price stability (Lianto and Suryaputra, 2012). Hence if the three factors mentioned are not maintained, the Indonesian currency would be devalued and would cost ANZ a very huge lost.
Recommendations regarding Sustainable Development Goals
Zadek (1998) argued that it is necessary for multinational corporations to take into consideration of the social, ethical and environmental perceptions in order to satisfy stakeholders needs and motivate their future actions.
Hence the United Nations (UN) came up with Sustainable Development goals, which is a set of 17 “global goals” to end sustainable development issues such as ending poverty and hunger, improving health and education, and fighting climate change (United Nations, 2015).