Reasons why Companies may opt to exit/divest from their foreign markets

Reasons why Companies may opt to exit/divest from their foreign markets

Sustained losses – Key markets are often entered with a long-term perspective. Most companies recognize that an immediate payback of their investments is not realistic and are willing to absorb losses for many years.

Difficulty in cracking the market – A company may also decide to pull the plug (stop/close) when it has difficulty to break the market in the host country. This was the main reason why Nokia decided to stop making and selling mobile phones for the Japanese market in 2008.

Volatility / instability – Companies often underestimate the risks of the host country’s economic and political environment. Many multinationals have rushed into emerging markets lured by tempting prospects of huge populations with rising incomes. Unfortunately, countries with high growth potential often are very volatile. However, it is easy to ignore or downplay the risks associated with entering such markets, such as those stemming from exchange rate volatility, weak rule of law, political instability, economic risks, and inflation. Numerous multinational companies pulled out of Argentina and Indonesia in the wake of these countries’ economic turmoil. As the then CEO of a major multinational wisecracked during an analyst meeting: ‘‘I wish we could just close Argentina.’’

Premature entry – As we discussed earlier, the entry-timing decision is a crucial matter. Entering a market too early can be an expensive mistake. Entries can be premature for reasons such as an underdeveloped marketing infrastructure (e.g., in terms of distribution, supplies), low buying power, and lack of strong local partners. Often exiting a market is the only sensible solution instead of hanging on.

Ethical reasons – Companies that operate in countries such as Myanmar or Cuba with a questionable human rights record often get a lot of flak in other markets. The bad publicity engendered by human rights campaigners can tarnish the company’s image. Rather than running the risk of ruining its reputation, the company may decide to pull out of the country. Heineken, for instance, decided to pull out of Myanmar in 1996 under pressure from a boycott of its products triggered by human rights activists.

Intense competition – Intense rivalry is often another strong reason for exiting a country. Markets that look appealing on paper usually attract lots of competitors. The outcome is often overcapacity, triggering price wars, and loss-loss situations for all players competing against one  another. Rather than sustaining losses, the sensible thing to do is to exit the market.

Resource reallocation – A key element of marketing strategy formulation is resource allocation. A strategic review of foreign operations often leads to a shake-up of the company’s country portfolio, spurring the MNC to reallocate its resources across markets.

Just as there are barriers to entry, there are exit barriers that may delay or complicate an exit decision. Obstacles that compound divestment decisions include:

Fixed costs of exit – Exiting a country often involves substantial fixed costs. In Europe, several countries have very strict labor laws that make exit very costly (e.g., severance payment packages). It is not uncommon for European governments to cry foul and sue a multinational company when the firm decides to shut down its operations. Long term contracts that involve commitments such as sourcing raw materials or distributing products often involve major termination penalties.

Damage to corporate image – A negative spillover of a divestment decision could also include damage to the firm’s corporate image if plant closures lead to job losses. Nokia’s decision to close down its manufacturing operations in Germany and shift them to more cost-friendly sites in Eastern Europe led to calls for a boycott of the firm’s phones in Germany. Kurt Beck, the head at the time of the Social Democrats SPD) told a local newspaper that ‘‘As far as I am concerned there will be no Nokia mobile phone in my house.

Disposition of assets – Assets that are highly specialized to the particular business or location for which they are being used also create an exit barrier.

Signal to other markets – Another concern is that exiting one country or region may send strong negative signals to other countries where the company operates. Exits may lead to job losses in the host country; customers risk losing after-sales service support; distributors stand to lose company support and might witness a significant drop in their business. Therefore, an exit in one country could create negative spillovers in other markets by raising red flags about the company’s commitment to its foreign markets.

Long-term opportunities – Although exit is sometimes the only sensible thing to do, firms should avoid shortsightedness. Volatility is a way of life in many emerging markets. Four years after the ruble devaluation in August 1998, the Russian economy made a spectacular recovery. The country became one of the fastest growing markets worldwide for many multinationals, including Procter & Gamble, L’Oreal, and Ikea. Rather than closing shop, it is often better to pay a price in the short term and maintain a presence for the long haul. Exiting a country and re-entering it once the dust settles, comes at a price.

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