Novartis in Bolivia Expansion Project Essay

Understanding the political structure of a country is very important when trying to do business internationally. When multinational corporations plan to invest in a new country they must understand the political system and culture. Bolivia has faced political instability for over the past century. Since Evo Morales was elected as president, many changes have been made to protect some of the natural resources and mandate foreign investment. Morales’ political influence has played a large roll in the regulation of foreign investment and business. Since his inauguration, Morales has nationalized the hydrocarbon industry and the telecommunication industry. This has caused many companies to negotiate new contracts. Although Bolivia’s legal framework is open to foreign investment, many foreign companies and investors are affected by many of the inconsistent regulatory decisions. These issues often cause uncertainty with investors when deciding to invest. In addition the easily corrupted judicial system also causes a threat to many investors that decided to invest in Bolivia. Several problems that come up when investing in Bolivia result from the weak judicial system. Many of the property and contractual rights might be enforced, but the process can take a lot of time due to corruption and political influence. This also could be a potential threat to companies that want to expand into Bolivia. Political protests against the government are another issue that might affect foreign investors when attempting to do business in Bolivia. Many of these protest cause disruption to the transportation of goods. Overall the political environment of Bolivia could potentially cause issues when doing business; we might put ourselves at risk of losing major profits or even expropriation by the socialist form of government currently established in Bolivia. Economic Analysis Bolivia has struggled economically in the past thirty years but has reached stability. This is partially due to low population growth that has kept the labor supply limited. Another key factor to the economic struggle in Bolivia is due to the political and social conflicts within Bolivian society. Many changes have been implemented after the economic crisis in 1984-1985, where they suffered from extreme hyperinflation. The main focus of the government after the period of hyperinflation was to maintain price stability, create conditions for sustained growth, and alleviate poverty across the country. Currently Bolivia relies heavily on foreign assistance to finance developmental projects. Direct foreign investment has contributed much of the growth experienced in private investment in Bolivia. Bolivia’s primary sectors, Agriculture/Forestry and Mining, have created economical opportunities for Bolivia. Agriculture contributes to almost ten percent of Bolivia’s gross domestic product and almost half of their work force is employed in this industry. One of their most profitable products is coca in which they are currently the third largest cultivator. Mining has played a big part in Bolivia economic growth as well. Many local miners are employed by small-scaled operations throughout the country. Although Bolivia is known to have over 5. 4 million tons of lithium, much of the lithium deposits are not mined due to the disturbance of the country salt flats, which are a big feature of tourism. Currently the United States is one of Bolivia’s largest trading partners, importing $707 million dollars in 2010. There are no laws directly regulating competition but the government does have some regulation on the activities companies have. Bolivia has struggled economically but are now more efficient Social Analysis Many of the issues arising socially are result of the living conditions and political reform. Although much of the population is living in poverty, two-thirds of Bolivia’s population is active within the economy, either working for corporations or on a non-contractual basis. One issue that the majority of the population is dealing with is working qualifications. Many people growing up in Bolivia may only attend one year of schooling. Some of the difficult living conditions and political influences can create a hostile environment throughout the country. Protests against the government are a common issue that might affect foreign investors when attempting to do business in Bolivia. Many of these protest cause disruption to the transportation of goods and can effect business decisions. Violent and disruptive social protests occur often in some of the major cities that have affected companies. There have been cases where the major airports have been shut down for over twenty days due to protesting and social unrest. The government is attempting to increase citizen involvement in politics in order to help decrease some of the protest. Through many political and economical reformations, Bolivia has stabilized many of the past issues they were facing but is still a difficult place to do business, and through time it has deterred many international companies from entering the market. Country Risk Analysis and Globalization As mentioned before, Bolivia constitutes one of the least developed and poorest countries in Latin America and one of the most isolated countries in South America. Bolivia’s socialist leader, Evo Morales, was elected because of his involvement with the anti-globalization movement. He has reduced poverty within the country, redistributed wealth, and has nationalized a significant amount of the energy sector. He has promised to favor domestic consumption of natural gas over export. He has supported mainly by the poor majority who mostly reside in the western highlands. The population residing in the eastern areas and voters from the middle and high class who have most of the wealth, are concerned about his policies. Those in higher social classes are concerned with the neo-liberal global economy while many in the mestizo class support the opportunities that come from participating in the global economy. When it comes to the country’s globalization, Bolivians have a deep love for the natural richness of their country and are fighting to protect it. Bolivia is rich in nature and has many natural resources to offer. The nature’s conservation of the country is under pressure because of global interests, but it’s an opportunity for Bolivia that can be beneficial to them and help create more stability and less inequality among the country. Bolivia has the second largest reserves after Venezuela and looks like the perfect supplier for natural gas. But in 2005, a hydrocarbons law was passed by the government that imposed higher royalties and required foreign firms who were operating under risk-sharing contracts at the time, to surrender all production to the state energy company in exchange for a predetermined fee. The hydrocarbons sector has raised question as to whether Bolivia has the sector’s capacity or not to grow. Bolivia will continue to supply Brazil and Argentina with their natural gas but their long-term market potential is at risk. There are a number of factors that may reduce the growth of the industry; increased political risk, delays in infrastructure projects, and insufficient funds for production. The country needs private investment to increase production, but if they continue to pressure investors this is going to be very difficult. Bolivia has had problems with political instability in the past years, which has affected investments in the sector. They had a large fall in investments in exploration and production of about $63 million in 2006. It has had a downfall on the amounts of gas delivered to Argentina since the volume of production decreased in 2007. They had initially agreed that Bolivia would deliver 7. 7 million cubic meters per day per year to Argentina, but Bolivia was only delivering about half of that. Bolivia’s supply to Brazil was almost quadruple of the7. 7 mcm/d per year to Argentina, in turn, Bolivia asked Brazil for help. They are currently working on balancing and maintaining the gas deliveries to Argentina. Political instability in Bolivia has caused them to hinder the opportunity of exporting gas to Chile, to Mexico through liquefied natural gas facilities, and to the U. S. through a Peruvian or Chilean port. Even though Bolivia has faced political instability, they have never stopped its gas supplies to Argentina or Brazil. In consequence to the political instability, the lack of investment in the country has reduced much of the production volumes. The Bolivian government has improved its relationships with other governments regarding negotiations; they also have improved their relationship with Brazil after the gas industry nationalization. Contracts of new investments have been made to initiate more production giving a positive signal for the future gas supplies in the region promising the security of supply for Argentina and Brazil. Although government relations have improved, there is still a risk of markets not developing because of Bolivia’s internal political problems. But if the government avoids these political problems and a more consistent policy framework is made, the future looks promising for Bolivia. Bolivia, being an underdeveloped country, poses economic risks to other countries entering their market. Future growth of the country will be constrained by declining foreign investment and the country’s high debt. Bolivia has such high poverty rates, that growth probably won’t reach levels to sufficiently relieve the rates. President Morales opposes free market economic policies and instead supports state involvement in policy making and more government spending on health, education, and infrastructure. The government continues to negotiate for further debt relief of the country. According to the Natural Hot Spot study by the World Bank, Bolivia has the 32nd highest economic risk exposure to three or more hazards. It’s exposed to detrimental hazards due to the country’s geographic location as well as the vulnerability of its population and infrastructure. In the past, the country has experienced a series of emergencies caused by many natural disasters such as floods; hail storms, landslides, and mudslides. The levels of vulnerability in Bolivia have increased due to poverty factors and repeated natural disasters in the same regions. Industries and the general population are affected by these events since 49 percent of the population works in the service sector, 40 percent work in agriculture, and 12 percent in industry. Bolivia’s legal framework remains generally open to foreign investment. However, foreign firms may be affected by inconsistent regulatory decisions, unfavorable interpretations of laws, and a corrupted judicial system. The Investment Law provides for national treatment of foreign firms and guarantees the foreign firms their profits, the free exchange of currency, and the right to international arbitration in all sectors. Laws that govern activities having to do in the mining and hydrocarbon sectors authorize joint ventures, and association of services to state-owned corporations. The Hydrocarbon Laws, which was issued in May of 2005, required investors to adapt to new contracts within 180 days, forced production of hydrocarbons to release all hydrocarbons to the state, and forced an additional tax of 32 percent on revenues. The law also required that before exporting, companies sell their hydrocarbons and satisfy the domestic market at factitious prices set by the hydrocarbons regulator. Bolivia’s currency is freely convertible at Bolivian banks or exchange institutions. The official exchange rate is determined by the Central Bank who auction’s dollars daily; the bank offers a set amount of dollars and offers a minimum price. The Banking Law establishes regulations for foreign currency hedging and allows banks to have accounts in foreign currencies. There are no restrictions of any sort on transfers of currency. In 2007, the Central Bank established a one percent fee for any money transfer that is larger than one thousand U. S. dollars. Any hard-currency cash larger than ten thousand U. S. dollars must be authorized by the Central Bank and Ministry of Finance if it’s leaving or entering the country. Bolivia’s past has hindered the investment of foreign firms is their country. Through their political and economic instability the country has yet to fully flourish in the agricultural sector. Some low population growth as well as low life expectancy and a high rate of disease has constrained the labor supply and prevented industries from flourishing. Overall the country has been not too open to globalization due to the current political regime but we believe that they are going to start shifting in the future to more open market and less rigorous import policies to improve their economy. Novartis Overview of the Company  In 1996 Novartis was created, one of the biggest healthcare companies in the world. This multinational pharmaceutical company was formed after the merger of Sandoz and Ciba-Geigy. Novartis is not only a worldwide leader in pharmaceuticals but as well in vaccines and diagnostics, Sandoz, Alcon, animal health, and over the counter. Sandoz is the generic pharmaceutical division of Novartis. It is the second in net sales in 2010 with $8. 5 billion USD, behind pharmaceuticals at $30. 5 billion dollars. Sandoz offers affordable and high quality medicines to everyone. The Alcon division is the eye care division of Novartis. These products are to improve and protect eye vision. OTC or also know as over the counter, are products that Novartis makes that do not require prescription. These products are designed to prevent medical illness as well as treatment from the comfort of your home. Not only is Novartis for the benefit of human health but as well for animal health. With animal health products, Novartis helps treat and prevent diseases in pets around the world. Novartis global headquarters are located in Basel, Switzerland. Even though their headquarters are located in Basel they operate in over 140 countries. They don’t only make and provide products to both humans and animals but also have research facilities. The pharmaceutical research facilities headquarters aren’t located in Basel. The Novartis institute for biomedical researches is located in Cambridge, Massachusetts. These research facilities over the world are to innovate and improve medicines that will treat diseases and improve the health of humans and animals. With its research facilities all over the world Novartis is determined to finding vacancies and treatments for diseases in developing nations. Like every MNC Novartis has a mission statement. Discover new medicine and products for all of their patients is a crucial mission in all of Novartis. They don’t only want to discover new things to improve the life of patients but they want to expand their innovations. This MNC wants to improve human and animal life as much as possible. Novartis official statement states: â€Å"We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life. (www. Novartis. com) In 2000 Novartis listed its shares in the New York Stock Exchange market at 37. 24 a share. With it’s highest in 11 years being 64. 52. Novartis doesn’t only have shares in NYSE but also has shares in the SIX Swiss Exchange. In 1996 Novartis opened their shares in the Swiss market at 35. 06 a share. In 15 years in the Swiss exchange market Novartis shares were the highest 76. 80 a share in 2006. You can say Novartis has double their market value since they went public.