STRATEGIC INVESTMENT OPPORTUNITIES IN IRAQ



STRATEGIC MANAGEMENT (MBA700)

STRATEGIC INVESTMENT OPPORTUNITIES IN IRAQ

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Cevdet KIZIL

(Graduate MBA)

Southern New Hampshire University

Strategic Management (MBA700) – Dr. Nicholas Nugent

July 28, 2004

Manchester, New Hampshire

STRATEGIC INVESTMENT OPPORTUNITIES IN IRAQ

Abstract

The primary objective of this study was to analyze the strategic investment opportunities in Iraq from the point of view of a company looking to identify and exploit business opportunities. For that purpose, a great deal of information was gathered from the SNHU Shapiro Library, course notes, internet websites and the Strategic Management book (Arthur A.Thompson, Jr. & S.J. Strickland III, 13th Edition) Chapter 6 powerpoint slides.

The major findings indicated that the business environment in Iraq was not safe and government was not stable. As a result, the risk was high. On the other hand, the readings showed that there were still many companies doing business in Iraq, though most of them were large-scaled.

The author concluded that the large-scaled companies could go into a lot of sectors in Iraq with taking the necessary security preparations, investing some of their assets in this country by diversifying their risk. However, investing in Iraq was not considered to be convenient for the small-scaled companies since their financial condition would not accept any mistake, limiting their chances to spread the risk. Finally, the best strategy for investing in Iraq was decided to be establishing joint venture partnerships with local Iraqi firms to get advantage of their knowledge about the market. That way, risk will be shared, both parties will win and good relations will run with the United States and Iraqi governments. The Iraq investment is profitable in the long-run.

Internal Environment

- a) Suppliers

Generally speaking, my outside research shows that the large-scaled companies operating in Iraq usually choose to supply their goods and services from their home countries or to supply them from their Iraqi partners in the host country. On the opposite side, the small-scaled companies experience some difficulties since they need further contacts to find suppliers in Iraq where they are limited. In other conditions, their financials draw them back.

- b) Buyers

The latest trends about the Iraqis as consumers represent us some positive results. For instance, since the summer of 2003, consumption has increased as a result of an increase in wages and the opening of international trade. The income per capita and the purchasing power are also going up in the country with a population of 25 millions educated people. Moreover, after the Saddam regime, the Iraqis are now open to all products and enjoying the beauty of free market. They had a long-suppressed demand for the modern goods and services which were denied to them for years.

- c) Rivals

At the moment, not so many rivals exist in Iraq because of political instability and insecurity. The rivals are generally global companies which are economically powerful. As an example, General Electric, Proctor & Gamble, Siemens, Samsung, Motorola, ChevronTexaco, Total Oil, Bechtel, Halliburton, Baker Hughes, Schlumberger, Flowserve, Fisher-Rosemount are some of the leading companies doing business in Iraq. Besides, the United States, India, Korea, Russia, Indonesia and Germany are some of the important countries investing in Iraq.

- d) New entrants

Iraq is a tough country for the new entrants, especially for the small businesses since contracts are very expensive, security and insurance costs sum up to 30% of total expenses, and finding suppliers are sometimes time consuming and requires contacts. On the other hand, for global companies which are financially strong and have a lot of contacts, the scenario is much more different.

External Environment

- a) Economics

The unemployment rate in Iraq is 30% and average labor wage per day is $4 per day. The labor force is educated and willing to work. GDP is some $10 billion dollars per year, excluding the oil sector. The GDP growth for 2004 is 8.8 and it is forecasted to be 7.9 between 2005 and 2009. The inflation rate is currently 14.0 for 2004 and is estimated to be 11.00 between 2005 and 2009. Iraq’s oil revenues roughly double GDP to about $20 billion annually. Iraq produced 2.04 million barrels per day in 2002, but Iraq’s oil production dropped to an average of 1.3 million barrels per day in 2003. Electricity production has reached 4,100 megawatts per day and Iraq owes some $120 billion in debt and interest payments to international lenders and creditor nations.

Iraq is also a large consuming market for all sorts of products including food supplies, clothing, cigarettes, pharmaceuticals, detergents, furniture, paper products, cement, steel, fertilizers, cables, cars, tractors, computers, white goods, satellite dishes, electronics, mobile phones, generators, and air-conditioning among others.

- b) Politics

The political environment in Iraq is not completely stable at the moment. This is disadvantageous for foreign investment since a lot of firms; especially the small-scaled companies avoid contracts. They fear that after the U.S. government leaves Iraq, their contracting partners can lose their authority, or the new Iraqi government may decide not to honor what the occupation authorities promised. But large-scaled companies are less affected by the political environment since they can take risks easier.

- c) Investment Opportunities

Iraq has a high risk for investments and its ratings are usually low Cs or Ds. However, various investment opportunities are waiting for companies in Iraq and we should keep in mind that higher the risk means higher the return.

On the services side, the Iraqi market needs consulting, banking, insurance, health and medical services, water and sanitation services, agricultural investment, petroleum services, chemical products, hotels, schools, land transport, seaports, airports, rail systems, advertising, auditing, printing, courier services, information technology, electric power plants, as well as, legal and management support services among others.

- d) Laws & Regulation

Even tough the legal and constitutional framework in Iraq is still incomplete; the Coalition Provisional Authority (CPA) has come up with some laws and regulations which are really very good for foreign investors. The customs tariff rate is set at 5% while the income tax rate is determined as 15%. Furthermore, 100% foreign ownership of business in all sectors except oil and mineral extraction is now permitted.

Executive Summary

Consulting, banking, insurance, medical, petroleum, tourism and transport sectors are thought to be the best areas for investment in Iraq. The best strategy for doing business in Iraq is to joint venture with Iraqi private firms because of the importance of local language skills, the importance of understanding local culture and the need to understand how business gets done in Iraq. So, risk will be shared, support will be gained in dealing with government regulations and understanding of local competitive environment. Strategic joint ventures are always a win and win approach, prevents over-competition and lowers the cost of capital. This strategy will let us access to new customers, obtain access to valuable natural resources, help achieve lower costs, capitalize on resource strengths and competencies, gain scale economies in production and marketing, share distribution facilities and dealer networks and direct combined competitive energies toward defeating mutual rivals. When forming our joint venture, we should pick a good partner sharing our common vision, be sensitive to cultural differences and recognize that the alliance must benefit both sides. Finally, time is also very important! Just as we discussed in the class, "The cost of being late exceeds the cost of being right". So, the sooner our company gets into Iraq the more likely it is to win business and influence. We must form our strategic joint venture with our own security and the earlier we go in Iraq, the larger the portion we can expect. Our investment will pay off in the long-run since not many people will play for this horse.

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