STRATEGIC MANAGEMENT (MBA700)
STRATEGIC INVESTMENT OPPORTUNITIES IN IRAQ
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 overcompetition 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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