Amazon Web Services Expansion to Russia and Mexico
Executive Summary
While globalization has posed numerous potential opportunities and threats in the international business arena, many of these opportunities and threats are specific to individual countries (Zhuplev, 2016). Therefore, a country risk analysis becomes a crucial element to consider for companies doing business on the international scale. In this view, country risk analysis has been the subject of extensive research in recent times with a focus on a range of opportunity and threat factors such as the economic, political, social and technological environments. The type of institutions involved in these analyses is equally broad ranging from debt-rating agencies, research organizations, political agencies, business entities and international entities like the World Economic Forum. Indeed, comparing countries such as Russia and Mexico as will be done in this study will influence the decision that Amazon Web Services will make regarding the market to invest and expand its services.
Introduction
(a) Statement of Purpose
The purpose of this paper is to diagnose the economies of Russia and Mexico and recommend the most suitable market for Amazon Web Services. For this to be achieved, a comparative PEST analysis of the two countries will be conducted with the aim of identifying the opportunities and threats associated with the markets. This will be followed by a recommendation on the most suitable market having many opportunities and few threats.
(b) A Description of the Company and Industry
Amazon is an in 1994. Its Amazon Web Services is commonly known as cloud computing and platform that offers businesses with content delivery, database storage, and other applications that increase the scalability and growth of companies. Nowadays, the company is not only a leading online retailing firm globally but also an icon regarding online business. The company intends to expand its Web Service business into either Mexico or Russia. However, the selection of the appropriate destination can only be made when macroeconomic, social and political situations in the chosen countries are analyzed and compared.
Analyzing the Environments
RUSSIA: Opportunity, Threat Factors, and Future Trends
PEST analysis is a useful model that can be used when identifying the opportunities and threats that a particular market presents to a company. Some of the important factors related to the political, economic, social and technological environment. They will influence the success of Amazon Web Services in the new market.
Political Factors
The Russian economy is based on an open foreign relationship (Berger et al., 2017). Presently, the country has established official relationships with over 200 countries thereby presenting a good opportunity for the economy and various industry players. Russia is playing a very important part in preserving world peace and safety. Therefore, they have adopted the most recent technologies besides having the biggest store of nuclear weapons and the military that comprises the air force, the ground force, and the navy. The serves to strengthen the position of the country in worlds geopolitical space.
After being defeated in Afghanistan, Russia suffered bad economic and political turmoil, which shuttered the economy (Zhuplev, 2016). Since then, the country has been working hard to regain its financial stability, and the political leaders had to make some of the toughest decisions to recover their political stability. Currently, the national government is stable, and the political system is as per the countrys situation and convention. Although it is a federation, the role of the national government in business cannot be downplayed. Moreover, its judicial system is strong although the citizens lack freedom.
The peaceful and strong relationship that a country has with other nations is an important factor because it influences the growth of its economy and attracts more investors both from within and outside its borders (Berger et al., 2017). The political government plays a key role in running the business of the entire country to maintain the social and economic stability. To attract investors, Russia demonstrates an impression of security and safety including growth opportunities within the country. Therefore, Amazon Web Services will benefit from this initiative if it ventures into the Russian market.
Economic Factors
In Russia, energy prices have become stagnant, and capital and labor are fully utilized making its growth to drop below the pre-crisis rates. Therefore, it faces the challenge of ensuring its economy is stronger and less dependent on the oil industry making it a serious weakness in the Russian economy. While seeking to overcome this challenge, the country needs greater energy efficiency and higher productivity growth all of which must be driven by stronger investment, competition and . Nonetheless, Russia is ranked as the eighth largest economy in the world as per the nominal GDP. Many businesses rely on the countrys two major natural resources such as gas and oil. With advantage associated with natural resources, the country is a perfect investment destination between Asia and Europe. However, its economy cannot be compared to that of Mexico and other European countries because of the overreliance on the oil prices in the market.
Moreover, Russia has an extensive energy and mineral resources. In fact, its natural resource base is the largest reserves worldwide, which make the country the biggest producer of oil and natural gas worldwide. The country is popular for its unrivaled nuclear weapons and has the largest stock of weapons of mass destruction. This has made the country to be highly ranked in the world. Looking at its economic growth rate, Russia is a promising destination for companies that want to expand business and create wealth such as Amazon Web Services. Its resilience can be seen from the way its economy grew despite the natural disasters that it faced in 2010 (Yakovlev, 2014). The country also survived the economic crisis, which affected the trade and economy of all countries worldwide in 2008/9. The graph below shows Russias growth rate over the years.
From this graph, it can be seen that even 2010 was not a successful year for business industries in Russia simply because of the climate and weather issues. However, in the 3rd quarter of the year, the GDP extended to hit 2.7. This differentiated Russia and other economies that play a main role in the global economy and confirms the confidence that investors including AWS will have while entering the Russian market.
Russias geographic location also presents a good opportunity to many companies from the west. With its location between Asia and Europe, its role in connecting two continents shows that the company has direct access to a foreign market, unlike Mexico. This allows companies in Russia to trade easily with countries in Europe and Asia, including North Korea, China, and Japan. This offers a great opportunity for Russia in gaining and exchanging experiences from the developed economies in the European region. Therefore, AWS should capitalize on this opportunity.
Social Factors
Following the collapse of the USSR and subsequent economic recession, the country shifted from the socialist to a democratic society (Cavusgil et al. 2012). With the growth of capitalism over socialism, the citizens tend to spend money on expensive outfits, cars, and other life necessities. The country supports entertainment and social activities, which improve the living standards of the population. Moreover, aspects such as ballet dance, music, literature, and artistry are loved in Russia. This shows the citizens resolve to try new things that come their way. The changing societal structure has led to the changes in peoples mindset and mentality. For instance, people have varying perceptions regarding the family planning. Since the 90s, Russia has been experiencing a remarkable decline in birth rate accompanied by an increase in death rate (Cavusgil et al. 2012). The countrys healthcare system is largely responsible for the death rate. Across Europe, the country among the nations that have been greatly affected by alcohol poisoning and HIV.
Moreover, there is widening aspect of income inequality between the rich and the poor. In fact, the gap between the rich and the poor in Russia is the biggest globally. Probably, the oligarchs snapped up the countrys best assets during the post-Soviet period that made them rich. Most Russians will only stare and envy the super-rich as they drink, smoke, and burn around in their luxurious cars. Economic experts warn that income inequality has increased eight times between the 80s and the 2000s (Yakovlev, 2014). Such a huge gap between the rich and poor has negated all the social and economic achievements that the country as achieves in recent times.
In 1993, Russia experienced a crisis in its constitution. However, the country was declared the federation based on a semi-Presidential system with support from a majority of the population. Tokso?z (2014) talks about the importance of having a constant policy and regime in attracting both internal and external investors. He notes that it is crucial to have policies that offer more advantages and benefits to companies or people who want to do business in the country.
Technological Factors
For the longest time, Russia has been known for its wealth in science and technology with its tradition having been recognized as early as the 18th century (Jain, 2007). Their favorable reputation in subjects such as engineering, science, chemistry, and mathematics all contribute significantly to the advancement of the technology sector. The technological advancements have helped strengthen Russias position in various global fronts. In fact, there is no question that the developments in the technology industry have transformed its business environment, particularly the retail sector. The major developments are those communications-based or Internet-based technologies like web services and cloud services (Berger et al., 2017). Such major developments have enabled companies like NeXT Plc to adopt an online business structure that compliments the traditional brick and motor retail firms. Empirical evidence shows that this growth has been exponential with a rapid approval by consumers of e-commerce in almost all markets including retail.
Since Russian companies are not only using technologies to facilitate online sales, new technologies have opened a range of marketing options for retailers, too. The most important are the technological developments that enable retailers to interact with their clients using web-based networking platforms such as Twitter, Facebook, and YouTube. Nowadays, these technologies have become core ingredients in the creation of effective marketing strategies.
Russia will possibly regain its position of leading in the technology sector because of the many works of science and technology from centuries ago. Global companies seeking expansion such as Amazon Web Services may take advantage of Russias advanced-tech industry. The success of its technology industry has pushed its expansion of trade and industries. It has opened doors to new opportunities for investors, which make the countrys trade to be more active with the market changes. Such achievements will improve the peoples living standards and help it out of inflation (Jain, 2007).
Although this section has largely presented technology as an opportunity, some risks cannot be ignored. There are concerns regarding the massive abandoning of the brick and motor business model as consumers now flock the online business model resulting in the closure of thousands of street shops. This can be seen from the recent case of Jessops, which seems to be falling courtesy of technological advancements. If more street businesses fall victim to this technological trend, the Russian economy may suffer.
Future Trends
The Russian economy is projected to strengthen gradually driven by exports in the natural resource sector, higher consumer spending and as the Russian ruble recovers. The low unemployment rates will spark real growth in wages, which may lead to growth in consumption. Inflation will fall due to increased exports in the natural resources sector. However, as the economic growth picks up, there will be a drop in the inflation as the government manages its public spending. Despite the increased inflation target and utility prices being partially frozen, reduction in interest rates will be inappropriate until a decline in core inflation is registered (Berger et al., 2017). The government has prioritized to strengthen its economic growth by improving its business climate. Furthermore, reducing reliance on the natural resources industry will diversify the countries core macroeconomic factors. For this to happen, Russia intends to remove business entry barriers in its various sectors, improve job-skill matches in the labor market, and support innovation.
MEXICO: Opportunity, Threat Factors, and Future Trends
Political Factors
Mexico has emerged in recent times as one of the most promising emerging economies in the world. However, the 2009 economic downturn affected its economy significantly. As of 2010, the country regained its growth trend, which is expected to bring the nation to compete with other drivers of global economy such as Russia (PWC, 2014).
The Mexican government has adopted a series of reforms to respond to the demand for higher transparency and accountability of companies and to fight corruption. The President has further introduced more structural reforms to promote foreign direct investment and improve the countrys economic competitiveness and the political environment (Jain, 2007). However, the country still confronts various issues, particularly regarding crime and corruption. As shown in the figure below, Mexico ranked 123rd out of 166 nations in Transparency Internationals 2016 Corruption Perception Index.
Mexicos poor ranking comes after a succession of corruption and political controversies (Millett, 2011). There have been negative media reports regarding business people and politicians concerning corruption and clandestine payments to government officials. Politicians have been accused of influencing the award of business tenders to companies. Its ranking demonstrates how little faith investors have in their ability to curb power abuse. The countrys failure to hold people accountable for their wrongdoing also negatively affects the international perception of Mexico. However, it may be a challenge to AWS because it might be forced to act unethically such as bribing if it has to establish itself in the country. The county also records the highest murder rates in Latin America. Such an issue also affects business and investment security. In fact, Euromonitor reported in 2008 that the Mexican government spent 8% of the national GDP on catering for expenses generated by insecurity and crime (Hamilton & Webster, 2012).
Economic Factors
The government debt continues to edge upwards. The recent deficits and moderate economic growth have caused the government debt to rise to 48%. This rise is projected to continue in the coming years. In fact, economic experts warn that the debt will not stabilize as earlier expected. Monetary policies are responding to weak exchange rates. The country had focused on attaining orderly Mexican Peso depreciation via interventions such as foreign exchange (Samford & Gmez, 2014). However, in 2015, the Central bank started raising interest rates and continued to bring the rates further up to 4% as of 2016 (Hamilton & Webster, 2012). Moreover, the central bank shifted from a rule-centered scheme for foreign exchange intervention to a discretionary model. Therefore, the depreciating currency may feed through into greater inflation. Recently, the country has experienced continued inflation, and at 2.9%, the figure is close to the banks 3+-1% target (PWC, 2014).
It is unfortunate that the Mexican economy has been greatly dependent on the US economy because of the 1994 NAFTA Agreement where Canada and Mexico established a strong political and economic partnership (Frynas, 2015). The figure below shows that the Mexican GDP had maintained a constant growth trend since 2001 except in 2009 when it became a victim the crisis that affected the US.
After the decline in 2009, the annual GDP has been grown tremendously. Although though this may allow Mexico to compete with Russia in the G20 ranking, it cannot surpass Russia. Moreover, President Trumps sentiment on Mexico has not been positive. Therefore, AWS would not want to risk investing in Mexico when its market in the US might be affected.
Social Factors
Population growth has been decelerating, and the country is currently facing an aging workforce. Moreover, disposable income and consumer expenditure have been growing well. However, unemployment remains a major problem in this country. Like Russia, there is a growing gap between the rich and poor. Emigration has always characterized the Mexican social environment (PWC, 2014). This has been advantageous to the country because it helped absorb the issue of unemployment while generating an influx of investments and money. However, the recent crisis in the US economy has largely influenced emigration. The Northern America labor market has become unattractive leading to a decline in the net migration. The consumer expenditures and behavior of Mexicans are getting even closer to the American standards making the country even more attractive as an investment destination.
Technological Factors
Technological environment in Mexico represents both potential opportunities and threats for AWS. The technology and communication sectors have been experiencing drastic growth in recent years. Moreover, the influence of the US remains relevant. Currently, Mexico has 39 bilateral trade agreements, which govern the use of radio spectrum at the border with the United States (Rovere, Ozo?rio & Melo, 2015). In addition, there are new border agreements, which cover services such as web services and broadband services.
Future Trends
The future of the Mexican economy relies on what is envisaged in the US, especially the manufacturing sector. Recently, the drop in economic growth was partly because of the impacts of the US economic downturn and unfavorable sentiments from President Trump. Some American companies have ceased operating in Mexico while others that had wanted to invest shelved their plans. Mexicos longer-term growth prospects are low. Reforms in the fields of education, energy, and labor must boost productivity and increase competition. The factors have previously exerted a limit on the countrys growth rate. Nevertheless, the projections for long-term GDP growth are limited mostly due to a rise in fiscal contraction (Hamilton & Webster, 2012).
Some downside risks include a steeper slowdown in the performance of the American economy. However, it would hit the Mexican exports thus put a break on their economic growth because of the threat emanating from the recently announced fiscal consolidation measures. They could have a lasting negative effect on the domestic demand in Mexico. Another risk is the sudden shift in international financial markets sentiments towards a greater risk aversion. In the emerging markets field, the Peso is one of the most traded currencies and reacts faster to any changes in the international market (Samford & Gmez, 2014).
Recommendation
Based on the analysis of the two countries, Amazon Web Services should consider expanding the business to Russia because the political environment in Mexico is unstable. Mexicos poor economic environment is characterized by uncertainties, which may hamper AWS prospects of boosting its revenue earnings and profit margins. Although Mexico presents a few opportunities, they are not worth the consequences that Amazon may incur when operating in the country. However, Russia location allows it to trade easily with countries in Europe and Asia thereby giving the company a wider market. This provides good opportunities for Russia to gain and exchange experiences from the developed economies in the European region. Therefore, it would be wise for AWS to capitalize on this opportunity. With the supportive political environment, Russia is an ideal market that AWS should invest in its upcoming expansion strategy.
Summary and Conclusion
A comparison of the two countries shows that the rate of foreign investment in Mexico is higher compared to that Russia. From an anti-globalist perspective, this may look like a disadvantage for Mexico. However, it can be a huge advantage because it reduces capital costs thus creating a basis for growth and development. In contrast, the greatest economic threat to Russia relates to the high cost of capital outlay, which is further exacerbated by the low rate of foreign direct investment (Berger et al., 2017). The population and growth rate between the countries should also be considered. Although Mexico has higher birth rate than Russia, this should not be seen as an opportunity because it is rooted in the impoverished nature of the Mexican countryside. As for Russia, its low birth rate is a huge risk factor. It has experienced a dramatic decline in the emigration rate while the rate of immigration into the country has increased resulting in population drop. However, it still experiences a net annual loss regarding its population thereby making it a serious factor for any company seeking to invest unlike in Mexico. The latter enjoy the incalculable opportunity of a free trade agreement with the US, which is the largest world economy. The relationship gives Russia with inexhaustible market opportunities for its exports. One of the biggest disadvantages for Russia is trade barriers to a good number of its export products, especially agricultural and steel. Perhaps, Russia should consider having a special trade agreement with North America such as NAFTA.
It must be appreciated that Russia is more industrialized and developed unlike to Mexico. In fact, it has a highly technologically sophisticated and educated population while Mexico suffers from illiteracy. Unlike Mexico, Russia does not depend on oil alone and has a low foreign debt with a highly diversified export base. Although Russia is the second leading exporter of oil, it is true that oil only a quarter of their exports (Berger et al., 2017).
Overall, Russia presents more opportunities, which Mexico must be envying. In fact, the country is a key player in the political and social matters of the world. It is a member of major international bodies such as United Nations (UN), World Health Organization (WHO) and G8. This provides the country with an opportunity not only to contribute but also give opinions for the development of the world as far as economic, political, healthcare and social matters are concerned. Therefore, AWS should choose Russia as the destination for expanding its business based on three solid reasons. First, Russia is strategically located between Europe and Asia. Secondly, its economic policies support both local and international investors. Lastly, the country has a stable political environment, which enables its techno-savvy citizens to thrive.
References
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