Prof Balunywa: The dark side of multi-national firms


Prof Waswa Balunywa


In my earlier articles on the depreciation of the shilling, I specifically referred to MTN and Stanbic bank and there was a feeling that my comments were against Multinational Corporations (MNCs).

My view is let the best person compete and let the best competitor win.

This is how the world is going at the moment, those companies that produce efficiently and have good products rule the market and make tonnes of money. MNCs therefore have a place in the world economies.

They come in to perform a number of roles, they provide a product or service and capital that nobody is able to provide.

They are taxed and provide money to government, bring in technology, create jobs among many other roles.

In Uganda, MTN is the biggest tax payer, shell and other oil companies also pay lots of money, so does Coca Cola, among others.

All these are positive roles that these companies play in any economy. I personally commend such entrepreneurs or organizations because they contribute to the growth of the country.

However, the debate against MNCs has been on for a long time, I recall as we studied economics in high school, we used to sing the arguments for and against MNCs.

The arguments against include: inability to transfer technology wholly, stifling competition, arm twisting poor developing country governments for favours, avoiding taxes through tax concessions, inability to develop local skills , suppressing local entrepreneurs among others.

These are arguments that have been there for a long time. The context of my discussion is that developing countries and indeed many do provide guidance on a variety of issues to the MNCs for instance they may give guidance on technology transfer, guidance on a number of expatriates and on what level they should come into the country.

There may be restrictions on repatriation of profits, shareholding. This varies from country to country in light of the negative impact of MNCs on the specific developing country.

Uganda has a fully convertible currency and this means capital will flow in and out unrestricted.

This has a good side and a dark side. The dark side is when it affects the value of the currency due to demand factors, this is what happened recently to the Ugandan economy.

I have been part of this liberal policy and I believe in those who are efficient to take the day. However, on reflection, can the policy be reviewed to get rid of the negative effects?

Uganda has other liberal policies for instance employment, there are organizations today that employ foreign gate keepers (abasika ekigi), clerks, and messengers in various offices.

This policy is not in the interest of the country, such employees need dollars to transfer their earnings back to their homes like our kyeyos do abroad.

Our kyeyos however are a tiny fraction of the capital markets of these countries. They are of no consequence to these markets unlike the kyeyos here who take away their earnings in dollars which we don’t have.

Some developed countries impose restrictions on the number and level of managerial cadres so that the local community can also develop these managerial skills. Unfortunately Uganda does not have such. These are areas for consideration of any good policy.

The last argument is the world needs to see an end to poverty, the big MNCs cannot sell their products in a sick poor society, there is need to empower the poor ion the developing countries and enable them buy their products.

There should be therefore a process of wealth creation so that people’s lives can be transformed.

Counties need not be exploited because this will perpetuate poverty especially in the poor countries. There is need to systematically build a prosperous society.

This can only come from enabling local people to acquire skills, shares and creating wealth among them.

The government parastatals failed in Africa but continue to succeed in Europe, they are seen as engines of social economic development especially the redistribution of wealth.

Can our MNCs encourage this? Stanbic already has, it has many local shareholders. This is the way to go for the local people are to benefit from the economic transformation taking place driven by MNCs.

Why UTL cannot be Shutdown

The telecommunication sector is one of the competitive and very low margins. It has high entry barriers and not easy to exit. Press reports indicate the UTL is on its deathbed. Can UTL be closed? Of course not.

UTL can only be swallowed up by somebody else in the industry because it has exit barriers. You cannot leave millions of subscribers unserved. In an industry there are a number of factors that shake the nature of the competition.

If it is easy to join the industry, the competition is usually very intense and is also usually very difficult to leave it. The entry barriers are normally the amount of money you need to invest in the business.

A mobile telephone company requires huge amounts of money and therefore you cannot have tens or hundreds of players. This explains the small number of players at the moment which I would say for the size of the market, it is too big.

When Celtel entered the market in the early 1990s, they dominated the market for five years until when MTN was licensed. Celtel made lots of money exploiting customers then.

Entry was barred by legislation and amount of investment. MTN came in the market and demystified the mobile phone. Unfortunately for the sector, many other companies have been licensed since then.

In a bid to outcompete one another, the players decided to commit financial suicide through promotions. Of course some of us who make numerous calls enjoy low cost phone calls at the cost of the profitability of some of the company.

MTN however, until recently did not go for the low cost strategy. They took advantage of their wide spread presence in the country to keep prices up.

Using this advantage, they have also been able to make money out of data and the same advantage has made them make money out of mobile money.

It is possible that MTN’s mobile money transactions are bigger than the majority of the banks in the country.

As the industry grows, it gets to a maturity where you can no longer have more customers. I guess the Uganda mobile phone industry has got to that stage. Everybody who can own a phone already has it.

Others have more than one line from different service providers. But before maturity, the industry goes through a stage of shakeout.

This is a stage where those who fail to make sufficient profits get out of the business.

In industries where there are exit barriers like banks and mobile phone companies, the businesses do not close they are taken up by somebody else. The mobile phone companies have been going through this stage.

Celtel was bought by Zain, Zain was bought by Airtel.

Airtel bought Warid. This was a consolidation strategy to be able to compete with MTN. Orange has changed hands. Vodafone is in town.

UTL is reportedly on the brink of collapse. Given the nature of the industry, UTL cannot be closed. Either an existing company will goggle it up or a new investor will be found.

The stories indicate that the challenge is in the inability to come up with additional investment in the business.

The company needs financial re-engineering to make it either survive on its own which it may not be able to do.

Even if the 60 days’ notice by UCC lapses, the solution is not in closing the business. Competitive Strategy does not work like that.

Prof Waswa Balunywa, the author is the Principal Makerere University Business School (Mubs)


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