The Bolivarian Republic of Venezuela is a developing country whose economy is majorly driven by the petroleum industry. Its key strengths include rich oil and natural gas reserves and mineral deposits including coal, gold, diamond, iron and other base metals (Duarte et al., 2006, p.235; Otero & Bastidas, 2002, p.237). It also endowed with several tourist attraction sites and has one of the best education policies in the world with an 89.5% literacy rate. Due to burgeoning oil prices, the country has a relatively high GDP growth rate and a surplus balance of trade. The 2012 estimate for the country’s real (Gross Domestic Product) GDP growth rate of was 5.5% (CIA, 2013). Notwithstanding, the country has been crippled by its overreliance on oil coupled with exorbitant corporate tax rates, political instability, unfavorable exchange rate regimes, and inflation. Moreover, it has a deficit budget and substantial public debt. It is therefore evident that Venezuela is faced with a myriad of political and economic risks (Meldrum, 1999, p.30). For this reason, A Ltd. should carefully evaluate the costs and benefits of acquiring the oil company in the country.
The petroleum industry “accounts for approximately 95% of export earnings, approximately 40% of the country’s federal budget revenues, and approximately 12% of the GDP.” (Zimmerman & Chu, 2013, p.77). Besides its heavy reliance in the petroleum industry, most businesses in the country are also oil related. Other than that, inflation, which has been occasioned by poor economic policies, poses a significant challenge to the country’s economy. In 2007 for instance, the consumer price index increased by 18.7%. This figure more than doubled the 8.4% growth in GDP the same year. The rate of inflation as of 2012 was 21%. The president’s move to nationalize firms in a bid to enhance government control in the economy worsened the environment for private investment resulting in a reduced productive capacity and a general decline in non-petroleum exports. Additionally, the country has fixed exchange rate system, which has led to the scarcity of foreign currency. Consequently, foreign currencies like the dollar are sold in black markets for roughly double the official rate. The local currency – bolivar – has also been devalued on several occasions, most recently in January 2011, when the president announced the second devaluation in twelve months (CIA, 2013). The country also has very weak property rights, which translate to numerous instances of breach of contract that discourage investment and savings.
The country’s overreliance on a single export poses a great economic risk, especially in periods of global financial crisis. This overreliance also suggests that the competition in the petroleum industry is very intensive owing to the fact that a majority of the businesses is oil-oriented. Intensive competition discourages new firms from entering the industry. Another challenge that significantly affects the operations of business ventures in Venezuela is inflation. This could result in massive losses for businesses while simultaneously reducing domestic demand due to reduced purchasing power. To add on to that, foreign exchange risk could seriously curtail international contracts and lead to unexpected demand shifts, which are more often than not accompanied by huge losses. Finally, the lack of strong property rights contributes to business risk, which is also associated with financial losses mainly arising from bad debts. Apart from economic risks, the country is also faced with political risk. This is because it is politically divided, especially among the opponents and supporters of the president, Hugo Chavez. This evidenced by government protests in recent years including a failed coup attempt in 2002 (EC, 2007, p.8). The country is also characterized by social unrest dating back to the mid-1980s.
Nevertheless, the rate of entrepreneurship in the country is very encouraging. In fact, according to a study carried out among 31 countries by the Global Entrepreneurship Monitor in 2009, Venezuela was ranked as the second country with the highest number new business startups (Zimmerman & Chu, 2013, p.77). During that year, 14.5% of the adults in Venezuela engaged in establishment of new business ventures. Furthermore, despite the fact that it does not support the Free Trade Area of American Countries (FTAA), the country has a friendly foreign policy especially towards Latin American countries (EC, 2007, p.10). Entrepreneurship promotes in investment, which in turn results in an increase aggregate demand. Good international relations on the other hand encourage bilateral and multilateral trade.
To conclude, there are several political and economic risks in Venezuela and as such, A Ltd. should carefully weigh its options before acquiring the oil company in the country. This however does not imply that the investment is not viable. The ultimate decision should be based on an elaborate cost benefit analysis of the opportunities and the risks involved in the investment decision.
Central Intelligence Agency (CIA), 2013. The world factbook. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html [Accessed 9 October 2013].
Duarte, C., Ettkin, L.P., Helms, M.M. & Anderson, M.S., 2006. The challenge of Venezuela: A SWOT analysis. Competitiveness Review, 16( 3/4), pp.233-47.
European Commission (EC), 2007. Venezuela: Country Strategy Paper 2007-2013.
Meldrum, D.H., 1999. Country risk and a quick look at Latin America. Business Economics, 34(3), pp.30-37.
Otero, I. & Bastidas, R., 2002. DBI: Doing business in Venezuela. Thunderbird International Business Review, 44(2), pp.237-60.
Zimmerman, M.A. & Chu, H.M., 2013. Motivation, Success, and Problems of Entrepreneurs in Venezuela. Journal of Management Policy and Practice , 14(2), pp.76-90.