Telefonica initially focused on Latin America because of the similarity in culture and the development of Latin American market. Much of region of Latin America and Spain had common language and deep similarity in culture and history. Moreover, Latin America were really a potential telecommunications market which were now growing rapidly, increasing the adoption rate and usage not just of traditional fixed-line telecommunications services, but also of mobile phones and internet connection.
Telefonica was slower to expand in Europe even though Spain is a member of the EU because for years, there had been a tacit agreement between national telecommunications companies that they would not invade each others markets. In 2005, this agreement broke down when France Telecom entered Spain and then Telefonica also quickly made its own European acquisition.
Telefonica has used acquisitions, rather than greenfield ventures, as its entry strategy. In this case, it was a rational strategy because acquisition has more benefits than greenfield ventures. First, acquisition is quicker to execute. By purchasing the largest operators, leading companies or monopoly provider, Telefonica quickly become the No.1 or 2 player in almost every Latin American country and had a remarkable market share. If Telefonica had used greenfield ventures, it would have spent years to build the whole new system and also a huge set up costs. Second, acquired firms have its valuable strategic assets such as customer relationships, brand loyalty, distribution systems.
Thus, it is easier and less risky for Telefonica to acquire those assets than to build them from the beginning. Not only Telefonica realize the potentiality of Latin American telecommunications market, many other giant companies also see that and want to run business in this region. By acquiring dominate domestic operators, Telefonica had reduced the chance of other competitors to compete in this market and also make itself stronger in global market. Third, Telefonica believed they could increase the efficiency of acquired firms by transferring capital, technology or management skills.
There are two potential risk associated with acquisitions. Estimating the target firms to acquiring is a complicated task. If Telefonica overestimates the value of those target firms, it will have significant impact on future profits, company may suffer the loss. Besides, the conflict of differences in culture, difficulties in acquiring process or in management and operation can be the risks that Telefonica must face when using this entry strategy.
Telefonicas FDI can have positive effects on the acquired companies by supplying capital, technology and also management resources that would not be available otherwise. Since Telefonica has experiences in transforming state-own enterprises into efficient and competitive companies, the acquired will be the first to receive these resources transferred. Consequently, employment base will increase due to expansion of newly acquired enterprises.
Telefonicas investment surely benefits the host nation. This flow of FDI brings about resources transferred (capital, technology, managerial resources), therefore, acquired companies become more efficient and competitive. This leads to stiffer competition in the market, eventually lower the price and benefits the consumers. Moreover, more competitive environment requires expansion both in scale and products; new jobs are available and services quality is improved. Thus, both the host countrys consumers and economic growth benefit from Telefonicas FDI.