inb 410 (final) draft

7/28/2019 INB 410 (Final) Draft

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Acknowledgement:

This final report on Renewable energy in Norway is an outcome of what

we have learned throughout the course INB 410. Mehree Iqbal missourcourse instructor hasmentored throughout the making of this project. Weare thankful enough to our course instructor for mentoring ourprojectand building our knowledge in International Business- InternationalCompetitiveness.


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Contents

1. Introduction ............................................................................................................ 1

2. Pest Analysis .......................................................................................................... 2

2.1.1. Political Analysis .......................................................................................... 22.1.2. Government Policies ..................................................................................... 3

2.1.3. Political Stability ........................................................................................... 3

2.2 Economic Analysis .............................................................................................. 4

2.2.1. Economic indicators ..................................................................................... 4

2.2.2. Purchasing Parity: per capital Income and Living Cost ............................... 6

2.2.3. Human development ..................................................................................... 6

2.3. Social Analysis .................................................................................................... 7

2.3.1. Language ....................................................................................................... 7

2.3.2. Religion: ........................................................................................................ 7

2.3.3. Education ...................................................................................................... 7

2.3.4. Population: .................................................................................................... 8

2.3.5. Social Strata: ................................................................................................. 8

2.4 Technological analysis ......................................................................................... 92.4.1. Infrastructure: ................................................................................................ 9

3. Porters Five Forces Analysis ............................................................................... 9

3.1 Threat of new entrance (Barriers to entry) .........................................................10

3.2 Competitive rivalry within renewable energy industry of Norway ...................11

3.3 Bargaining power of customers .........................................................................12

3.4 Bargaining power of suppliers ...........................................................................12

3.5 Threat of substitute products ..............................................................................12

4) Porters model......................................................................................................13

Factor endowment .................................................................................................13

Demand condition .................................................................................................15

Related and supporting industries: ........................................................................15


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Firm strategy, structure, and rivalry: ....................................................................16

The government and chance .................................................................................17

5. SWOT Analysis: ..................................................................................................17

6. Decision................................................................................................................197. Recommendation .................................................................................................20

8. Conclusion ...........................................................................................................21


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1. Introduction

We selected renewable energy industry of Norway in order to conduct this

report. The task for us was to find a lucrative industry in a developed country

and analysis the potential of investment.

Norway is small country with a population of about 4.8 million bordered by

Sweden, Finland and Russia. Today Norway is the third largest exporter of

natural gas, the fourth largest exporter of oil and the second largest exporter

of fish in the world. The country consistently ranks high in many global

rankings such as Global Competitiveness Index, Human Development Index,

etc. This country is full of natural resources and a hub for doing business.

Kazakhstan has attracted more FDI than any Asian country in last decade and

it is increasing day by day. Renewable energy is one of the sectors which are

very profitable in this country. There are some reasons behind choosing

renewable energy sector of Norway

Norway consistently attracts strong foreign investments. The energysector especially draws the most amount of FDI and the countries

with the largest FDI are Sweden, USA, UK, Denmark and the

Netherlands.

The Norwegian market has performed well since 1900 with anannualized real return of 4.1% per year. Based on P/E ratios Norway

looks cheaper.

The unemployment rate stood at 3.5% in March this year, the lowestamong OECD countries.

Among the developed countries, Norway has the second highest GDPper capita next to Luxembourg at $52,000 per person.

Norway is a heavy producer of renewable energy, first of all due togood resources in hydropower.


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The following part of the report will analyze the investment potential of renewable

energy industry in Norway. This will start with the PEST analysis of Norway which

will analyze the political, economic, social technological aspect of the country for our

investment. Then we will use Porters 5 forces to analyze the four factors related with

our industry. Then well do the analysis of national competitiveness using Porters

model. Then we will conduct SWOT analysis to find the strength, weakness,

opportunity and threats to our industry. Based on these we will come to a decision

about the investment method on the final part of the report with some

recommendations.

2. Pest Analysis

2.1.1. Political Analysis

Norway is a unitary constitutional monarchy with a parliamentary system of

government, wherein the King of Norway is the head of state and the Prime

Minister is the head of government. Power is separated between the

legislative, executive and judicial branches of government, as defined by the

Constitution, which serves as the country's supreme legal document. Norway,

which functions as a constitutional monarchy has seated Harald V as its

current king, while Labor Party leader Jens Stoltenberg just recently began

his second term as Prime Minister. The King of Norway is not considered a

"citizen" and cannot vote. The government efficiency and political stability

are better in Norway.


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2.1.2. Government Policies

Norway attracts foreign investors by actively developing the market

economy, wealth of natural reserves and political stability. The governmentsupports free trade and non-interference. Some limitations do exist but only

applied to the protected areas like fisheries & agriculture. The Norwegian

government is generally positive toward all investments, foreign and local.

For this reason, Invest in Norway, an official and nationwide body for

attracting foreign investments, was established in 1993. Norway imposes no

currency and foreign exchange controls there are no licensing requirements in

force. Norway has fully opened the electricity distribution system to foreign

participation, however, making it one of the more liberal power sector

investment regimes in the world. One important priority is the development

of investments facilities and support of investors. In this regard Norway

adopted several preferences

Lower social security payments Lower tax rates Extra deductions in tax rates for individuals

At the end of 2011, the stock of foreign direct investment in Norway

amounted to NOK 1,068 billion, which was an increase of 6% from the year

before. Norway is basically an exporter of raw materials and semi-processed

goods.

2.1.3. Political Stability

Norway is a politically stable country and for that reason they are always

ranked top in doing business and different popular ranking related to

business.


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2.2 Economic Analysis

2.2.1. Economic indicators

Norway is has always been doing great in Economic indicators. Listed below is a list of

Economic indicators of Norway:


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Figure: FDI Inflow and outflow (Global Finance Magazine)

Figure: Norway in World Competitiveness Ranking (The Global

Competitiveness Report 201213)

2.2.2. Purchasing Parity: per capital Income and Living Cost

The cost of living in Norway is extremely high, and it was rated the second most

expensive country in which to live in a 2006 Quality of Life Index, compiled by the

Economist Intelligence Unit. It is the most expensive European country in which to

live.

2.2.3. Human development

In terms of employment, over 75% of people aged 15 to 64 in Norway have a paid job,

above the OECD employment average of 66%.


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Life expectancy is increasing in Norway. In 2011, life expectancy at birth for women is

83.5 years and for men is 79.0 years. Men with a tertiary education have a longer life

expectancy than women with a compulsory education.

2.3. Social Analysis

2.3.1. Language: Norways official language is Norwegian, a northern Germanic

language closely related to Danish and Swedish.

2.3.2. Religion:

2.3.3. Education: Education in Norway is mandatory for all children aged 616. The

Norwegian school system can be divided into three parts:

Elementary school (age 6-13) Lower secondary school (age 13-16) Upper secondary school (age 16-19).

Elementary and lower secondary schools are mandatory for all children aged 616.


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2.3.4. Population:

2.3.5. Social Strata:

Classes and Castes: While income differences are relatively flat, there is a small

proportion of extremely rich owners and managers of merchant fleets. Although the

affluent are likely to own ski huts in the mountains, their huts may not be better

furnished than those of less affluent workers. Conspicuous consumption is not admired.

Leisure time is an important resource for industrial workers, who in 2002 will have five

weeks of vacation annually. Counting national holidays, this brings the number of

working hours in the year down to 1,703 for industrial workers. Immigrant populations

have tended to move into some of the less desirable and less well-paid occupations

such as cleaners and fast food workers.

Symbols of Social Stratification: Affluent individuals signal their wealth by driving a

luxury car, wearing expensive clothing, and taking expensive vacations. They may

have a posh Oslo accent. However, these differences in possessions and advantages do

not symbolize differences in moral worth.


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2.4 Technological analysis

2.4.1. Infrastructure:

Norway is technologically sound country. It has perfect infrastructure for FDI in

renewable energy industry. Norway, Europe's biggest producer of hydropower, may

increase annual production by 12 percent through 2020 as the country strives to meet

EU targets for higher renewable energy output, an investor survey showed.

Hydropower investors are ready to build new plants and upgrade existing stations. The

Nordic country gets 99 percent of its electricity consumption by running water through

turbines. Increases in power production are subject to permits from Norways Water

Resources and Energy Directorate.

Norway could double installed capacity in its hydropower plants if it builds new cross-

border links to ship the surplus electricity abroad.

3. Porters Five Forces Analysis

Porters five forces is a framework for industry analysis and business strategy

development. It is derived by Michael E. Porter who is the Bishop William

Lawrence University Professor at Harvard Business School. This model

refers to the micro-environment of an industry rather than the macro-

environment, and its the combination of the horizontal competition which

are threat of new entrance, threat of substitute products or services and

intensity of competitive rivalry and the vertical competition which are

bargaining power of customers and the bargaining power of suppliers. Any

change of the five forces may influence the firms ability to serve its

customers and make a profit, thus if any change occurs, the business units


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may need to reassess the attractiveness of the marketplace of a certain

industry. Now lets have a close look at the Norway renewable energy

industry, to see whether it is an attractive industry or not from the perspective

of the Porters five forces analysis.

3.1 Threat of new entrance (Barriers to entry)

Norway has rich resources on renewable energy. It is the biggest producer of

hydropower in European Union. Over 99% of the electricity production in

mainland Norway is covered by hydropower plants. According to the investor

survey, Norway may increase annual production by 12% through 2020 as the

country strives to meet EU targets for higher renewable energy output.

Moreover, Norwegian government has the willingness to lead Norway to be

an environmental friendly nation and a leader in renewable energy, it would

promote other types of renewable energy other than hydropower such as wind

power on and offshore, osmotic power, solar power and bio energy. Thus, the

market still has a great potential to make profits and the macro-environment

is good for the development of the industry. From this perspective, the


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industry would be attractive to the investors. However, its not easy to enter

this industry because the initial investment is high compare to other products

and services, especially investors need to spend a big amount of money on

infrastructure and it also takes long time to build. Moreover, since its still an

emerging industry and most importantly it needs the high-end technology and

continuous R&D which will cost a lot in the future. On the other hand,

because of the high complexity, as soon as ones enter the industry, they are

tending to make the profit due to the high demand high differentiation from

other products and services. In a word, there are still great chances for other

new investors to enter the renewable energy market in case of Norway.

3.2 Competitive rivalry within renewable energy industry of Norway

In Norway, the competition within the industry is higher compare to other

counties because its advantages in renewable energy resources, especially the

hydropower resources. However, it is still low within the industry because the

growth rate of the industry is high, and there is still a huge space to expand

for this industry as the supply is always falling behind the demand. Even the

provision of the energy is enough in Norway, because it is the biggest energy

producer in EU, it could export the energy to the other nations so that it is

able to make more profits, so basically there wont be much conflict among

the competitors as they all can make the ideal profit. Moreover, the fixed cost

and the exit barrier is high, the threshold of the industry is high, so there

wont be much investors be able to invest in this industry so that the

competitive rivalry is actually low.


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3.3 Bargaining power of customers

The bargaining power of the customers is low in this industry because there

are few alternatives and everybody needs the energy supply, customers will

buy energy in any situation. More importantly, the price of the renewable

energy is comparably lower than the fuel energy; customers will prefer to buy

the renewable energy not only because of the price but also by its

environmental-friendly nature. Most importantly, its very hard for the

customers to move to the backward vertical integration. Thus, the bargaining

power of customers is very low.

3.4 Bargaining power of suppliers

The bargaining power of suppliers are high is in this industry because they

could find customers everywhere, there are almost no switching cost and they

could also move to the forward vertical integration easily which means they

can distribute their energy by their own willingness. So the bargaining power

of suppliers of this industry is extremely high.

3.5 Threat of substitute products

The substitute products here refer to other products or services available out

of the industry which can be used instead of the existence ones. The

renewable energy industry is still in the growing stage in Norway also over

the world, and the renewable energy became very popular in the recent years

because of the greenhouse effect due to the greenhouse gas emission and the

big part of it is from the power supply by fuel burning. Besides, the falling


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production of petroleum and the fluctuation of crude oil price also lead to the

switching to the renewable energy which is cleaner and environmental

friendly. Due to the nature of the industry, there wont be any threat of the

substitute products as its uniqueness.

4) Porters model

Factor endowment

1) Human resource : even though Norway has a growing business in renewable energy,there is lack of skilled labors or engineers in present. While hiring of engineers dropped

off during the height of the recession, recruiting has taken off again. After serious

downsizing, companies across Europe are ramping up their engineering staffand

finding themselves in a war for talent. Graduate and experienced engineers in all

disciplines are being heavily recruited, and Norway is leading the way. Norway is facing

a shortage of engineers. Its employers are definitely feeling the crunch as they compete

for top engineers. Norway is currently short 16,000 engineers as there is a high demand

of engineers in oil and petroleum industries. In the short term, Norway is importing

skilled engineers from throughout Europe. However, the need is critical for Norway to

ramp up engineering education efforts. There is a global shortage of skilled experiencedengineers and of engineering students, according to UNESCO.

2) Natural Resources: The ratio of natural energy resources per capita is very high inNorway, with hydropower representing the most important resource. The countrys

topography and hydrological status results in concentrated rainfall in the western areas

leading in turn to high run-off through waterfalls and river systems. A multitude of

natural lakes and waters at high altitudes in sparsely populated or uninhabited mountain

areas has made it possible to construct a series of dams and regulation reservoirs that can

store water from the spring, summer and autumn for use during the subsequent winter. In

addition to hydropower, Norways renewable energy resources include wave power, solar

energy, wind power and biomass. Together, these alternatives could supply some 20TWh per annum. Norway has the potential to exploit wind energy, especially in coastal

areas, but the cost of the facilities remains high. Electrically-powered heat pumps for the

exploitation of heat from the soil and other surroundings can also be used to meet some

of the demand for heating. Housing is generally built so as to make maximum use of the

natural heat of the sun. Direct solar heat is also utilized in special niche areas. Biomass,

i.e. wood chippings and other biological material from agriculture and industry, is used to


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some degree but has not yet reached its full potential. Wave energy has been the subject

of extensive research, but has thus far only been introduced on a small scale.

3) Knowledge Resource: The Norwegian Government gives priority to research aimed atconfronting the challenges related to energy supply and greenhouse emissions. The

capacity building in the area of renewable energy is being developed in close cooperation

between companies, research centers and higher education institutions. Norwegian

universities and university colleges offer programs and courses related to renewable

energy. There are many organizations that works to strengthen the educational facilities

on renewable energy in Norway, and to recruit young people to renewable energy

research and industry, for example Centres for Environment-friendly Energy Research

(CEERs).

4) Cost of Capital:

There are agencies and other organizations financially supporting the renewable

energy projects.

5) Infrastructure: The quality of the Norwegian transportation infrastructure is quite good,although its high mountains and deeply cut valleys and fjords combined with a severe

northern climate make inland transportation difficult during the winter months. Railroads

are located mostly in the south while most of the northern regions are accessible only by

ship, car, or aircraft. Good communication e.g. internet is also available.


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Demand condition

Norway has a small population so it might indicate a small domestic market.

However it has one of the highest GDP per capita in the world. This make the

Norwegian to be sophisticated customers, and due to the fact that the need forenergy in Norway is unavoidable due to climatic conditions especially during

winters, hence this makes energy purchase as one of the commodity that is

purchased by every person, and this in turn contribute to the growth of the

solar energy industry in Norway. Buyer needs are characterized as being

relatively sophisticated. Because of low illiterate rate in Norway also this

makes the customers in Norway to demand higher quality of service which

makes the solar energy industry to be more effective and efficient in the

service they give to customers. The market is still not saturated but medium-

to long-term growth is expected to slow down due to increased saturation of

large markets and shift towards the future. Norway is getting the pressure todo global business as it wants to be the Green Battery for Europe.

Related and supporting industries:

Norway is ranked 27th among 40 countries on the attractiveness of theirrenewable energy markets, energy infrastructure and the suitability for

individual technologies (CIA index) by Ernest & Young. This represents the

current situation of supporting industries of Norways renewable energy

sector, but is not a reflection of the future.

Norway already has a well established source of hydropower energy, but it

also has the capability of installing and producing close to 30000 megawatts

of wind energy from offshore turbines, due to its geographical positioning.

But the plan for the wind farm was put on hold until further notice, with the

company involved citing a lack of political support.

Research, technology, and sound business practices are at the core of the

ongoing development of renewable products and technology in Norway.

INTPOW (Norwegian Renewable Energy Partners) works closely with the

Norwegian ministries and its member companies that include Statkraft,


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Agder Energi, Norconsult, Nexans Norway, Navita and Norsk Solkraft to

further renewable energy initiatives in Norway and beyond.

With regards to solar energy, solar cell technology and solar battery

technology continue to improve. The exchange of technology and the

financial interaction between Norwegian companies and the international

clients in this sector is leading to new business and new projects as the

companies and organizations take advantage of strong Norwegian technology

within photovoltaic (PV) and other solution.

In terms of backward linkage, Renewable Energy Corporation (REC) is an

example of a vertically integrated company in the Norway renewable energy

sector. REC produces polysilicon, wafers, cells and modules for the solar

industry, and silicon materials for the electronics industry.

Firm strategy, structure, and rivalry:

Norway already contains the natural resources to generate many different

kinds of renewable energies. But the local community looks to price of

energy, more than anything else. Hence, most of the energy bought in

Norway comes from fossil fuels (45%) and nuclear power (more than 30%).

Fortunately, renewable energy is priced very similar to non-renewable

energy, due to the strong competitive renewable energy industry of Norway.

A total of 28 major companies are in the market, and hence, it is observed

that the industry is close to saturation. The renewable energy sector here is

well-represented by the Ministry of Petroleum and Energy, who believes thatrenewable energy areas such as offshore wind may well become the next

energy adventure for this country and has established this framework to

facilitate this becoming a reality

Such initiatives include the support of the establishment of INTPOW

(Norwegian Renewable Energy Partners) that was established early in 2009

in order to build on present strength and future possibilities. This initiative


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was taken in close cooperation between the energy industry and Norwegian

authorities

The government and chance

The government plays an important role in terms of supporting the research

and development and through the ministerial support to the solar energy

industry which has overall positive impacts to the five forces suggested in the

theory. Also the stability of the political system which determines the

business environment of the solar industry in Norway is good.

Chance includes all the unpredictable variables which may influence the

four determinants. That is events that are beyond the control of the firmswhich may create forces that reshape the industry structure, allowing shifts in

competitive position. These chances orunpredictable variables may be new

inventions; however, the efforts for the research in these sectors might have a

positive outcome as there is more probability of a boost in these industries.

5. SWOT Analysis:

SWOT Analysis is used to find the strength, weaknesses, opportunity and the

threats of a business. As our corporation will invest in Renewable Energy

industry in Norway, this analysis is very important. Through this analysis we

have found out the strength of this industry. We found the weaknesses and

the opportunities of this particular industry. Moreover we have found the

threats to our industry which may cause problem In the future. So all these

analysis is put on a table below which summarizes it.


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Strengths:

i) Norway is blessed with the naturalresources required for generation ofrenewable energy.

ii)

Institutions are available for theresearch of renewable energy. TheNorwegian Government givespriority to research aimed atconfronting the challenges related toenergy supply

iii) Norway has sophisticated customerfor renewable energy due to lowilliteracy rate in the country and alsomakes the customers in Norway todemand higher quality of service.

iv)

The quality of the Norwegiantransportation infrastructure is quitegood with transport andcommunication medium.

v) Banks and other financial institutionsare there to support this boomingindustry.

vi) Ongoing development in research,development, and sound business

practices.

vii) Large amount of energy produced isexported, generating immense

revenue

viii) Similar pricing compared to fossilfuels and nuclear power

ix) Competitive industry close tosaturation, with abundance ofnatural resources and advancements

in technology

Opportunities:

1. Renewable energy is in big demand inmany European countries.

2. An increase number of customers whoare environmentally conscious.3. Significant export potential.

4. The cost of electricity has been low inNorway compared to other EU countries.

5. High growth rate of the market.6. Norway has better wind conditions.


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Weaknesses:

i) Lack of labors such as engineerswhich is about 16000 in the nation. Itis importing labors for doing

renewable energy business.ii) Population is less in the nationindicating a small market in thecountry.

iii) Government priority is not therenewable energy industry, halting

important endeavors.

iv) Local demand is low.

Threats:

1. Wind power projects may need severalyears to build and connect to the grid.

2. Threat of new entrants.3.

Investing into large hydro power projectsmay take 3-4 years to build.

4. Renewable energy is climate friendly,although not necessarily environmentallyfriendly.

5. Wind farms might negatively impactvulnerable coastal scenery and occupylarge natural areas.

6. Decision

As we did analysis on this renewable energy industry of Norway, we had to reach a

decision on the investment method or how we should enter the Norway renewable

energy market. There are different method to entry such as- Greenfield investment,Mergers and Acquisition and Joint Venture.

But from above three investment methods we choose Joint Venture entry to the market.

A joint venture is an agreement between two or more companies to cooperate on a

specific initiative.

We opted for this point of entry because there are already some established company in

the market but they are unable to meet the growing demand. If we choose Greenfield

Investment then it would be costly and we needed much time to set up our business.

For this reason we didnt choose Greenfield Investmen t. So we will enter into the

market with high investment with another company from Norway to meet the need and

by expanding the business. In this way we can use the experience of that Norway

Company and well have less chance of making mistakes. Also in this method we can

easily meet the current and future needs of the renewable energy market.


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Moreover we can get benefit from the new rules and regulations set by the Government

for the pharmaceutical industry. This is why we are opting for Greenfield investment.

7. Recommendation

As this is a big investment in a developed country with growing demand in renewable

energy industry, we need to focus on a lot of factors. Some factors we need to focus on

include

The rules and regulations of Norway Government Usage of new technologies in the future In future we need to focus on the supply condition Expanding business


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8. Conclusion

So from the above analysis we can conclude that our decision to invest in renewable

energy industry in Norway is a best one. From the PEST and SWOT analysis our

decision to invest was proven right. All the economic with political factors are in our

side as we have seen throughout the report. Therefore our decision to invest here is the

best decision from our multinational corporation.


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Bibliography

1. en.wikipedia.org/wiki/Norway2. http://www.gfmag.com/gdp-data-country-reports/206-norway-gdp-country-

report.html#axzz2QAukpGEK

3. http://www.egypt-import-export.com/en/country-profiles/norway/investing4. http://www.indexmundi.com/facts/norway/foreign-direct-investment5. http://www.oecd.org/norway/6. http://en.wikipedia.org/wiki/Renewable_energy_in_Norway7. http://www.renewableenergyworld.com/rea/news/article/2013/02/norway-may-

boost-hydro-output-12-by-2020-survey-shows

8. http://www.nortrade.com/sectors/publications/renewable-energy-environmental-technology-by-norway-exports/

inb 410 (final) draft

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