International Business

International Business

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International Business

Abstract

The modern day business market is dynamic having significant levels of uncertainty concerning future conditions and state. This factor necessitates expanding companies to develop effective strategies that conform to their managerial vision. Decision making in the development of a strategic plan is complex therefore requiring in depth analysis of the expanding market prior to entry. In detail, this paper analyses and explores various international markets that are driven by expansion in order to discern the best location for the U.S.A based toy manufacturer to expand. In addition, the report will provide market expansion methods for the company to ascertain successful market entry. A socio-cultural analysis will be made in order to identify the best cultural approaches that will ensure the toy manufacturer effectively co-exists with the immediate social environment.

Introduction

Strategizing to a company in the progressive and dynamic economic market characterized by the globalization concept is a complex undertaking. The market is always changing, having interconnected variables and distinct policies that make the business environment an explosion of knowledge. The high degree of uncertainty and change in new markets is a problem that organizations consider prior to entry. The modern market and concept of globalization requires corporation between different legal systems, co-operate structures, borders and cultures. Companies that aim to expand have to possess high degrees of flexibility and conformance to the dissimilar markets in order to thrive. Despite globalization necessitating standardization in different t markets, the world remains to be divergent. International markets have equal degrees of conformance and dissimilarities in their business market presenting different opportunities and threats for new companies. Internationally operating businesses require the ability to adjust to the evolving environments that they encounter in the various points of our globe.

P.E.S.T.E.L Reports

Germany

Political Analysis: Germany is a federal republic and legislative authority vested in their parliament, which is known as the Bundestag (Mennen, 2011). The country is made up of a centralized federal government divided into sixteen federal states. Following their 1949 constitution, none of the sixteen stases can develop a government of their own (Mennen, 2011). Germany has three power ranks that are the Head of State (President), Head of Government (Chancellor) and the Cabinet. Germany is a member of the G8, G20, World Bank and the International Monetary Bank (Mennen, 2011). It is one of the most stable political systems in the world.

Economy: The country has enjoyed a stable growth rate of 0.7% from 2008 translating in 3.6777 trillion dollars annually plus compound generation (Mennen, 2011). Germany is a social market economy and the biggest European market. Germany is the world’s second exporter having 1.41 trillion dollars generated in 2011 (Mennen, 2011). Exports account for a third of the gross domestic product. The main products are of engineering, technical, and chemical natures. It is the leading manufacturer of wind and solar powered technology. The nation imports two thirds of its energy requirements. The service industry is its leading GDP generating sector followed by industry and agriculture.

Social Analysis: Germany has a population of 82 million with a growth rate of -0.061%. The birth rate is 8.21 per 1000 persons with a life expectancy of 79 years (Mennen, 2011). It is the second most populous country in Europe with a population density of 230 persons per square kilometer. Persons between 15-64 years make the biggest chunk of the population representing 66% of it. Labor works for 37 hours weekly between 9am and 5pm with an annual leave of 20-30 days. Germans ignore discounts and prefer quality, comfort, safety, and reliability in products.

Technology: Germany is one of the global leaders when it comes to engineering. It is the leading automobile producer. It is the eighth out of 139 countries technology wise according to the World Economic Forum report of 2010 on Global Competitiveness (Mennen, 2011). The WEF ranks Germany third on innovations using number of patents filed annually. Technology research accounts for 2% of the country’s expenditure.

Environment: Germany is the sixth carbon emitter in the world. After the Kyoto Protocol, emission reduced by 23% through use of wind energy (39%) for production (Mennen, 2011). Germany has reduced its energy consumption by 27% since the Kyoto Protocol. It is invested heavily in the transformation to renewable energy.

Legal: Law is enforced in three fronts that are Federal, State and local in order of supremacy. The Supreme Court is accountable for enforcing rights and justice preservation. Germany follows Roman law where administration of Justice is divided into five branches that are Ordinary, Labor, Administrative, Social, and Financial Courts (Mennen, 2011). Investors put the legal system of Germany second after Britain worldwide.

Brazil

Political Analysis: Brazil relies on monetary policies when it comes to business. Interest rate value is set at an average of 10.5% to benefit consumers (Lukac, 2008). The political system is focused detrimentally on the consumer thus has a negative outlook for companies operating on a short-term basis. Inflation remains to be the biggest challenge in Brazil because of the domestic energy consumption rate and global oil prices. After inflation, corruption is the second political concern. Corruption has resulted in lack of government contracts thus new entrants bribe in order to gain approval.

Economics: As of 2011, the country’s GDP was 2.52 trillion dollars (Lukac, 2008). Exports, the leading GDP generator accounted for 201.9 billion dollars (Lukac, 2008). Main exports are iron ore, manufactured items, coffee, and other agricultural produce. Imports account for less than a third of the country’s expenditure. According to ranking done by the Foreign Direct Investment (FDI), Brazil has a score of 8 out of 10 (Lukac, 2008). The score reflects the country’s economic risk, stability, business, and investment ambiance. The service industry accounts for 64% of the GDP followed by Industry (28%) and Agriculture (8%) (Lukac, 2008).

Social Analysis: The most dominant class is the middle class eating up of 50% of the population. 20% of the population is illiterate thus; foreign investors discourage investing in Brazil. The population of Brazil is three times that of Germany. The population growth rate for the country is 0.31% (Lukac, 2008).

Technology: The country spends 1% of its GDP on research and development (Lukac, 2008). Intercommunication and global communication factions remain the central focus of technology in the country. Brazil has the highest rate of patent application in South America (Lukac, 2008). The country has a technological agreement with European countries for scientific and technological co-operation in order to elevate accessibility of technology information.

Environment: Brazil compels companies to install eco-friendly combustion techniques in product development. There is a signed pact with border nations to develop the Amazon basin. The Amazon is the centre focus thus emphasis is put on reducing deforestation and human settlement around the basin. The country ranks sixth according to the Kyoto protocol regarding emission of green House Gases (Lukac, 2008).

Legal: the Civil Code governs Brazil when it comes to business. New entrants in Brazil register with the Trend Board as separate legal personalities (Lukac, 2008). Creditors cannot seize partner assets in order to reimburse company debts. The legal system is strict on foreign investment giving minority participation in media, financial bodies, insurance, and health. The minority participation is also placed on foreign individuals. Taxes vary from state to state, elevating compliance and complexity expenses.

China

Political Analysis: China follows the Rule of Law established in 1982. There are 300 laws regulating economic functionality in the country (Tian, 2007). China is a one party communist country marked by dictatorship. Economic management powers in the country are decentralized increasing complexity costs for foreign investors (Tian, 2007). The political environment of China favors foreign investment through soft policies on distribution channels and market expansion.

Economics: China is the second largest economy after the United States with predictions having it surpass the leader by 2020 (Tian, 2007). As of 2011, the GDP was at 30 trillion dollars. The country has maintained a growth rate of 9.5% in the last decade. Chinese exports account for 10% of the globe’s total exports (Tian, 2007). The consumer price index for China rises at a stable rate of 4% benefiting foreign investors who effectively expand in the market. The biggest resource for China is its labor force. China’s big population provides an abundant labor force for both foreign and local investors in manufacturing industries.

Social Analysis: China is the most populous country in the world with over 1.3 billion persons and a growth rate of 0.494% (Tian, 2007). The IMF considers China as a high context society keenly focused on family and community ties. In this, foreign investors require strong private relationships with key stakeholders in order to overcome the blood and racial ties in China. This makes it time consuming and costly for foreign investors. Corruption is another problematic social issue in China. The Corruption Perception Index places China at 72 out of 179 nations (Tian, 2007). Given the economic size of the country, the ranking does not entirely reflect the expense in damage caused by corruption. Foreign investors experience huge losses in the country more than in other countries ranked ahead of it by the CPI.

Technology: The growth rate of technology in China is rapid. This is because of governmental emphasis on innovation through funding, reform, and programs. Technology has helped the country cut 21% of its production costs in the last decade (Tian, 2007). Focus is put on biotechnology and information systems because of the country’s reliance on agriculture and engineering. The country has a technology agreement with the United States that includes sixty protocols. China invests 3.5 billion dollars annually on research and development.

Environment: The rapid population and industrial growth rate in China has numerous adverse effects on the environment. As of 2007, China was the world’s biggest carbon gases emitter (Tian, 2007). According to the World trade Organizations, seven of the ten most polluted cities were in China. All rivers in China are water polluted to some degree with half the population lacking access to clean water. This makes water scarcity the biggest environment concern for foreign investors. The environmental legislation has imposed high operational taxes for manufacturers in attempts to mitigate the adverse effects of production.

Legal: Chinese laws support foreign investors. There is an established law on foreign equity that rules and regulates on operational commencement, termination, and liquidation of foreign-based organizations. Foreign investment is protected and supported by three laws. These are the Chinese-Foreign Equity Joint Ventures, Chinese-Foreign Contractual Joint Ventures and Law on Foreign Owned Enterprises (Tian, 2007). China is known for its attractive taxation package for foreign enterprises in Asia. Tax incentives in the manufacturing sector are given in promotion of foreign investment.

Country Selection

The country selected for market expansion for the Toy manufacturer is China. The current opportunities in the nation present numerous spaces for foreign investment that the company can tap into successfully. For instance, the Chinese government focuses on internal growth thus continues to implement positive economic policies and modifications of its economic structure to ascertain growth (Knight & Ding, 2009). China has been undergoing a reform period that is highly beneficial to both local and foreign investors. The country has a fixed rate of GDP growth that runs over a ten-year period proving its political and economic stability (Knight & Ding, 2009). These mark its political climate.

Economically, China within the framework of the competitive market is highly profitable. The rate of return of capital is high because of low labor costs in the initial production investment and high sale numbers (Knight & Ding, 2009). The Chinese population offers a readily available labor force that the Toy manufacturing company can use. The capital- labor ratio is out of equilibrium making the rate of investment return big (Knight & Ding, 2009). Integrating the local people in the company creates a good image for the company that in turn reflects in sales. Equally, the large population offers a big market in children for the manufactured toys. Moreover, the large children population is a big enough space for all competitors in the toy business. China has an abundance of production resources in the form of labor and energy. Abundance results in low costs of acquiring the resources that in turn reflects in low production costs.

The WTO argues that Chinese investors have grown in confidence with their legal system since the early 1990s. This is because of the various legal reforms that have been put in place in alignment with economic and political reforms (Knight & Ding, 2009). The present legal system is adequate in resolving disputes and conflicts in the market. Decentralization of the legal system provides an in-depth analysis of cases in timely fashion allowing business continuity (Knight & Ding, 2009). Improvements in the legal system result in an indirect proportional change in the rate of corruption. As the system improves, corruption decreases in China.

Demerits of investing in China arise from its living conditions. Water scarcity and high carbon emissions create a hostile environment for foreign workers (Knight & Ding, 2009). The polluted environment may result in ill health conditions and living hardships that necessitate the company to offer hardship allowances in order to lure international employees. The extra salary incentives increase the production costs of the company.

Mode of Expansion

The recommended mode of expansion is franchising. Franchising is a form of partnership where goods and services are marketed and distributed by secondary parties other than the manufacturer with the original trademark (Sahay & Sharma, 2008). Franchising is an ever-growing method that gives the consumer the notion that the provider of the goods and services belongs to a group or chain of the original maker. In detail, franchising is a written contract that grants a party the right to engage in service delivery, sales, or distribution under the marketing plan or system developed by the franchisor. The operations of the franchising process employ the trademark, trade name, service mark, logotype and any other symbol associated with the franchisor and its affiliates (Sahay & Sharma, 2008). There are various legal exemptions dependent on the type of franchising undertaken that both the franchisor and franchisee need to be coherent with prior to contract commencement.

There are numerous reasons as to why to franchise. For one, in applying the energy and resources of the motivated operator, the expansion process occurs in a faster way (Sahay & Sharma, 2008). This can allow the Toy manufacturer to access market opportunities that have a time constraint. Local operators that act as marketers and distributors have greater knowledge of their local market than foreign investors do. Local operators have easy access to resources and understand the legal and political niches of the market that they can manipulate to their advantage. In short, local operators are more effective than foreign companies in the local market are. Franchising increases the flexibility of the original company giving it a competitive positioning in regards to future and present conditions.

The biggest fear in franchising is the loss of quality control (Sahay & Sharma, 2008). Secondary operators in the contract function under the trademark of the original firm thus can destroy or tarnish their goodwill given that they operate in poor ways. Quality control is ascertained in the trade agreement that gives the franchisor enforcement rights in incidences that the franchisee steers off from the set business plan. This is part of the trade off in the application of the franchisee’s resources in order to expand one’s business.

Cultural Challenges

The Toy manufacturer will be operating in two different environments that will create conflicts in relation to degrees of cultural adaptations. Communication and organizational structural differences are the major challenges facing the expanding company (Sahay & Sharma, 2008). The two are linked ideologies as communication practices affect culture and the opposite applies. Language barriers will exhibit the cultural differences affecting operational coherence and effective functionality (Sahay & Sharma, 2008). The USA converses in English while China communicates in Chinese. In addition, there is dissimilarity in communication practices such as signs, symbols, and gestures. Individuals from different backgrounds communicate in dissimilar manners thus creating communication, commitment and functioning issues in employees.

In order to understand the cultural differences, the Toy manufacturer must devise a way to highlight the similarities and divergence in the two environments. Understanding is done on two fronts that are the context in communication and the beliefs attached within the context (Sahay & Sharma, 2008). The two concepts are used in the elevation of understanding in intercultural communication. The study on cultural divergence is done prior contract commencement with partners in order to increase the level of effectiveness in the trade agreement. Study is done jointly to equally improve operations, cohesion, and relations. In order to eliminate employee conflict arising from poor communication, workers are taken for training immediately after recruitment (Sahay & Sharma, 2008). Training establishes a standard communication practice that considers both cultures. In addition, training solves the problem in the language barrier as foreigners are taught of the local language and vice versa.

Conclusion

Companies that attempt to seize the opportunities of a new business market for growth are faced with complex and significant decisions regarding mode of entry and managerial expenses. The company needs to understand the business climate of the foreign business environment in order to identify the best model for expansion. Modes are divergent in terms of control, resources, legal conformance and technology associated risks. The Toy manufacture company is one that targets children. Of the three target markets, China has the biggest child market. In addition, the political, economic, and legal environment of the country provides the optimum conditions for expansion. Socio-cultural and sociopolitical challenges in language barriers, access to resources and corruption direct the company to franchising as the ideal expansion model. Franchising provides the best model for growth with lowest degrees of risk and highest legal and operational conformance.

 

References

Knight, John & Ding Sai. (2009). Why Does China Invest So Much? Oxford Department of Economics Discussion Paper. 441. 3. 1-38.

Lukac, D. (2008). Key Success Factors for Foreign Direct Investment (FDI): The Case of FDI in Western Balkan. Diplomica Verlag.

Mennen, M. (2011). Strategic Analysis of the BBC. München: GRIN Verlag GmbH.

Sahay, A., & Sharma, V. (2008). Entrepreneurship and new venture creation. New Delhi: Excel books.

Tian, X. (2007). Managing international business in China. Cambridge: Cambridge University Press.