How does a company decide which countries to target? HARRIET BENNETT

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  • How does a company decide which country to target? 3.3.3
    • Level of economic development
      • Development is measured by income (GDP)
        • Some countries appear to be wealthy but the income comes from natural resources & not evenly distributed amongst the population
      • A better measurement is Human Development Index (HDI)
        • Income as measured by GDP per capita, which gives an idea of the population's living standards
        • Life expectancy, which gives an idea of the population's health
        • The time spent in schools, which gives an idea of the population's level of education
        • For a business seeking new markets this information is useful.
        • Access to education is a particularly important indicator for businesses that will want to hire skilled labour
        • Overall levels of development can indicate the existence of potential markets
        • Goods & services could be adapted to suit the level of development
    • Legal framework
      • Businesses rely on sound legal frameworks to protect their interes e.g. IPR and being able to use the law to enforce contracts & payments.
      • If the law enforcement is corrupt, the system may fail to protect foreign investors' interests
      • Without legal safeguarding businesses may be reluctant to invest, when high-tech products are involved.
    • Government policy
      • Tax regime can be important. Countries such as Ireland with low corporation tax still attract businesses despite recent problems
      • Protectionismcan be important. high tariffs can be a deterrent as it can make potential export markets unattractive.
    • Political stability & corruption
      • Countries that have history of political unrest tend not to attract businesses, unless they really do need to be there e.g. oil companies
      • Corruption can also be a problem & is endemic in many developing countries. For ethically motivated companies this is a problem
      • Both political instability & corruption are hindering the development of certain countries, including some in Afica
    • Ease of setting up a business
      • Looks at time, cost & minimum capital required to open a new business
      • Deal with permits & regulations
      • Ease with which employees may be hired & fired
      • Tax payable as a share of gross profit
      • Cost & time needed to export & import
    • Natural resources & commodity prices
      • For some businesses expansion overseas is about finding new sources of resources that they can exploit
      • Mining & oil companies go to where the resources are & then export them to where there is demand for them
      • The rise of China has increased demand for raw materials & commodities generally. With price rises businesses have a big incentive to seek out new sources.
      • China has become one of the leading player in the commodity markets, seeking out raw material sources.
      • Businesses that need raw materials for inputs mostly do not need to be near their sources because most commodities can be transported cheaply. it may be more important to be near to markets for the finished products
    • Demographic attributes
      • Structure & makeup of a population may influence those companies selling to a particular demographic market segment
      • Socio- economic factors are taken into account
      • Segmenting a population in to demographicgroups allows companies to assess the size of a potential market & also to see ifs its products are likely to succeed
    • The labour market & technological capabilities
      • Labour is less heavily regulated in developing economies
      • The ease or hiring & firing is important. if its easy to make people redundant, the business will be able to adapt quickly to market change
      • The workforce may need training, added cost.
      • There can be a trade-off between cheap labour & labour with the right technical skills
      • Wages can be critical in maintaining competitive-ness.
    • Consumer profile
      • Consumers in emerging markets often see a rise in their disposable income as growth happens. The emerging of a new 'middle class' of consumers creates potential new & vast markets
      • They have a demand for western goods & brands has seen businesses selling everything from fast food, fashion & cars moving in to take advantage
      • Along with the rise of middle classes have come the new super-rich. China & India are predicted to account for 25% of the global luxury goods market by 2015
    • Infrastructure
      • Its vital for businesses to be able to access suppliers, distribute goods & services & communicate with stakeholders.
      • Weak infrastructure is very much a feature of low levels of economic development as it inhibits business growth.
        • It slows the transport system & raises costs, makes communication more uncertain & difficult, makes it harder to maintain supply chains, makes it harder to use modern production techniques (JIT), it prevents efficient distribution of goods & services
      • Even in developed countries poor infrastructure can be a problem. B&Q switched its main port from Southamptonto Hull to avoid the congestion in the South.
    • Corporate policy
      • For some, its about diversifying to reduce risks. others businesses want to expand their markets & profitability. Both LVMH in China & JCB in India found success after facing saturation in the western markets.
      • Other businesses are looking to cut costs & employ cheaper labour
      • Some businesses may go for inorganic growth by buying up appropriate businesses abroad
      • other businesses set up their own factories/ offices/ retail outlets, growing organically wherever they feel confident of being able to create a market or cut costs
    • Exchange rates
      • Exchange rates are flexible & vary. this can cause great uncertainty
      • Selling exports in a foreign market with an undervalued exchange rate is bad because of cheaper domestic competition
      • China has been accused of keeping the Yuan artificially low to boost its exports & make it harder for imports to penetrate the market
        • So selling in the Chinese market may entail producing there too
      • Locating production in an economy with a relatively low exchange rate may cut costs & open up markets
      • However, businesses need to watch inflation rates. higher than average inflation in China has caused wage rates to rise & this will affect the competitive-ness of goods produced in China
    • Language & culture
      • Clear communication is vital for business success
      • India & Egypt have been successful in attracting Western FDI because they have high numbers of english speakers

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