How does a company decide which countries to target?

assements of country market, comparitive adavantage & the role of specialisation by countries

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Location decisions

Assessment of country markets

When a business starts to rade internationally, it willnot decide which countr to target at random. Very careful investigation is needed to asses the potential of one location in comparison with other possible alternatives. Much will depend upon th nature of the business & the product or service that it provides

Broadly speaking there are 2 main reasons wwhy a company starts to operate in another country:

  • to distrubute & sell its products/ services
  • to set up production faclilities
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Where to go?

Many factors will need to be considered in selecting an appropriate geographic location, including:

  • the level of economic development
  • the legal framework
  • gov polict
  • political stability & corrutopn
  • ease of setting up a business
  • natural resources & commodity prices
  • demographic attribute
  • the labour market & technological capabilities
  • consumer profiles
  • infrastructure
  • corporate policy
  • exchange rates
  • language and culture
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The decision is often complex as there will usually be trade-offs between different factors. E.g the cheapest labour is not necessarily th best if certain skills are required. A country that has an ideal consumer profile may have a high level of bureaucracy, making it hard to set up a new business

businesses must weigh up all of these factors & any relevant trade-offs before choosing the best location. Ultimately the business must choose the location that will be most profitable in the long run, i.e. the one that gives it the best rate of return on its investment

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Measuring development

Factors to consider

Level of economic development

  • development is often meausured by income (GDP) levels but on its own, this measure is not always helpful
  • some countries appear v.wealthy but the income may come from natural resources & not be evenly distrubuted amongst the population
  • it is often better to use a measure that combines other factors with income such as the (HDI) Human Development Index
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Diagram

draw diagram.

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The Human Development Index can be useful because it ranks countries in relation to several aspects of development. It has 3 strands:

  • 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 popultion's level of education

The Human Development Index is constructed by the United Nations Development Program & provides a measure of development based on access to health care & education as well as national income. It therefore includes qualitative as well as quantitative aspects of development

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The HDI ranking of countries is usually different from one based solely on GDP. Health & education levels have a big impact of the capabilities of the labour force. A low HDI ranking may indicate that the economy is not ready for projects that require skills & experience of industrial development. Or it may indicate that local markets for the output wil be small.

  • for a business seeking new markets / place to manufacture. the information is useful
  • access to education is particularly important indicator for businesses that will want to hire skilled labour
  • overall levels of development can indicate the existence of potential markets for the product or service
  • products & services could be adapted to suit the level of development
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Legal system

The legal framework

businesses rely on a sound legal framework to protect their interests. This includes IPR (intelluctual property rights) as well as being able to use the law to enforce contracts & payments. most countries have legal systems but they can be slow and unpredictable

  • if some of the law enforcement agencies are corrupt, the system may fail to protect foreign investors' interests
  • without adequate legal safeguards, businesses may be reluctant to invest. this is particularly likely which high-tech products are involved
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Government policy

The attitude to a government to businesses can have a big influence of where they locate:

  • the tax regime can be important. Countries such as Ireland with low rates of coporation tax still attract businesses despite recent problems
  • the degree of protectiontism can be important. high tariffs (import duties) can be detterent as it can make potential export markets unattractive
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Political stability & corruption

businesses need a stable political situation; civil unrest & wars especially are not conductive to successful enterprise. They may still be prepared to invest but only if the expected returns are v.high

  • countries that have history of political unrest tend to not attract businesses, unless they really need to be there e.g. oil companies
  • corruption can also be a problem & its endemic in many developing countries. for ethically motivated companies this is a problem
  • both political stability & corruptopn are hindering the development of certain countries, including some in Africa

The UK was ranked 20th & the BRIC countries were ranked 69,87,78 respectively in least /most corrupt countries. This shows that economic growth can take place even in corrupt countries. but some businesses will be dettered from locating there

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Business start-ups

Ease of setting up a business

the Ease of Doing Business Index was created by the World Bank. It looks at a range of factors that make a business easier to start & run, including:

  • time, cost & minimum capital required to open a new business
  • dealing 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

The higher up the easier it is to do business. regulations are better, simpler & easier to comply with & there is a strong protection for business property rights.

The BRIC countries were ranked 127,123,134,79, again emerging economies can prosper even when businesses faces problems there, but those countries that have tried to make business conds easier have seen some benefit & those really near the bottom do face serious difficulties.


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Natural resources & commodity prices

  • For some businesses expansion overseas is all about finding new resources that they can exploit
  • mining & oil companies go to where the resources are & then export them to where there is a demand for them
  • the inexorable rise of China has increased the demand for raw matrerials & commodities generally. when their prices rise businesses have a big incentive to seek out new sources
  • china itself has become one of the leading players in commodity markets, seeking out raw material sources everywhere
  • businesses that need the raw materials for inputs mostly do not need to be near their source cause most commodities can be transported quite cheaply. it may be more important to be near to markets for the finished product

Commodities are raw materials/ semi-manufactured products that are traded in bulk & are not recognisably originated from any particular business. E.g iron ore, cotton, wheat & oil

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Population issues

Demographic attributes

  • the structure & make-up the population may influence those companies selling to a particular demographic market segment
  • socioeconomic factors such as age,income,sex,occupation,education & family size are taken into account when deciding location
  • segmenting a population into demographic groups allow companies to asses the size of a potential market & also to see whether its products & services are likely to succeed
  • fast food companies suchs as MCDS & Yum Foods were especially keen to enter the Indian market because of its particularly large no. of young people, a key market segment for their products
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Pay & skills

The labour market & technological capabilities

labour can be a crucial factor in decidng where to produce. its availibilty, cost and qualities can all have an influence. the skills and education level of the potential labour force may be important. experience with new techs may be needed. India has a rep for skilled IT workers who speak english

  • wage costs can be crticial in maintaining competitiveness. China's spectacular growth owes much to its low cost labour force. that may be changing now that some Chinese employees are negotiating higher pay. Some employees may move production io Bangladesh/ Vietnam, where wages are now lower
  • there can be a trade-off between the need for cheap labour & labour with the right technical skills
  • the workfoce may need training; this will add to costs
  • the ease with which labour can be hired & fried is important. if it is easy to make employees redundant, the business will be able to adapt quickly to market change
  • labour markets tend to be less heavily regulated in developing economies
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Market segments

Consumer profile

while many businesses are looking for low-cost labour to manufacture their products, others want to find new markets. (some are looking for both) for those seeking new markets, consumer profiles can be decisive factor

  • consumers in emerging markets often see a rise in their disposable income as growth tskes place. the emergence of a new 'middle' class of consumers creates potential new & sometimes vast markets
  • their appetite for western consumer goods & brands has seen businesses selling everything from fast food, fashion, houehold appliances to cars, moving in to take advantage
  • along with the rise of the middle classes has come the new super-rich. China & India are predicted to account for around 25% fo the global luxury brands market by 2015
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Transport & communications

Infrastructure

Infrastructure includes all transport & communications facilities as well as the provision of basic services such as energy & water supplies. Examples includes telephone systems & ports, as well as roads, power stations & drains

  • in its broadcast sense infrastrucutre includes all the basic services that enable individuals & businesses to function.
  • for a business, it is vital to be able to access supplies, distrubute goods & services & communicate with its stakeholders
  • weak infrastructure is v.much a feature of low levels of economic development. it inhibits business growth because:

- slows down the transport system & raises costs - makes communcaition more uncertain & hard - harder to maintain supply chains -harder to use modern production techs such as JIT - prevents efficient distrubition of goods/ services

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  • the Indian gov estimated that more than 250 million Indians go to bed hungry every day, often cause of lack of storafe & distrubtion lines connecting prouduction & consumption hubs
  • even in developed economies poor infractrucute can be a real problem for businesses. in the UK, B&Q switched its main port & distrubution centre from Southhampton to Hull to avoid what is known as 'Southern Discomfort'' the chronic congestion in the S.England on what have become Europe's busiest motorways
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Strategic decesions

Coporate policy

Different corporate objectives & policies mean that businesses vary as to the extent to which they want to expand abroad.

  • for some, it is about diversyfing to reduce risks. other businesses simply want growth to expand their markes & profitability. both LVMH in China & JCB in India found success after facing saturation in their western mrkets
  • other businesses are looking to cut costs & employe cheaper labour
  • some businesses may go for inogranic growth by buying up appropriate businesses abroad
  • other businesses set up their own factoriees or offices or retail outlets, growing organically wherever they feel confident of beign able to create a market/ cut costs
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Exchange rates

  • exchange rates are fexibile & vary over time, this can be a source of great uncertainity
  • selling exports in a foreign market that has an undervalued exchange rate can be problem because of the cheaper compeititon
  • China has often been accues of keeping the value of the Yuan artitifcally low to boost its exports & to make it harder for foreign imports to penetrate its domestic market. so selling to Chinese market may entail proucing there too
  • locating production in an economy with a relatively low exchange rate may both cut costs & open up markets
  • however, businessses need to watch inflation rates as well.Higher than average inflation in China has caused wage rates to rise & this will affect the competitivness fo good produced in China
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Language & culture

  • clear & accurate communication is vital for business success
  • India & egypt have both been successful in attracting Western FDU because of the high.no of english speakers they have
  • the importance of fitting in with the local customers & culture .
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Trade & growth

Comparitive advantage & the role of sepcialisation by countries

Comparitive advantage can be confusing. you will not have to explain exactly how it works but you may have to explain its impact on a country's trade & development

In international trade most economies will specialise to some extent by producing the things they are best at

  • they may have some competitive advantage over other countries in certain sectors
  • their advantages may include natural resources, abundant land, cheap labour, scarce skills, technical know-how, a favourable climate, beautiful scenery, a deep-water port, a university active in scientific research/ accesible sources of finance
  • by specialising output can be increased. some or all of this can be traded forr goods & services the country does not produce
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Specilisation

Specialisation means that people (/economy) make the most of their skills by concentrating on what they do best.as an appropriately skilled person produces more, output per head rises. this only works when people/ economies are in a position to trade their putput for things they need but do not produce

Absolute advantage

One country will have an absolute advantage over another if it can create a product using fewer sources. then it pays to specialise, producing more of the products in which the country has an advantage & trade it for other things that are best produced elswhere. however, economies can still gain from trade even when then they do not have an absolute advantage.

An abolsute advantage exisits if the real resource cost of a product is lower in 1 countrey than another

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Comparitive advantage

The theory of comparative advantage states that if 2 countries each specialise in the products with the lowest opportunity cost, & then trade, real incomes will increase for both countries

  • the theory of comparative advantage shows that specialisation & trade can usually increase real incomes
  • this works even if 1 contry has an absolute advantage over the other for all posb products
  • comparative advantage relates to the opportunity cost of production
  • provided opportunity cost structures differ between countries, every country will have a product for which its opportunity cost is lower than that of other countries
  • this is the product that it can produce relatievly more effectively & should specilaise in
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trade & output

  • it is clear that if both countries specilaise in the producution of the good that has lwoer opportunity cost (comparatie advantage) & then trade, total output increases
  • by specialsing, economic growth has taken place & output/income has increased
  • the link between trade & growth oberall is well estaiblish. exporting more raises GDP
  • higher incomes mean eople can afford more imports, creates new markets for other producers etc
  • although the theory hold good there are in reality  many things that can halt/ reduce the increase in trade. trade restrictions & protectionsm etc
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What specilisation can mean for an economy...

Advantages of specilisation

  • can lead to increased output & efficiency
  • economies of scale gained as output increases
  • goods & services can be produced more cheaply
  • competitive advantage is enhanced
  • export earnings increase
  • comp amongst producers helps to lower price & drive innovation which benefits domestic & foreign consumers
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What specilisation can mean for an economy...

Disadvantages

  • can lead to over-reliance on 1 are of the economy
  • comparitive advantage can more elsewhere
  • emerging economies often rely heavily on 1 commodity product (all your eggs in one basket)
  • fluctuating commodity prices can be a problem
  • reliance in imports for other goods & services
  • over-specilisation can lead to severe structural unemployment if demand should fall


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