Why Businesses seek International Markets?
extending the product life cycle
1 Extending the Product Life Cycle:
- Businesses can often sell old products or services to new markets.
- Mainly because the prodcut has become mature in the domestic market, and demand is declining. e.g. moblie phones in Africa.
- This way, the business can sell an old idea in a new place and there is no additional R&D cost.
2 Domestic Limtiations:
- Government Watchdogs: Most governments want to keep there markets competitve to make sure there is constanr innovation and cosumer purchasing power is high. Watchdogs do this by making sure successful businesses do not gain too much influence in the market.
- Market Saturation: When a product reaches market saturation, it means that the growth of sales of products will be low, the point of maturation on the PLC curve. Reach out to new markets.
- Foreign Competition: Often foreign competition may provide better quality goods at lower prices. Will force businesses to search of new markets or to make their products more competitive by making better products/lowering prices etc. May be forces to export.
- Small market: If the business is in a country with little demand for its product, then exporting may be the only way to expand the business.
4. Global Sourcing:
- Global sourcing is the process of obtaining something from a different country. This is to exploit global efficiencies such a cheap labour.
- Due to the differences in the cost of living in poorer nations, skilled labour as well as unskilled can be significantly cheaper.
- The business has to spend less on production, and thereby will have more profit as a result
Key terms:Outsourcing: buying inputs from indepentent suppliers
Offshoring: buying inputs from overseas suppliers
4. Bussiness Objectives:
- It may be the desire of the owner to expand the business occurs the borders of domestic nation. More profit and the bigger business will spread the costs.
- Bigger businesses can take some risks without threatening its future.
5. Trade Liberalisation:
- International trade barriers such as quotas and tariffs have decreased massively over the past few decades.
- As a result, it gives businesses more incentive to export as well as importing goods.
- The world trade organisation (WTO) has helped nations to achieve greater co-operation in making markets more accessible to each other.
- This resulted in greater FDI flowing into and out of countries.
- Costs for trading internationally have gone down meaning that trading internationally is more lucrative.
Ability to trade within a trading bloc
6. Ability to trade within a Trading Bloc:
- What are trading blocs: a group of countries that have no trading restrictions between them.
- Free trade areas: Countries that have no trade restrictions within themselves but each country determines their own trade policies with the rest of the world, e.g. NAFTA
- Common markets: Countries that have no trade restrictions within themselves and also have a common trade policy with the rest of the world. Also free movement of people and capital.
- Single market: Where there are no barriers to trade, a single market is a place where with regard to trade they are one country. e.g. EU
- Benefits:- makes sure businesses have equal opportunties, no barrier or price fixing
- No border controls means goods arriver faster + JIT
- Businesses have access to a larger market and exploit efficiencies within the bloc
-EU members are protected from non-EU companies due to barriers
- Shipping containers made overseas sales cheaper
- Air transport cheaper
- Computerised data handling has led to a drop in administration costs
- E-commerce has made shopping accessible worldwide. e.g. eBay/Amazon
Key players in world economy
Key players in world economy
China: Background Information
China: Background Information
- Fourth largest country by landmass with a population of 1.3 billion.
- Orginially state-run economy but changed to a more capitalist economy.
- Includes the changes of the making of megacities like Shanghai.
- However, the interior provinces of China still remain very poor, with little education
China : Economic Growth
China: Economic Growth
- China became world's second largest economy in 2009.
- China has been booming for three decades. Economic growth around 10 constantly. This growth makes China very lucrative for businesses.
- However, rates of growth are normal for a developing country. But to have the level of growth for such a prolonged period of time is truelly remarkable.
- China's population has greatly benefited overall with their incomes rising and famines being a thought of the past.
China: The influence of purchasing power
China: The Influence Of Purchasing Power
- Measured by the purchasing power parity
- Much of rural China still remains poor
- Overall, the massive increase in total GDP has helped China
- Cities like Shanghai and Guangzhou are very wealthy, facilitating the growth in demand for luxury goods.
China: The influence of increased FDI
China: The Influence Of Increased FDI
- FDI is the inflow of foreign wealth into a nation. This can be in the form of capital or outsourcing production or it may be directed towards production of foreign markets
- FDI poured into China when it adapted a capitalistic approach; mainly due to cheap unskilled labour ideal for manufacturing plants
- FDI led to technology transfer, when countries with limited access to technology acquire expertise when MNC's set up there; the reason MNC's have to set up a joint venture with a Chinese company
- Has led to more skilled labour being in the Chinese market which has resulted in greater production efficiency in China.
- Due to better technology and information, China began to develop more sophisticated products like electronics and solar cells
China: Predicted Economic Power In Comparison to t
China: Predicted Economic Power In Comparison To USA and EU
- The USA has a higher GDP than China, but China has a greater growth rate. Expected to overtake the US by 2040. As China becomes more developed, will its growth continue?
- China has the largest car market in the world, will put pressure on infrastructure
- China is already 'economically colonisng Africa' to make sure it has the resources to sustain strong economic growth in the future.
- China is also investing heavily into education and research facilities due to the massive inflow of foreign currency.
- Due to these high growth rates,Chinese people are becoming richer and demanding more
- China is making its business nire competitive and transport through the introduction of regulatory commissions as well as privatisation of SEO's; reducing corruption at the same time
Barriers to trading in China
China; Barrier To Trade
- language barriers: English speaking manager are in short supply and also expensive
- Intellectual copyright laws are not properly enforeced in China, so it can be become a very difficult market to sell to.
- Markets can suddenly fluctuate due to changes in government's economics policies as they have a huge inlfluence creating uncertainty
- China has no nationwide credit database making it tricky to assess consumers credit worthyness
- China is undergoing rapid social and economic change; a widening disparity in inequality
- MNC's often have to compete with local players who have low cost operation and lower prices
- The diversity of the Chinese market is significant, requiring a variety of products to meet segmented needs
- Infrastructure is less developed making transportation more difficult
- Language and culture barriers make market research difficult
China: Trading Opportunites
China: Trading Opportunites
- China is fast growing with an enromous landmass and population; plenty of customers
- Growing car market= larger market for car manufactures to sell into
- There is a lot of interest in foreign education
- China is becoming richer there is growing demand for processed foods
- Large increase in income has led to the demand of luxury good
India: Background Info
India: Background Information
- 7th largest by landmass with a population of approx 1.2 billion
- The Indian subcontinet was colonside by the British for 200 years meaning the economy was crippled. Though the British did estalish an adminisration system and rail transport lines. Also much more english speakers than China (advantage)
- India has a much lower HDI than India
India: Economic Growth
India: Economic Growth
- After inderpendence India adopted socialist principles aiming to reduce the rift between rich and poorer. Also believed in the idea of self-sufficiency meaning domestic market were heavily guarded by trade barriers. Thus little FDI was attracted and no technology transfer occured,
- In the 1990's government control over businesses were removed. As a result India became an open economy.
- India is now 50% of the global market for outsourced IT and business services, made possible by its English speaking and good education system
- India also has great human capital as there are many unemployed graduates in India with growing industries in pharmaceuticals, electronics and technology
India: The influence of increases purchasing power
India: The Influence Of Increasing Purchasing Power
- India has a strong and growing middle class meaning that the overall purchasing power of India is increasing. Means it will become more lucrative for car manufactures, luxury goods producers as well as electronics manufactures to sell here. Resulted in more FDI in India
- However 40% of the Indian population live in the poorest states and 25% of the Indian population live under the US$1.25 poverty line
India: the influence of fdi
India: The Influence Of FDI
- Flow of FDI is still slow due governments remaining belief in self-sufficiency
- FDI has increased purchasing power
- Also, technology transfer has helped India's IT sector grow making it a powerhouse of IT
India: Barrier to trade
India: Barriers To Trade
- Has barriers to make imported goods more expensive, foreign compaines pay higher corporate tax (40% compared to 35%)
- Culture and language
- Still alot of corruption persists meaning legal formalites can take a long time
- Inconistent industrial policy and rules ;laws, reglations and rules are often suddenly changed
- Foreign companies are limited to the amount of loans they take
- Goods in India are often smuggled from other countries making them cheaper. Unfair competition
- Foreign investors are bared from investing into key sectors
- Lack of infrastructure: areas such as power, roads and telecommunications networks has not been developed and this is the principle barriers to increase overseas investment
India: Trade opportunities
India: Trade Opportunities
- There is considerable human capital in India with an English speaking population, it means that skilled labour can be recruited at very cheap wages as the cost of living is much lower then in western countries
- India is a very education-promoting nation, meaning that there are many opportunities for western universities
- International businesses are allowed to own pharmaceutical companies
How does a company decide which countries to targ
How Does A Company Decide Which Countries To Target?
1. Geographic Proximity:
- Genrally the further the nation, the higher the transport cost, can be less though
- For normal manufacturing businesses, it would be best to locate near their manufacturing plants, which would make transportation easier and faster
- Service oriented businesses will not find this a great problem, as there is little to transport
Government Policies and Exchange Rates
2. Government Policies And Exchange Rates:
- Taxes: businesses will try to pay the least tax to maximise profits in high taxe countries. Low taxes attracts FDI
- Barriers to trade such as tariffs and quotas
- Ease of setting up a business; often with developing nations there is exercise red tape.
- Exchange rates: unstable exchange rates would cause uncertainty. Undervalue exchange rates would make foreign goods more expensive; some businesses choose to locate the business in the target market will have to offset added production cost with sales
- Grants and subsidies, this makes doing business cheaper. Often governments try to lure in businesses in businesses in poverty stricken areas in order to increae employment there
Level of Economic Development
3.Level Of Economic Development (HDI or GDP)
- Targeting areas of high HDI and GDP per capita will be good for most businesses as people there are healthy, educated and rich. This means the market should be able to cater for most buisnesses, but labour costs should be very expensive
- Stong infrastructure should allow for businesses better communication as wekk as transportation of goods and services, allowing them to reach a larger number of censures
- Businesses will need to seek out economies that meet their needs and at the same time provide the best competitive advantage due to its economic efficiencies
Political and legal system
4.Political And Legal System
- Businesses will want stability in the economy, so that businesses can grow as usual and long term predictions on growth can be made. However, often businesses have to take risks in order to make profits in volatile nations with political instability or corruption
- The legal systems are not always dependable e.g. counterfeit software is a major concern in China
Natural Resources and commodity prices
5.Natural Resources And Commodioty Prices
- Big factor for mining and oil/gas companies
- High commodity prices for natural resources such as coal, oil and metals may give companies enough incentive to start doing business in volatile regions. Chinese companies have a lot of mining operations in Zimbabwe because of the abundant mineral reserves and very cheap labour available there
- Commodity prices will affect a decision in a similar way to the levels of other factor costs. Lower commodity prices make location there more attractive. However, by the widely traded nature of commodities, it is unlikely to be a major factor in location as they can simply be imported. Depends on the importance of commodities as raw materials for the business in question
Potential Labour Force and Level Of technology
6.Potential Labour Force And Level Of Technology:
- Different businesses will need different levels of skill. Businesses may often have to trade off additional training costs with low wages in certain countries, and low wages should provide a greater return on investment
- If a business wants locate its R&D sector in a country, then it will have to have net its technology and human capital requirements. Infrastructure and good telocommunication should also be a key factor when deciding where to locate the R&D sector
Return On Onvestment
7. Return On Investment
- Businesses will make forecasts on profitability. This depends upon the previous factors and also what the business expects in the long term
Comparative Advantage And The Role Of Specialisati
Comparative Advantage And The Role Of Specialisation In Economics
- When businesses are tasked with producing something, they divide the workload into different parts, handled by different work-group: the division of labour
- As these groups work on their specific tasks more and more, they become better at what they do and thus increasing efficiency
- The ability of a county, individual, company or region to produce a good or surface at a lower cost per unit than the cost at which any other entity produces that good or service
- A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor
- Demonstrates the ways in which protectionism is unessary in free trade
- Agrees that free trade works even if one partner in a deal hold absolute advantage in all areas of production. That is, one partner makes products cheaper, better and faster than its trading partner
- Stipulates that countries should specialise in a certain class of products for exporting, but import the rest. Even if a country holds an absolute advantages in all products
- A particular advantage that a business has that enables it to preform better than its rivals
- To do with sales and specifically how a product or service sells in relation to competition. Could be that the good or service is cheaper, has better branding/reputation, advertising, better quality etc.
Other Considerations Before Trading Internationall
Other Considerations Before Trading Internationally
Responsibility to stakeholders
1.Responsibility To Stakeholders:
- (CSR) is continuing commitment by businesses to behave ethically and contribute to economic development to improve the quality of life for the work force and their familird as well as of the local community and society at large
What and where to manufacture
2.What And Where To Manufacture:
- Businesses may have to take up large areas of land in order to operate which may be farm-land. Established business operatiobs here will damage the livelihoods of the local inhabitants as well as have negative environmental effects. Often businesses will compensate by spending money on local environmental projects; jobs to local community are also offered
Balance between capital and labour
3.Balance Between Capital And Labour:
- Businesses might seek to reduce production cost by making their production capitsl intensive. However, this will mean that fewer jobs will be available. In poorer countries, cheap labour is heavily exploited
Where to sell
4.Where To Sell:
- Often businesses will take advantage of the lack of education that people have in certain regions e.g cigarette
5.Pay And Working Conditions:
- Giving workers better working conditions will definitely increase business costs. Businesses often outsource production in order to benefit from lower wage costs
Environmental factors such as waste and disposal
6.Environmental Factors Such As Waste And Disposal:
- Laws in MEDC's that limit the amount of pollution that a business can emit. Fines have to be paid for crossing the limit
- Often businesses relocate to a developing country where their laws on pollution are not as stringent, all an effort to reduce cost, but the total damage to the environment remains constant
- Developed countries emit the highest pollution per capita
- Often businesses are adopting more responsibility for their actions e.g. fair trade.
CSR and ethical behaviour
7.CSR And Ethical Behaviour:
- Ethical decision making means making decisions based on moral principles. The objective is to do the right thing, which means taking into considerationd of everyone affected by the decision
- The difference between CSR and ethical decisions is that they are morally intended to benefit the stakeholders. However, CSR is often done because of laws and regulation and also because it is really good for public relations
Social And Cultural Differences In Doing Business
Social And Cultural Differences In Doing Business
Different promotional messages in different countr
Different Promotional Messages In Different Countries:
- Due to the differences in culture, there may be many manner as well as customs that businesses have to understand and appreciate in order to do business in a particular country
- Often, businesses have to resort to changong brand name of altering the prodcut to make it more appealing to customers
- Adverts often have to be carefully worded
- Brands with international appeal can be marketed in many countries (e.g coca-cola). This makrs production alot easier, makes the product marketable to range of countries with limited modifications
- Brand loyalty have be exploited via tourists and travellers
Distribution Changes And Joint-Ventures
Distribution Changes And Joint-Ventures:
- Often businesses have to work in co-operation with partners in foreign countries, forming a joint-venture. This means, that profits will be shared as well as the tasks of operating the business
- Often products without brand image have to reduce the quality of their products in order to sell them to LEDC with people with lower incomes and knowledge. People in developing countries often have to sacrifice something else for branded products
The Purpose Of Tarrifs, Laws And Import Quotas
The Purpose Of Tarrifs, Laws And Import Quotas
Why Tariffs And Quotas Are Used
Why Tariffs And Quotas Are Used:
A tariff is a taxation imposed on goods and services imported into a country; also known as a duty tax
A quota is a limit put on the amount of a specific good that can be imported
- Protect domestic industries by making foreign goods more expensive
- Raise tax revenue
- Prevent dumping
- Protect infant industries
- Quotas can also help the exporter when the demand for the good is inelastic, as there is lower supply but still the same demand, thus the price of the good will increase meaning the business could make more profit from fewer units being sold
- The government could provide businesses subsidies, so that they are able to sell their goods at cheaper prices, to cut costs simply ensure their survival through a recession
- Undervalued exchange rates provide exporting businesses a competitive advantage when they are exporting their goods as ith makes their goods cheaper. (China?)
- Safety standards can often be used to prevent certain goods from competing. Nowadays, this is mostly imposed in the food industry
Disadvantages Of Takeovers And Mergers
Disadvantages Of Takeovers And Mergers:
- Statistics say, less than 50% of the companies get what they expect from the merger or takeover
- Two businesses might not be able to function properly due to a clash of corporate culture and management style
- Businesses that become conglomerate (A merger between firms that are involved in totally unrelated business activities) through expansions tend to move away from their core business and become weaker in that market
- Takeovers and mergers facilitate sourcing in the sense that it means that the business can gain access to more countries and thus can exploit the economic efficiencies of that region
- Outsourcing and the pouring of FDI into developing nations such as China and India has improved the standard of living in these countries significantly
Ethnocentric Model- The Domestic Approach
Ethnocentric Model- The Domestic Approach:
- In this model, foreign markets are seen to be almost identical or similar to that of domestic markets, and hence the marketing and promotion of the product is done in the same way as done in domestic markets. There is no adaptation of the product (to succeed, the two markets must be similar)
- The benrfit lies in the economies of scale that is provides. No extra research of investment has to be made when marketing the product in a new market. This standardisation reduces avearge costss significantly. However, the businesses risks losing sales because the marketing mix is nit oriented to the individual market
- Often businesses have to adopt an ethnocentric model especially when they are in a business with rapidly changing technology; these products entail high development costs, so specialising these products would make it very expensive
Polycentric Model- The International Approach
Polycentric Model- The International Approach:
- Essentially, firms focus on adapting to the local market, providing tailored products to the market: believing that the market is distinct from that of domestic markets and thus requires tailored products. (Increase in sales)
- However, the average costs of the product should increase as there is more expenditure on market research and new product development
Geocentric Model- The Mixed Approach
Geocentric Model- The Mixed Approach:
- The fusion of poly and ethnocentric models, managing what need to be managed globally and locally in another way. By doing this, the domestic approach of the business is retaines to the extent possible and sales orientation to the products that are different
- Orientation of products is done to increase the prospect of sales and to become more recognised in the country that the business has newly set up in
- Pricing strategies that have worked in western economies are likely to be unsuccessful in easten economies as the level of economic development is low
- Adapting to culture reduces the barrier that the person is actually buying something foreign (specialising products can increase sales)
Global Market Niches
Global Market Niches:
- Global niche markets are markets that target very specific types of people, called subcultures; groups of people that share common interest such as hobbies or values. (e.g. luxury products are sold)
- Global niches are born because these subcultures have special needs and have a sense of brand loyalty to the company producing the product. This adds stability to sales as brand loyalty to these products will mean that they will be more tolerant of faults as they have for alternatives
- Businesses have to work hard to distinguish themeselves from mainstream products: clear understanting of the needs and wants of their choses market segment, customer servie, expertise, innovation, quality over cost efficiency.
- International businesees may often start to target a market niche to begin with as they cannot competr with mainstream competitors who are mainly concerned with quantity and price
What is a mnc
What Is A Multinational Corporation?
- A MNC is a company that operates or has assets in more than one country
MNC's have many benefits for the host nation...
- MNC's bring FDI and invest into the country; it will need to employ people which will create employment
- Some jobs may require additional training which will aid in transferring technology and methods to the host country
- MNC's will have a demand for money services such as meals, transport, raw materials, maintainence services that will be provided by domestic businesses, indirectly increasing employment
- Wages should increase a MNC's will want the best people working for them
- Wages my be lower than International standards but should be higher than the local standard
- Often MNC's are critisied for their wage policies but recent research and statistics prove this wrong
3. Skill And Technology Transfer:
- Transfer of technology through training and skill will make domestic buisnesses more competitve
- Efficiency will rise as new technologies become available
- The production of more sophisticated goods and services will make the economy stronger due to transfer of technology
Exports and Taxes
4.Exports And Taxes:
- Exports will rise as businesses are producing goods and selling them for foreign currency (increase GDP)
- The government will get tax revenue from both exports as well as production
- More employment means that the government will get more income taxe as well as having to spend less of unemployment benefits
5.CSR And The Standard Of Living:
- MNC's that offer higher wages will force domestic businesses to increase wages, raising the standard of livng
- MNC's often help local communities greatly by providing them compensation for things such as taking up farming land
-ve's (influence on governments
Negatives- 1.Influence On Governments
- MNC's are often accused of giving bribes to government officials to gain advantage of tax breaks and other forms of financial assistance; they are essentially beibg subsidised
- Governments can often turn a blind eye to there MNC's action that may exploit the environment or use of child labour
- Either way, these advantages means that MNC's will grow in prominence abd make more profit as they are getting very cheap production costs. This in turn will diminish competition as they cannot hope to compete
2.Exploitation Of Labour In Developing Countries:
- BAT are accused of using child labour in production; these childeren can be subject to nicotine poisoning
- 'Sweatshops' e.g. Nike-paying Chinese workers little wages to maximise profits
3.Sales Of Unsafe Products:
- Quality not the safe which could danger the safety of cosumers and the public
4.Use Of Unsustainable Resources:
- Oil companies deforested large areas in order to meet the growing demand of bio-fuels
- MNC's use plants of natural resources and high levels of competition make them earn money through unsustainable means
- MNC's produce and pollute on a large scale, destroys natural environments
- Climate change via carbon dioxide emissions
- When MNC's come into a host nation, they bring their domestic culure with them, Often this culture is promoted to a great extent and is artifically injected into society. This results in the degradation of the host nations culture
- Often the younger generation opt for the more "modern culture" that is often seen to be western. The adoption of a new culture and forgetting the old can lead to a loss of identiy for the host nation
- MNC's can shift production from more developed nations where it is more expensive to produce to nations with cheap labour. This will leave a large number of jobless people and therefore the govt. has to spend more on unemployment
- Priority is profits
Controlling Multinational Corporations:
- Pressure groups: influence publicd opinion, will affect sales
- Internet: people can easily express opinions
- Self-regulation: business have become more conscious of how PR affects their image
- Legal Constraits: taking businesses to court can be lengthy and very costly. However MNC's fall under no direct legal system and are often very hard to control
- Government Control: Stronger governments will be able to enforce restrictions more effectively. China and Indai insist on joint ventures and have tight expansion laws for foreign businesses