International business can simply be defined as ‘Any firm that engages in international trade or investment’ according to Hill and Hult (2017). Before expanding into foreign markets companies must conside multiple factors. I will critically analyse reasons which can positively or negatively impact doing business in another country.
According to Ahmed (2003), globalisation is expanding an organisation’s actions internationally allowing there to be a global market. Foreign direct investments(FDI) helps promote globalisation. When a business takes part in FDI they accept potential risks for instance if they decide to choose the form of greenfield investments there is a higher risk of failure as starting a new operation in a foreign country can lead to threats especially if they lack knowledge in the market they are about to enter. Whereas mergers or acquisitions reduce the risk of failure as they are joining a firm already established in the country.
Political factors are vital for a business to consider when expanding their operations to other countries. A key element to consider is high bureaucracy, which is where procedures and requirements are set by state officials rather than representatives. Bureaucracy may be a negative factor in deciding whether a business enters another country. This will make it harder for a business to enter due to the long process and may cause unease especially as it could result in a loss of profit. The idea of bureaucracy links to political and economic stability (corruption). A country with corruption is seen to have lower ecomonic growth and therefore seen as undesirable for business (Mauro, 1995). The graph below from Mauro (1995) provides evidence that when there is a higher level of buraccracy there is a lower lever of GDP which measures the countrys economic output. From this a company wanting to do business in other countries would likely only invest depending on the level of bureaucray and consequently the ease of doing business.
In Addition to beauracray companies should be aware of tarrifs and barriers set by the government of the country they plan on doing business in. Firstly they shoud be aware of the different trade barriers such as the European Union (EU), North American Free Trade Agreement (NAFTA) and Association of Southeasr Asian Nations(ASEAN). A company such as Ikea have store located in each of these trade agreements which they can benefit from when exporting and importing, however they must consider taxes they will have to pay. The benefits of a business taking advantage of free trade agreement is that it can promote competiton and skills improvement. The disadvantages of tarrifs and barriers is that it can raise the price of imports. Linking back to the benefit of skills improvement, companies must also consider the education levels of the country they plan on entering depending on the level of skill required, as if a business enters a country which have low levels of education (e.g. reading and writing) when they need highly skilled employees it will effect their productivity and efficieny in completeing the job.
Companies may shy away from countries with high taxes when importing as it may not benefit their profit. However companies in nations with absolute advantage may benefit from having nations voluntairily trade with each other, as it make the process of trading easier and cheaper.
Furthermore considerations of the countries current situation must be aknowleged, for instance Brexit. For example Ikea are preparing for Brexit by trying to negotiate a good trading agreement which profits them. Gillian Drakeford Ikeas Uk manager said “I’d like to see some clarity, Theresa May talked about a transition period and this would be beneficial for us to adapt to a new trading reality, to allow us to offer products at the best prices” (Association, 2018) (the Guardian, 2018). This emphasises the importance of considering tarrifs and barriers when doing business in other countries.
A key economic factor that companies must be aware of is their Gross Domestic Product (GDP), economic system and disposable income. Firstly, GDP allows a company to assess the health of an economy. This is important as a business planner as it suggests growth in the economy, this could lead to increasing their operations internationally which will in return potentially increase their sales. Furthermore, economies which are growing rapidly appear to be more attractive to international businesses and therefore they try to establish a strong presence in growing markets such as China (Hill and Hult, 2017). GPD must be considered as if they enter a marker with a low GDP such as Guinea it may not be profitable for the business compared to entering a country such as India. High GDP would be beneficial for a business as knowing that the economy is growing there will be a stronger demand for the product/service in the country and therefore likely higher earnings for the business which chooses to operate internationally. The graph below shows the countries that businesses are more likely to enter due to fast growing GDP.
(World Economic Forum, 2018)
Businesses must also take into account the link between political ideology and economic systems when deciding to do business in another country. ‘Countries that stress individual goals are likely to have market based economies’ whereas countries with state-ownership collective goals are common. (Goudarz 2017). This is a key factor for a business to consider because it will affect weather they enter the market or not. A larger company such as Lyft from the US is more likely to enter a market based economy as there is more room for growth as productions are privately owned and therefore not influenced by the government. However, market based economies tend to have a firm monopolising the market, this will have a negative impact on a company doing business internationally as the monopoly(competitor) is unlikely to make room for the new business and therefore it will not be worth entering a new country.
Finally, when discussing economic effects disposable income is vital when considering doing business in another country. According to Law (2014) disposable income is the available income an individual has after deductions. High disposable income means individuals have more money to spend on goods and services. This will attract business to countries such as Latvia or Canada where they have high disposable income (see appendix 1). This means customers are more likely to spend money especially on luxury goods. Therefore, it is likely that large in demand companies will decide to do business there to increase profits. However, companies that sell necessities may want to invest in countries with a lower disposable income such as Norway as people have less flexibility to buy goods especially those that that have an inelastic demand. This will benefit the company as people will not have much choice but to buy the goods/service. Although the company must also consider that there is likely to be high competition in the given market.
There are multiple laws and legal factors companies must abide by when entering another country to do business. For instance if wanting to operate in the United Arab Emirates (UAE) they must involve a UAE national as a sponsor. Companies may want to consider this because it requires a percentage of ownership belonging to the sponsor with foreign ownership often limited at 49% (Gov.uk, 2018)(Government AE, 2018) unless entering a free trade zone which is limited. This could result in comanpanies taking part in joint-ventures, mergers or partnerships rather than solely, as it may be more beneficial especially for smaller businesses.
Companies must also consider the three types of legal systems Common law, Civil law and Theocratic law. Legal factors are important to be aware of as it can affect the businesses operations (Goudarz 2017). Companies may have to change the way they operate for certain countries especially countries that use theocratic law. This may push companies away from investing in certain countries as changing the way the business is run for the host country may not meet the criteria/ethos.
Culture is a fundamental factor for companies to consider when deciding to do business in other countries which can relate to legal factors. Using the countries values and norms to operate the business can lead to success. The EPG model can be used for this, depending on the service provided the appropriate approach can be implicated. In most cases the best option may be the polycentric model because the company focuses on meeting the locals needs (Wind, Douglas and Perlmutter, 1973). Altough the experience and expertise from the home country may not be used which could negatively impact the business. This is therefore key for a business to consider as it could limit there success.
To conclude there are multiple factors that companies must be aware of when deciding to do business in other countries. I belive that the most important factor is the economy. This is because it allows the business to see how profitable it will be and therefore if it is worth investing in. I belive that the least important is environment/culture because if the company has a strong brand that is in demand it will make obstacles easier to pass.