International Business

China

Over the last 30 years, the Chinese economy has changed dramatically from a centrally planned system (decisions made by the state) that was largely closed to international trade to a more market – orientated economy that has a rapidly growing private sector and is a major player in the global economy.

BRIC Economies

•  Brazil, Russia, India and China – Predicted to be the largest economies by 2050
•  Brick Exchange rates could appreciate by close to 300% by 2050 (substantial potential growth)
• Potential for many foreign investors

G7 – largest economies around the world established in 1975 - France, West Germany, Italy, Japan, UK, Canada and US.

( The G7 groups had the title of the largest economies, however the power is shifting to the BRIC economies. )

 

Economic Reform – changes made in the economy over a period of time.

• In late 1970 and early 1980, trade with other countries were allowed.  
• Economic zones created for attracting the Foreign Direct Investment (FDI)
 

• A Special Economic Zone (SEZ) is a region that has economic and other laws that are free market orientated than a country’s typical or national laws.
•   Nationwide laws can be suspended inside a SEZ. 
•  The goal of such a structure is to increase foreign direct investment by foreign investors which may include an international business or a multinational corporation (MNC).

Multinational Corporations – a business that is based and operates in multiple counties. i.e. McDonalds.

These companies help to boost the economy, inhibit success and growth, decrease unemployment, Increase GDP and lead to less risk of uncertainty.  It also increases global communication aswell as gives the government more disposable income which can be invested back into the economy.

·        In the past 5 years, Car Sales in China have risen by 300%, and in India by 60% and in the UK by 0.2%.

 

Why has China grown at such a fast rate?

• Well educated – highly skilled
• Good Work ethics
• Population – more manpower
• International Trade – More investors because of the Eurozone Crisis
• Low unemployment 
•    Larger exports
•   Infrastructure
•   India has a higher percentage of illiterate population
•   Cheap and efficient production
• Increase in Private sector businesses
• Increase level of foreign investment

• Huge investment levels (an investment rate of 40%) Chinese investment in fixed assets in early 5 times higher than India.

• Spending on construction is nearly 8 times higher in China.
• Literacy level is much higher in China. Illiterate population in India is 9% whereas in China it is 9%.

What is Economic Reform?

• Political or Government Change
• Uncertainty or a specific event that leads to a change
• Specific stage of the business / economic cycle
• Other economies that may change
• Foreign Direct Investment (FDI) - trade with other countries
• Recession
• Rates of Growth
• Exchange rates
• Interest rates
• Inflation
• Unemployment
• Countries with substantial growth will lead to competition among foreign investors - evidently better for customers

Changes in China

• Creating a pricing system and decreasing the role of state in resource allocations.
• Administratively driven comman economy transformed to a price driven market economy.
• Closing of unprofitable enterprises.
• Dealing with insolvency in the banking system.
• constraints on foreign trade were relaxed and joint ventures with foreign firms were officially encourages as sources of modern technology and scarce foreign exchange.

 

Trade Agreements and Alliances

Key Point:

Governments will make agreements with each other to establish guidelines for international trade to set up alliances, e.g. the European Union.

Benefits of the government setting up alliances:

·         Economies of Scale

·         Wider channel of consumers

·         Increase in competition

·         Reduce of risk

·         Share of resources

·         Diversification

·         Sharing of cultures

·         Markets distribution easier process

·         Shared costs

·         Better Trade Credit

·         Freedom over job prospects

·         Imports and exports – easier & cheaper

·         Single currency opportunities

·         Exchange rates

International Trade

Benefits for Consumers:
·         More Variety and alternatives
·         Higher Quality and lower price
·         High completion – good prices
·         More availability
Benefits for Producers:
·         Potential for more customers – larger target market
·         Globalization / Awareness
·         Exchange rates
·         Mass production / Low cost
·         Easy negotiation
·         Cheaper imports
·         Aiding to other economies –create jobs
·         More choice of highly skilled workers
·        Consumers will benefit because competition encourages the production of high quality goods with lower prices.
·        Producers gain higher profits by expanding their products into international markets (increases sales revenue).
·        Workers benefit because international trade leads to higher employment rates.
·        Nations benefit because foreign investment in a country often improves the standard of living for the country’s people.
Protectionism:
This is the economic policy of restraining trade between states through such methods as:
·        Tariffs (tax) on imported goods
·        Restrictive quotes (limitations on what you can and cannot do)
·        Regulations to allow ‘Fair Competition’ between imports and goods and services produced domestically


Advantages:


·        Fair


·        Prevents copy right


·        Protects existing domestic business and encourages them to stay in the economy


·        Stops exportation of certain businesses


·        Not an monopoly – Greater opportunities for customers


·        Protects interest of international business


·        Clear guideline/set of instructions – allows businesses to know what they can and cannot do
Disadvantages
·        Restricts business – Limits larger multinational corporations
·        Stops companies gaining larger market share (monopoly)
·        Similar choices and prices among competition
·        Substantial fines for exceeding quotas – could stop businesses from wanting to enter the market

Free Trade and Perfectionism
 
Free Trade:
·        A policy that allows consumers to buy from abroad just as freely as they can buy goods domestically.
Perfectionism:
·        A policy that discriminates between domestic and foreign goods and services. 
·        Protectionist policies introduce hurdles for consumers and merchants, E.g. Tariffs (taxation on imports)
A Single Market – The single market describes the EU project to create free trade within the EU and mould Europe into a single economy.


Factors to consider when a business chooses a location:


·        Local Competition


·        Local prices


·        Target Market of area


·        Currency (weak or strong?)


·        Local trends


·        Culture


·        Business ethics (Culture) – Negotiations?


·        Work ethics of employees


·        Gaps in the market


·        Levels of employment


·        Taxations


·        State of market


·        Government involvement


·        Barriers to Entry / Exit


·        Laws / Legislation / Protectionism


·        Economic Climate


·        Language barrier


·        Demand – average income / spending power




Spending Potential – What factors do you think will determine the spending potential of customers?


GNI (Gross National Income) – a high and rising gross national income will show that people can afford to consume and will be able to consume in the future.


-          If people’s general income increases, the demand for inferior goods decreases.


 


·         The population size is also an important consideration.


·         India has a high population of young people; therefore it is an attractive market for many children and young adult products.


Key Point – Between 2010 2030-, India will add approximately 241 million people to the working age population.


 


Variations in Culture


Variations in culture will have a major impact on how a business is done and what is purchased.


Variables that influence what people buy and how they do it?


·         Currency


·         Religion/Ethnicity/Language


·         Personal preference


·         Gender


·         Socio economic groupings


·         State of the economy


·         Age


·         Alternative products


·         Price


·         Quality


·         Current economic factors – inflation, unemployment rate


·         Appearance of product


·         Real Value wages


·         Availability


In India, customers are accustomed to small shops and also to interaction with traders in checking price and quality. Bartering is also a part of their business culture.


Key Point – The instability of the government is also a major cause of making markets unattractive.


 


International Business


Developments in Inflation (UK)


·         CPI (Consumer price index – house tax, council tax etc.) measure was 2.6% but decreased to 2.5% in August 2012


·         RPI (Retail price index) was 3.2% but decreased to 2.9% in August 2012


·         Decrease in average wages


 


Reform of the banking systems (UK)


·         Specific changes to the banking system – full separation of investment banks


·         Bankers regulations (professional code of conduct)


·         Separation of retail banking and investment banking


 


The current state of the Indian economy


·         Rupee has weaken, making goods cheaper to tourists – income will be reduced for domestic businesses


·         Poor global economy has impacted both imports and exports in India


·         Export level has decreased – lowering GDP


·         However, India has good connections with Latin America – import/export


·         Economy is slowing down, but trade is expected to pick up


The HDI (Human Development Index) measures the development based on access to health care and education as well as national income.
 
Highest HDI
1)      Norway
2)      Australia
3)      Netherlands
4)      New Zealand
5)      Canada
Lowest HDI
183) Chad
184) Mozambique
185) Burundi
186) Niger
187) Congo
 





Considerations that International                                                                                 business have regarding Labour/Workforce?


·         Cost of labour
·         Availability of workforce
·         Work ethics
·         Legal requirements
·         Skills/education – is training required?
·         Language barrier – other ways to communicate?
·         Considerations of possible relocations
·         Workers rights
·         Influence on Trade Union
·         Constraints on hours




Globalisation



 


Links directly to Tesco
Key Point – ‘They’ve got nowhere else to go. Their domestic markets are saturated, so they are looking for countries with large populations, high population growth, per capita GDP edging towards high consumer levels and low supermarket presence. Countries with all five of the characteristics are a good bet and companies rush to get there before everybody else does.’


·         Tesco entered Poland in 1995 and now have 100+ hypermarkets.
·         Between 2001-2003, they researched retail markets and the consumer purchasing patterns.
·         Entered the Japanese market in 2003, by acquisition; they bought a Japanese discount supermarket chain with 78 stores using the brand name ‘Tsurukare’.
·         From here they have continues their expansion through acquisition.
·         Modern economies are built on Specialisation and Trade.
Trade – buying and selling products
Specialisation – buying and selling in an area the has been specialised
Benefits of Specialisation for businesses 
·         Output increases (Demand)
·         More revenue/sales/profits
·         More employees (specialised skilled workers)
·         Increase efficiency
·         No major competitors
·         Potential innovation (as Technology improves)
Benefits for Specialisation for Customers
·         Good quality
·         Products could be cheaper because of competition
·         Customer loyalty
·         More availability
Environmental Sustainability
Key Point – By China having Tesco part of their economy, they’ve tried to implement changes to the economy and to sustain the population and the environment.
Peter Jay – BBC Economics Correspondent
-          Describes globalisation as ‘The ability to produce any good or service anywhere in the world, using raw materials, components, capital and technology from anywhere, sell the resulting output anywhere and place the profits anywhere.
What is Globalisation?
-          Integration – Cultures are intermixing
-          Different cultures/tastes forming part of everyday economy
-          Allowed communication to become more efficient (developments in technology)
-          Affects the sustainability of an environment
Key Point – A Key example of Globalisation could relate specifically to the banking system. The internet has allowed banks to trade with their customers across international borders.
 
China and Globalisation
·         Increased exports to the western world
·         Domestic companies influenced by international companies
·         Economic reform (technological development)
·         Multinational companies moving into China – 104,621 FDI enterprises entered between 1996-2000.
·         300% raise in car purchasing – relate to BMW, Volkswagen, Honda
·         ASEAN- Connecting with countries with Asia – encourages trade and reduces barriers to entry
UK in 1903
·         Richest in the world
·         Centre of world business / finance centre
·         Largest Military
·         Strongest education system
·         World centre of innovation and invention
·         Currency the world standard of value
·         Highest standard of living





Businesses that Trade across International Borders


Advantages




·         Globalisation


·         Cheaper exports/imports – exchange rates


·         Growth in economy


·         Possible economies of scale


·         Larger potential market


·         Spreads risk


·         Make use of international suppliers


·         Increased brand awareness – more customers


·         Increased revenue/profit


·         Increased communication (international market)


·         To avoid domestic limitations


·         Possible chance to extend product life cycle


Disadvantages


·         Protectionism – Tax & Restrictive Quotas


·         Barriers to entry / exit


·         More competition


·         Globalisation


·         Laws/Legislations


·         Spreads risk


·         Vulnerable to global




·         financial crisis


·         Copy right issues


·         Trading in a single market can restrict growth


 
Globalisation Continued
Main benefits of Globalisation:
·        Reduces poverty rate
·        Allows existing domestic businesses to thrive
·        Develops the economy when the business expands
·        Foreign ethics allow the economy/laws to improve
·        Less government interference/bureaucracy 
·        Domestic businesses begin to integrate with multinational businesses
 
Takeover: Where one business acquires a controlling interest in another business = a change of ownership
Merger: a combination of two previously separate businesses into a new business
When two companies join to form one new firm, this can be:
·        Voluntary (Merger)
·        Forced (Takeover
Merger activity is an example of ‘integration’ taking place within industries. This can be:
·        Vertical (where firms at different stages of production merge)
·        Horizontal (where firms in the same industry merge) 
Some examples of takeovers:
·         Facebook and Instagram
·         Coco Cola and Innocent Drinks
·         ITV and Friends Reunited
·         TAT Carter and EMI
·         Universal and EMI
 
Advantages of Takeovers / Mergers
·         Decrease in work load
·         Shared responsibilities – further expertise
·         Larger potential growth
·         Increased market share
·         Increased revenue/profit
·         Increased power over suppliers – economies of scale
·         Less fierce competition
Disadvantages of Takeovers / Mergers
·         Less control
·         Increase in uncertainty
·         Increase in risk
·         Adding debt (refinance)
·         Potential redundancy payments (if cut workforce)
·         Power struggle between businesses (decisions and direction)
·         Shared profits
·         Wages could be reduce
·         Problem with stake holder groups
·         Different business ethic policies or attitudes (e.g. free trade, recycling)
Firms sometimes keen to merge when:
·         They can make savings from being a bigger firm (economies of scale)
·         They can compete with larger firms or eliminate the competition
·         Spread production over a larger range of products / services
Benefits of Take over’s in the UK economy

·         Levels of greater employment – income increases, more disposable income, contribute to GDP (taxation)
·         Increases job security
·         Greater share – value rise
·         Substantial profit
·         Takeover is best during downturn
·         Long term success rate
·         Increase in efficiency
·         Businesses purchasing in hostile situations tend to do better
Marketing economies of scale



A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market. A good example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts. The major food retailers also have buying power when purchasing supplies from farmers and other suppliers.



Word Bank:


External Growth – Occurs when a business takes over or merges with another business. Often called integration as one firm is integrated with another.


Organic Growth – Growth achieved through the expansion of the current business activities e.g. new products, expansion into new markets etc.


Diversification - expanding into new markets with new products – the riskiest growth strategy
Ansoff’s matrix - a model that analyses four growth options: product development; market penetration; market development & diversification.

Porter generic strategies - 3 strategies commonly used by businesses to achieve competitive advantage (cost leadership; differentiation; focus)


Economies of scale -  where unit costs fall as a result of increased scale
Competitive Advantage – the advantage that a business has over its rivals. It can be gained in a variety of ways.
Strategies:
Extend the Business - Locations, Markets, Globalisation
 Change Competitive Structure - Consolidation, remove competition, economies of scale
Improve Business Capabilities - Access better technology, stimulate innovation



Kenyan Economy	Taiwanese Economy
·        Closed to Globalisation ·        Don’t have right to purchase or extend land ·        Less chance of loans ·        Restricted FDI ·        Lower GDP growth rate ·        High Poverty	·        Open to Globalisation / Industrialization ·        Right to purchase land and keep whatever they earn ·        FDI is encouraged (contributes to GDP) – stimulation of economic growth ·        Increase in Lifestyle


 


Multinational corporations will differ for a number of reasons, for example:


·        Size


·        The nature of the businesses


·        Production Locations


·        Ownerships


·        Organisational Structure


Multinationals can be split into 3 levels of organisation:


·        Horizontally Integrated


·        Vertically Integrated


·        Conglomerate


 


Multinationals and High Street Businesses – coffee industry


·        Cause high street rents / council tax / business rates to rise


·        Smaller businesses can’t afford ( expensive running costs)


·        Brands (Starbucks) represent higher quality


·        Puts high street shops out of business – losing customers to well known brands


·        Expensive business rates (£70,000 – start up)


 


Host Nation  - If a business that moves from one country to another, that country becomes the Host Nation.


Advantages of becoming multinationals


·         Larger target market


·         Potential for growth


·         Globalisation


·         Economies of scale


·         More power / market share


·         Increase brand awareness – higher profits


·         Owning a large segment of the market


Disadvantages of becoming multinationals


·         Diseconomies of Scale


·         Riskier


·         More vulnerable to recession


·         Barriers to entry / exit


·         Larger costs


·         Protectionism


·         Limits growth


·         Large taxes


·         Cultural variation – different tastes


 




Benefits to Host Nations


·         Increase in employment / job opportunities


·         Contribution to GDP – if business expands


·         Corporation tax


·         Boosts competition


 


Disadvantages


·         Boosts competition


·         Domestic businesses will struggle


·         Different work policies / ethics / attitudes


·         Increased inflation


·         Less employment benefits


·         More Tax


·         Less demand for local products


 
Globalisation Continued....
Position of Tesco and Sainsbury’s
Tesco
Almost double market share of Sainsbury’s
·         Tesco – 29.1%
·         Sainsbury’s – 15.7%
Supermarket chain Tesco has reported its first fall in profits in 18 years.  Profits fell 11% to £1.66 billion in the first sixth months of 2012.
Tesco which is the UK’s largest retailer and the world’s 3^rd largest supermarket group, still makes over 60% of its trading profit in Britain.
 
 
Sainsbury’s
Released a trading update which said its sales in the 2^nd quarter, excluding fuel but including VAT, will rise 1.9%
Expected to grow profits this year by 5%
 
Current Economic Factors
·         Lack of growth in UK economy and Eurozone
·         South Korea is currently the biggest market – regardless of the lack of growth
·         Sales and Price of Fuel has dropped
 
The Product Life Cycle and Multinational Corporations
·        The Launch Phase
·        The Growth Phase
·        Maturity
·        Late Maturity and Decline
 
Problems facing Multinationals
·         Language Barriers
·         Selling and Marketing
·         Relations with Host Government
·         Relationships between subsidiaries