‘International economy is evident due to increases
‘International trade refers to the exchange ofgoods from multiple countries’.
In this report I will critically discuss thekey factors that companies must be aware of, before undertaking internationalbusiness. Additionally highlighting key economic and political concepts, astechnical advances in the economy is evident due to increases in economicgrowth and trade. Cantwell (2016) emphasises ‘innovation and internationalbusiness’ has created a more interconnected world. This has created a networkthat has transformed the world of trade, including the creation of jobs and theconstruction of infrastructure. ProfessionalAcademy (2011) defines ‘Pestle analysis’as the framework used to analyse the international business environment.
PESTLEstands for political, economic, social, technological, legal and environmental.These factors can highlight potential threats a firm may encounter whilstundertaking international business, as well as highlighting potentialopportunities . Hollenson (2010) indicates that international expansion canincrease the competiveness of a firm as they are likely to benefit fromeconomies of scale, where average costs fall as output rises. If the firm isnot prepared in advance then they are unlikely to be successful. Firms can alsouse the concept of an ‘Eclectic Paradigm’ to determine whether it is beneficialto pursue Foreign Direct Investment that is a driving force for innovation andgrowth. Hollenson (2007) highlights the politicalenvironment can affect the marketing activities of international businesses.Hollenson states that ’embargoes’ can affect firms doing international business.Embargoes are a ban placed on certain goods being sold.
Firms will need to beaware of embargoes, as goods that they sell in the host country may beforbidden in others. For example, Cuba prohibits all transactions includingimports and exports without a licence authorisation. If a firm does not abideby these rules and regulations, they may potentially subject to fines. Shethand Paravatiyar (2001) state that the removal of trade barriers can have apositive effect on globalisation, increasing interconnectedness, reducing thecost and time involved with trading across national boundaries proves strategic. Furthermore, intotalitarian countries such as China; government instability such as wars canbe unattractive to international firms. Totalitarianisms’ argue to endorse lawsthat will restrict private enterprises; these contradict to the laws indemocratic states that tend to be ‘pro private enterprise’.
Whereas if abusiness was looking embark upon international trade with a democratic nation,the government will not restrict the businesses operations, making itfavourable for firms due to no dramatic rise in inflation or debt. Social unrest can have negative economic implications,which can affect the profit of firms. For example, in 1979, there was anIslamic revolution in Iran, ‘a large number of Iranian assets of US companieswere seized by the new Iranian government without any compensation’. Investmentis less favourable in politically unstable countries where ‘speculativefinancial bubbles have led to increased borrowing’ e.g Greece. Inglaitemphasises that economic factors can also influence a multinationalcorporations decision of locating in another country. These include, the rateof economic growth in countries, current state of the economy and taxes andmany more. Economic growth refers to an increase in the levels of GDP within aneconomy.
The rates of economic growth has a direct correlation to the levels ofdemand in international markets, for example countries with low economic growthusually have a negative knock on spiral consisting of less capital float, thusreductions in consumer spending and disposable income may be present, becominga significant factor for international firms to consider before relocating. Forexample, the UK recession of 2008, where spending in the UK was low, subsequentlyresulted in low levels of demand from national customers, such activities couldlead to business failure. Tariffs are a tax on imports, meaning that cost ofimporting will increase thus, affecting international business. Therefore, dueto the increase in price, some LEDC’s may not be able to afford certain items,as tariffs deter trade by acting as a barrier to entry. According to the WTO,tariffs vary in different countries, which can affect profit levels as they maybe higher elsewhere.
Tax rates canalso influence FDI as they vary in different countries, Pettinger 2017highlights that MNC’s have sought to invest in countries that have lowcorporation taxes. Examples include Google ‘funnelling their profits throughIreland due to the low tax rates ‘ as Ireland is seen as a ‘tax haven’ forkeeping profit levels high. Also, economic growth can be impacted positively byFDI. Nigeria has recently undergone FDI into the Oil industries, which haselevated the standard of living in Nigeria, and are seeking more investment toimprove their ‘infrastructures to broaden economic growth’. Firms can benefitfrom first mover advantages, as they will have a competitive edge over otherfirms who have not invested into Nigeria. Trading blocsis a government agreement where a barrier to trade e.g tariffs is reduced forthe members, driving down the fees for imports.
If a business is operatingwithin the EU, it can benefit from free trade between members, this can reducecosts significantly, they may also benefit from economies of scale. However,they will need to be aware of the significant costs they may encounter if theytrade with countries outside there blocs. Moreover, trade agreements maysuddenly change; an example of this is BREXIT, meaning that the UK will nolonger benefit from free trade between members.
Although at the moment it isstill unsure, as a Welsh Minister has been told there will be no tariffs with EUtrade following Brexit and free trade will remain. Jenkins(2014) provides an understanding that for a business to be successful inanother country they must have a competitive advantage and be aware of ethicaland cultural differences. Firms can find help from the Chambers of Commerce,who specialise with providing an understanding of the culture of the nationthat they are looking to do business with, which can help understand thecountry’s market. However, firms may find it difficult investing in developingcountries such as India due to the language barriers, this will cause communicationproblems, potentially creating issues in the working environment.
It is evidentin the news that many firms exploit LEDC’s, for example a reporter for the BBCstated, Primark employed children in India for 60p a day to work in sweatshops withpoor working conditions, in order to reduce costs, which proves unethical andimmoral. This is due to not have strict regulations and laws in place, allowingfirms to exploit child labour, which is also a legal factor that falls underpestle. This is a major incentive to why firms invest abroad, because averagelabour costs are $15 an hour in the US, compared to India at $1 an hour.
Hofstede(1967) concluded that ‘Culture is more often a source of conflict than energy’,and that cultural differences in the workplace are often a disaster’. Additionally,firms will need to adapt their marketing strategy to suit the country they willbe working in, for example an ethnocentric concept is when the home country is’superior’ and uses the same strategy in other countries. On the other hand,this may not always be the case, so firms will need to take a polycentricapproach and adapt their strategies to suit the countries needs. This processis also defined as ‘localisation’ adapting a product to a specific country. Technologicalchange is also a factor that most businesses should consider before becomingglobal. The lowering of trade barriers has allowed the globalisation of marketsa possibility. ‘The explosive growth ofthe internet’ has made it easier to do business with multiple countries.
Withthe decline in transportation costs, it has made it possible for firm to managea globally ‘dispersed production system’ and help create a global market.Technical innovations has made it possible for everyone to have equal access togoods and services, for example the US firm CNN is now available in multiplecountries. It isimportant to note that there are some differences in culture and consumer preferences.
Ignoring these differences can affect trade and investment. Advancements intechnology have now allowed machinery to complete the tasks that humans woulddo. This has advantages as the goods will be of higher quality and businesses overheadswould be reduced.
Yet, knock on effects would be an increase in unemployment,as machinery will be replacing labour. Inconclusion, it is evident that there are many factors that a business mustconsider before doing business in another country. Varying from politics, toeconomical and technological factors. Overall, the most important factor thatcan affect trade is economic factors. This is crucial as economic factors suchas economic growth; disposable income and tax rates will determine howsuccessful a firm will be in another country. Furthermore, economic factorswill allow businesses to plan and adapt their services for a particularcountry, which could potentially be rewarding if done correctly and throughseeking new markets it could possibly increase profit margins.
