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More Problems In International Business

By Edited May 21, 2014 0 0

Deficient Infrastructure

Inadequacy in infrastructure can be another factor that deters business expansion. According to a survey by MIGA 2002, the reliability and quality of infrastructure and utilities was the fourth most important factor in choosing a country location to invest. In general, poor infrastructure will increase overall capital and operating costs for firms for the reason that poor infrastructure increases the uncertainty risk and requires firms to hold higher levels of inventory in order to reduce the risks of production being interrupted.

In some cases, a company has to incorporate its own electricity generators, water filtration units and communication facilities to reimburse the deficiencies of local infrastructure. The access to roads and utility also further increases the company investment cost. McDonald is one of the examples. McDonald as the global fast food giant was having expansion problems in India. Based on an article from India, McDonald as the global fast food giant has 600 stores in China but in contrast it has just 50 outlets in India. The major issue here is the shortage of infrastructure, especially highway roads that link to smaller towns in India.

According to the survey by global consulting major KPMG and Economist Intelligence Unit, 66 percent of the total executives stated that existing transportation infrastructure in India highly increases the operating cost for their company, 62 percent of Indian executives said the existing energy and power supply infrastructure has substantially increased the company operating cost. However, companies can consider joint venture as market entry strategy to reduce the risk. Through joint venture, companies can share the financial risk, secure access to resources, gain local management knowledge and obtain access to market or distribution.

Policy barriers

Macroeconomic policies are another problem that deter foreign firm from entering a market, increase cost and increase the business risks that foreign firm have to deal. The major macroeconomic policies that could deter a business expansion are: (a) Fiscal policies: the stability of fiscal policy can influence the level and growth of tax revenues which directly influence the trade taxes and corporate revenue tax. (b)Monetary policies: the control of money supply by central bank can influence domestic interest and inflation rates, and indirectly on the stability of domestic currency values. (c) Debt management policies: the government internal and external debt and comfort levels for repaying loans. High debt country tends to repay public debt by printing domestic currency and caused inflation and deprecation of currency.

In short, bad macroeconomic policies management will cause economic instability and increase the risk of future taxation, currency risk and currency convertibility risk which affects company profits. Euro Disney is one of the examples to illustrate the problem. The financial plans for Euro Disneyland first year operation anticipated total revenues of FF 5,482 million and a net profit after taxation of FF 204 million. However, in reality they didn't meet the plans. European recession caused Euro Disney to fall into serious financial problem. In November 1992 the management announced a loss of FF 188 million. The second year was even worse; they faced a loss of FF 5,337 million whereas total turnover was FF 5,725 million due to the failure of unforeseen European recession.

Managing global business is equal to managing the complexity; decision that made on today may be not appropriate tomorrow. Thus, it is important to gather all information to create a basis for plan decision making. All plans include uncertainty and risk because the nature of future planning requires estimation.

Technology

Technology is the key to provide businesses with the competitive edge that can lead to greater profitability and growth. Indeed, technological factors can lower the barrier to entry and reduce the minimum efficient production levels, reduce capital costs and labor costs, and influence outsourcing decisions.

For instance, although outsourcing can help companies to influence the latest and the most sophisticated workflow technologies, International Business Machines Corporation (IBM), the world's largest supplier of technology services had failed due to increase labor. IBM set up global centers for tasks like software development and maintenance and employing 53,000 workers in India, and employing 200,000 people worldwide in its services business with spending on $11.8 billion on 54 acquisitions (36 software and 18 services companies). This growth means that they had to add more people, the IBM's business is in trouble for its labor represents 70 to 80 percent of the cost in traditional technology service contracts, and the traditional work of maintaining and updating software and data centers for corporate customers is still a large part of IBM.'s services business.

In order to avoid such pitfalls in outsourcing, a company like IBM can integrate the business strategy that focus on the technological advances to substitute software automation for its labor force. This case of IBM illustrates that the key strategy for multinational companies in expanding business overseas is to use global teams to take advantage of greater performance to create competitive edge as well as continually investing in R&D activities in growth opportunities to ensure to compete on the basis of innovation and technology.

Entry Strategies

When entering a foreign market, a company must decide on the appropriate entry strategy and ownership forms; while at the same time considering the legal structure, the amount of capital, resources invested, and managerial involvement required in the host country. The management of joint ventures, for instance, is one of the key entry strategies a company can consider when expanding business overseas.

International Business Machines Corporation (IBM), developers and manufacturers of information technology products and services worldwide, though underestimated the costs associated with the joint ventures that recently formed with PC maker Lenovo resulting reduction in its profit margins. Having manufactured an IBM's product in its entirety, Lenovo was privy to an IBM's intellectual property, and thus enabling to build its own brand expanded also designing and engineering custom electronic components and forge its own relationships with retailers and distributors including those of the IBM.

From this case, selecting the appropriate entry strategies are the key factor in the success under different circumstances. IBM found itself facing not only more dangerous vendors, Lenovo, but also a new competitor that once underestimated. Multinational corporations and their manufacturing partners in foreign market need to rethink how they manage their relationships with each other. For companies like IBM and the other multinational companies, partnership problems are one of the leading causes of joint ventures failure. To avoid such pitfall, a company should focus on investing in the personal relationships that must be built to create a successful joint venture and commit the necessary time and effort, even thought the tangible inputs of the decision such as legal function of the structure, the financial considerations of ownership, the market analysis, and end result and desired outcome are all critical concerns.

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