When a company decides to take their business international, there are many different factors that they need to take into account. There are differences in management styles, international laws and treaties that regulate international business, trade barriers, tariffs, taxes, exchange rates as well as cultural customs that come into play. Each of these is significant and needs to be taken into account in order to minimize potential problems. It is essential to an expanding company to study these factors and integrate them into taking their business abroad.
Many times, lack of knowledge can create serious problems and in some situations stop a business deal from happening all together. If such matters are not ever correctly dealt with they can completely destroy the entire business. All a company needs to do to reduce this risk is some research in the international market. Today, as we enter the new millennium, the 21st century, it is difficult to completely stay out of the international market place. Even if a business is completely based in a specific country, it is very possible that another company outside their country supplies them.
Even if there is a small company that is simply importing some parts from Mexico, there are rules that must be met for NAFTA. It is almost impossible today for a company to avoid dealing with international issues. That is why all companies should have some understanding of international business. When first discussing international business, one must realize how beneficial international trade is to the world. Trade amongst countries has been growing very rapidly since the end of the Second World War. One way of looking at international trade is the simple economic principle of supply and demand.
One country is producing something that another country needs so they use trade in order for the other countries to obtain the products that they desire. This then brings in the basic law of comparative advantage by David Ricardo, “Each country would posses comparative advantage in the production one of the two products and both countries would then benefit by specializing completely in one product and trading for the other. ”(3) A country can definitely gain by any means of trade. Countries set up barriers to import and export for several reasons.
Duties on importing and exporting can create some government revenue. It is usually a minor source of revenue, however, in smaller less developed countries, it can be a significant source of revenue. A shortage of supply is a reason for a high tariff on exports in a country. If there is a high tariff then there will be less exporting, therefore more of that product in the country, thus making the price of that product in the country lower since there will be a greater supply of it. So trade barriers can be helpful to a country.
On the contrary, trade barriers can have a negative effect on a country as well. Consumers will have to pay a higher price on imports, and for similar products produced in the country the price will rise due to consumers buying the imported products. In order to regulate the barriers on international trade, there have been organizations formed. One such organization is GATT, which stands for General Agreement on Tariffs and Trade. Another organization that regulates trade is NAFTA, which stands for North American Free Trade Agreement.
This organization of course is set up to regulate the trade in the North American continent, specifically between the countries of Mexico, United States, and Canada. The purpose of these organizations is to promote a free, open, nondiscriminatory trading system. One of the most important aspects to be taken into account when managing companies abroad are the cultural variations that exist between them. It is necessary to give attention to the way different executives think about doing business around the world. The direction one takes towards the international market is crucial in establishing the company properly.
The globalization of market competition brings on the need to foster development of globally oriented managers and executives. ”(13) Managers must be sensitive to the cultures and customs of the countries in which they are living and working. For example, a manager can not be expected to moved from the United States to France and conduct his business in the same manner. It is necessary for one to familiarize himself with the culture in the country in which they will be working. It is extremely important for a manager to understand that they need more than a fluency in a language to be successful in that country.
You should make a bonafide effort to learn the language and the customs of the country you’re going to conduct business with. ”(12) In the global market place, the companies that succeed are the ones who mold their business to conform to the culture of the country in which they are doing business. What we might consider to be a minor fault, other countries take very seriously. People certainly do things differently and not paying attention to these differences can be costly. If a business deal is pending, a simple mistake such as scheduling a meeting at the wrong time can spark some hostility and kill the business deal.
For example, if a businessman offers to shake hands with another businessman, and the custom in that country is to bow, this can be a significant factor in a business deal. This example brings to mind a situation that happened in an American sitcom, “Seinfeld. ” There was a language barrier between one of the characters and a foreign businessman. When the characters had a cold and did not shake the hand of the foreign businessman a complete misunderstanding occurred which cost the deal. This is why it is critical to understand customs and traditions of other cultures when negotiating.
Many things come into play, including where, when and how meetings are conducted. Another aspect that should be taken into account right along side cultural differences, are problems associated with religion. This can come into effect because certain religious have their daily worship at specific times of the day and A manager can not schedule a meeting at this time. Since holidays and religious affairs vary in different religions around the world, there should be attention paid to this matter. One industry where religious differences become an issue is in the restaurant business.
In India cows are considered sacred so therefore they do not eat any beef. A McDonald’s restaurant in India probably would not be so successful. Another issue similar to this was when McDonald’s opened up in Israel. Orthodox Jews are not allowed to mix milk products with meat products. This was a problem in Israel, for instance, when a cheeseburger was served in McDonald’s. There was a petition signed by many Israeli citizens, but the company did not change its practice to suit them. McDonald’s International Chief Executive Officer, James R.
Cantalupo, said in response to the concern, “At McDonald’s, we strive to be a responsible corporate citizen and a good community neighbor. Whether in the US, Israel or any of the 80 other countries in which we do business, we always try to be sensitive to the cultural and religious heritage of the community. ” By not complying with the request, McDonald’s lost a large part of potential business. Going international in any business there is a great risk factor.
“When companies choose to grow, they must accept risk along with opportunity. 1) There are many issues that need to be taken into consideration when taking a business abroad. Lack of familiarity with foreign environments, along with the greater degree of uncertainty in operation across borders, create a high level of risk. To reduce this risk, one should know exactly what they are getting into. There is a need for a collection of information, which will apply to their expansion abroad. This will help a company make better crucial decisions in their international venture. Information is required to help in several different aspects of decision-making.
It will aid in deciding what countries to enter, what product markets, what target market, and what mode of entry. Such information can be obtained by primary or secondary data. With research there are risk factors that will be reduced. There are three major types of risk factors that can be affected. The first is political risk, which would be information on the government. Next would be financial and foreign exchange risks, which would be information on the rate of inflation, currency depreciation, or restrictions on capital flows and repatriation of earnings.
There are also legal and regulatory factors, which deal with import-export restrictions, various forms of ownership, modes of operation, tariff barriers, product regulation, and legislation. Some factors that need to be researched are indicators of the market potential. One such factor would be demographic characteristics, which deals with population size, rate of population growth, urbanization of the area, population density and age structure. There are also economic characteristics that deal with factors such as gross domestic product (GDP), gross national product (GNP), rate of growth, and income distribution.
As well there are geographic characteristics that need to be considered, such as physical size of the country, climate conditions, and topography conditions. Also, there are technological characteristics that should be looked at such as the level of technological education, sophistication of consumer education, and existing product or consumption technology. Finally there are socio-cultural characteristics of a country, which deals with the cultural values, life-style patterns, and the break down of the number of ethnic or sub-cultural groups.
Some information must also be acquired about the resources of a country. This is such physical resources information such as electricity, energy, or water. There are also human resources such as the availability of labor, work skills, management training, attitudes, size of a labor force, levels of productivity and hourly wages. Also there is information on capital resources such as financial resources, technological availability and sophistication. International research provides an essential input into the design of effective strategies for international marketing operations.
Further, it aids in decisions concerning appropriate tactics to be used in different country markets. In particular, research is required to evaluate long-run market potential relative to different countries, product markets, and target segments. Research can also aid in determining appropriate modes of market segmentation. Finally, research provides a valuable input for long run strategic planning and selection of countries, product markets, target segments, and modes of operation for long run market growth.
Collection on information is a key element in developing and implementing effective international business strategies. In particular, it is important to gather information relating to macroeconomic indicators in order to monitor the business-investment climate and marketing environment in different countries throughout the world. In domestic markets, an effective information system is essential to success. In the international markets, it is even more important to have an effective information system because of the rapid changes that are going on in the international market place.
It is almost impossible for some industries to ignore the global market place because they are interrelated. In addition, data relating to the specific product market should be collected. This would include information with regard to sales volume of product, product usage, durability of a product, and repeat purchase rates for non-durables. Data relating to complementary or substitute products should also be obtained (for example, automobiles for tires or film for cameras). Another aspect that is extremely important is the competitive market structure.
This would be information on the number and size of competitors, their sales volume, rate of growth, and relative market share. Why is it that some companies do not participate in adequate market research? Possibly, the answer to the question is simply high costs to obtain the information. However, in the long run, it is extremely beneficial for any company going abroad to get information to lower their risk in the global market. Studying International management will broaden any company wanting to expand and help to assure the success of such an endeavor. Knowledge is key to expanding into the international domain.