Why would a firm choose to trade internationally, reasons and the plan - Assignment Example

?Assessment item Report: Module Topics 6 Due 03-Sep Return 26-Sep Length: Approx 3,000 words (600 words on each question) Submission method options Hand delivery (option applies to Internal only) Alternative submission method Task Topics 1 to 6 are covered in this assessment task. Your assignments requires that you utilise at least six references in addition to your text, preferably including some journal articles. You may use no more than two URL Websites (This does not refer to journal articles) Background: Content Incontinence (CI) is an Australian Biomedical Company. It is a third generation offshoot business of a family controlled company. The founders, two German migrants with exceptional engineering skills have pioneered plastic injection moulding in Australia and have a worldwide reputation for their injection moulds. They supply industry worldwide with their products manufactured to precise specification in Australia. They have followed the Mittelstand philosophy of Germany's manufacturing sector. Two third generation members of the family have reached the pinnacle of surgery and pioneered new surgery and techniques to treat patients suffering from bladder and urinary tract illnesses and also from prostate problems including cancer. Their most recent treatment treats incontinence by inserting an artificial sphincter around the urinary tract to allow incontinent patients to control the emptying of the bladder. This is done by activating a micro chip inserted in a flap in the abdomen using a small device much like a remote control for a motor car. By using the device the artificial sphincter expands, allowing the patient to empty the bladder at his convenience. The artificial sphincter and can then be tightened again to prevent leaking. All of the research and development work has been done within the parent company in Australia.   Incontinence is common throughout the world and research indicates that approximately 40 million people suffer from this in India alone with comparable figure based on demographics worldwide. It is estimated that approximately 1 million Australians suffer incontinency. The dilemma facing the company is how to internationalize this new and potentially huge business. The traditional family approach of manufacturing and exporting to specification may not be the best way. The product is not just the hardware (artificial sphincter, controller, software and switching device) but the diagnostic techniques, the operation, the knowledge and experience. Your task is to answer the following questions in the context of this company Question 1: a. Why would a firm like this choose to trade internationally? State your reasons clearly and concisely.  b. Describe concisely the main types of international business this firm is likely to set up in the short term and long term. Give reasons for your choices. c. What does the term globalisation means in relation to this business? 1. a) Incontinence is the problem where the patient has a problem in controlling the emptying of the urinary bladder. It becomes an involuntary action where the patient complains of urine leakage (Minassian, Drutz & Al-Badr, 2003, p.1). There are many physical as well as psychological problems that can lead to it. Urinary incontinence occurs globally in huge numbers mainly affecting the female population. In a report it was found that UI was common in the white female population than in the black (Minassian, Drutz & Al-Badr, 2003, p.331). Apart from the European and the African continent, it is also prevalent in the Asian countries like India. A report in the newspaper The Hindu in India showed that a huge number of the people especially females suffered from the problem. More acute was the fact that these patients felt embarrassed to consult the doctor (Varma, 2012). It is here that the Australian company CI can establish its foothold. The company specializes in making surgery equipments and is widely known for their injection moulds. The company had recently developed an artificial sphincter that could be inserted around the urinary tract to allow the incontinent patients control the emptying of their bladder. It can be controlled much like a remote control. This saves the patient of visiting a doctor and public embarrassment as well. The company has excellent chances of going global in their business ventures as there seems to be a high demand for products like this which can be of tremendous benefits to the patients of urinary incontinence. Also, since the artificial sphincter has not been developed anywhere else in the world, the company stands strong chances of making profits from its international aspirations. These are the main factors which can lead the company to aim for international business extension. b). the company can aim for short term business expansion strategies first then going by its success rate can look into the long term strategies. For the short term strategies the company can look into franchising in the foreign locations. They can sell their goods in foreign locations by hiring some local retailers dealing in the medical equipments. This would help the company to understand its acceptability level on the country. This would also help the company in increasing its revenue and expansion of its brand name in the local markets (case study, n.d., p.90). After it has established its name in the market the company can look into the long term goals and establish its manufacturing plants in the country. They can also provide licensing facilities to some medical hospitals and retailers in the country. They can also export their goods and enter into deals with the local country. The company can also form joint ventures with some organizations of the host country to sell their products (Jain, 2003, p.141). c) Globalization means a reduced barrier in terms of communication and exchange of trade between countries. Globalization helps the countries expand their power and also their trade and labor (Featherstone, 1990, p.7). In the context of the company Content Incontinence, globalization can play a great role while helping the country to expand its market base. Firstly, globalization allows a country to relax their trade barriers that can help the Australian company in their market entry strategies. The company can also get labor and resources at a reduced cost. Globalization would allow the company to form trade zone in the long run where there would be no barriers in trade. There can be reduced cost for the subsidies. These aspects would definitely go in favor of the company while planning to expand internationally. Question 2: 1. Describe concisely the main barriers to international trade that CI may face. 2. What are the arguments for and against trade protection and how would they influence CI? 2) 1) There are many barriers that a company might face while operating in a foreign location. It can be in terms of social barriers, economic, technological, operational and financial barriers. Social Pluralistic society- Sometimes the countries where the company might wish to do business appears to be Pluralistic in nature. There would be different sets of ideas and it would become more prominent in the political domain. The company might not be able to get a uniformed support for its expansion there (case study, n.d., p.22). Industrial policies- The Company can have different objectives for its business proposals which may not be adequate and appropriate for the markets in the host country. Operational Risk: This arises because of the assets and the financial capital of the company that would help in the daily business operations. The breakdown of the company machineries, its supply and demand for the resources and the products, its shortfall in the goods and its services, the lack of a perfect logistic supply and inventory chain would lead the Australian company into shortage of production (Vallabhaneni, 2008, p.68). As the company deals in surgical instruments it is very important for the company to have operational risk away from its production units. Technological Risk: Lack of adequate security in the electronic transactions, the cost involved in developing a new technology, its fact that the new technology might fail along with an outdated existing technology that could further aggravate the situation, the result arising from it could have dangerous effect for the company while doing business in international locations (Clark, 1994. p.144). Financial risks: The Company could face severe barriers that could be related with the exchange rates and its tax duties. It also involves tax reforms that could impact its import/export activities. There may be situations where the exchange rates, interest rates etc might change in a country owing to its economic or political pressures. Most of the primary exports in Australia such as coal, iron ore, are usually exported under contracts that are denominated in the US dollars as US dollar is the principal trading currency in the world. The exchange rate mechanism with the Japanese currency Yen is also important as Australia has close trade relations with the country. The British pound is highly important in respect of the trade relations of Australia with Britain (case study, n.d., p.11). The company needs to be aware of certain trade transaction that changes overnight like the Swap transactions. It involves the exchange of currencies within the spot market with a formal agreement to swap the transaction in future i.e. it is a spot and a forward transaction occurring simultaneously. It is necessary to have an understanding of the mechanics of exchange rates. As the company is Australian in origin, it has to keep itself updated about these financial transactions. Besides, Australian business had to acclimatize itself with the international competitive environment and floating exchange rates (case study, n.d., p.14). The company can face tremendous risks in these areas and it would affect its sales and revenue volumes directly (Czinkota & Ronkaine, 2007, p.510). 2) By having trade protectionism, the company would be in a profitable position where it would enjoy profit levels in the operating country. By having trade protection the company can ensure that it has the protection from the government of the host nation. The company can enjoy reduced tariffs and subsidies cost (Baldwin & Evenett, 2009, p.50). By having trade protection the company (CI) will have the advantage to safe guard its goods from other competition and also attain a competitive advantage in the operating nation. It will also help the company to hire local people for its production units at a reduced cost. There are certain disadvantages for trade protectionism. By accepting trade protectionism, the company might become monotonous in its product and their designs. This would arise from low level of competition in the industry that is caused by trade protectionism. It can also lead to more layoffs in the company and economic downturns in the country of the company due to job outsourcing and other activities (Delimatsis, 2008, p.73). Question 3: 1. What are the main types of political and legal risk  that CI may have to deal with in its operations? 2. What type of strategies can CI use to manage political and legal risk?  3) 1) While doing business globally, there can be situations where the company may have to face political or legal barriers or both in trade. It can face the following types of barriers:  Risk of expropriation- the Australian company could decide that it would establish its subsidiary in the foreign country. Here it can face political problems if its subsidiary gets seized by the local government following the one which is in place at times of its entry. In fact, in some of the developing countries, this high risk for expropriation that is based on precedents often deters the western-owned companies in doing business in these countries (Czinkota & Ronkaine, 2007, p.136). Risk of civil unrest or wars –The company can face risk from the local civil wars especially in the developing nations. This unrest can cause interruptions in its supply chain management and while availing the work force. Though globalization will allow the company to outsource its activities it will not help the company in containing its business in the unrest area. It will become more evident if the company chooses to settle its company in Asian and African countries. Restrictions on capital outflows – The company can face problems where it might not be able to have a continuous supple of funds. It can also face problems while withdrawing the funds. Asian countries like China which has recently opened its trade barriers can impose restrictions on the capital outflows for the company at some point. Legal system strength –The Company can face risks from an inefficient legal system too. An under-developed legal body in a country could trigger risk as legal enforcement would be absent in such countries. 2) Strategies for managing international trade barriers The company CI will have to formulate some strategies to deal with its international political and legal risks. There are ways by which the company can form good relations with the local government. Building relations -The Company can establish good relations with its customer and the stake holders in the host country. The company cans hire a chief risk manager for its units in the foreign locations. The company can manage these risks by analyzing the local climate in the market and the country before setting its business venture there. The company would have to set effective policies that should be in accordance with the laws in the host country (Kobrin, 1982, p.xi). Low involvement strategy - There can be a number of alternatives for the low-cost risk management, which included reducing the costs by associating with other organizations with similar goals while trying to avoid the political entanglement and disruptions altogether. If the company, CI wishes to form wholly-owned companies in the operating countries, it can form coalitions with other companies with similar- interest levels. For example, the firms that are interested in reducing their import tariffs could join together that would lead to sharing the costs of their lobbying strategy instead of making these effort independently. This form of low resource strategy would help the company, CI in avoiding the hazard of political interference in its operations. High involvement strategy – if the company feels that it might face high levels of political risk exposure, it should expend greater resources and should develop a concrete elaborate network which would help to affect the political environment in the host country in a way that would provide adequate returns for their efforts. The network could be of many parties for gaining scope. It could be consumer groups, the labor unions, the creditors, the environmental and government agencies, etc. which are forms of potential network members. By maintaining frequent contacts and communications, the network would act as a centre for gathering information and a mechanism to work with for controlling the potential sources in political and legal risks that could interfere with the company objectives (Iankova & Katz, 2003, pp.184-185) . Question 4: 1. Describe Hofstede's framework for analysing cultural differences.  2. What are the strengths and weaknesses of Hofstede's Framework for CI's managers analysing cultural differences?  3. How would cultural characteristics influence patterns of communication for CI's managers in USA and in India? 4. How can the managers of CI take different communication characteristics into consideration to improve cross-cultural communication? 1) Hofstede's framework Power orientation This feature believes in the appropriateness about power and authority differences. The extremes lie in power respect and its power tolerance. Power distance between the superiors and the subordinates is determined by the society which might affect business negotiations. Social orientation This feature believes in the orientations regarding the relative importance between the individual and the groups in which the individual belong. The beliefs range from collectivism where the group is considered first to individualism where the person is considered first. Nations such as the USA have a high level of individualism which is assumed to be a source for well-being. Collectivist societies such as Japan on the other hand consider the emphasis on an individual to be alienating and undesirable. Uncertainty orientation It refers to the level of tolerance in uncertainty for the future. The extreme groups are the ones who do not favor uncertainty acceptance and try to avoidance uncertainty in future. Some countries such as Indonesia attempt at reducing uncertainty by long-term planning. But there are societies which place high emphasis on taking risks. Goal orientation This dimension is related with the manner in which the people get motivated to work for achieving different goals. It can be aggressive and passive. Aggressive goal behavior lays stress on materialism and assertiveness such as in Japan. Passive goal behavior emphasizes more on quality of life as well as a concern for others such as in Scandinavian countries. Time orientation This dimension is related with the extent in which the society views a long-term approach as compared with the short-term outlook. Australia has a form of time orientation that lies between the two. Japan has long term outlooks, while Pakistan has a short-term (Case study, n.d., p.36). 2) CI wishes to go international to expand its business. But before venturing into any new area it has to first analyze the culture and the local market conditions that prevails there. Using the Hofstede model we can evaluate some the strengths and weaknesses of the CI managers. The first dimension peaks about power difference. The managers in CI will have to maintain a certain degree of power difference to achieve their objectives. In the absence of this feature, the company may not be able to control its employees and its operations. The managers will have to follow collective attitude instead of individualism. However, this seems to be in conflict with the previous dimension. They will have to take some amount of risk and uncertainty for establishing their venture. The managers at CI will have to follow aggressive goal orientation and have a long run strategy. 3) There will be stark differences between the communication patterns for CI's managers in USA and in India. While USA is a developed nation with more focus on achieving growth and power India is a relatively developing nation with more emphasis its social values. In USA people are more concentrated in their individual gain while in India it is the other way round. The CI managers will have to develop separate strategies for dealing with these people. Their communication ways, their business interaction would vary. While in USA it would be easy to deal as the concern for society is not cared for, in India the managers will have to address the sensitive issues too. 4) For improving cross cultural communication, CI will have to understand the cultural implication in the countries. The managers at CI will have to check those areas in culture that would be accepted by the other country too. It has to understand the local society by understanding its likes and preferences in culture. E.g. as Japan is a collectivist society and USA an individualistic society, the managers would have to find out ways like the common traits in their behavior that would affect its cross cultural communication in a better way. Question 5:   1. Using point format, briefly describe how could CI use the range of international trade organisations.  2. What influence could regional economic groups be used by CI?  1) Managers involved in international business need to be aware of the existence and functions of several supranational organizations and institutions that can have a considerable impact on shaping the business environment. International organizations that are associated with the trade relations are the World Bank, The Asian Development Bank (ADB), The International Monetary Fund (IMF), The World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT) can be consulted by the mangers at CI before planning any global venture. The United Nations- As the UN does not primarily deal in trade or help organizations related with economic matters, the body is not assumed important in the relation of international business. But, the UN is known to be a large buyer for goods and services. There are the opportunities for the companies like CI to raise substantial amount of sales. Also, The UN employs many business graduates who specialize in international business. These information can be used by companies like CI who have not experienced the cultural and business environment in other countries (case study, n.d., p.48). World Bank- The main functions of the entire group is to encourage as well as assist the social and the economic progress in the developing nations by extending multinational loans for their development purposes which would be distinct from any bilateral loan. There are several firms that are suppliers to the borrowers for the World Bank finance related projects. The borrowers are found to invest billions of dollars every year for buying goods and the services from different businesses. The information that is gathered by it about a country or the finances used in a nation is regarded to be more accurate than the same information which could be obtained from other sources. The CI could take help from this information and decide on the place that would be the best for its business venture (case study, n.d., p.49). The Asian Development Bank (ADB) - The role of ADB is to encourage economic developments in Asia and in the Far East. As has been explained before, there are many people in the Asian countries who suffer from urinary Incontinence. The company can use these countries as its bases for expanding its hold oversea. Before it, the company can consult executives from the ADB inquiring about the safest place to deal in. The International Monetary Fund (IMF) - IMF’s main role is to help in coordinating the efforts seen in the financial world in times of debt crisis. CI would be expanding its business in foreign locations. As such there are high chances of the company to make losses and run into huge debts. In such cases, the company can approach the IMF to borrow funds which the company would promise to pay back at the stipulated time. 2) The business in any country is regulated by many f actors and one such feature is the presence of regional economic groups. These groups exert tremendous influence on the business activities. In a new location, a study of these groups is essential to understand their mind set and working patterns. It would help the company to deal and operate in the market in a peaceful manner. It could keep itself away from unnecessary politics and societal activities. Maintaining harmonious relations with the regional groups would help the company in attainting its economies of scale effectively as there would be fewer disturbances. The regional groups tend to control the labor force. So by keeping good relations with these regional economic groups, the company can ensure of keeping itself aside from the problems of social, political and legal risks. References  Baldwin, R. & Evenett, S. (2009). The Collapse of Global Trade, Murky Protectionism and the Crisis ... Centre for Economic Policy Research   Clark, K. B. (1994). The Product Development Challenge: Competing Through Speed, Quality, and ... Harper & Row Publishers Delimatsis, P. (2008). International Trade in Services and Domestic Regulations: Necessity ... Oxford University Press Featherstone, M. (1990). Global Culture: Nationalism, Globalization and Modernity. Sage Publications  Jain, S.,C. (2003). Handbook of Research in International Marketing. Edward Elgar Publishing Iankova, E. & Katz, J. (2003). Strategies for political risk mediation by international firms in transition economies: the case of Bulgaria. Journal of World Business, 38 182–203 retrieved on August 31, 2012 from: http://wase.urz.uni-magdeburg.de/evans/Journal%20Library/Problems%20of%20Economic%20Transition/Bulgaria%20political%20risk%20mediation%20MNCs.pdf  Kobrin, S., J. (1982). Managing Political Risk Assessment: Strategic Response to Environmental Change. Univ of California Pr Minassian, V., A., Drutz, H., P., & Al-Badr, A. (2003). Urinary incontinence as a worldwide problem. International Journal of Gynecology & Obstetrics, 82(3), 327-338 VARMA, M., D. (2012), Most women with incontinence don’t seek medical aid: survey, retrieved on August 31, 2012 from: http://www.thehindu.com/health/policy-and-issues/article3577678.ece, retrieved on August 31, 2012 Vallabhaneni, S., R. (2008). Corporate Management, Governance, and Ethics Best Practices. Wiley Rationale Assessment item 1 has been designed to test your understanding of the material covered in Topics 1 to 6 and to meet the learning objectives listed in the Study Guide for those topics. Marking criteria Generally, markers use the following criteria for grading an assignment. Pass mark assumes: 1. The question is understood and addressed.  2. The required reading is completed – evidence of such.  3. Awareness of issues involved  4. Awareness and understanding of major theories/theorists.  5. Sufficient organisation of thought and expression to allow the reader to follow without effort.  6. Use of correct referencing.   Read More