Global Business: The Role Of Internalization Of Business - Assignment Example

Global Business: The Role Of Internalization Of Business Introduction Currently lots of organizations are taking the initiative of expanding the business. Growth of the company or sometimes diversification is the main reason for the companies to go for internalization. The other forces that drive internalization of business include employees, ideas and availability of resources. The opportunity of capitalizing the international business is the objective of the organizations. The companies can opt to set up plants other than the home market in places where cheap labour as well as the resources required in the operation process can be made available easily. The exchange of ideas is yet another reason for internationalization. The benefits of internalization varies between the type of business the companies works in but the most common benefit that accrues to all organization is savings of money. The workforce from different backgrounds can bring in new ideas which contribute on the growth path of the organization. When a company goes international it is easier to get into deals with other organizations and the expansion processes brings more consumers under the base of the company. It is not a hidden secret expansion of business steadies the cash inflow into the company. Part A Current issues in Global Economy: Futurology The Domino effect of globalization has provided a level playing field for many countries on the international platform. The global economy reaped the benefits of globalization as the interaction between the developed and the developing countries led to exchange of technological know-how. The current global economy is on the steady state with the developed economies like U.S. and Japan showing little progress. The price of oil is on the rise and it can act as a constraint towards progress for the developing economies as high oil prices plays its part in raising the level of inflation. The fiscal and monetary policies adopted by different governments have been an attempt by developed economies to stave of recession. The emerging markets however are running account surpluses which mean that these economies will be able to expand. The developed countries are running huge fiscal deficits which will mean that higher taxation is certain for both Individuals and corporations and will lead to some level of stagnation in these markets. The global stock market raced to unheard levels after slowdown in U.S. but rising corporate profits as a share of GDP coupled with political stability ensured the stability in the prices of stocks. The trade liberalization process contributed in growth of the global economy. The trade liberalization will open up a basket of opportunities for the developing countries as the restriction on agriculture, labour mobility, textiles have been withdrawn. The long term problems for the global economy have been persistent rising levels of inequality and poverty levels. The non renewable sources are getting exhausted and inadequate regulation of the financial market pose threats to the global economy. The economic turbulence of the European region acts as the catalyst in narrowing the progress of the globe. If the current situation persists the economy may well be trapped under the vicious circle and the turmoil will gain strength to strength. International business strategies One of the Pillars that form the international business strategy is the identification of potential markets which also takes into account the choosing of the most desirable markets through analysis at both a country Macro level and an individual micro level approach to include areas such as competitor analysis. A strategy can be defined as the actions for the managers to carry out the goals of the company. The common goal is to maximise the value of the firm for the stakeholders. Profitability of the firm is determined by the rate of return the firm accrues on invested capital. The percentage increase in net profits leads to growth of profits. It is the decision of the management to determine where the company wants to be positioned taking into consideration the value and cost. The company must choose the efficiency frontier that is of course viable and will be supported by enough demand. The internal operations must be directed to support the position. The organization must have the correct structure so as to execute the strategies. It is of utmost importance to analyze the position of the competitors. International Trade and Investment Issues The great trade collapse was the resultant of the financial crisis and great recession. In the years of recession the world trade to GDP fell by nearly 30% which exceeded the experience felt after the post war recession. The role of credits, inventory adjustments for imports and demand for the durable as well as non durable goods dried up in that phase. The sectors vulnerable to the financial crisis suffered the most. The major investment issue that companies consider while investing into emerging markets or in the countries identified as potential markets is making the difference between speculation and investment. The next issue that can be considered is avoidance of the currency risk. While investing into other countries the company should forecast the demand that can be generated along with the supply to match the demand. If there is any mismatch strategies to nullify them should be undertaken. The stability of the exchange rate in important as the fund exchanges are important for the operations of the company. The trading policies practiced in the country where the company wants to diversify and the trade barriers should be accounted while making the policies for internationalization. If the barriers appear to be stringent and the practices are hard to break through it is advisable not to move in into that country as international businesses find it extremely difficult to survive with only domestic demand. The regulatory as well as the exchange risks can be discussed in this part. A highly fluctuating currency risk will lead to unanticipated changes in the prospects of the company. The exchanged risk can have severe effects on the financial position of the company if not managed effectively. So the company must make some strategies so as to nullify the exchange risks. The regulation practices followed by the government in different countries may not be beneficial for the company. It is necessary to analyze the regulatory practices before venturing into the new or emerging market. SWOT analysis of Elecdyne in internationalisation perspective Strengths Elecdyne is a Japanese SME that produces electronic goods. Japan has a global reputation for high spec electronic products. The technology owned by the Japanese are patented and so they cannot be copied elsewhere. Therefore, the company has developed confidence in producing electronic goods. The domestic business environment is one of the major strengths of the country. The company also get access to many local suppliers. In internalization perspective, it would gain strengths in some areas. It can take its own experienced staffs to new markets so that it can compete with the local players by producing innovative products. China could have offered huge market or the electronic goods but since Japanese and the Chinese government do not share close terms the option is ruled out. Weaknesses The company has been facing major weaknesses in some areas of its business. It had failed to grow in terms of sales since last two years. The company has o huge amount o he MNCs as it use their licence for producing electronic products. Wage rate is also higher in Japan than other countries like China and UK where MNC are getting expertise with comparatively lower wage rate than Japanese. The company is also not able to hire new research graduates who can help it to produce own technology because they prefer to join multinational companies based in Japan with brand value, global exposure and also higher wage rate. For all these reasons, the company has estimated that it might also incur loss in the next financial year. Opportunities Despite of several weaknesses, the company has many opportunities to grow and come across over its weaknesses. One of the major opportunities of the company to grow its business is internationalization. The top management of the company are contemplating the high possibility of internationalization into one of the three high prospective and potential foreign markets. These are China, Mexico and United Kingdom. Through internationalization, it can revolve many critical current issues which lead to its major weaknesses. The company can access technological expertise from foreign markets with comparatively much lower wage rate. It also can access to new potential markets with higher demand of new product. Overall, the company have an opportunity to develop an international company. Threats Despite of many external opportunities, the company also has some threats. Currently, one major threat of the company is market competition by the leading multinational companies present in Japanese market. Again, in terms of internationalization, it night faces completion from the local players in foreign markets. Elecdyne need to invest huge amount in marketing and promotion along with its own production unit in foreign markets. Therefore, internationalization cost would be very high which might be huge for a SME like Elecdyne. Again, it needs to face foreign currency translation risk for business transaction in foreign currencies in foreign markets. Foreign currency translation risk is one of the major threats to the companies that operate in foreign markets (Heidrich, 2012, p.5). If foreign currency exchange rate decreases then the company will be a major threat as it will have to earn more in foreign currency to increase earning in currency of its home country. Again, higher amount foreign assets in balance sheet of the company would increase the translational risk (Henderson, 2003, P.5). Apart from this another threat is cultural differences. He company needs to understand the foreign culture in both employees and customer perspective to be comfortable in operating business operation and understanding customer demand trend. These are the major threats of the company. Cost and barriers in entering new markets When the existing competitors in the market have achieved economies of scale it can act as barriers to entry for the new entrants. The existing competitors enjoy benefits in terms of cost which cannot be duplicated by the new ones. The new entrants are forced to differentiate their products from that of the competitors as the competitors already have been able to gain the consumer loyalty. This involves a steady flow of funds for the new entrants. In order to compete in an industry the entrant has to invest large financial resources which can sometimes be risky from the point of view of the company. The company may also face difficulties in accessing the distribution channels. The role in the government in granting licenses and other testing regulations can act as barriers as well. Comparative PESTEL Analysis Political- The government of UK has tried to micro manage the economy of the country. The local authorities of England have kept close eyes on the government if they are taking the right initiatives for the welfare of the people. The constitution of Mexico establishes three levels of government namely the federal, municipal and the state government. The constitution states that the constitution must be headed by a republican government composed of an executive, a governor and appointed cabinet. The president of the country directs the foreign relations. The principles of foreign policy include respect for international law, maintenance of sovereignty and independence and peaceful resolution of conflicts. The Chinese government has been characterised as communist and socialist. There are restrictions in many areas including the usage of internet, the freedom of press, the freedom of religion and reproductive rights. The leaders of the country term the political situation of the country as socialism with Chinese characteristics. The political system of China is partly decentralised while limited democratic processes exist at the local levels. In Japan there is freedom of press. The independent system of courts plays the role of protecting the journalists. The elected officials have lesser role to play as the country is under the hands of strong central bureaucrats. The regulations need to be abided by the businesses in the country but some of the rules are overseen by the bureaucracy. The UK government supports the industries that employ a minimum number of people. If the company forecasts to employ that amount of people then UK may be a right choice as government’s support is necessary for businesses. Economic- The economic system of United Kingdom is based on the complex financial system. In fact it has too many eggs in one basket. The economy was the worst sufferer of the subprime crisis and the effect of recession will last for longer of period in UK than in most developed countries (NewsFan, 2003). The economy of Mexico is the largest auto producing nation of North America. Mexico is the sole country of Latin America to include itself in World Government Bond Index. In terms of Nominal GDP, China has the second largest economy. The government encourages the growth of small enterprises and takes the appropriate initiatives to promote foreign investments. Trade relations are considered as the building blocks of growth. The western management styles were introduced to reform the sick state owned enterprises. The economy of Japan ranks at the top in yielding crops. In terms of Purchasing power parity Japan is just behind China. The financial sector of Japan was not exposed to the subprime crisis but the economy was pushed into recession as the after effects of recession led to sharp decline in investments. The taxation system prevailing in the countries needs to be addressed. The taxation system in UK involves two types of payments to two different government levels. Although certain goods are exempted from the VAT yet the rate is high enough. In Mexico the rate of federal tax does change. VAT is imposed on the sale of goods which is normally around 10%. Business or corporate tax comprises an important source of revenue for the Chinese government. The tax is generally imposed on the value of turnover from business. Japanese government follows a three tier tax structure and the taxes are levied according to it. The maximum percentage of payable tax is 25.5% while the minimum is 15%. Social- the society of UK is class conscious while the middle class is not so big. There are problems of immigration. Mexico is ethnically diverse. The immigrants of Europe are united under single national identity. The synthesis of European culture forms the basis of national identity. The population of Japan consists of ethnic groups like Chinese, Japanese, Koreans and some other groups. The rate of urbanization is 0.2% for Japan (Alston and Takei, 2005). The population is young with a major proportion of the population consists of people within the age group of 15-64 years. English is an internationally acclaimed language. Therefore it can be expected that most of the communications within the company will be conducted in English. Language can be a constraint for the Japanese or the Chinese as they are not well versed in English. Technological- The UK economy is hot bed of inventions and innovations. There is encouragement from the government to the entrepreneurs for research and development. Mexican designs are favourable for American brands. The high levels of infrastructure and educational support paves the way for technological advancements. China is also characterised by many ethnic groups. The education system of the country made rapid progress after 1986. The country of Japan is well known for its industries in automobile and electronics. The electronics products from Japan enjoy a lump sum share of the market. The country is an advanced in the field of scientific research as well as in medical research (Krugman, 1995). Every year a huge sum of money is sanctioned in the budget for the ongoing researches in various fields. Following the above discussion it is advisable for the company under consideration to internationalize in Mexico. Part B International market entry strategies There are several types of business strategies adopted by leading domestic firms of many developed countries when they started internationalization. Efficient foreign market entry strategies are Joint venture, Greenfield site, merger and acquisition. Elecdyne is a Japanese SME with medium financial base (Poisson & Miami, 2000, p.3). Therefore, the company needs to focus on cost effective or low market diversification strategy o enter into new foreign markets. Joint venture would be the most cost effective strategy for the company to enter into new market. It will benefit the company by reducing competition with the partner and joint strategic goal will be stronger to compete with other brands in the market (Alina & Emili, 2009, p.3787) It also can access existing distribution channel of the partner and a existing market. Jointly both the partners can access technology expertise of both the companies. Initial investment for joint venturing with existing foreign companies is very less. Merger and acquisition is comparatively high valued strategic business activity followed by large multinational companies for further expansion of their businesses across the global markets. But, for a SME like Elecdyne, joint venturing with one SME in the same sector or same business in the selected foreign market would be most beneficial for the company. Conclusion Based on the comparative PEST and SWOT analysis, it has been identified that internationalization into Mexico would be more beneficial for the company. It can get required technology expertise in comparatively lower wage rate. Many domestic suppliers in that market and high disposable income of the people and emerging trend to buy foreign brands. Foreign currency translational risk also would be lower than other countries i.e. United Kingdom and China. The economy of this market is also growing and also there are very players in the same business. Therefore, it will be easier for the company to joint venture with small firms in same business. References Alina, H. & Emilia, C. 2009. The Internationalization Strategy in a Global Age. [Pdf]. Available at: http://www.itchannel.ro/faa/375_pdfsam_ICEA_FAA_2009.pdf. [Accessed on 23 December, 2012]. Alston, J.P. & Takei, I. 2005. Japanese Business Culture And Practices: A Guide to Twenty first Century Japanese Business. iUniverse. Heidrich, C.S. 2012. Foreign Currency Translation According to Ias 21 and Ias 39 in Consolidated Financial Statements Considering Intragroup Foreign Currency Hedging Strat. GRIN Verlag. Henderson, C. 2003. Currency Strategy: The Practitioner's Guide to Currency Investing, Hedging and Forecasting. John Wiley & Sons. Krugman, P. 1995. Trade with Japan: Has the Door Opened Wider?. University of Chicago Press. McGuigan, J.R., Moyer, R. C. & Harris, H. F. 2010. Managerial Economics: Applications, Strategy, and Tactics. Cengage Learning. NewsFan, 2003. Pestle Summary United Kingdom. [online]. Available at: http://newsfan.typepad.co.uk/pestle/2009/03/pestle-summary-united-kingdom.html. [Accessed: 23rd December, 2012]. Poisson, R. & Miami Z. 2000. Utilisation of strategic alliances in the processes of internationalisation: an empirical study of small and medium sized high-tech enterprises. [Pdf]. Available at: http://www.fsa.ulaval.ca/cepme/Articles&documents/IAMOT_2000-strategy.pdf. [Accessed on 23 December, 2012]. Watkins, T. 2012. Accounting or Translation Risk Exposure. [Online]. Available at: http://www.sjsu.edu/faculty/watkins/accountrisk.htm. [Accessed on 23 December, 2012]. Table of Content Part A 1 Current issues in Global Economy: Futurology 1 International business strategies 2 International Trade and Investment Issues 3 SWOT analysis of Elecdyne in internationalisation perspective 4 Comparative PESTEL Analysis 7 Part B 9 International market entry strategies 9 Conclusion 10 References 11 Bibliography 14 Bibliography Alston, J.P. & Takei, I. Japanese Business Culture And Practices: A Guide to Twenty-first Century Japanese Business. iUniverse, 2005. BBC News. 2011. China overtakes Japan as world's second-biggest economy. [Online]. Available at: http://www.bbc.co.uk/news/business-12427321. Krugman, P. Trade with Japan: Has the Door Opened Wider?. 1995. Web. 16 Oct. 2012. University of Chicago Press. Mente, B.L.D. Kata: The Key to Understanding & Dealing with the Japanese. Tuttle Publishing, 2003. Ministry of Foreign Affairs of Japan. 2012. Japan’s measures including barriers to trade and investment.[Pdf]. Available at: http://www.mofa.go.jp/region/asia-paci/australia/study0504/chapter4-2.pdf. [Accessed on 23 December, 2012]. Wharton. 2009. How the Environment for Foreign Direct Investment in Japan Is Changing -- for the Better. [Online]. Available at: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2212. [Accessed on 23 December, 2012]. Read More