Multinational Business in the Chinese Economy - Research Paper Example

Lecturer: Management Essay Introduction The economic geography refers to the location, allocation and spatial grouping of the country’s business activities in the globe. China is one of the economies, which has geographical location of industries, infrastructure and agglomeration of economies being distributed in a unique way. China’s economic geography has contributed to the economic development of the nation; thus, it has made the country emerge as one of the fastest and emerging developing economies. However, economic disparity in regional incomes is one of the economic and geographical issues contributing to disparity in China. The persistence poverty level especially in Northern Shaanxi and other parts of China is due to economic disparities. The income disparity has been the key issues in China; thus, here is the need to widen the geographical income gaps, avoid industrial clusters and improve infrastructures, which are barriers to economic growth in the interior geographical locations of China. Dimensions of Distance The distance matters for multinational business because of varied issues. First, the cultural distance is one of the matters for successful business performance and economic growth of China. Differences in language are one of the cultural issues impacting the economic and geographical locations of the multinational companies. The language barrier is still a problem for companies carrying out business activities overseas. This is because Chinese have their language, which they use in the country, and it is difficult for foreigners to understand. Moreover, different ethnicities and poor social network communication are another attribute of cultural distance. Lack of effective and well-developed social networks may hinder the successful business performance of multinational companies. China has many industries, some of which are multinational companies located within the economy. However, due to poor infrastructure development, especially roads and the communication network, many of them are unable to meet their demanding goals because of lack of connective ethnic or social networks. Ghemawat argues that an economy’s cultural attributes such as ethnicity, social norms, different languages or national identity on consumer products matter a lot in business activities (140). This is because religious beliefs, ethnicity, language or social norms are capable of creating distance between two economies (Ghemawat 140). Secondly, the administration distance is another matter for multinational business. Historical and political organizations being shared by more than one country may create an impact on multinational business. Ghemawat points out that government policies, political hostility, lack of shared or political connections and institution weakness are among the attributes creating administrative distance (140). These attributes may impact the effective business performance of multinational companies. China is one of the emerging economies that have made efforts to improve the economic growth. However, administrative distance is still a matter towards becoming a fully developed nation. For instance, individual government policies including environmental, trade and other policies create a barrier for successful multinational business. Thirdly, geographical distances matter for multinational business. This is through creating barriers towards successful business performance because of increased transportation costs, bulk ratio issues and losses encountered in the transportation of fragile or perishable commodities in a long distance. Geographical distance is not a matter of how far is the place in terms of miles or kilometers – other attributes contribute to geographical distance. These include the physical scene of the nation, topography, access to waterways as well as transportation and communication infrastructures. These are among the attributes that have impacted the effective business performance of multinational business in the Chinese economy. This switches direct foreign investment; hence, the country should take these issues into consideration in order to ensure successful business performance. Lastly, economic distance is one of the most significant matters for multinational business in China. The income or wealth of a consumer is one of the significant attributes that create economic distance. This has an effect on trade levels among countries conducting business activities together. The research study reveals that developed nations participate in economic activities more relatively than developing nations. Therefore, conducting economic activities with the richer actions have a positive correlation in terms of per capita gross domestic product (GDP) and trade flows. For instance, Wal-Mart in China may not perform successfully but it can perform well in Canada because of differences in consumer income. Institutions The institutional arrangement is a matter in the economic geography of China; hence, they matter in various ways. First, the political system is a matter for multinational business in China’s economy and it is a critical issue for economic development. For instance, the Jasmine Revolution in the Middle East that demanded a political change impacted business activities in the economy. Poor political administration creates hindrance towards economic growth through making the environment not favorable for foreign investors to venture business activities. Secondly, social systems are issues in the Chinese economy, and they create a barrier to successful business activities. The social system of China with varied social norms and social lifestyles hinder the multinational companies from achieving their goals. China is one of the nations with many social groups of people who have various beliefs and social norms attached to consumption behaviors in the market. This social system creates a barrier towards successful business activities, thus contributing to increased economic disparities. Thirdly, openness to product consumption is another issue that impacts foreign investors. Many people in the Chinese market are open to foreign products; hence, many of them prefer locally manufactured products because they are cheap. Moreover, the government permits Greenfield investments and acquisitions that enable the company to align their interests with the Chinese government (Khanna and Sinha 68). Lastly, labor and capital markets are other institution arrangement that matter a lot in the China market. The Chinese economy has local and cheap labor to work in the industries, and many of them have adequate or technical skills to handle sophisticated machines. Employees can also join government-controlled trade unions, which protect them from poor working conditions and other work related issues. The capital market in China is favorable because the country has adequate banking and equity markets. However, the accounting standards are not strict and bankruptcy of companies is common, thus hindering successful business performance. This hinders the foreign industry to raise equity and debt in their home markets, thus impacting the economic growth of China. Industrial Clusters Industrial clusters refer to the geographically proximate groups of interconnected industries or institutions that are linked by commonalities or complementarities (Alijaber 1). The opportunities for multinational business may include knowledge spillover, innovation enhancements and stimulation of new business creation – all resulting because of industrial clusters. Therefore, industrial clusters are critical opportunities for multinational companies because such clusters enable the companies to share economies of scales. These include sharing of transportation costs and knowledge, hence producing high innovative products. Industrial clusters offer organization an opportunity to increase and widen business activities as well as encourage competitiveness in an industry. Moreover, it contributes to formation intercluster alliances through some collective action whereby the cluster management teams are in charge of the process (Alijaber 5). These alliances are essential because they create opportunities for multinational business companies to set up technological partnerships, facilitate effective learning and knowledge sharing as well as stimulated effective business growth in an economy. However, the intecluster alliances have some risks such increased competition among the firms, lack of motivation and poor governance. Therefore, the management should carefully choose the right partners in order to achieve success in the multinational business. Diffusion of Technology Diffusion of technology is a matter to multinational companies because it contributes to competitive advantage in the global market (Porter 34). Many companies are nowadays incorporating technology in order to increase the production of innovative commodities with an aim of achieving a competitive advantage. However, diffusion of technology is an issue in China because many people, especially the consumers, do not utilize technologies in making consumption choices. This is because of lack of trust and fear for privacy; thus, the companies need to manage and implement legal issues to protect the privacy of their clients. The Internet and use of social networking sites are widespread, although it has created negative impact on effective business performance in the contemporary society. However, it is the role of the Chinese government to develop industrial policies that may create an effective business performance, hence contributing to increased economic growth. Zara Fashion Group and the Way They Will Operate Business in China Market Zara Fashion Group is a Spanish retailer that manufactures clothes and varied accessories. The business was established by Ortega Amancio and Mera Rosalia in the year 1975. The Zara store distributes varied brand clothing for male, kid and women. The store is integrated vertically, and it distributes most of their products across the globe including United States, Europe, Portugal and Asian countries. China is among the countries that trades or exchanges products with Zara fashion group. Zara store produces distinct brand and finished commodities as well as modifies existing products. They cancel the short life cycle of the products and pursue new design. They also rely on sophisticated information technology, and they have a variety of fashion forward designs in their stores. The Zara retailer operates in vertical integration and employs a business model that enables them to achieve competition in the competitive global market. Zara retailer needs to change the way it operates their business in case it wants to enter and become successful in China. Understanding the way Zara performs trade is vital because it will help one to determine in case changing their business strategy will make them profitable or not. Therefore, Zara employs a business models that determine the way it operates their business. This model is broken down into concept three main categories including the concept, capabilities and unique value. First, they use the concept of maintaining design, manufacturing and distributing products in a way that will enable them to respond to customers effectively. Secondly, the capabilities of the company demand resource to exploit opportunities and execute this strategy to achieve effective performance. The capabilities permit them to achieve their goals and strategy of responding to customer’s needs. The last model is value driven for both tangible and intangible benefits that are provided to stakeholders. The business model employed by the company is unique, and it is distinguished by the vertical amalgamation approach. Making the necessary changes when entering the new market would not keep away Zara from being profitable. However, the only way that will make them continue being profitable it to adapt and adjust to the new business environment. Ghemawat (2007, p.1) reveals that employing a global strategy is a challenge, but companies should use adaptation method to boost their market shares. This is through customizing their process and offering in order to meet the unique needs of the global market. Therefore, Zara should be ready to change their strategy or combine various options in order to enable their business to evolve. This is through opening up their mind to the capacity of broadening the perceived opportunities, sharpen their decisions and enhance a global performance. Ghemawat (2000, p.1) argues that managing differences is a challenging global strategy, but a company should exploit the economies of scale in case they want to achieve a competitive advantage. Zara is committed to achieving competitive advantage through responding the needs of customers. This is through delivering to them fashion products that have a short life span. They are committed to their capability of product development and strategically partners and employ unique advertising technique in order to improve their business performance. Therefore, these strategies are effective for achievement of competitive advantage; thus, they should maintain them while adapting to the situation in order to continue enjoying profits. They can also employ a portfolio strategy, which involves setting their operations outside the home area. The portfolio strategy should report directly to home base; thus enabling them to become successful in China market. Ghemawat (2000, p.1) argues that the portfolio strategy is the first strategy that companies can adopt when seeking to establish presence outside their markets. This approach is effective because it contributes to growth of business faster outside the home market; thus generating high profit opportunities to average economies of scale across the regions. The Clothes for kids (Zara Kids) Products The Zara value chain for the children’s kids can be disaggregated in order to reach the overseas inputs, markets and collaborations. The increased competition forces are making many industries disaggregate themselves in order to reach foreign markets, inputs and collaboration with others (Contractor, Kumar, Kundu and Pedersen 1417). It is crucial to split the value chain to a set of activities because this can augment cost associated with the value chain distribution and disaggregation. Zara can reduce the total cost and associated risks of encountering losses. This is through disaggregating their value chains in order to reap the benefits from the China market or other alliance across the globe. They can disaggregate them into discrete portions such as performing their activities in-house and outsourcing others to external dealers in order to improve their performance. Zara can outsource the Zara kids’ products both in the home country and overseas as well as restructure some of their activities. Outsourcing is significant because it can enable the company to reduce cost and maintain operation efficiency in the value chain. Outsourcing also can enable Zara to utilize skills and gain a competitive advantage. Competition can force companies to employ unique strategies in ordered to reduce operation costs. Infrastructure, sophisticated skills and other aspects hindered many companies from achieving effective business performance. Therefore, many companies employ varied strategies in order to achieve a competitive advantage within and outside their markets. Therefore, the new wave of outsourcing has become common among industries. Outsourcing can enable Zara to keep or maintain their business within the country. Contractor, Kumar, Kundu and Pedersen (1420) argue that disaggregation in production is aided by increased codification of organizational knowledge. Knowledge codification contributes to success business performance and it help companies in the outsourcing process. The increasing products in the current business environment require broadening of input skills even from the outside of the firm. Therefore, outsourcing Zara kids requires the company to broaden their skills in order to increase opportunities in the foreign markets. The company cannot only rely on the internal resources, but also the external sources for significant core functions. The company can organize their global network of activities both in home and overseas in order to achieve total benefits of value added network. Zara can offshore particular activities, and this is through restructuring the industry geographically in the foreign country with other industries producing similar products. Off shoring involves the relocating the operation of an industry from the home country to a foreign nation where the same industries designs similar products. The off shoring is significant because it enables the company to continue operating efficiently at low cost because of the economies of scale. It will also enable the company to find market for their products, share skills and expertise; thus achieving a competitive advantage. Off shoring particular activities will enable the company Zara to reduce costs and expand their business in the foreign country. The off shoring has much in widespread with geographical repositioning; thus, the industry expands the oversea subsidiaries. It also increases the foreign direct investment and exploits the country-specific opportunities. How First Solar Company Can Use Motivations for Its Multinational Business First Solar is a fast growing energy technology company that operates in many countries across the globe. The business was established by McMaster Harold in 1948. The corporation relies deeply on the marketing strategy of existing subsidies, as the only means for contributing to increased industrial investments. Subsidies reduce the costs of solar and increases competitiveness in relation to conventional generation. First solar employs a business model and it focus on a narrow value chain with an aim of benefiting from specialization. The vertical integration in the First Solar Company enabled them to enter into new market in the United States. The downstream integration enabled them to achieve sustainable and long-term competitive advantage in the global market. Integration also enabled the company to compete with other favorably and eliminated the marginalization issues associated with solar industry. First Solar employ also the business context of competition and technology in order to improve their business performance. First, the company employed technology that possessed varied inherent features that made the company suitable for photovoltaic deployment. They valuated and employed new technology within the solar industry; thus, it had to perform varied functions. Technology focused on low production of products and it focused on cost effectiveness of producing energy from a certain technology. The cost for technology was lower and efficiency in order to enable the company to avoid operating at high costs. Secondly, the company employed a business context of competing with their rivalry in order to achieve competitive advantage. The company attracted new industries that led to intensified competition. The increased competition enables the company to employ a business model of integrating business in order to remain competitive in the global competitive market. First Solar Company should use motivations and structures for its multinational business strategy over the next ten years. First, motivations such as adaptation, arbitrage and aggregation will enable the company to carry out their business effectively across the globe. These motivations are essential because it will enable the company to achieve a competitive advantage within the home country and foreign nations. One of the motivations that the company will use is adaptation. Adaptation focuses on certain conditions with designated value chain in each country. The industry can use adaptation to attain local significance while developing various economies of scale in order to attain a competitive advantage (Ghemawat 2007, p.4). Adaptation can enable the company to use their strategies in the foreign market, and it will offer the company unique needs of boosting their market share. The First Solar Company can also use arbitrage in order to exploit differences through off shoring some activities in the foreign market with cheap labor (Ghemawat 2007, p.1). This is essential because it will enable the company to achieve absolute economies of scale through specialization for their products in the international markets. Lastly, the company uses aggregation as a motivational effect for achieve a competitive advantage and increasing business performance. Aggregation is a business activity of consolidating an activity in order to achieve economies of scale. The company will also use structures including portfolio, hub, home base, platform and mandate for its multinational business strategy for the next ten years. This is essential because these structures play significant roles in the international business. For instance, the company can use home base strategies in case the economic concentrations outweigh the economics of dispersion (Ghemawat 2000, p.5). The company can locate the disaggregation and start manufacturing in their home country. They can also use portfolio in the establishment of operations outside their home country. This is essential because it will enable the company to accelerate the growth of business. The company can use the hub strategy to build regional bases for the provision of shared resources and services to continue operating in the business (Ghemawat 2000, p.1). Lastly, the mandate and platform can help the company to achieve higher economies of scale. These strategies are effective because they can help the company to reduce operation cost; thus, the company can use them in improving business performance. Works Cited Alijaber, Abdullah. "Lyonbiopole: The Challenge of Becoming a World-class Biotechnology Cluster." Richard Ivey School of Business (2009): 1–13. Print. Contractor, Farok.J, Kumar, Vikas, Kundu, K.Sumit and Pedersen Torben. Reconceptualizing the Firm in a World of Outsourcing and Offshoring: The Organizational and Geographical Relocation of High Value Company Functions. "Strategies That Fit Emerging Markets." Journal of Management Studies. 83.6 (2010): 1417-1433. Print. Ghemawat, Pankaj. "Distance Still Matters. The Hard Reality of Global Expansion." Harvard Business Review79.8 (2001): 137–147. Print. Ghemawat, Pankaj. "Managing Differences: the Central Challenge of Global Strategy."Harvard Business Review. 85.3 (2007): 1-13. Print. Ghemawat, Pankaj. "Regional Strategies for Global Leadership." Harvard Business Review. 89.5 (2000): 1-13. Print. Khanna, Tarun, Krishna G. Palepu, and Jayant Sinha. "Strategies That Fit Emerging Markets." Harvard Business Review 83.6 (2005): 63–74. Print. Porter, Michael E. "Location, Competition, and Economic Development: Local Clusters in a Global Economy." Economic Development Quarterly 14.1 (2000): 15–34. Print. Read More