Should the Multinational Firm Be Involved In International Business or Investment with a Developing Country - Essay Example

This case study is about a frictional company Supermart which is located in United Kingdom. It will expand its business to China. The market of UK was initially very favorable for this company. But to expand its trade it is beneficial for the company to establish its business in emerging market. The purpose of this case is to decide if the multinational firm should be involved in international business or investment with a developing country. This case study gives a detail idea about the developing country China and its emerging market. Here the international trade agreement of China is also mentioned. The country has become the member of WTO in2001. The other international organizations also have important roles contributing in the business development of the country. The trade agreements with these organizations will help in the process of business development of Supermart. A detail analysis of the political environment of China is also provided in this case. Different government policies off this country can affect the business profitability of Supermart. This paper also provides a brief idea about the national institutional systems of United Kingdom and China which will play an important role in the retail business. Introduction In this case study Supermart is taken as a frictional multinational company which is based in United Kingdom. It is a developed country. Supermart is a retail company doing its business for a long time in various countries of the world. It is one of the largest companies in the retail industry segment of UK. But for the large numbers of players the market of UK has become very much saturated which limits the growth of the company. Therefore expanding its business internationally will help this retail company to generate more revenue by acquiring new customer base. For this reason this UK based company has made a plan of expanding its business in the emerging market of China. Supermart can have many benefits and advantages from this decision. China is experiencing a huge growth in its retail market. A significant rise in the income of household people influences the retail industry of China to grow. Answer 1a) China is a developing country having an emerging market. The improvement of the Chinese economy Influences its people to spend more which becomes an advantage in its retail industry. Purchasing power of the people is increasing in this country which leads to the rise in demand. A positive marketing environment is created for this reason (Krafft and Mantrala, 2009). The government of China is providing business licenses to many new companies for the development of the country. But in some cases its government policies creates many difficulties in case of foreign companies for establishing its business. Some of the reforms of China opens the country’s market and attracts many big companies. The political factor of China influences a lot in its national institutional system. Previously there were many trade regulations in the retail industry sector of this country. This industry was not considered as prestigious industry by its government and it was not sanctioned. But modernization of China facilitates the growth of its retail industry. The open market system of the country influences its institutional system. The economic system of China has become market oriented economy. The country has become a significant player of global economy. It supports the growth of its private sector industry. For business operations the country maintains strict regulations and laws. There is a specific framework under which the companies have to operate its business. China has certain environmental standards and regulations like banning plastic bags etc which the companies have to obey. In UK its national institutional system is helps in the growth in of industry in this country (Daniels, Radebaugh and Sullivan, 2009). The market of UK is characterized with much advantage that’s why a large numbers of companies are present there. The government policies of UK directly create impacts on the business operations. The inflation rate of UK and its currency devaluation creates a bad impact in its retail industry. The price of the retail products rises for this and the spending capacity of the people lowers down. The legislation of this country is less restrictive in case of price control and market power. The government policy of UK has a tendency of de regulation. It is the most important legislative step taken by the government of this country. China’s national institutional system will help the Supermart of UK to expand its business. There are many local suppliers in China who helps to develop the business framework of the business companies. The retail industry gets a huge benefit from this type of national institutional system. Answer 2 d) The regional trade agreements have become very popular in the present world. Many of the countries have participated in these trade agreements for their benefit. The retail industry of China is affected by WTO, EU and NAFTA. The business operations of the multinational companies have to follow the rules and regulations of these international institutions (Usunier and Lee, 2009). In 2001 China became the member of world trade organization. Its entry made a great impact in the country’s trade relation with different other nations. The agreements made by the World Trade Organization helps to made rules and regulation for starting the business in the emerging market of China. The multinational retail company has to maintain a good relation with WTO for doing its business properly in other country. The North American Free Trade Agreement (NAFTA) and the agreements of WTO can help Supermart to become the largest retail company in China. The international trade agreements of Super4mart with these organizations will enable this firm to enter into the market of China and dominate its domestic market. These international organizations also provide funds to the business which will help the retail company Supermart to establish its business in the emerging market of China. The economic growth rate of Supermart will also be influenced by this. NAFTA rules of market access and investments eliminate some of the existing restrictions of the government. It makes the business operation of the company easier. For this reason Supermart expects a growth in the market of China. The trade agreements of these institution helps in making the export and import process easy for the firm. Supermart will have needs to exports different products to China for its business. So these trade agreements will have an effect on the company. The free trade agreements passed by WTO contribute in the growth of the business (Holloman, 2013). The WTO membership of China will act as an added advantage to company. It eliminated quotas and tariffs from many products leaving and entering in China. More over WTO has also cancelled our many limitations from the companies doing business in China. Supermart has a strong base in its home country Europe. This successful company of Europe is trying to expand its business in China. The company has to follows the rules of European Union as it belongs from the country which is a member of EU. It will play an important role in the taxation system of the Supermart. EU will also encourage the business activities and can provide business support to the company. Answer 3e) Political risk can radically change the business environment of a company. The change of the Government leaders can change the business situation. Elections, death of a powerful leaders etc often influences many companies. China is highly affected by the change of its leaders. The bias mentality of its leaders sometimes ruins the political and also the business environment of the country. China is experiencing political in stability. Change of its government leads to many major changes in the country’s policies. The business operations of Supermart will be affected by this. As it is multinational company so it can face many political restrictions from domestic retailers and local government body. The firm has to depend on its external stocks to supply products in the market of China. Protectionist sentiments and the political unrest of China can create problem in the retail business of the company. The volatility of the china’s political situation force the government to disrupt the process of supply chain of the business which has the risk to hamper the confidence of the investor and destroy of fixed assets of the company. The foreign companies which operate business in China sometimes experience uncertain political situations. Domestic Chinese competitors manipulate the business environment of the country. The system of legal production is very poor. The retail company can face many problems for these issues. The political system of this country provides financial support to the domestic companies which de-motivate the growth of the foreign companies. There is a major threat of protectionist policies experienced by the foreign companies in China. These policies favor the growth of the Chinese companies. The retail company can have the risk of gaining bad reputation in its home country. The Chinese government manipulates the consumer which often leads in accusing the firm of doing unfair labor practices (Bremmer and Zakaria, 2006). This can become a major thereat for the multinational company Supermart in maintaining its reputation in other countries. Supermart can take various measures to handle these risks. The company should work with its home government for creating pressure on the Chinese government for honoring its commitment of implementing the open market policies, intellectual property right and economic rules. It can maintain its reputation in the home country by improving its standard of corporate. Supermart should have supporting plans to handing the political situation if China affecting its business operations. This retail company should not assume anything before implementing any decisions. It should make a detail analysis of the political environment and then perform its business activities. Conclusion and recommendation The frictional company Supermart is planning to expand its business in the emerging market of China. This retail company has its origin in United Kingdom. With the time UK market has become very saturated. Many small big retail companies opened its business in UK which lowered the profitability of Supermart. Expansion of its business is the only way to increase the profitability of the firm and improve its business growth. By establishing its business to China Supermart will have great advantage. China is experiencing an increasing demand in retail goods. Therefore setting up business there will lead to the acquisition of a huge customer base. But there are some factors which the retail company has to give importance. Though China is encouraging and attracting foreign companies to establish their business but some political risk factors of the country can hamper the retail company. So Supermart needs to follow effective and efficient strategies to develop and establish its retail business in China. References Bremmer, I and Zakaria, F., 2006. Hedging Political Risk in China. [online] Available at: [Accessed 5 January 2015]. Daniels, J., Radebaugh, L. H. and Sullivan, D. P., 2009. International Business: Environments and Operations. London: Prentice Hall. Holloman, D., 2013. China Catalyst: Powering Global Growth by Reaching the Fastest Growing Consumer Market in the World. New Jersey: John Wiley & Sons. Krafft, M. and Mantrala, M., 2009. Retailing in the 21st Century: Current and Future Trends. Germany: Springer Science & Business Media. Usunier, J.-C. and Lee J. A., 2009. Marketing Across Cultures. London: Prentice Hall. Read More