The most viable foreign market to invest in between China and UK - Essay Example

? International Business a) Executive Summary This report has been written in an attempt to provide advice that is of axiological importance to a Canadian pharmaceutical company. The report addresses two fundamental objectives. One of the objectives is to provide timely and critical advice to the firm with regard to the most viable foreign market to invest in between China and UK. The second objective is to advice the firm on the most cost effective and beneficial market entry strategy. In an attempt to choose between the two markets, Porter’s diamond model was utilized. Foreign market analysis revealed that; China has a booming economy with good infrastructural development while UK has falling business investment and rising unemployment rates. China has a huge population of 1,334.7 million as of 2009 (China National Bureau of statistics, 2012) compared to UK’s 62.3 million as of 2010 (Agediscrimination, 2011) with 11.8 % 0f Chinese being over the age of 65 by 2020 exerting significant pressure on healthcare system. UK’s life expectancy is estimated at 78.2 for men and 82.3 for women (BBC News, 2011). UK has a huge number of pharmaceutical firms making it difficult to penetrate the market while Chine has been predicted to be the world biggest prescription drug market by year 2013. Key findings with regard to market penetration include: it is more cost effective to enter new market by joint venture because critical market information availed by partner and distribution of the drug is made easier by making use of the already established distribution channels. It has thus been concluded that the foreign market of choice is China and the mode of entry into the new market is by joint venture. b) Introduction The world is rapidly being converted into a global village. It is rapidly becoming cheaper and faster to communicate and transact business worldwide. Many companies are seizing the opportunities that arise from the technological advances occurring worldwide. Companies are expanding beyond their local zones and investing in other lucrative markets overseas and making huge profits running into billions of US dollars. These they achieve by acquiring new foreign markets for their products and taking advantage of cheaper production costs that may be in that foreign country and eliminating transport costs that would arise from transporting products from the original country of production. The firms are also better placed in accessing other markets that are close to the new market. This Canadian firm is no different. There are ready foreign markets overseas which would see the firm increase its profit margins and market share. It is therefore of great importance that the company acquires new markets and increases its profit margins. c) Choice of market In choosing the best foreign market in which to invest, Porter’s diamond model was used. According to the model, there are four attributes of a nation that shape its business environment in which firms compete for market share. They include: factor endowments (conditions); demand conditions; supporting and related industries; and firm’s structure, strategy and rivalry (drypen, 2010). 1) Factor Endowments While examining factor endowments it is worth noting that any company can obtain certain non key factors like raw materials and unskilled labour rending these factors useless when generating a competitive advantage. Certain specialized factors like technology, communication infrastructure are more useful while creating a competitive advantage in the new market. This is because these specialized factors are more difficult to duplicate (drypen, 2010). Both China and UK have well developed transport and telecommunication infrastructure. According to human Resource Management Guide (2012), UK’s unemployment rate has from by 0.4% over the year to 8.4% up from 8.0%. The Chinese economy on the other hand is booming. According to Morison (2011), China is one of the fastest growing economies emerging as both a trade and economic power. The economic state of China makes it a better investment destination compared to UK whose economy isn’t doing as well. 2) Demand Conditions The population of a country would directly influence demand of products within the country. China is the world’s most populous country. The population stood at 1,334.7 million as of 2009. UK on the other hand had a population of 62.3 Million as of 2010. This unequivocally indicates that the demand of products in China is likely to be significantly larger than that of UK. The life expectancy of UK stood at 78.2 for men and 82.3 for women as of 2011. By the year 2020 it is estimated that 11.8% of Chinese would be over 65 years of age. This would exert pressure on the healthcare resources of China and indirectly result in an increased demand for pharmaceuticals. This makes China to be a more suitable investment destination. 3) Supporting and Related Industries The UK pharmaceutical market is increasingly competitive and dynamic. It has a trade surplus in excess of 2.44 billion Euros in 1998 and ranked third in the global rankings of the pharmaceutical industry (Keynote, 2000). The amount of money that UK spends on prescription drugs per person is significantly lower than in other major European countries. The UK has also got a highly complex distribution system with pharmaceuticals being distributed through specialist wholesalers like Alliance Unichem (Keynote, 2000). China’s pharmaceutical market is less competitive compared to UK’s pharmaceutical market with the market being estimated to be worth $ 15 billion. It had also been predicted that by 2010 China would successfully become the world’s 5th largest pharmaceutical industry (Zhou, 2007). Although there are challenges that accompany a fast growing pharmaceutical industry such as increased competition, identification of a good China based firm is of utmost importance. Such a firm would enable the Canadian firm to distribute the new drug more efficiently through its well established distribution channels. UK has a much bigger pharmaceutical industry and has well established pharmaceutical firms. Such firms as Boots and Lloyd could be of great benefit to the Canadian firm but because they have similar products (painkillers), it becomes difficult for the Canadian firm to distribute its drugs via the British firm. China would become the 3rd largest prescription drug market worldwide by 2013 (IMS health, 2010). Unlike in UK China does not have high street retailers as the major selling point for drugs. Although China has over 5000 R&D institutes, not all of them have access to the international market. This makes them less competitive and much more easier for the Canadian firm to easily penetrate. China also has a huge number of Wholesalers (165,000) and retailers (140,000) with only 77 having the ability to distribute drugs in all of China (Zhou, 2007). 4) Firm, structure, Strategy and rivalry Competition for the market in UK is way stiffer compared to China. UK has well established pharmaceutical firms which produce analgesics and painkillers. Some of these firms include: GlaxoSmithkline PLC, Pfizer, Reckitt, and Benkiser. GlaxoSmithkline produces Panadol while there other firms produce Anadin and Nurofen, Other pharmaceutical firms in UK include:Warner Lambert, Shire and Roberts and Astra Zeneca (Research and Markets, 2000). All these companies would make it difficult to penetrate the UK market. China has a bigger population with less well established pharmaceutical firms. It is thus more beneficial for the Canadian firm to invest in China. Having found it to be more beneficial to invest in China, the next most critical step was market entry strategy d) Market Entry Strategy 1) Joint ventures China is known world over for its huge use of traditional and herbal medicine. The UK on the other hand has one of the biggest pharmaceutical companies with consumption of over the counter drugs and prescription drugs being common. The Chinese market in comparison has more room for the introduction of conventional drugs as compared to the already saturated UK market. The Canadian firm stands to gain a lot from a joint venture between it and a Chinese firm. The Chinese firm would bring with it essential market information. The Canadian firm would also benefit from an already established distribution system and production premises. This would make it cheaper and easier for the firm to introduce its product (painkillers) into the market. The firm will also be able to make use of the already established premises for production. Although there are substantial gains to the joint venture approach, there are limitations to it. The Canadian firm looses secret formula of their product; the firm also looses a certain degree of control of their business as decisions will be made in consultation. 2) Wholly owned manufacturing plant This option is accompanied by major obstacles. For instance, the firm has to raise a huge amount of capital to put in place the necessary production infrastructure in place. The firm would also incur costs of hiring new staff who are knowledgeable with local market tastes and preferences. There is also a cost incurred in developing an entirely new distribution network. This approach has its advantages too. One is that the firm retains all the information that it wants kept private. The firm is also able to retain total control of the business and the approach eliminates any conflict of interest that may arise for example in a joint venture scenario. 3) Using local firm for Marketing Both China and UK have local firms that can be used to market the painkillers. But there is a possibility of a conflict of interest as the firm may also be marketing its products which are similar to the Canadian firm’s products. If the firm chooses to use this option, it stands to gain from utilizing the already established distribution network. The firm would also benefit from the knowledge of the local firm. There are more shortcomings to this approach than there are positive aspects. The firm would have to incur transport costs to avail the product to the new market. This would not be so in the case of a joint venture. The firm may need to incur more costs in educating the local firm marketers on important aspects of the drug. The firm may also find it difficult to keep track of their product’s performance in the new market. 4) Setting up own market firm Setting up a market firm is also a viable option. This option allows the firm to market its own products and in the process retain the control of its products fully unlike in joint ventures. The company can more easily follow its products performance and make prompt decisions that are critical to the sale of the painkillers. Although the option seems good, it has got major setbacks. The firm would be forced to develop its own distribution channel and given the size of China this would prove to be a daunting task. Setting up a new distribution channel in China would be time consuming and expensive. This is because the firm would be forced to hire new staff with market knowledge to develop the channel of distribution. The firm may also incur costs in training its staff on essential information with regard to the Chinese pharmaceutical industry. e) Conclusion In conclusion it is more beneficial to invest in China because of its sound economy, huge population, less competitive pharmaceutical industry and state of the art transport and telecommunication. A joint venture would be the most cost effective and beneficial because it is less costly to set up, the partner would provide essential market information and knowledge, any losses and profits are shared, and it is overall a cheaper approach. References Agediscrimination (2011). Current UK population. Retrieved from: http://www.agediscrimination.info/statistics/Pages/CurrentUKpopulation.aspx BBC News (2011). Life expectancy rises again, ONS says. Retrieved from: http://www.bbc.co.uk/news/business-15372869 Chinability (2009). China’s population, 1969-2009. Retrieved from: http://www.chinability.com/Population.htm Drypen (2010). Porter’s diamond theory. Retrieved from: http://drypen.in/marketing/porters-diamond-theory.html HRM Guide (2012). UK unemployment: Labour market statistics. Retrieved from: http://www.hrmguide.co.uk/jobmarket/unemployment.htm Morrison, W.M. (2011). China’a economic conditions. Retrieved from: http://www.fas.org/sgp/crs/row/RL33534.pdf National Bureau of Statistics of China (2012). Statistical data. Retrieved from: http://www.stats.gov.cn/english/ Research and market (2000). UK pharmaceutical industry market review. Retrieved from: http://www.researchandmarkets.com/reports/3935/uk_pharmaceutical_industry_market_r eview Zhou, E.Y. (2007). China today: Pharmaceutical distribution in China. Retrieved from: http://www.biopharminternational.com/biopharm/Article/China-Today-Pharmaceutical- Distribution-in-China/ArticleStandard/Article/detail/401362 Read More