Attractiveness of Markets for International Expansion - Essay Example

Assessing market stability and attractiveness of markets for international expansion Introduction: The English and Dutch East Indian Companies were considered to be the pioneers in international trade and hence can be regarded as the first two multinational corporations in the world. Ever since their expansion outside their home territory, many other organizations have followed suit. The English East India Company also had the dubious distinction of conquering and forcefully establishing trade with Asian countries especially India. The way international business has been done has changed over the years and the political aspect has now been under the control of respective countries. Even so, international expansion is a complicated matter and companies intending to enter a new country should take into consideration a lot factors. They include the economic and political environment, the individual strengths and weaknesses of the company, the opportunities and threats seen there, business and marketing strategies, and even the cultural factors that is peculiar to a particular region. This paper looks at these factors and will provide a detailed review with regard to its importance and relevance in international expansion strategies. It will establish a system by which companies can assess whether a market is attractive and stable. The focus will be on two countries namely China and Dubai, to provide specific applications of theory and literature on this area. Specific factors influencing international target markets: The increase in globalization and free trade has now resulted in more and more companies looking to expand to overseas markets. Domestic competition is another factor the drives these companies to look for new markets. There are many factors (as mentioned above) that influence decision making by companies as to which market they should enter. “While only a few decades ago these external aspects were seen as centring on the home country of the business, the environmental horizon of business has widened to take in a host of international forces, which interact with national and local factors” (Morrison 2002, p 2). Morrison has provided a broad overview of the factors that influence international business as follows. (Morrison, n.d., p.4) The organization is pictured at the core of the diagram which shows the various forces that act on it in a domestic and international environment. The additional forces that act on it in an international setting are the nation-state, region, and world ones. It can be seen that economic, socio/cultural, legal, technical and political forces are common to both domestic and international environments. Companies resort to specific techniques and tools in order to analyze all these forces. Morrison states that certain factors and techniques that need to be considered when expanding overseas. They will be discussed in the coming sections of this paper. Globalization: According to many authors, the term does not limit itself to expansion and interconnectedness in various spheres of human activity, including business. Technology has now made it possible to conquer the time element between distances (space) – “through reorganization of time in such a way as to overcome barriers of space” (Inda & Rosaldo 2002, p. 6). Technology hence plays a crucial part in promoting the need to globalize. It has both positive and negative repercussions, and some countries have benefitted from it while others have suffered. It can practically affect all types of activities and can affect every individual one way or the other. For example it can eliminate some types of jobs while it can create new opportunities. It can drive out technically backward industries, but can create new ancillary ones. It should be noted here that globalization is bigger in scope when compared to internationalization (Benetti 2003, p. 36). The former has more to do with adapting goods and services so that it can be marketed in another country. The Chinese Government has taken a positive view of globalization by successfully promoting FDI in the country. This is echoed in the words of the Chinese ambassador to the UK delivered during a speech at the Chinese Economic Association Annual Conference in 2003. “China has learnt from her long history that isolation leads to backwardness. Development, progress and prosperity could only be achieved through opening to and integrating with the outside world, through stepping up exchanges and cooperation with other countries and through absorbing all fine results of human civilization” (Peixin 2003). The country is quite cautious in opening up certain sectors like defence and media, but is open to most others. It is an attractive market in terms of its globalization policies to many sectors like consumer and electronic goods. Dubai on the other hand has a longer history of opening up to international trade and investment. The only area that is not feasible is large scale manufacture since this sultanate is small in terms of area. In fact, Dubai is a place which has succeeded on globalization alone since it has no oil deposits to speak of. Its success is party due to the concept of guest workers which provide a diverse and qualified workforce for any type of activity (Lane 2008, p. 74). It can be concluded that both countries have globalization policies that foreign business participation. Market strategy: Market strategy should not be confused with marketing strategy. The former takes a broader long term view of the market while the latter is a day-to-day action plan for selling products and services. Market strategy is defined as “plan that sets out which market areas the business will participate in and how it will compete in those market areas, in order to achieve a well-defined (set of) business objectives” (Jones 2008, p. 16). In this context, a market strategy is relevant since the paper is about planning expansion into foreign markets. A well-defined market strategy needs to have two essential components. The first one needs to identify which type of market in which country to operate in. The second has to take into consideration how it will successfully market goods and services. This is essentially why an analysis as given in the following sections is being done. For example, a company can have a market strategy to sell products at more competitive rates. It can then shift its manufacturing operations (in part of full) to a country where labour is cheap. The finished products can then be imported back into the home country and sold at lower prices. The company can also increase sales by marketing its products in the host country. Many companies have such operations in China where labour is cheap and availability of technology is not a major issue. Dubai is more of an international marketing hub, and its policies are centred on promotion of trade through commodity exchanges (Oxford Business Group 2007, p. 80). A market strategy aimed at increased international trade is more suitable in Dubai, rather than on setting up manufacturing operations. SWOT analysis: SWOT analysis is a useful technique for analysing the strengths, weakness, opportunities and threats in the environment in which a company operates or is planning to do so. Strengths and weaknesses are connected with the internal environment while opportunities and threats are with regard to the external environment (Stapleton & Thomas 1998, p. 79). Hence, a company can directly act on its strengths and weaknesses and try to increase the former and bring down the latter. With regard to the other two external factors, a company may not be able to directly influence them. It can make use of opportunities and try to bring out a plan that will minimize the threats. Stapleton and Thomas add that strengths and weaknesses should be listed primarily through inputs from a company’s customers. Opportunities and threats should be identified by conducting a study of the intended market. One way to make use of the data obtained is to put them in four quadrants. Q1 can contain a list of strengths, and Q2 to its right can list the opportunities. Q3, below Q1 can show the weaknesses and Q4 to its right can show the weaknesses. The company can easily analyse the strengths to make use of the opportunities and to ward off threats. It can see how weaknesses can be a hurdle to handle (external) threats. In this way, a strategic market plan can be made to handle the situation. In this present context, no particular company is chosen and hence analysing strengths and weaknesses (which are internal) is not possible. The possible threats in a Chinese market could be competition from other foreign companies, infrastructure problems, strict rules, a socialistic government, inflation, communication (language), cultural differences in work and life, and a largely uneducated workforce. The opportunities could be a stable government, favourable policies, effective partnerships with local companies, cheap labour, healthy economic growth and availability of natural resources and technology. In Dubai, the weaknesses include competition, communication (language), the need for a sponsor, lack of a manufacturing base, and its strong dependence on the international economy. Opportunities include favourable policies, an environment for international trade, compactness of the country, excellent infrastructure, and a diverse workforce from many countries. A company can analyse its strengths and weaknesses with the opportunities and threats by listing the factors on a grid as mentioned above. PESTLE analysis: Morrison writes about conducting a PEST analysis of the market in which any company plans to operate. The acronym stands for political, economic, social and technical factors present in the external environment. Often, two additional factors namely legal and environmental forces are added, and referred to as PESTLE or PESTEL analysis (Thompson & Martin 2005, p. 168). There is an opinion among management experts and theorists that a PESTLE analysis should precede a SWOT analysis. This is primarily because the former can provide valuable inputs regarding opportunities and threats in any market. Each of the forces can have independent criteria to evaluate the market. Political forces can include the stability and type of governance, investment policies, incentives, statues regarding employment etc. A country which is highly socialistic may not attract FDI in general. Economic factors include taxation rates, level of inflation and unemployment, and the general economic development of the host country. So, high rates of inflation can deter foreign investors. It can also include factors like wage rates and the potential of the market for a particular product or service. Social (includes cultural also) factors can be the work and social culture, language spoken, religion, corruption levels, women empowerment, and literacy rates. Technical factors include the level of technology available, research and development spending by government and private agencies, power and transportation infrastructure, technical literacy, and trained manpower. Legal factors include all statutes and laws with regard to the workplace, environment, disputes, conduct of business, social issues, crime etc. Environment factors related to policies, statutes, and practices with regard to protection of the environment. If the laws are very strict, then the market may not be attractive to polluting industries like manufacturing. China and Dubai are politically stable with the former being a communist nation and the latter, a monarchy. In the case of China, it has attractive policies for foreign investors in spite of its Marxian ideals. Economically, both countries are strong, with China being considered as one of the worlds’ largest economies. China has its distinct culture and language, but has not been a hurdle for foreign investors. The one problem is the lack of ability to understand and use English. Dubai is a multi-cultural society with people of many nationalities living there (as immigrants) apart from its local inhabitants. Again, both countries have stable legal infrastructure which favours foreign investment. Even though environment laws do exist in China, authorities have failed to enforce them, primarily due to the rapid all-round growth rate in the country. This could be an advantage to high polluting industries (Bernard, Wall & Wang 2006). But public outcry has now forced the government to take corrective action even though it has not been very effective. Dubai and UAE of which it is a part has effective environmental laws. For example, chemical fertilizers were replaced by neem based ones in as a part of its environment policies (UAE Government n.d.). But since the state is primarily a trade destination, environmental laws may not be a barrier to investment. An analysis of PESTLE factors shows that both these markets have advantages which outweigh disadvantages and hence, can be considered to be attractive and stable destinations for FDI. International Business Strategies: Literature on this area shows that it is a vast field with many viewpoints and theories on developing an international business (IB) strategy. “Decades of IB research have long suggested that institutions – commonly known as ‘rules of the game’ around the world – are a major driver behind IB strategy” (ed. Rugman 2009, p. 256). This suggests that a strategy has to be evolved taking into consideration the rules (policies, practices, statutes etc) of the game followed in both the target and home countries. According to the authors, there are three types of IB strategies, namely resource based, industry based, and institution based ones. Resource based strategies take into account the resource of the company and gives more importance to the internal environment. It analyses resources and creates a strategy on how these can be utilized to handle the external environment (Jansson 2008, p. 68). The industry based view looks at all factors affecting a particular industry and not the environment as a whole. An example of catering to this view is to use Porter’s five forces model in analysing and industry. But Peng and Khoury states that current management view favours an institution based business strategy as most effective. The other two approaches are limited in their analysis of the market. Jasson provides other approaches like efficiency based and legitimacy based strategies. The author then provides a (IB) strategic mix that takes into consideration all the above approaches mentioned above. It takes into account the internal and external environments and includes company resources (both tangible and intangible), customers, competitors, other stakeholders, political factors, social factors, and legal factors. If done in a proper manner, the strategy will succeed in “creating three major types of values in society, namely economic value (mainly customer value), social value, and natural value. It this creates an advantage over the competitors, a sustainable competitive advantage has been achieved” (Jansson 2008, 75) In short, if companies can hope to achieve this sustainable competitive advantage, then the market is attractive and stable. So, if a company can create an international business strategy which has the potential to achieve the above in China and Dubai, it can go ahead with its expansion plans into these territories. National and international culture: Another important factor to be taken into account is the concept of cultural diversity that may exist between different countries. A company operating in Germany may not find a major cultural difference if it plans to expand into say Austria or France. But if the expansion is into Asia (China and Dubai, in this instance) it may need to understand the culture (social and workplace) that exists there. A review of literature on the subject leads almost universally to the studies done by Professor Geert Hofstede on his studies on national identity in the workplace. The importance of culture in an international business environment is evident from his own words – “Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster” (Hofstede 2009). Before going into detail on the cultural dimensions as conceived by Hofstede and other theorists, it would be pertinent to look at the factors responsible for the evolving of a work culture. “Culture is a metaphor which can be used to explore the identity of a business. It is about how others see the business, but also how the individuals who work there understand it. Culture offers us a powerful insight into the business and what it is like to work within it” (Learning Space n.d.). The company tradition (depends on how long the company has been in existence) or ‘how things were always done been done here’ is another factor. Each area or type of business (or service) will have its own style and culture and will influence the behaviour of the employees. Hofstede began his journey into international cultures when he did a study of work cultures of IBM employees working in sixty four countries. Subsequent follow ups were made covering students, commercial airline pilots, upper middle class and elite consumers, and managers in civil services. Even though not without criticism, these studies are universally used as a foundation to measure the differences in national cultures that exist within organizations. The end result of the study was five measures or dimensions which are explained below. Each of these dimensions will be analyzed with reference to the national cultures that exist in China and the Arab world. There is no separate study by Hofstede on Dubai Power Distance: Power is a phenomenon that is universally seen and exercised (in different levels) across all societies worldwide. “This dimension focuses on the nature of human relationship in terms of hierarchy” (Andrews University 1999). But the level and extent of power varies from culture to culture. Power distance is measured by how the less privileged and powerful members of the society view their superiors with regard to power. In some cultures, they are viewed as wielding more power by virtue of certain characteristics like position, age and knowledge. This power is less evident and lower in some other cultures. Individualism (as opposed to collectivism): This dimension refers to the level of independence that is practiced by people living in a country. In highly individualistic societies people tend to live without too many social and family contacts. Social, cultural and religious gatherings are far lesser when compared to societies where individualism is low. Western societies tend to be more individualistic whereas Asian societies are more collective in nature. Masculinity (as opposed to femininity): In countries with high masculinity, there is a dominance of the male over the female. There are other dimensions to masculinity. “High masculinity is associated with ambitious assertiveness, while low masculinity is associated with a caring, altruistic attitude towards others” (Bargiela-Chiappini & Harris 1997, p. 40). It can also mean a situation where women play roles that were once the domain of the male. For example, many countries now have women serving in the armed forces and top management of corporations. Uncertainty Avoidance: Some societies have low tolerance for unclear and ambiguous things. “People in low uncertainty avoidance society are more willing to take risks and appreciate flexibility and informality in the workplace” (Vance & Paik 2006, p. 40). In case it is high, people need clear cut instructions on how to do a job or task. Such societies have a passion for order and will also have strict laws and regulations that clearly spell out what to do and what not to do. Long Term Orientation: “It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting ones face” (Buckley & Ghauri 1999, p. 384). Here also values may be different when comparing Western and Eastern cultures. An analysis of the cultural dimensions of China the Arab World as compared with that present in the United Kingdom is given here. It should be noted here that Hofstede had not analysed culture in Dubai alone. Hence it is assumed that his studies on the Arab World as a whole are relevant to some extent. The highly developmental policies followed in Dubai may not be fully representative of what is found in the Arab World. Power distance in both China and the Arab World is quite high indicating a respect to position and power even though it could be lower in Dubai. In the UK power distance is quite low. Companies should take this into consideration and formulate strategies accordingly. A manager in China and Dubai may command more respect and power from subordinates in these two countries when compared to the UK. Employees tend to obey decisions from superiors without questioning and hence an efficient manager is essential for stability of business. Individualism is low for both these nations and people tend to have strong family and social ties. This may be an advantage since such attitudes can help employees cope with stress and challenges. Individualism on the other hand is very high in the UK and English managers who work in these countries may find the atmosphere a bit stifling. Uncertainty avoidance is high in the Arab World. Employees prefer clearly laid out instructions regarding tasks. It is moderate in China and the UK. One can expect Chinese employees to be more creative and independent when compared to Arab employees. Masculinity is about average in all the regions. Women tend to play a stronger role in society under such conditions. But Muslim religion may put some restrictions on the role of women in Dubai. They may prefer male supervisors and managers when compared to China and UK. This may not be a true picture since Dubai is a multi-cultural society as mentioned earlier. Long term orientation (LTO) is very high in China and low in UK. The Chinese hold great respect for values and can overweigh truth. Maintaining a value based workplace is important here. This could be confusing for an English manager since LTO is low in UK. LTO for the Arab World is not available. On the whole these cultural differences can be understood and managed and does not create a major hurdle in FDI. There are other studies on cultural dimension especially ones by Trompenaar and Wharton (GLOBE study). The former has only provided certain parameters like individualism vs communitarianism, equality vs hierarchy, achieved status vs hierarchy etc (Changing Minds.org, 2009). The globe study too provides nine cultural dimensions to assess a society. They are on the whole similar to Hofstede’s studies. It is felt that the Hofstede study is enough to understand the culture that exists in China and Dubai to a large extent. Conclusion: International expansion is increasing around the world and more and more companies are expanding their business into new markets. It is essential that such markets should be attractive and stable and companies should assess it in detail in order to get a clear picture of the situation. This paper reviewed the factors and techniques involved in such an assessment. Two countries, China and Dubai were taken as examples. It can be seen that there are certain disadvantages in both markets. But the advantages outweigh disadvantages and hence both markets are attractive and stable destinations. Again a large volume of FDI is already in place in these two markets which show international investor confidence. The parameters and techniques used in this paper also support this confidence. It can be concluded that both these countries are attractive and stable destinations with regard to FDI. Dubai is more suited for international trade while China is attractive as a manufacturing base. References Andrews University, Geert Hofstede’s Cultural Value Dimensions, Andrews University, viewed 27 December 2009, < http://www2.andrews.edu/~tidwell/bsad560/Hofstede.html> Bargiela-Chiappini, F & Harris, S 1997, The languages of business: an international perspective, Edinburgh University Press, Edinburgh Benetti, R 2003, Survival of weak countries in the face of globalization: Puerto Rico and the Caribbean, Universidad de Puerto Rico, San Juan Bernard, M, Wall, M & Wang, A 2006, Environmental law in China, National Resources Defense Council, viewed 27 December 2009, Buckley, PJ & Ghauri, PN 1999, The internationalization of the firm, 2nd edn, Cengage Learning Changing Minds.org 2009, Trompenaar’s and Hampden-Turner’s cultural factors, Changing Minds.org, viewed 27 December 2009, Hofstede, G 2009, Cultural Dimensions, ITIM International, viewed 27 December 2009, Inda, JX & Rosaldo, R 2002, The anthropology of globalization: a reader, 2nd edn, Wiley-Blackwell. Jansson, H 2008, International business strategy in emerging country markets: the institutional network approach, Edward Elgar Publishing Limited, Gloucestershire Jones, VR 2008, The executive guide to boosting cash flow and shareholder value, John Wiley & Sons, New Jersey Lane, JE 2008, Globalization: the juggernaut of the 21st century, Ashgate Publishing Ltd, Hampshire Learning Space n.d., An introduction to business cultures, Learning Space, viewed 27 December 2009, Morrison, J n.d., The internal business environment, Palgrave McMillan, viewed 27 December 2009, Morrison, J 2002, The international business environment: Diversity and the global economy, Palgrave McMillan. Oxford Business Group 2007, The report Dubai 2007, Oxford Business Group Peixin, Z (H.E. Ambassador to UK) 2003, China and globalization, Embassy of the People’s Republic of China to the Great Britain and Northern Ireland, viewed 27 December 2009, Rugman, AM (ed.) 2009, The Oxford Handbook of International Business, 2nd edn, Oxford University Press, New York Stapleton, J & Thomas MJ 1998, How to prepare a marketing plan: a guide to reaching the consumer market, 5th edn, Grower Press Limited, Vermont Thompson, JL & Martin F 2005, Strategic management: awareness and change, 5th edn, Cengage Learning, London UAE Government n.d., Environment, UAE Government, viewed 27 December 2009, Vance, C & Paik Y 2006, Managing a global workforce: challenges and opportunities in international human resource management, M.E. Sharpe Inc, New York Read More