‘International economy is evident due to increases

 ‘International trade refers to the exchange of
goods from multiple countries’. In this report I will critically discuss the
key factors that companies must be aware of, before undertaking international
business. Additionally highlighting key economic and political concepts, as
technical advances in the economy is evident due to increases in economic
growth and trade. Cantwell (2016) emphasises ‘innovation and international
business’ has created a more interconnected world. This has created a network
that has transformed the world of trade, including the creation of jobs and the
construction of infrastructure.

 

 

Professional
Academy (2011)  defines ‘Pestle analysis’
as the framework used to analyse the international business environment. PESTLE
stands for political, economic, social, technological, legal and environmental.
These factors can highlight potential threats a firm may encounter whilst
undertaking international business, as well as highlighting potential
opportunities . Hollenson (2010) indicates that international expansion can
increase the competiveness of a firm as they are likely to benefit from
economies of scale, where average costs fall as output rises. If the firm is
not prepared in advance then they are unlikely to be successful. Firms can also
use the concept of an ‘Eclectic Paradigm’ to determine whether it is beneficial
to pursue Foreign Direct Investment that is a driving force for innovation and
growth.

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 Hollenson (2007) highlights the political
environment can affect the marketing activities of international businesses.
Hollenson states that ’embargoes’ can affect firms doing international business.
Embargoes are a ban placed on certain goods being sold. Firms will need to be
aware of embargoes, as goods that they sell in the host country may be
forbidden in others. For example, Cuba prohibits all transactions including
imports and exports without a licence authorisation. If a firm does not abide
by these rules and regulations, they may potentially subject to fines. Sheth
and Paravatiyar (2001) state that the removal of trade barriers can have a
positive effect on globalisation, increasing interconnectedness, reducing the
cost and time involved with trading across national boundaries proves strategic.

                                                                                 

Furthermore, in
totalitarian countries such as China; government instability such as wars can
be unattractive to international firms. Totalitarianisms’ argue to endorse laws
that will restrict private enterprises; these contradict to the laws in
democratic states that tend to be ‘pro private enterprise’. Whereas if a
business was looking embark upon international trade with a democratic nation,
the government will not restrict the businesses operations, making it
favourable for firms due to no dramatic rise in inflation or debt.  Social unrest can have negative economic implications,
which can affect the profit of firms. For example, in 1979, there was an
Islamic revolution in Iran, ‘a large number of Iranian assets of US companies
were seized by the new Iranian government without any compensation’. Investment
is less favourable in politically unstable countries where ‘speculative
financial bubbles have led to increased borrowing’ e.g Greece.

 

 

Inglait
emphasises that economic factors can also influence a multinational
corporations decision of locating in another country. These include, the rate
of economic growth in countries, current state of the economy and taxes and
many more. Economic growth refers to an increase in the levels of GDP within an
economy. The rates of economic growth has a direct correlation to the levels of
demand in international markets, for example countries with low economic growth
usually have a negative knock on spiral consisting of less capital float, thus
reductions in consumer spending and disposable income may be present, becoming
a significant factor for international firms to consider before relocating. For
example, the UK recession of 2008, where spending in the UK was low, subsequently
resulted in low levels of demand from national customers, such activities could
lead to business failure. Tariffs are a tax on imports, meaning that cost of
importing will increase thus, affecting international business. Therefore, due
to the increase in price, some LEDC’s may not be able to afford certain items,
as tariffs deter trade by acting as a barrier to entry. According to the WTO,
tariffs vary in different countries, which can affect profit levels as they may
be higher elsewhere.

 

 

Tax rates can
also influence FDI as they vary in different countries, Pettinger 2017
highlights that MNC’s have sought to invest in countries that have low
corporation taxes. Examples include Google ‘funnelling their profits through
Ireland due to the low tax rates ‘ as Ireland is seen as a ‘tax haven’ for
keeping profit levels high. Also, economic growth can be impacted positively by
FDI. Nigeria has recently undergone FDI into the Oil industries, which has
elevated the standard of living in Nigeria, and are seeking more investment to
improve their ‘infrastructures to broaden economic growth’. Firms can benefit
from first mover advantages, as they will have a competitive edge over other
firms who have not invested into Nigeria.

 

Trading blocs
is a government agreement where a barrier to trade e.g tariffs is reduced for
the members, driving down the fees for imports. If a business is operating
within the EU, it can benefit from free trade between members, this can reduce
costs significantly, they may also benefit from economies of scale. However,
they will need to be aware of the significant costs they may encounter if they
trade with countries outside there blocs. Moreover, trade agreements may
suddenly change; an example of this is BREXIT, meaning that the UK will no
longer benefit from free trade between members. Although at the moment it is
still unsure, as a Welsh Minister has been told there will be no tariffs with EU
trade following Brexit and free trade will remain.

 

 

Jenkins
(2014) provides an understanding that for a business to be successful in
another country they must have a competitive advantage and be aware of ethical
and cultural differences. Firms can find help from the Chambers of Commerce,
who specialise with providing an understanding of the culture of the nation
that they are looking to do business with, which can help understand the
country’s market. However, firms may find it difficult investing in developing
countries such as India due to the language barriers, this will cause communication
problems, potentially creating issues in the working environment. It is evident
in the news that many firms exploit LEDC’s, for example a reporter for the BBC
stated, Primark employed children in India for 60p a day to work in sweatshops with
poor working conditions, in order to reduce costs, which proves unethical and
immoral. This is due to not have strict regulations and laws in place, allowing
firms to exploit child labour, which is also a legal factor that falls under
pestle. This is a major incentive to why firms invest abroad, because average
labour costs are $15 an hour in the US, compared to India at $1 an hour.

 

Hofstede
(1967) concluded that ‘Culture is more often a source of conflict than energy’,
and that cultural differences in the workplace are often a disaster’. Additionally,
firms will need to adapt their marketing strategy to suit the country they will
be working in, for example an ethnocentric concept is when the home country is
‘superior’ and uses the same strategy in other countries. On the other hand,
this may not always be the case, so firms will need to take a polycentric
approach and adapt their strategies to suit the countries needs. This process
is also defined as ‘localisation’ adapting a product to a specific country.

 

 

Technological
change is also a factor that most businesses should consider before becoming
global. The lowering of trade barriers has allowed the globalisation of markets
a possibility.  ‘The explosive growth of
the internet’ has made it easier to do business with multiple countries. With
the decline in transportation costs, it has made it possible for firm to manage
a globally ‘dispersed production system’ and help create a global market.
Technical innovations has made it possible for everyone to have equal access to
goods and services, for example the US firm CNN is now available in multiple
countries.

It is
important to note that there are some differences in culture and consumer preferences.
Ignoring these differences can affect trade and investment. Advancements in
technology have now allowed machinery to complete the tasks that humans would
do. This has advantages as the goods will be of higher quality and businesses overheads
would be reduced. Yet, knock on effects would be an increase in unemployment,
as machinery will be replacing labour.

 

In
conclusion, it is evident that there are many factors that a business must
consider before doing business in another country. Varying from politics, to
economical and technological factors. Overall, the most important factor that
can affect trade is economic factors. This is crucial as economic factors such
as economic growth; disposable income and tax rates will determine how
successful a firm will be in another country. Furthermore, economic factors
will allow businesses to plan and adapt their services for a particular
country, which could potentially be rewarding if done correctly and through
seeking new markets it could possibly increase profit margins.