Globalisation is defined as the development towards amore multicultural and inter-dependent world economy (Hill and Hult, 2017).
Companies investing into other countries have greatly increased over recentyears with the aim to achieve maximum profit and benefit from growthopportunities. However, before this, companies must also be aware of thedifferences and continuous changes of the environment, this is because theworld is now shifting to a global market. It is therefore important forcompanies to acknowledge the key factors that will influence the success ofdoing business abroad, this essay will focus on factors including political,economic, and social. Political factorsBusinesses need to consider the country’s politicalsystem whether it is a collective or an individual market-based economy as thiswill majorly affect profits and reputation of the business overall.
Collectivismis a political system that emphasises the importance of collective goals ratherthan individual goals. This was early argued that individual rights should bedisregarded for the good of others in the community by Plato (Hill and Hult,2017). Hofstede’s research also proves that there are many different categoriesof culture that businesses should be aware of when doing business abroad, onebeing collectivism and individualism. Figure 1 shows that South Korea has thelowest score of 18 in individualism.
If a company does business in for exampleSouth Korea, where individualism is low and collectivism is high, employees arelikely to undertake stronger relationships with others and responsibility istaken as a team. In this society, employees will consider loyalty as most importantwhen doing business with others and will also expect long-term commitment fromothers (Lee and Lee, 2014). However, some societies may value the importance ofindividuals instead.
Individualism, a philosophy that an individual should havefreedom in their economic and political actions. This was also early on arguedby Aristotle that a variety of individuals and private ownership arebeneficial. For example, a business may encounter employees that are reluctantto voice their own opinions if they differ with the rest of the team whichleads to slower decision-making. Although, the success of doing business abroadwill also depend on the company’s work environment. Figure 1 shows a high scoreof 91 in USA, this suggests that employees areexpected to be self-reliant and take initiative.
Figure 1: Barchart comparing national cultures by Hofstede (Hofstede Insights, 2018)Companies need to consider the degree to which countriesemphasise as democratic or totalitarian, as stakeholders work differently ineach country. A democracy is another political system in which the governmentis carried out by the citizens or elected representatives when there is ahigher population. Totalitarianism is a government where political parties or aperson implements complete control over everyone else and excludes disagreeingpolitical parties. This type ofgovernment rejects an individual’s right to freedom of expression andorganisation, a free media and regular elections.
A company may therefore haveto pay off politically influential individuals in another country before thegovernment allows it to do business there (Hill and Hult, 2017). For example,in North Korea, Kim Jung-un has complete control over the country, one attemptin giving no right to freedom of expression is that all citizens must giverespect to portraits of the ‘great leader’ and show their loyalty by polishingup and cleaning the ones they have at home and workplaces (Joo, 2010). Economic factorsA company must be aware of the state of a country’seconomy and how they engage in foreign direct investment, this greatlyinfluences the costs and image of a company. Foreign direct investment (FDI),is defined as “a firm’s direct investment in production and/or serviceactivities abroad” (Peng, 2014). Companies engage in FDI to reduce costs of production fromfor example China to benefit from cheaper labour costs. Although this decreasesa company’s production costs, they could get criticised for poor workingconditions which could initially damage their overall reputation. For example,in 2014, an investigation discovered Apple’s dangerous working conditions inChinese factories, leading to Apple getting criticised and possibly lostcustomers (BBC News, 2014).
However, this would be severer in smallerbusinesses and could lead to bankruptcy, as Apple were easily able to recoverbecause of the loyalty from their customers. To avoid this, businesses coulduse Elkington’s triple bottom line model which aims to measure a business’sperformance according to three overlapping parts; successfully encouragingbusinesses to consider profit as well as people and planet (Elkington, 1999),this leads to higher morale in the workplace and a better image for thecompany. However, this depends on how the company can consistently assesspeople and planet bottom lines. Nevertheless, businesses can also gain costs whendeciding to do business abroad because of the country’s economy.
For example, when expanding to Moscow,McDonalds had to provide their own dairy farms and grow their own ingredientswithin Russia as the local ingredients were found too poor. This significantlyincreased costs, which would have the same impact on other sophisticatedeconomies (Hill and Hult, 2017). When expanding to different countries,companies must also therefore consider if they have enough funds available toprovide their own infrastructure if there is a lack of any.
Gross national income (GNI) is an important economicfactor companies need to consider before deciding to do businessinternationally as some countries achieve much higher GNI than others.Countries such as Japan (GNI per capita of $37,930), United States (GNI percapita of $56,810) and Australia (GNI per capita $54,420) are amongst therichest on this measure. Whereas large developing countries like China (GNI percapita of $15,500) and India (GNI per capital of $6,500) are significantlypoorer (Data.worldbank.org, 2017). The wealthiest countries amongst this measure suggests alarger market size, a high purchasing power from consumers and a higherpotential for growth in the business cycle, this will be greatly beneficial toa business that sells luxurious goods or services looking to do businessabroad, enabling them to achieve maximum sales and profit. However, countrieswith lower GNI like India and China suggests a low purchasing power ofconsumers, lack of infrastructure and supporting businesses.
Though, there ispotential for these markets to grow as of their large population, China being1.4 billion and India with approximately 1.3 billion (Worldometers.info, 2018).As of 2018, India has also had a growth rate of 7.3%, with China at 6.4% showsan “enormous growth potential” amongst the emerging markets (India Today,2018). Companies should therefore also have local responsiveness, this meansadapting to different consumer preferences and demands (Hill and Hult, 2017),for example lowering prices for countries that have lower GNI.
However, a company being aware of just GNI is not enoughas there is uncertainty to the country’s economy as well as consumer buyingbehaviour. Businesses therefore need to prepare to adapt to the changes of theeconomy they decide to do business in. Companies should consider the economic system as afactor before deciding to do business in a country, this includes marketeconomy, the command economy and the mixed economy. In a market economy, thetype and amount of goods and services is influenced by supply and demand; foundfrom purchases from consumers. The government in this economy promotes free andmoderate competition between organisations, this encourages more innovation andentrepreneurship and would be beneficial for organisations like Google andApple. However, in a command economy, for example countries like China, Cuba andNorth Korea, this is all set out by the government meaning little freedom tocontrol costs.
Since the government owns all stages of production, there isonly a small drive towards innovation. (Hill and Hult, 2017). Social factors Education is another factor companies need to be awareof when to become global as this will impact on the quality of production. Aninnovative company such as Google requires skilled and creative employees,which can be found globally. The level of education plays a significant role inshaping a country’s economy. However, employing skilled workers abroad can alsohave difficulties such as language barriers. For example, in 1997, Samsung weresuccessful in bringing skilled workers from abroad by forming a ‘GlobalStrategy Group’, this consisted of non-Korean MBA graduates from top Westernschools being sent to study two years of basic Korean in Seoul (Peng, 2014).
Inconclusion, it is important for companies doing business in another country tobe aware of the external factors as expanding without this knowledge may leadto major additional costs. Companies need to acknowledge and adapt to thepolitical and economic systems as well as cultural differences between eachcountry. Being aware of these factors can limit risks to failure, such as nocustomer satisfaction. Acknowledging these factors can also influence how acompany should market their goods or services, for example by a country’s GNIand high economic growth, customers are willing to spend more on goods orservices.