Globalisation is defined as the development towards a
more multicultural and inter-dependent world economy (Hill and Hult, 2017).
Companies investing into other countries have greatly increased over recent
years with the aim to achieve maximum profit and benefit from growth
opportunities. However, before this, companies must also be aware of the
differences and continuous changes of the environment, this is because the
world is now shifting to a global market. It is therefore important for
companies to acknowledge the key factors that will influence the success of
doing business abroad, this essay will focus on factors including political,
economic, and social.

 

Political factors

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Businesses need to consider the country’s political
system whether it is a collective or an individual market-based economy as this
will majorly affect profits and reputation of the business overall. Collectivism
is a political system that emphasises the importance of collective goals rather
than individual goals. This was early argued that individual rights should be
disregarded for the good of others in the community by Plato (Hill and Hult,
2017). Hofstede’s research also proves that there are many different categories
of culture that businesses should be aware of when doing business abroad, one
being collectivism and individualism. Figure 1 shows that South Korea has the
lowest score of 18 in individualism. If a company does business in for example
South Korea, where individualism is low and collectivism is high, employees are
likely to undertake stronger relationships with others and responsibility is
taken as a team. In this society, employees will consider loyalty as most important
when doing business with others and will also expect long-term commitment from
others (Lee and Lee, 2014).

However, some societies may value the importance of
individuals instead. Individualism, a philosophy that an individual should have
freedom in their economic and political actions. This was also early on argued
by Aristotle that a variety of individuals and private ownership are
beneficial. For example, a business may encounter employees that are reluctant
to voice their own opinions if they differ with the rest of the team which
leads to slower decision-making. Although, the success of doing business abroad
will also depend on the company’s work environment. Figure 1 shows a high score
of 91 in USA, this suggests that employees are
expected to be self-reliant and take initiative.

Figure 1: Bar
chart comparing national cultures by Hofstede (Hofstede Insights, 2018)

Companies need to consider the degree to which countries
emphasise as democratic or totalitarian, as stakeholders work differently in
each country. A democracy is another political system in which the government
is carried out by the citizens or elected representatives when there is a
higher population. Totalitarianism is a government where political parties or a
person implements complete control over everyone else and excludes disagreeing
political parties.  This type of
government rejects an individual’s right to freedom of expression and
organisation, a free media and regular elections. A company may therefore have
to pay off politically influential individuals in another country before the
government 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 attempt
in giving no right to freedom of expression is that all citizens must give
respect to portraits of the ‘great leader’ and show their loyalty by polishing
up and cleaning the ones they have at home and workplaces (Joo, 2010).

 

Economic factors

A company must be aware of the state of a country’s
economy and how they engage in foreign direct investment, this greatly
influences the costs and image of a company. Foreign direct investment (FDI),
is defined as “a firm’s direct investment in production and/or service
activities abroad” (Peng, 2014).

Companies engage in FDI to reduce costs of production from
for example China to benefit from cheaper labour costs. Although this decreases
a company’s production costs, they could get criticised for poor working
conditions which could initially damage their overall reputation. For example,
in 2014, an investigation discovered Apple’s dangerous working conditions in
Chinese factories, leading to Apple getting criticised and possibly lost
customers (BBC News, 2014). However, this would be severer in smaller
businesses and could lead to bankruptcy, as Apple were easily able to recover
because of the loyalty from their customers. To avoid this, businesses could
use Elkington’s triple bottom line model which aims to measure a business’s
performance according to three overlapping parts; successfully encouraging
businesses to consider profit as well as people and planet (Elkington, 1999),
this leads to higher morale in the workplace and a better image for the
company. However, this depends on how the company can consistently assess
people and planet bottom lines.

Nevertheless, businesses can also gain costs when
deciding 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 ingredients
within Russia as the local ingredients were found too poor. This significantly
increased costs, which would have the same impact on other sophisticated
economies (Hill and Hult, 2017). When expanding to different countries,
companies must also therefore consider if they have enough funds available to
provide their own infrastructure if there is a lack of any.

Gross national income (GNI) is an important economic
factor companies need to consider before deciding to do business
internationally as some countries achieve much higher GNI than others.
Countries such as Japan (GNI per capita of $37,930), United States (GNI per
capita of $56,810) and Australia (GNI per capita $54,420) are amongst the
richest on this measure. Whereas large developing countries like China (GNI per
capita of $15,500) and India (GNI per capital of $6,500) are significantly
poorer (Data.worldbank.org, 2017).

The wealthiest countries amongst this measure suggests a
larger market size, a high purchasing power from consumers and a higher
potential for growth in the business cycle, this will be greatly beneficial to
a business that sells luxurious goods or services looking to do business
abroad, enabling them to achieve maximum sales and profit. However, countries
with lower GNI like India and China suggests a low purchasing power of
consumers, lack of infrastructure and supporting businesses. Though, there is
potential for these markets to grow as of their large population, China being
1.4 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% shows
an “enormous growth potential” amongst the emerging markets (India Today,
2018). Companies should therefore also have local responsiveness, this means
adapting 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 enough
as there is uncertainty to the country’s economy as well as consumer buying
behaviour. Businesses therefore need to prepare to adapt to the changes of the
economy they decide to do business in.

Companies should consider the economic system as a
factor before deciding to do business in a country, this includes market
economy, the command economy and the mixed economy. In a market economy, the
type and amount of goods and services is influenced by supply and demand; found
from purchases from consumers. The government in this economy promotes free and
moderate competition between organisations, this encourages more innovation and
entrepreneurship and would be beneficial for organisations like Google and
Apple. However, in a command economy, for example countries like China, Cuba and
North Korea, this is all set out by the government meaning little freedom to
control costs. Since the government owns all stages of production, there is
only a small drive towards innovation. (Hill and Hult, 2017).

 

Social factors

Education is another factor companies need to be aware
of when to become global as this will impact on the quality of production. An
innovative company such as Google requires skilled and creative employees,
which can be found globally. The level of education plays a significant role in
shaping a country’s economy. However, employing skilled workers abroad can also
have difficulties such as language barriers. For example, in 1997, Samsung were
successful in bringing skilled workers from abroad by forming a ‘Global
Strategy Group’, this consisted of non-Korean MBA graduates from top Western
schools being sent to study two years of basic Korean in Seoul (Peng, 2014).

In
conclusion, it is important for companies doing business in another country to
be aware of the external factors as expanding without this knowledge may lead
to major additional costs. Companies need to acknowledge and adapt to the
political and economic systems as well as cultural differences between each
country. Being aware of these factors can limit risks to failure, such as no
customer satisfaction. Acknowledging these factors can also influence how a
company should market their goods or services, for example by a country’s GNI
and high economic growth, customers are willing to spend more on goods or
services.

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