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International business opportunities in Latvia

Part A: Executive Summary

Today, international business is an important part of growth strategy of companies in the world. Every company tries to expand its business by entering foreign market. Company knows that it can obtain great profits and sales by entering new market. Company also will go abroad to defend its home market. In addition, there are a lot of opportunities that company can achieve when company invest outside of home country. That is a brightness future for all companies. Besides, international business contains tremendous potential dangers, risks that company will have to confront them. Hence, how to exploit potential opportunities, how to manage change and risk? Those are difficult questions that all companies have to answer before going abroad.

To more understand about international business, I will choose Latvia to analyze and to demonstrate theories and concepts of IB. In the scope of assignment, I will discuss some issues by analyzing the real situation of Latvia:

Firstly, based on the theory of country size to the Country, I will discuss the nation’s “natural advantage”. This includes location, topography, climate and natural resource factors that have impact on nation’s economy.

Secondly, I will analyze the political, economic and social characteristics of the Latvia. They will relate to the government’s attitude to trade.

Next, I will discuss the influences of Forces Globalization on nation’s natural advantage and government’s objectives for international business.

Lastly, I will justify and recommend policies and solutions for Latvia Government to improve their international trade strategies.

Part B: Apply theory to discuss Latvia’s “natural advantage”

Natural factors consist of location, climate, topography, and natural resources – can impact on the way people organize their activities, because the physical environment supplies the basic situation in which we perform our economic lives (A. Ball 2008).

Location

First of all, investors need to understand the location that they will invest on. Where a country is located, where are the major cities and who are its neighbors? These factors should be a part of general knowledge of international business. In addition, these factors influence to the way that companies will build its competitive advantages. Furthermore, location helps to understand what are the factors that effect on operation of company.

Figure 1: Latvia's MapThe picture shows that Latvia is country in Baltic region of Northern Europe in which Riga is the capital city. Latvia has some neighbor including Estonia, Russia, Belarus, Lithuania. Furthermore, Latvia has 498 km of coast line. In addition, Latvia is very small country with only 64,589 km2 and population of 2.22 million people (2010 est.). Hence, Latvia is the lowest population density in European Union.

Topography

Surface features such as plains, mountains, body of water and deserts could effect to business. Differences in surface features lead to differences in cultures, economies, social structures and politics both among regions of a single country and among nations.

Geography of Latvia is almost plains and plateaus that facilitate exchange and interaction among areas and regions. It is not difficult to build up transportation system to improve exchange economy. In addition, there is a little difference in culture because Latvia is not divided into small regions by mountain. That is an advantage for Latvia to attract investment.

Moreover, Outlets to the sea are another notable aspect of waterway. Latvia can connect to outside world with low-cost transportation. In addition, Latvia government can charge fee of landlocked nations that want to import or export their goods through sea-port. So that Latvia should create proper policies to promote landlocked nations to transport their goods across Latvia. Another advantage of Latvia is that it is big canal and river grids. Water transport is economically carrier for bulk goods moving over long distances. The largest river is the Daugava river (290 km) follow by the Venta and Gauja river.

Climate

Climate is another important factor that effect economy. Latvia has four seasons, summer, winter, spring and autumn. The weather is quite favorable for trafficking. However, winter is able to tremendous cold due to cold winds from Russia. It leads to snowfall and it effect to the doing business. In addition, Latvia has the heaviest rainfall in June, so that investors need to know this to have properly business project.

Natural resources

Although Latvia has some minerals resources, including barite, dolomite, peat, high quality clay and limestone for cement and construction material such as sand, but its quantities are small, satisfy the local needs. Some geologist predicted that Latvia has potential oil field. In recent year, Latvia government is considering to invest on hydroelectric and renewable energy resources such as wind, solar, and biomass energy. Clearly, lack of energy is a big problem for Latvia to develop its economy.

Part C: Government’s attitude to trade

Latvia’s political and legal analysis

Latvia is a Republic Country, under the control of the Saeima. This country was evaluated that has stability political. Performance of country was reported in six governance dimensions that shown in the below table. Percentage ranks show the countries’ percentage that rate below the chosen country. Hence, higher values depict better governance rating. Additionally, all percentage ranks are higher than 50%, mean that Latvia Government is very good in regulation political and legal

Source: Worldwide Governance Indicators, 2010

Index

Ranking

Voice and Accountability

70%

Political stability and Absence of Violence

60%

Government Effectiveness

70%

Regulatory Quality

80%

Rule of Law

70%

Control of Corruption

65%

Source: Commercial Guide for U.S Companies 2010

Latvia’s economic analysis

With GDP is nearly $32.2 billion, Latvia stood at 106th position in the world in 2010. However, this was a decrease in GDP from $39.99 billion in 2008. According to the World Bank, Latvia is one of the high - income countries in 2009 and went down to middle income in 2010. Furthermore, the pie chart shows that services have highest percentage among three main occupations, including industry, agriculture, and services (see appendix 4). More understanding when we look at the bar chart and table that shows the doing business situation in Latvia. Singapore is the first ranked economy, while Latvia is 24th ranked economy in the Ease of doing business.

Latvia – compared to global good practice economy as well as selected economies:

Additionally, Latvia is an open and small economy based on export that significantly contributed to its GDP. Export products consist of wood products, machinery, equipment, metals… There was an increase in export, from $7.222 billion in 2009 to $7.984 billion in 2010. It led to grow in GDP in over two years (2.9%). We also see the main export partners are Lithuania, Russia and Estonia. Similarly, Latvia’s import rose slightly to $9.154 in 2010, from $8.906 billion in 2009. Lithuania also is a biggest import partner of Latvia, at 16.36%, followed by Germany (11.34%) and Russia (10.69%).

Latvia’s social/cultural analysis

In Latvia, Latvians and Livonians are approximately 60% of population, and nearly 27% of population is Russians. Hence, the Latvia’s culture was strongly impacted by Latvian and Russia. As a result, Christianity is the largest religion in Latvia. Latvian Christmas traditions encompass decorating with traditional ornaments, cooking traditional dishes, sometimes made of straw, and singing Christmas carols.

Latvian language is used as an official language in Latvia with 58.2%, followed by Russian language at 37.5%. In addition, Livonian and Latgalian language are also protected by law. In recent year, Latvia widely accepted English language especially in tourism and business.

Government’s attitude:

Latvia has small and open economy, in which Government welcomes Foreign Direct Investment. The Government encourages investments that promote to the improvement and diversification of the country’s economic base, as well as creation of new employment opportunities. Government also stimulates to generate earning/saving of foreign exchange and to increase the effective transfer of technology. By offering various packages of investment incentive, the Government tries to encourage existing and new enterprises. In addition, the Government of Latvia has expressed that it recognizes the importance of creating an enabling environment that fosters investor confidence by attracting foreign and local investments; however the Embassy is aware of several disputes between U.S. and other foreign investors and various government agencies

Latvia allows that foreigners can ownership and control their companies without any restrictions. They may purchase real estate with exception of forests and protection zones. The procedures are able to alter depending on the residency of foreigners and the land status. However, purchase of rural land is more difficult and complex and requires approval of municipal until 2011.

Part D: Forces of Globalization

Globalization can be defined as “the inexorable integration of markets, nation - states, and technologies... in a way that is enabling individuals, corporations and nation-states to reach the world farther, faster, deeper, and cheaper than ever before” (w. Griffin & W. Pustay 2007).

Globalization effects on economy

In Latvia, Globalization has some positive effects, it promotes growth. In recent years, globalization has given new trade possibilities. In 2004, Latvia participated in to the Europe’s Union (EU), so that new trade methods were opened. According to the economic data of the ministry it can be seen that this country has signed twelve free trade agreements with 29 countries (em.gov.lv). In 2009, countries which signed free trade agreement covered 89, 4% of Latvia’s total import as well as 91.2% of total export. In year 2010 export went up by 3 % than that was in 2009. Economics ministry has begun to form the customs for a free trade with EU and has dropped customs functions. 

Foreign investors were attracted to invest on Latvia. Evidences show that economic activities are growing year by year. For example, FDI had increased for 14% more than in 2006, followed by a decrease in 2009 because of economic decline in the world. However, there is a good signal when foreign investor’s interest in the Latvia economy has renewed with the economic recovery. Some economists suppose that FDI inflows will amount to 4-5% of GDP in coming years…

Globalization effects on Political

After the declaration of national independence, foreign embassies were established, various international treaties were created, and Latvia joined NATO, the EU, and other international organizations.

Globalization effects on Social/cultural

There are two opinions about Globalization in our society. One group of people says that Globalization is a huge chance to become a modern country. It opens new opportunities to study or to travel abroad. On the other hand, the other group of people supposes that Globalization is a threat to our society. It will change the original culture, have negative impact on society, especially young people.

Globalization effects on economy

The line chart shown that Latvia’s unemployment rate significantly decreased from 12% in 2003 to nearly 5% in 2008 because of positive impact of globalization. Latvia joined EU, so that plenty of employment opportunities were created. However, unemployment rate rocketed over 20% due to affecting of economic crisis in 2008. And then it slightly fell by 1% to 19.4% in Q2 2010.

Part E: Recommendation for Latvia to improve international strategy

Throughout analysis Latvia’s natural advantages, current political, economic and social/cultural, I would like to recommend some points to improve international strategy:

Development education

higher degree of education facilitates an understanding the effect of globalization on the country’s political, economic and  social/cultural. There are several reasons why Latvia should implement development education strategy. For example, there are new, unforeseeable problems will increase in future. In addition, there are many barriers to development such as conflict, poverty, diseases, etc will continue to exist. Furthermore, people who is from developing countries, would like to study and work in Latvia because Latvia is developed country with high income. To develop its education system, Latvia can learn a lot of lessons from Singapore. How Singapore can attract students around the world?

Transportation development

Although, Latvia has good transportation system with some kinds of transportation such as City Transit, high way system, boat, planes. In addition, Latvia’s infrastructure ranked 55th out of 139 countries. However, Latvia still needs to improve their transportation system to reduce transportation costs, deliver on time and to promote economic development.

IT development

As we know, Information Technology (IT) plays important role in business, it significantly influences on business performance. For instance, by using Internet, we can perform the video conference from different places, different countries. Hence, companies can save time as well as money to travel. Additionally, customers can go online shopping and carry out online transaction, so that domestic companies can increase the sale volume through online marketing. As a result, Latvia should invest to develop the IT system as almost developed countries such as US, UK, Singapore...

Innovation strategy

Innovation is the weakest pillar among 12 pillars of competitiveness. This will limit the Latvia’s ability to compete with other countries. Hence, Latvia should establish properly innovation strategy to become more aggressive in international business.

Part F: Conclusion

REFERENCES

Carbaugh, Robert J., 2009, International Economics, 12th ed. : South-Western: Cengage Learning.

Cravens, David W., and Piercy Nigel F., 2009, Strategic Marketing, 9th ed. USA: McGraw-HII.

Daniels, John D., Radebaugh, Lee H, and Sullivan, Daniel P., 2009, International Business: Environment and Operations, 12th ed. USA: Pearson, Prentice Hall.

Hill, Charles W. L., 2009: International Business: Competing in the Global Marketplace, 7th ed. USA: McGraw Hill.

Hill John S., 2009, International Business: Managing Globalization, 1st ed. USA: SAGE Publications, Inc.

Ireland, R. Duane, Hoskisson, Robert E., and Hitt, Michael A., 2009, The Management of Strategy: Concepts and Cases, 8th ed. USA: South-Western: Cengage Learning.

Pearce II, John A., and Robinson, Richard B. Jr., 2009, Strategic Management: Formulation, Implementation, and Control, 11th ed. Singapore: The McGraw Hill Companies.

Peng, Mike W., 2009, Global Business, 1st ed. USA: South-Western: Cengage Learning.

Solnik, Bruno, and McLeavey, Dennis, 2009, Global Investments, 6th ed. USA: Pearson, Prentice Hall.

Thompson, Arthur A. Jr., Ill, A. J. Strickland, and Gamble, John E., 2010, Crafting and Executing Strategy: The Quest for Competitive Advantages – Concepts and Cases, 17th ed. USA: McGraw Hill.

APPENDIX

Appendix 1

Appendix 2: Remittances

Appendix 3: Export and import level between 1988 and 2008

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