International Business Environment Of Countries Hg Operates Economics Essay
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To identify and gain an understanding of the environment for international business in Germany, several factors will be reviewed. A country's geography, culture, population demographics as well as political and economic structure can all play a role in either contributing to or working against the existence of a climate favourable to international business. By examining issues such as Germany's participation in area economic integration, its attitude toward foreign direct investment and its participation
Germany is one of the most densely populated countries in the world, with almost 83 million people inhabiting 357,022 square kilometres of land. The country consists of 16 federal states and 32 kingdoms, principalities and small towns. The countryside is quite diverse with five major landscape types, including sandy beaches along the North and Baltic Seas, hills and lakes in the North German Plain, numerous islands, fertile lands, lowland bays, and mountain ranges in the Alps. The Bavarian plateau in the southwest averages 1,600 feet above sea level, while its highest point, the Zugspitze
Mountains, reaches 9,721 feet. Germany's major rivers are the Danube, the Elbe, the Oder, the Weser, and the Rhine.
Natural resources present include iron ore, coal, potash, timber, lignite, uranium, copper, natural gas, salt and nickel.
Germany's Population Demographics
The estimated 2006 population of Germany is 82,422,299 with a population growth rate of -0.02%
Balance of Trade
Germany continues to be a very export focused, as noted below in its current account balance. Germany exports account for more than one-third of national output. Although production costs within Germany are very high it continues to be a top exporter of goods. German export sales are concentrated in motor vehicles, machinery, chemicals, and heavy electrical equipment. France is Germany's second-largest trading partner, with the U.S. being the second largest. Trade with the U.S. totalled $89.1 billion in 2002; U.S. exports to Germany totalled $26.6 billion while U.S. imports from Germany totalled more than $62.5 billion.
Foreign Debt Obligations
Germany's focus on being a lead exporter lends it to continue to carry a positive trade/debt ratio compared to that of competing countries such as the U.S. Estimates based on 2005 data show that the U.S. continues to run a current account deficit compared to that of Germany. Germany continues to run a positive current account balance; this has been one of the factors supporting the increase of the euro compared to that of the dollar.
World Trade Organization Involvement
Germany was one of the inaugural members of the World Trade Organization founded in January of 1995. Today it remains committed to promoting multilateral trade and in 2000 began a series of contributions to the WTO's technical assistance and training activities. Germany's most recent donation of EUR 1.7m in 2006 makes it the second biggest voluntary contributor to the WTO.
Currency of Germany
Germany is the world's third-largest economy and the largest in Europe, but has recently been one of the slowest growing economies in the European Union for a number of reasons including: the continued integration of the eastern German economy, inflexible labour practices which continue to increases unemployment rates to 11.7%, taxation and high social insurance cost. The bureaucracy associated with labour practices have led German employers to consider investing in oversee operations or automating production rather than to create jobs in domestic facilities.
Historically Germany's main currency was the Deutschmark, but in 1999 the European Monetary Union introduced the euro as a common currency to be used within its member's financial institution and by January 2002, the euro became the sole currency for all member countries. As of the November 30, 2006 the euro was trading at 1.3167 compared to that of the U.S. dollars, this is an increase over the 2005 average of .8041. (Yahoo Finance) Due to the creation of the euro it is difficult to determine Germany's overall impact on this increase of the euro compared to that of the dollar, however, the Gross Domestic Product (GDP) information illustrates Germany's dramatic impact on the increase.
Although Germany has experienced a high level of unemployment in recent years, 11.7% in 2005, it continues to hold a major labour force of approximately 43 million; Analysing the above data shows that although the growth rate has been low in recent years Germany has experienced a relatively stable economy with the potential to increase it performance.
Although Germany has experienced recent slow economic growth and the cost of producing goods is higher than other foreign countries, Germany offers an environment that strongly supports international business, evidence of this includes the presence of a highly skilled and productive worker force and its prime location in the heart of Europe. Investing in Germany appears to be a sound business decision; various incentive packages can offset real costs as well as provide tax incentives in future years. To help structure a successful integration with German consumers, companies should ensure that they have a high quality innovative product. Culturally, German consumers do not focus on the cost of a product but are extremely focused on the quality of a product. Promising sectors to consider for international business opportunities in Germany include computer software, management consulting services, drug and pharmaceuticals, and telecommunication equipment.
Major Elements and Dimensions of Culture in the United Kingdom
The United Kingdom is rich in cultural heritage. The country is a tourist destination known for its landscape, art galleries, architecture, parks, palaces and museums. Although the sites are remarkable, the culture is distinctive. In the United Kingdom, their culture is considered a reflection of their diversity.
The official language of the United Kingdom is English which is said to be spoken by 95% of the population. Although the Unites States speaks English as well, they are very different. The dialects are not only different between the United Kingdom and the United States; they are also very different between the regions in the United Kingdom. The American English and the British English are the reference forms of English that recognized in the rest of the world.
The United Kingdom is the third largest trading and financial center in Europe. Over the past few years, the United Kingdom has been focused on growth of the economy and reduction within the social welfare system. The government of the United Kingdom has been researching possible ways to stimulate the economy; however, they are currently facing economic slowdown, high unemployment, declining home prices and increased consumer debt. The rate changes in the United Kingdom are driven by the rate moves of the Bank of England; this is similar to the moves that are driven in the United States by the Federal Reserve ("The economy of," 2010).
When doing business with the United Kingdom, it is first necessary to determine whether you have established a "presence" with your business activities. If your business with the United Kingdom is simply exporting goods, then there is no a "presence" established. If there is a permanent base in the United Kingdom, then the a business has a "permanent establishment" that will require consideration which will possibly be taxable in the United Kingdom, if business is conducted from that base with regularity (Bryan Cave, 2009).
If a "permanent establishment" is created there are additional considerations the United States based company must consider.
The United Kingdom has a tax system has gone through many changes. It is based on an income system, much like that of the United States. When a business has been "permanently established" in the United Kingdom they are subject to taxation in the same way that the local businesses are. The tax systems measures the rates based on cash flow, instead of profits as it has been in the past. According to a study of King and Fullerton the corporate tax rate for the United Kingdom has changed consistently since the war. They have continued to experiment with the rates with legislative approval. In addition to the corporate taxes, they also have social security tax and capital gains tax.
It is important to understand that to conduct business in the United Kingdom will be required to establish a local bank account. Due to increased issues surrounding corruption and money laundering, the United Kingdom establishes the Money Laundering Regulations. As a result of this program, the banks in the United Kingdom have undertaken a process for due diligence, which is required as part of this law
Imports and exports
Since the beginning of 2011, UK's monthly trade deficit has hit record levels of more than £4 billion per month. The monthly deficit in the UK for 2011 is also exceeding the previous record level of £3.5 billion per month reached in 2007.
Total value of exports: US$405.6 billion.
Primary exports - commodities: manufactured goods, fuels, chemicals; food, beverages, tobacco.
Primary exports partners: US (14.71 percent), Germany (11.06 percent), France (8 percent), Netherlands (7.79 percent), Ireland (6.89 percent), Belgium (4.65 percent), Spain (4 percent)
Total value of imports: US$546.5 billion
Primary imports - commodities: manufactured goods, machinery, fuels; foodstuffs
Scanning the business environment is an activity that needs to be conducted on a continual basis by all international businesses. The reasons are diverse when dealing with countries risks. When global companies enter into the international arena, consistent efforts must be made to understand the ever-changing business climate in each country that they are involved in .Thus company objectives and policies must be aligned accordingly to meet these changes. In dealing with country risk, strategic usage of joint ventures and partnerships may be used to minimize the risk involved.
P2 Describe how the following mechanisms regulate international trade:
the work of the WTO in international trade;
Quotas and Tariffs;
The legislation on product safety and reliability.
The WTO as an Organization was created on January 1, 1995, as
a result of the Uruguay Round Negotiations. Currently consisting of 140 members worldwide, it is based with headquarters in Geneva, Switzerland and has a secretary staff of over five hundred. The organization of the WTO consists of a head Ministerial Conference, with branches of a General Council, Trade Review Body, and Dispute Settlement Body. Below these branches lie several councils and committees to deal with many different trade issues. One branch consists of a committee with the name Trade and the Environment, which concerns itself with issues relating to trade and the environment. Overseeing the organization of the WTO is the director-general, currently Michael Moore. The basis for all WTO decisions lies in its multilateral trading system, where a large amount of agreements that are negotiated and signed by members must finally be ratified in each country's individual Senate. While the individual agreements are signed and ratified by each country's government, the primary purpose of the legislation is to assist the country's producers, exporters, and importers. The overall goal of the WTO is to make trade freer, resulting in, claims the WTO, a promotion of peace worldwide, an increase in income and a stimulation of economic growth. As part of its preamble, the WTO claims an interest in the environment, and thus created the Committee on Trade and the Environment to make decisions when environmental issues are involved. The preamble itself states it will promote trade "while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment." The organization, in the past few years, however, has encouraged a lower tariff universally, thereby encouraging producers to look towards less developed countries as prime places for cheap labour and low regulations, especially low regulations relating to the environment. These less developed countries, or LDCs, are known universally for having very cheap, productive labour, and are not even close to having the environmental protection efforts seen in the United States and Europe. So these countries are encouraged to make waste of the land and save profits. Yet the WTO maintains that freer trade will benefit all, and their concern for the environment is shown in the existence of a council concerned with only environmental matters.
The discussion of tariffs covers both tariffs on quantities within quotas and those outside. Traditionally, the tariff reductions that resulted from trade negotiations came from bilateral product-by-product bargaining, or they were based on formulas that applied over a broad range of products, or combinations of the two. How the reductions will be handled in the present negotiations is still undecided. Some countries - such as Canada and the US - are advocating that in addition, "sectoral liberalization" should be negotiated. In some sectors, in past negotiations these have sometimes meant "zero-for-zero" deals. It would include negotiating the complete elimination of tariffs (and possibly other measures such as export subsidies or subsidized export credits) by at least the key WTO members in specific sectors such as oilseeds, and barley and malt. Some countries - for example Japan - have said they do not support this.
One country, the US, has gone so far as to argue that because so many agricultural tariffs are high, the negotiations to reduce tariffs should start with "applied rates" (the tariffs governments actually charge on agricultural imports) and not the generally higher "bound rates" (the legally binding ceilings committed in the WTO as a result of previous negotiations). This has proved quite controversial because it would break a tradition of basing negotiations on bound rates. A number of countries have also countered that they should be given credit for unilaterally applying tariffs that are more liberal than the negotiated bound rates, instead of being forced to make even deeper cuts than countries that kept to their higher bound rates. Some countries that recently joined the WTO also feel that they accepted low tariffs in order to become members and therefore should not have to reduce them much further.
A number of developing countries also complain that they face difficulty if they try to increase their incomes by processing the agricultural raw materials that they produce. This is because the countries they see as potential export markets impose higher duties on processed imports than on the raw materials - known as tariff escalation - in order to protect their own processing industries.
Some countries see tariffs and other import barriers as necessary in order to protect domestic production and maintain food security. For this reason, some countries are linking lower import barriers with disciplines on other countries' export restraints and export taxes - if producing countries do not restrict their exports, then importing countries can feel more secure about being able to obtaining food from them. Some developing countries say they need flexibility in deciding the level of import duties they charge to protect their farmers against competition from imports whose prices are low because of export subsidies.
The tariff quotas
Quota administration is a technical subject, but it has a real impact on trade - on whether a product exported from one country can gain access to the market of another country at the lower, within-quota tariff.
Methods used for giving exporters access to quotas include first-come, first-served allocations, import licensing according to historical shares and other criteria, administering through state trading enterprise, bilateral agreements, and auctioning. The terms can also specify time periods for using the quotas, for example periods of time for applying for licences, or for delivering the products to the importing countries. Exporters are sometimes concerned that their ability to take advantage of tariff quotas can be handicapped because of the way the quotas are administered. Sometimes they also complain that the licensing timetables put them at a disadvantage when production is seasonal and the products have to be transported over long distances.
Each method has advantages and disadvantages, and many WTO members acknowledge that it can be difficult to say conclusively whether one method is better than another. Several countries want the negotiations to deal with tariff quotas: to replace them with low tariffs, to increase their size, to sort out what they consider to be restricting and non-transparent allocation methods, or to clarify which methods are legal or illegal under WTO rules in order to provide legal certainty.
Who has tariff quotas?
43 WTO members currently have a combined total of 1,425 tariff quotas in their commitments. The numbers in brackets show how many quotas each country has.
Chinese Taipei (10)
Costa Rica (27)
Czech Rep (24)
Dominican Rep (8)
El Salvador (11)
New Zealand (3)
Slovak Republic (24)
South Africa (53)
United States (54)
P3 Describe how the environment and culture of another country affects HG's business operations. You are asked to present a PEST (L) analyse on both the Netherlands and China.
PEST Analyse The Kingdom of the Netherlands
Full name: The Kingdom of the Netherlands
Population: 16.6 million
Capital: Amsterdam; seat of government: the Hague
Dependencies: Aruba, Netherlands Antilles
Location: Western Europe, bordering the North Sea, between Belgium and Germany
Area: 41,864 sq km (16,164 sq miles)
Major language: Dutch
Major religion: Christianity
Export commodities: Machinery and equipment, chemicals, fuels, foodstuffs
GDP per Capita: $ 47,042
Political Risk Factors
Political Structure Analysis
The Netherlands is a constitutional monarchy (since 1815) and a parliamentary democracy (since 1848). Dutch monarch has no real political power: from the representative side - head of state (Queen Beatrix), from the executive side - person uniting the divided parliamentary politics.
Thus, the Netherlands is usually governed by an alliance of different political parties. Prime minister comes from the party, which won the most seats in the elections, and forms the new government. These days Dutch government is in uncertain situation due to its collapse in mid-February 2010. Whichever government alliance comes to power after the June 2010 election will continue to focus on managing the after-effects of the political and financial crisis.
Limits of press freedom
Dutch constitution guarantee freedom of the press, as is free speech. Moreover, journalists don't present flagrant news in the light of tabloid sensationalism. But government limits press freedom establishing rules especially regarding country's secret service. Every day there is paper's confrontation with the government. Journalists have to make out where are secret information and not. And government needs to clarify "free speech" statement.
Key Internal Political Risks
Political unrest in the light of financial crises. Decision-making of financial crises results is held up at least until the general election in June due to the collapse of the government in mid-February. The two main parties failed to agree on whether or not to withdraw troops from Afghanistan as planned in 2010 and it served the main reason for government breakup. Indeed, the future of a new road pricing suggestion ("the kilometre tax"), based on charging motorists for the distance and time driven, has become uncertain. This scheme has been hanging in the air since its initiator, Mr Eurlings, has announced his departure from the political scene and this question hasn't got its following consideration. The " kilometre tax" question isn't a sole problem that previous government hasn't had time to solve them. New solutions of residual tasks will be founded when new government comes to the office.
Corruption and private property
Private property and contracts are secure. There is no difference between citizens and foreigners purchasing real property. Although intellectual property rights are generally protected, there is piracy of optical disc media as everywhere. Government needs to increase arrangements against these criminal organizations.
Corruption is on the minimal level.
So the Netherlands ranks 6th place among 180 countries in Transparency International's Corruption Perceptions Index (2009). The Organisation for Economic Co-operation and Development's Anti-Bribery Convention leads struggle against corruption by penal offense. However low-level law pressure corruption doesn't have to allow government to relax its attention regarding corruption.
Key External Political Risks
The Netherlands Antilles as a part of the Netherlands
The Netherlands Antilles are part of the Kingdom of the Netherlands and acknowledge the Dutch monarch. In comparison with its "motherland", the Netherlands Antilles don't have very low political risk. In 2010, Curacao and St. Maarten (two largest islands whose production accounts more 70% of GDP) will achieve independence from the rest of the islands and the Netherlands Antilles probably will desist to exist because of financial insolvency (poor tax collection and high social spending contribute).
Economic Risk Factors
The Netherlands has one of the most advanced economies in the world, which is modern and diversified, with institutional strengths in the sphere of legal framework and impregnability of property rights.
Exports and imports account more than 60 % of nominal GDP. Strategic geographic position and a small size of its domestic market play a key role on the world arena and by attracting foreign investments. The Netherlands showed significant economic performance and GDP growth in the nineties. The economy's main focus is export commodities. Dutch trade mainly comprises chemical products, fossil fuels and agricultural products, machinery and transport equipment. Exports contributed 70 % of GDP in 2000 in comparison with 58.3 % of GDP in 1996. In 2001 the rate of GDP decreased sharply and the economy didn't see growth improvements at all in 2002-2003. Cyclical shock was caused by lower rates of export growth as part of the global economic slowdown. 2006 however, showed a promising 3% growth, which steadily accelerated to 3.5 % in 2007. The economy still grew 2 % in 2008, but due to global financial crisis the economic activity had been shrinking; exports and imports dropped rapidly in 2009, by 8.4 % and 8.9 % respectively.
The Public Sector
Fiscal policy in the Netherlands is designed to reduce taxes and to create a favorable climate for business investors. The Income Tax of 2001 represented significant tax cuts since the war. Total tax revenue was 37.5% of GDP (2005), which is below the EU average. In January 2007 Dutch government has deducted corporate tax to 25.5%. The following tax reform gave international companies a green light for FDI in the Dutch economy. Dividend tax has also been diminished from 25% to 15% and a patent box with a 10% tax rate on income from innovations was proposed. The Dutch tax system combines 30% tax break for top qualified foreign workers, wide tax treaty network and participation exemption.
The Monetary Sector
The Netherlands joined economic and monetary union on January 1st 1999. European Central Bank controls monetary policy and sets interest rates in euro zone. The Netherlands is a member of the euro zone. Inflation level between 2006 and 2008 has been relatively low, averaging 2% and is expected to stay low at about 1.5% in the coming years.
Refinancing rate was raised by 25 basis points eight times to 4 % since December 2005. Due to recent financial turmoil intervention rates have risen very rapidly to 4.7 %. Since 2009 these rates remain unchanged and likely to continue to do so in 2010.
The External Sector
The Netherlands had strongly positive balance of payments in 2005 estimated at â‚¬31.5 billion, because more than two-thirds of GDP was derived from merchandise trade. Top leading export markets in 2007 were Germany with 28.2 % of the total export share, Belgium with 15.6%, the United Kingdom with 10.5 % and France with 9.8%. Germany topped the list as leading supplier to the Netherlands with 20.5 % share of imported goods. From these figures it becomes obvious, that Germany is the most important trading partner of the Netherlands.
According to EIU World Investment Prospects foreign investments increased particularly in 2007 on a worldwide basis. Inward foreign direct investments to the Netherlands have skyrocketed from US$ 635 billion in 2007 to US$ 796 billion in 2010. (see Appendix 4)
The Netherlands showed good results in co-operation with multinational companies from emerging industrial companies, like India, China and Korea.
The Labour Market
The Dutch labour market and welfare system is similar to the German model. Policy making and industrial relations are key elements in dealing with most issues. In recent years the labour market has become more flexible than in Germany. Labour regulations are relatively strict in the Netherlands. The non-salary cost of employing a worker is high, and dismissing an employee is costly and unenviable process. The pension system is financed by pension funds, which invest pension contributions in shares and other assets. One unique characteristic of the Netherland's labour market is a large number among women, who work at part-time jobs. The 'one and a half earner model' has become very popular in Holland, in which man has a full-time job and a woman works part-time. The current labour market is in a structurally better position.
Social Risk Factors
Social Spectrum of Netherlands
Introduction to Social Structure of Netherlands
The Netherlands is a country where native population is nearly 81%. Dutch society is tolerant to the homosexuality but undergo Islamic conflict. This country also is well-known for the most comprehensive system of social security in the EU. It is also one of the world's most densely populated nations. As in many European countries, there is the tendency of growing 65s population that lead to greater demands on the welfare system.
Facts of social structure of Netherlands:
Age structure: 0-14 years: 17.4%; 15-64 years: 67.7%; 65 years and over: 14.9%
Median age: total: 40.4 years; male: 39.6 years female: 41.2 years
Population growth rate: 0.412%
Net migration rate: 2.46 migrant(s)/1,000 population
HIV/AIDS: people living with HIV/AIDS: 18,000
HIV/AIDS: deaths: fewer than 200
Ethnic groups: Dutch 80.7%, EU 5%, Indonesian 2.4%, Turkish 2.2%, Surinamese 2%, Moroccan 2%, Netherlands Antilles & Aruba 0.8%, other 4.8%
Religions: Roman Catholic 30%, Dutch Reformed 11%, Calvinist 6%, other Protestant 3%, Muslim 5.8%, other 2.2%, none 42% (2006)
Key Social Risks
Over the past decade there is trend of the politicization of childhood which links with certain risks. In many countries, these risks are known as the "new social risks" (services for the elderly and disabled; services for families with children; active labour market policies). One of the reasons for it results from income and service gaps in post-industrial labour markets. This is one social risk of insufficient income security. Besides there has also been an increase in the female employment rate and virtually all adults are now expected to be involved in employment. (see Appendix 7) In addition, changes of labour markets and transformations of family and demography create challenges of social care (especially child care) when young families lack access to affordable and quality child care and yet all adults in the family must enter the labour force.
Around 68% of its population is aged between 15 and 65. A short term risk Netherlands faces is the very low birth rate. Declining working population and low rate of migrant inflow are present these days. In the Netherlands, the legality of guest workers - that arrived in the 1960s to work temporary for Dutch industries but never left the country afterwards - leads the country's current migrant labour situation and conflicts what link with it. The social care sector has some difficulties in immigration sphere. Government officials maintain that there is no demand for migrant labour in the social care sector, and hence there is wide field of activity for low-skilled labour.
Nearly a half (42%) of Netherlands citizens are atheists but Muslims are the main problem for the country . There is no evidence which suggests strict religious regulations in this country. In general, religious restrictions risk hence remains very low but government should continue improve situation regarding Islamic groups.
Technical Risk Factors
Superior logistics and technology infrastructure
The Netherlands is located in the center of Europe and provides a strategic location to run international businesses with global market leaders. Rotterdam is one of the world's largest seaports and Schiphol Airport is considered as one of the busiest hubs in Europe.
The Netherlands is ranked as one of the most wired countries in the world, because of dynamic communications, e-commerce boom and outsourcing; but although the quality of transport and high speed Internet, cable communications network is fantabulous, the railway and road density thousand citizens is relatively low. Total government spending on rail, harbor, road and airport infrastructure improvements is one of top priorities and this plan is estimated to cost a total of â‚¬37 billion.
Highly qualified workforce
The Netherlands labour market predominantly consists of highly educated and competent workers. Dutch professionals are very multilingual and can adapt to every cultural hazard and work in every business environment.
Quality of life
The Netherlands offers to its citizens a high standard of living and reasonable costs of housing, education and other activities, which are lower than in most Western countries in Europe.
Key Technical Risks
Risk of shipping industry
Shipping is one of the most important key Dutch industries. In 2005 around 60% of all European cargoes were transhipped through Rotterdam port. The Dutch Government is planning to invest in a multimillion project, designed to increase freight capacity and improve rail links, which will enable to increase port's competiveness and to reduce risk of cargo overloading and difficulties in logistics.
Risk of energy exploration and consumption
The Netherlands has natural resources and produces oil and gas. For ecological reasons and to reduce the exploration of the North Sea and in order to prevent the consequences of the Dutch disease (the term the Dutch disease means the increase in exploitation of natural resources and a decline in the manufacturing sector) government issued a policy to explore other sources of energy. Priority has been given to expanding the use and production of electricity and to develop renewable energy sources, particularly wind and biomass energy.
The Netherlands' trade and investment policy is among the most open in the world and owing to this fact, country is one of the most attractive economies where liberal policies and favourable conditions - good geographical location, strong economy (exports and imports goods virtually equal GDP), well-developed financial sector, high quality of the physical and communications infrastructure, lack of corruption - create solid fundament for development. It's important to mention that the Netherlands is the 4th among the European largest recipients of FDI.
PEST Analyse of the Republic of China
Economic risk factors
Morisson (2009) found that "The global economic crisis began to impact China's economy in late 2008. After growing by 13% in 2007, China's real GDP slowed to 9.0% in 2008 and to 7.1% in the first half of 2009 (year-on-year basis)." The global economic crisis not only has a significant negative impact for China's GDP, but also on the international business venture in China namely FDI. The vulnerability of China's economic during the global economic crisis will result in the downgrading of MNCs' confidence level in investing or doing international business venture in China, in which eventually lead to the diminished of FDI inflows rate. This statement affirmed by Morisson (2009), "China's trade and inflows of FDI diminished sharply, and millions of workers reportedly lost their jobs." In responds to this situation, "The Chinese government has sought to boost the economy by implementing a $586 billion economic stimulus package (largely aimed at infrastructure projects), establishing easy money policies to boost banking lending, and providing assistance to various industries. Such policies have helped stabilize China's economy; real GDP is expected to grow by over 8% in 2009-far higher than the expected growth of any other major economy." (Morisson, 2009) The success of China in recovering and strengthen their economic environment has gain back the confidence level of MNCs to infuse FDI into China.
The other enticement in China economic environment is that the accession of China into World Trade Organization (WTO) on December 11, 2001 (Zumwalt, n.a.). Zumwalt (n.a) argued that, "WTO membership will make China even more attractive to foreign investors." This circumstance is due to the companies that will benefit from an expanded rule of law as China implements its WTO commitments, particularly those designed to foster the highest degree of transparency and trade-related non-discrimination (Zumwalt, n.a).
Social risk factors
Age structure: 0-14 years: 17.6%
15-64 years: 73.6%
65 years and over: 8.9%
Median age: total: 35.5 years
male: 34.9 years
female: 36.2 years
Population growth rate: 0.481%
To conduct international business venture in China, managers of companies need to take into their consideration in regards to the culture of Chinese society. One of the main aspects is the attitude of human resources that may affect their working behaviour. Chinese graduates are good at following instructions and are hard-working. They are not good at teamwork, sharing information with colleagues, dealing with ambiguity, and undertaking tasks that call for creativity."
Managers in China need to be aware of this and be prepared to implement training programs that foster teamwork and creativity. "It is an enormous task that requires expatriate managers to be patient and nurturing, and have strong mental skills. Individuals who do not have these skills should reconsider taking an assignment in China.
Technological risk factors
Nowadays, China is on its way to become the world's factory hub. To achieve this objective, China needs to have a competitive advantage so that it can differentiate themselves from any other country. The competitive advantage is also become an imperative requirement to attract more MNCs to do international business venture notably FDI in China. Low labour and land costs are often cited as China's main competitive advantages. However, they are not the only factors that have helped make China the world's largest factory. In fact, in comparison with other developing countries around the world, China's wages and land costs may not be the lowest. One of the advantages China enjoys over its competition is a relatively high standard of infrastructure. This not only makes massive production possible, but also facilitates the transportation of raw materials into the country and finished products out to the world.
China infrastructure is including seaports, airports, expressways, railways, and telecommunications. For its seaports, "China's seaports have been the most important gateways for its foreign trade. Currently, the nation ranks first in the world in terms of both cargo throughputs by weight and by the number of containers handled". Moreover, in the other sector of infrastructure, China's airports play a significant role in the fast growth of both passenger and cargo turnovers . The rocketing growth of foreign trade coupled with the booming domestic economy has generated great pressure for improvements to China's domestic transportation system. Roadway systems have played the most important role in container transportationâ€¦ The improvements expected to boost the economic integration among different regions across China tremendously." Moreover, the China's railway systems play a very important role in bulk cargo and passenger transportation. Its successfully achieve the third ranking in the world . And at last in regards for China's telecommunication, knowing the importance of telecommunication services, China has been paying close attention to this sector of its economy. The Chinese telecoms network features a large network capacity and many high speed connections. It covers the entire country with optical cables as the mainstay, and satellite and digital microwave systems to supplement the system."
Nowadays, China is successfully become one of the countries with a high and stable rate of economic growth in the world. This situation is in consequence of the market reform that China conducts over decades ago. The market reform that China conducts is intended to build an open economic through inviting companies to invest in international business venture in China such as FDI. In this regards, FDI is becoming the core in the economic growth in China.
P4: Describe how the monetary environment affects businesses that operate internationally. What can you say about how the monetary environment affects the international trade of an international business? Include methods of protection against exchange rate fluctuations, the influence of international banks, trade support and government agencies in your response.
Exchange rates influence many aspects of the firm's activities. For one thing, they affect demand for a company's products in the global marketplace. When the country's currency is weak (valued low relative to other currencies), the price of its exports on world markets declines and the price of imports increases. Lower prices make the country's exports more peeling on world markets. Furthermore, a company that sells in a country with a strong currency (one that is valued high relative to other currencies), while paying workers at home at its own weak currency improves its profits.
The intentional lowering of the value of the currency by the nation's government is called devaluation. The reverse, the intentional raising of its value by the nation's government, is called revaluation. Devaluation lowers the price of a country's exports on world markets and increases the price of imports, because the country's currency is now worth less on world markets. Revaluation has the opposite effects: it increases the price of exports and reduces the price of imports.
Exchange rates also affect the amount of profit, a company earns from its international subsidiaries. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency.
Exchange rate factors
Two concepts are used to determine the level of which an exchange rate should be. The wall of one prize stipulates that when prices expressed in a common denominator currency, an identical product must have an identical price in all countries. For this principle to apply, products must be identical in quality and content in all countries and must be entirely produced within each particular country. The concept of purchasing power party (PPP) helps determine the relative ability of two countries currencies to buy the same "basket" of goods in those two countries. Last, although the law of one prize holds for single products, PPP is meaningful only when applied to a basket of goods.
Two phenomenon influence both exchange rates in PPP: inflation and interest rates. When additional money is injected into an economy that is not producing greater output, prices rise, because more money is available to buy the same amount of products. When unemployment is low, employers pay higher wages to attract or retain employees. Employers then typically raise prices to offset the additional labor cost to maintain profits.
In turn, interest rates affect inflation because they affect the cost of borrowing money. Low rates encourage people and businesses to increase spending by taking on debt. On the other hand, high rates prompt them to reduce the debt because higher rates mean greater debt payments. Because real interest rates -- rates that do not account for inflation -- are theoretically equal across countries, any difference in the rates of two countries must be due to different expected rate of inflation. A country that is experiencing inflation higher than that of another country should see the relative value of its currency fall.
Forecasting exchange rates
There are two distinct views regarding how accurately future exchange rates can be predicted by forward exchange rates -- that is, by the rate agreed upon for foreign exchange payments at a future date. The efficient market view holds that prices of financial instruments reflect all publicly available information at any given time. As applied to exchange rates, this means that forward exchange rates are accurate forecasts of future exchange rates. The inefficient market view holds that prices of financial instruments do not reflect all publicly available information. Proponents of this view believe that forecasts can be improved by information not reflected in forward exchange rates.
Two main forecasting techniques are based on this belief in the value of added information. Fundamental analysis uses statistical models based on fundamental economic indicators to forecast exchange rates. Technical analysis employs a technique using charts of past trends in currency prices and other factors to forecast exchange rates. Many forecasters combine the techniques of fundamental and technical analysis to arrive at potentially more accurate forecasts.
Evolution of the current international monetary system
The Bretton Woods Agreement (1944) was an accord among nations to create an international monetary system based on the value of the US dollar. The system was designed to balance the strict discipline of the gold standard, which linked paper currencies to specific values of gold, with the flexibility that countries needed to deal with temporary domestic monetary difficulties. The most important features of the system or fixed exchange rates, built in flexibility, funds for economic development, and an enforcement mechanism.
Bretton Woods created the World Bank, which funds poor nations economic development projects such as the development of transportation networks, power facilities, in agricultural education programs. It also established the International Monetary Fund (IMF) to regulate fixed exchange rates and enforce the rules of international monetary system.
Ultimately, the Bretton Woods Agreement collapsed because it depended so heavily on the stability of the dollar. As long as the dollar remained strong, it worked well. But when the dollar weakened, it failed to perform properly. The Jamaica Agreement (1976) endorsed a managed float system of exchange rates -- a system in which currencies float against one another, with limited government intervention to stabilize currencies at a particular target exchange rate. This system differs from a free float in which currencies float freely against one another without governments intervening in currency markets. It within the system, some countries try to maintain more stable exchange rates by tying their currencies to another currency stronger currency. The European monetary system (EMS) was a complex system designed by the European Union (EU) to stabilize exchange rates, promote trade, and control inflation through monetary discipline.
P5 Identify why businesses operate internationally. Why would HG choose to operate
There are a variety of factors that have been driving the spread of globalization across industries. Although their impact and pace has varied according to type of industry, these have been the dominant triggers for change from local to global (or at least regional) industry structures.
The factors are as follows:
To build brand image
Access to scarce resources
Leverage core competences
Respond to competition
Too small home market
External initiatives to spread the product
To diversify sources of sales and supply
Globalization Of Competitors
Globalization of competitors is the first example of reactive reasoning. Many businesses are forced into international selling due to the competitive environment. While it might be terrific to stay the same size and just focus on quality, the problem is that the competitive environment creates situation where your competition continues to grow. So, if you do not grow and expand you will lose customers. Your customers will move to larger vendors that can offer lower prices ."One of the most common reactive reasons that prompt a company to go overseas is global competition. If left unchallenged, competitors who already have overseas operations or investments may get so entrenched in foreign markets that it becomes difficult for other companies to enter at a later time"
In addition competitors that are operating globally at a lower cost and that have market power available to them will have an advantage available domestically to them.
lessened in recent years as a result of trade agreements, which have led to increased exports, some countries restrictive trade barriers do provide another reactive reason that companies often switch from exporting to overseas manufacturing" If an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs.
When a company or a franchise finds it has problems expanding their business at home then they choose to seek expansion growth through the international markets. An example of this would be the McDonald's Corporation. McDonald's made the announcement of their plans to invest $2.1 billion in 1,000 new locations in 2010. This would make McDonald's have a "new life" in another country because of its declining growth in its domestic home market.
"In addition new markets abroad provide a place to invest surplus profits as well as employ underutilized resources in management, technology, and machinery. When entirely new markets open up, such as in Eastern Europe, both experienced firms and those new to international competition usually rush to take advantage of awaiting opportunities"
Resource Access And Cost Savings
Many companies choose operate from overseas because they are intrigued over the resource access and cost savings. "The availability of raw materials and other resources offer both greater control over inputs and lower transportation costs. Lower labor cost (for production, service, and technical personnel), another major consideration, and lead to lower unit costs and have proved a vital ingredient to competiveness for many companies. Usually just knowing the anticipation of shifting manufacturing production companies overseas will improve competitiveness at home.
In conclusions the main reason companies must go international is to be competitive. If your company does not grow then the competitors will grow and you will lose your customers. Your company has to be proactive and start exporting or importing to be more competitive in the global market.
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