Challenges Faced by International Firms in Asia and Their Response to These Problems - Research Paper Example

MULTINATIONAL BUSINESS FIRMS IN ASIA: CHALLENGES AND STRATEGIES USED TO OVERCOME THEM Table of Contents Introduction …………………………………………………………………………pg 2 2. Challenges faced by international firms in Asia and their response to these problems… ……………………………………………………………………………………………pg 3 3. A case study of a multinational firm doing business in Asia: BHP Billiton…………..pg 7 4. Conclusion……………………………………………………………………………..pg 9 5. Bibliography…………………………………………………………………………pg 10 MULTINATIONAL BUSINESS FIRMS IN ASIA: CHALLENGES AND STRATEGIES USED TO OVERCOME THEM Introduction There are several reasons that lead to the need for firms to spread their wings beyond the home base and seek markets abroad. The reasons why firms establish bases in foreign countries are myriad. It might be in search of new markets if the home ones are saturated or if competition has become too stiff. It might be in a bid to seek natural resources that have been depleted in the country of origin or it might even be to capture potential and as yet untapped markets. Most Asian countries have only come to be recognized as economies with potential in the past three decades or so. The chief attraction for foreign investors has been the low costs of production and a large consumer market locally. However, there are also challenges that these international firms face while attempting to penetrate the Asian market with a major stumbling block being the cultural differences which are felt even in the business world. These advantages and disadvantages shall be examined in detail. Along with the strategies that international firms apply to benefit from the former and cope with the latter. A case study shall then be done with one Australian firm, BHP Billiton. Challenges faced by international firms in Asia and their response to these problems One of the problems of multinational companies in Asia, among many, are the “long, thin arm” problem, the assumption that it is adequate to think globally while acting locally and of course the absence of cross border integration in Asia. For the multinational companies to remain relevant in an increasingly competitive scenario that is now the face of global commerce (Williamson, 2004). The political stability within the country that a foreign investor takes interest in is crucial. When there is civil unrest or war, then the risks are raised sometimes to a point that the business venture is not worth undertaking. The government plays a major role in whether the investor in creating ambience to attract investor since it is the government that formulates policies on trade and other factors that influence trade. An example of how a government can indirectly influence trade is the action taken by the Chinese government in conducting land reforms. For years, the Chinese peasants have been agitating for land reforms that will make them land owners and it has only been of late that the Chinese government has looked deeply into the matter. Just the anticipation of the revision of land ownership has had a positive impact on the Chinese economy, a ripple effect that has been felt even by foreign firms (Orlik & Rozelle, 2008). One of the reasons why firms were eager to establish business within Asia was that labor costs were comparatively lower in light of their countries of origin. This was especially true for industries where human labor is required and that is a factor that worked in BHP Billiton’s favor. However, over the years the wages paid to laborers has steadily been on the rise. According to a survey done by the Japanese External Trade Organization (JETRO) in 2008, labor costs are rising with China having the highest increase, a 43.1% rise from the previous year. Another deterrent for international firms in china is that of dealing with underdeveloped and inefficient legal systems as well as inadequate protection of intellectual property rights (JETRO, 2008). There is, according to the JETRO 2008 survey “lack of clustering or development of related industries" in Asian countries and a poor infrastructure, with India and Vietnam ranked as the ones most severely affected (JETRO, 2008). Risks that come with tax also acts as a restraint for multinational firms in Asia with China being the first with highest tax-related risks. The Chinese government has tried to counter this by having a different taxation system for firms with foreign affiliations. The survey also indicates that firms found India’s taxation system as being the most complex (JETRO, 2008). The feature of the Asian market that encourages foreign firms is that labor, though the cost of which has been rising, is still relatively cheap. When Western multinationals first came to Asia, they were impressed by the low cost manufacturing operations that were presented by the continent. Not only was the skilled labor cheap and readily available, but the cost of running the manufacturing plant in general was significantly lower than their home countries. Soon, many multinational companies established manufacturing and operations centre in the low cost location. For others, they were attracted by the expanding Asian market and they established sales and service units in Asian location. However, all these entrants into the Asia continent established centers that would serve as extensions of their global activities within the multinational (Williamson, 2004). Another feature that foreign firms found attractive was the availability of a large, local consumer market especially in China which has a population of over one billion. India was credited with having the highest level of education which makes it an easy target for computer software and other such computer technology (JETRO, 2008). Garry Emmons (2005) states that though globalization has made our world seem exceedingly small, with faster communications technology and international relations at an unprecedented scale, there are still major differences between cultures that lay beneath the surface of homogenization. These, differences present a challenge for marketers. Another challenge that can face western multinational organizations working in Asia is that of being in a different cultural environment. According to Emmons (2005), there are subtle cultural differences between the eastern and western ways of doing things that may seem small and almost insignificant but greatly influence the workplace atmosphere and output. Emmons (2005) points out that while the west puts more emphasis on individualistic values and achievement, this is quite contrary to the approach adapted by the east where a more communistic approach is adopted. Again, he says that employee-boss relations have to be delicately handled since it is a disgrace to lose face in public. In the east, respect for those in authority is placed highly on the scale of values and an employee should never forget his place. For Australian nationals working for the first time in Asia and who may not be conversant with these subtle and unspoken social cues, they may unknowingly offend co-workers and create hostilities at the workplace. Emmons goes further to say that as a sign of trust and goodwill; Asian companies uphold handshake deals, where terms are agreed upon even before the official signing of contracts (2005). The solution, according to Emmons (2005), lies in the creating common ground for multi-national firms to work with. he points out that it is imperative for multinationals to adopt these common grounds if they are to be successful. Some of these common grounds are taking up issues on human rights and environmental conservation. Such issues determine how the organization runs. Other features that international organizations need to adopt are such as the ability to adapt to a new environment, being open-minded and receptive of new ideas, fostering creativity and innovativeness as well as the organization learning from the country where it has established itself. Emmons also notes that successful international firms encourage greatly intrapreneural activities even in the face of risks (Emmons, 2005). The hallmark of a true international firm, Emmons stresses, is the ability of employers and employee, despite outstanding cultural differences to strike a common ground and vest their energies together to bring out the best results. A company has to come up with a style of management that it deems most appropriate to that particular working environment and since companies are profit-oriented, the management methods applied should work with this singular focus in mind (Emmons, 2005). A case study of a multinational firm doing business in Asia: BHP Billiton The issue of culture is one that is faced by any firm venturing into foreign territory. BHP Billiton has had to adapt by learning how to react to local culture and even incorporate it in the style of management. Tipton (2007) takes note of the fact that Asians generally have a very different approach in doing things as compared to the west. When it comes to the running of their businesses they employ an almost military approach and viewing business transactions in terms of who wins and who loses. It is interesting to note that many Asian executives make a point of reading military classics such as ‘The Thirty Six Stratagems’. The attitude they adopt towards business is almost as if they were going onto a battlefield. Tipton (2007) carries out an adept comparison of the management methods used by firms in Asia. He points out that with time and rapid globalization; Asian firms have had to make adjustments in the methods of management. One of the challenges that BHP Billiton has had to deal with is that of the widespread notion that their products are of an inferior quality if compared to those of the United States. Whereas this stigmatization may be baseless, it still delineates consumers from purchasing the firm’s products. BHP has countered this by carrying out a marketing campaign that is focused at branding itself as a world class company that puts high quality goods onto the market (Ramesh & Ulrich c2000). Another challenge has been the lack of integration between Asian countries. There are great disparities between the Asian countries whether on economic or cultural fronts are enormous. While some Asian countries such as Japan and China are considered amongst the world’s most powerful economies, others such as Colombia and Vietnam are still developing. This difference makes for a non uniform market sector that limits what could have been a very wide continental market. The fact that Asian, markets are more integrated with the That the approach used in running an international corporation by BHP Billiton is successful speaks for itself. BHP Billiton is currently the world’s single largest mining company. The profit for turnover gained by the company in the fiscal year 2008 stood at a staggering $US 13.59 billion (Sharples, 2008). What has really worked in the favor of BHP Billiton is the current rapid economic growth of China that has called for the manufacturing of steel in vast amounts. There are constantly structures being put up. Even the developing countries within Asia are a ready market for BHP Billiton steel. Though there has been a decline in the overall Asian economy, the Chairman of BHP Billiton, Marius Coppers, has a positive outlook that this will not greatly affect their sector (Sharple, 2008). Another advantage that BHP Billiton has is that the mining corporation has access to petroleum, iron ore, coal, manganese, nickel, copper, aluminum and diamonds, all which are essential to the steel industry. They do not rely on an external party to provide them with raw products hence this cuts down on production costs (Sharple, 2008). Conclusion The markets in Asia have shown a steady growth over the years and it looks like there are greater developments in the pipelines. For foreign investors, this is good news. However, foreign firms must recognize and anticipate the challenges that come with investing in Asia. These challenges, beyond that of culture and lack of Asian integration, have been made more complex by globalization. A successful foreign firm must thus have a clear outline on how to keep up with the changing face of the international business platform as it is shaped by changing global trends. There is the challenge of succeeding within the less competitive yesterday conditions as opposed to adjusting to suit the needs of today is high. This is a dangerous line to tread because there has arisen as new breed of Asian multinationals, which have risen to the occasion and embraced inter-nationalization wholly. Multinational companies can excel beyond their home tufts as can be seen in the stellar example of BHP Billiton, only by being able to see opportunities, exploiting them, being able to adapt and still staying steps ahead of the competition. Bibliography Emmons Garry (July, 11, 2005). The New International Style of Management. Working knowledge, Harvard Business School. . Last retrieved on 3rd December 2008 from http://hbswk.hbs.edu/item/4893.html Harvard Business School (2004). What the New Asia Means for Multinationals. Japanese External Trade Organization. (March, 6, 2008) Results of Survey on International Operations of Japanese Firms. Orlik T & Rozelle S (2008). Chinas Land Reform: Speeding the Plough Sharples B (September 17, 2008). BHP Asia Still Hungry Herald Tribune September 17, 2008. Tipton B.F (2007) Asian Firms: History, Institutions and Management. Edward Elgar Publishing. Ramesh A & Ulrich (c2000). Achieving financial stability in Asia Paris: Development Williamson P. J. (June, 28, 2004). What the New Asia Means for Multinationals Working knowledge, Harvard Business School. Last retrieved on 3rd December 2008 from http://hbswk.hbs.edu/item/4893.html Read More