International Business Environment - Assignment Example

International Business Environment International Business Environment Executive Summary (Fictional Company) The Enterprise is an Automobile company, doing business since 10 years in the Europe vehicle industry with headquarters in Leeds, England. The company is planning is expand its business in India, which is a less wealthy state, but is an emerging market in the current time and possess high scope for both low cost and high cost vehicles with longer life cycles. With the huge Indian market and high population rate, the scope of vehicle companies is becoming strong in the country and can provide a sound platform for the company to enter into the Asian market. Before importing labor services or exporting finalized goods in the Indian market, the differences in their national intuitional and social framework have to be considered to decide a proper strategy for meeting the environmental needs of their business market (Griffin & Pustay, 2010). The aim of this report is to get an insight of opportunities and threats that exists in the Indian automobile industry, and strategies that should be adopted to make a place in the Indian market. Introduction The world business trends and customs have significantly over the past couple of decades and that is because of variation in the global economy. Industries are motivated and also forced sometimes by the internal and external market environment, to expand their business globally to sustain their economic growth and reputation. The term International Business can be best defined as businesses which cross the national borders for selling and purchasing and look for expansion options in the international world. Initially, the concept of international business environment was limited to selling outside states or country. However, with the boom of globalization, companies realize that they can take purchasing of goods and services from other countries to improve their cost efficiency and product quality (Ajami & Goddard, 2006). The Absolute Advantage theory is very relevant in this respect which suggests that each country would have some absolute advantage over other countries in one or more domains, which can be utilized by industries in other countries to take a competitive advantage over others (The Gemeni Geek, 2013). However, there is always a dark side of the picture, and in international business environment it is the cultural and political challenges and risks that exist for companies that are planning to target the international market (Ajami & Goddard, 2006). A wine manufacturing company, for example, has great limitations to expand in countries where there are heavy tax duties on wine import, or in countries where the competition is the biggest hurdle to conquer. Therefore, the environment setup in the international business is a complex one, comprising of absolute cultural, social and governmental values and laws. This paper aims to provide a detail account of what opportunities and threats arises for an industry in a developed country to expand in a less developed and culturally diverse country (Hill, 2010). National Institutional System of India Institutional system of a country defines the business framework and environment of the region. In regions where the global market is emerging, it can be sated the National Institutional System is based on Neo- Liberalism. This defines that the ownership patterns and the extent to which the government is involved in the international business. The report of (Friedman, 2009) illuminates that in the emerging markets the distribution of wealth and resources are done on a broad and diverse scale. This gives more choices for foreign investors to invest in that country or state (Friedman, 2009). Moreover, many researches highlights that neo-liberalism can be seen as a positive initiate for privately owned companies, as governmental influence from the business market is decreased (Griffin & Pustay, 2010). Comparing the Economic System Comparing the institutional system of UK with that of India, there are certainly great differences that are visible and pivotal to explore and design company’s strategies accordingly. Reviewing the economic system of the UK, it is much stable and balanced as compared to that of the Indian economic system. The labor and offshore costs in any country in he UK is far more than that in India and that can be taken as the opportunity of off shoring for the company (Ghemawat & Reiche, 2011). (Casson & Lundan, 1999) studies the changing institutional framework of the Asian market and India in particular. The labor market of India is more extensive than any other in the entire world, which is open for foreign private companies. Moreover, the technological system is also grooming in the country which will ensure satisfactory labor work and quality maintenance of the outsourced services (Casson & Lundan, 1999). Currently, the financial deregulation and the increasing share of foreign investors in the Indian stock market are serving in its global emergence. The current economic system in the UK is not entirely deregulated, due to the privatization laws of the state. Therefore, entering into the economic system of India would help the company to generate more revenue, which can then be implied to strengthen the UK market hold (Sinha & Sinha, 1995). Cultural Differences between UK and India The social and cultural differences in India have the tendency to become the risk factors for the company. Contrary to the UK long term benefit approach, the Indian culture practices the short term benefits of a product (Gesteland & Gesteland, 2010). Researches also highlights that in terms of vehicles, cost efficiency is preferred over fuel efficiency, which depicts that people in India, are more concerned with the visible and short term benefits of products (Gesteland & Gesteland, 2010). This requires the company to modify the current production line of their automobiles, which currently focuses on fuel and energy efficiency. Besides this, the Indian community is divided into status categories, where the elite class is considered inspirational icon and influences the middle class people. For this reason, the company has to fist target the high class people for brand exposure with the luxurious image of the company’s vehicles and then have to target the other people, by introducing the low cost models of the company (Hill, 2010). Impact of Cultural Difference in Indian Market The increasing demand of large seater passenger cars highlights their family associated culture, where one family carries a single car. This is quite different from the individualistic culture in the UK, where each member of the family owns a separate car. This poses a challenge to the existing car design of the company, whose width and height are designed to limit the material cost, and have a capacity of five persons. Therefore, the company might have to change the design and structure of its automotives, so to fit in the need description of the Indian market (Car Dekho, 2013). Inter-Trade Relations By far, the trade relation between the UK and India is the strongest relation between any two countries of the world, and this is because of the balanced trade between these nations. India being a democratic country, has given great opportunities to European companies to invest and trade in the Indian states. Till early in the 20th Century, Indian trade policies have several restrictions on the import of goods from other countries. Being rich in natural resources and man power, it has sustained as a self- sufficient country for many years (Gesteland & Gesteland, 2010). However, as per the demand of globalization and need for enlarging the export sector, the Indian government has eased trade policies for international investors. The UK private and joint venture companies have taken the most advantage of Indian business market since then and has allowed Indian companies to expand in the UK countries (New Business, 2012). Trade Pattern and Trends Due to the bilateral trade relations between these two, many of the trade tariffs and restrictions in UK and India have been molded for each other. Economist reports on the UK-India trade relations show that, both has played a vital role in the economic growth of each other over the past fifteen or more years. The bilateral trade between these two entities has brought more than £16.4bn in the UK in 2011, which was around £13bn in 2010. Moreover, it has also brought £8bn to the Indian economy. For this reason, the government of India is encouraging foreign countries to do business in India with little or no barriers (British High Commision, 2013). The automotive trade relation between UK and India has also grown substantially over the years. Till the start of the 21st Century, India was a high importer of UK automotives and possessed great opportunities for the emerging automotive brands. However, Indian car manufacturers like Tata Motors, Mahindra Limited and Hindustan Motors have also acquired a large market share, in India and in the UK countries. For this reason, the ratio of import in the automotive sector has not increased much in India, as compared in the other sectors of fashion products, aircrafts and jewellery (Vogg, 2012). This exists as a trade limitation for the company to enter into the Indian automotive industry. For this factor, the company can make profit sharing deals with the government or of job opportunities by opining its franchise in India. The optimistic fact about the UK’s automotive sale in 2012 is its highest sales than ever. India has proved to be one major importer in the last year. Many UK companies combined their projects with the Indian companies to establish a win-win approach. This gives options of exporting raw material to Indian companies, or utilizing their manpower and technology with the company’s automobiles to expand collectively (Marsh, 2013). Protection Measures of Trade and Foreign Investment When businesses expand to international trade they have to keep in mind the protectionism status of the region they are moving in. India being an emerging market is an opened forum for business (Mcentire, 2012). The country allows businesses to step in, but being an emerging pool there are certain barriers of trade and protectionism too which companies have to face at the very first occasion. According to the three-stage model of international expansion, there are different levels of organization expansion. Each level reduces the intensity of trade barriers and so as protectionism which is highest at the first level of trade (Contractor et al., 2003). The Indian authorities have been consistent in internalizing the Indian automotive sector. This is to empower the economy, the industry and the stock market of the country. In that respect, the Government has kept a liberal point of view for direct foreign investment (The World Bank, 2011). It has kept the flexibility and openness to invite new firms to expand and to contribute to their economy. There came different phases in the Indian trade policies. The phase of (1980-90) when taxes were high just to minimize the international trade competition, and the phase of (1990) when regulations were there just to make the firms more self dependant (The World Bank, 2011). Today the scenario has changed as the market has shown a lot of worth for innovative and technological firms. There are different segments of Italian brands (Fiat) and Japanese brands (Nissan-Mitsubishi) found in Indian market, which shows the diversity and flexibility of the Indian trade legislation (The World Bank, 2011). Since the last 10 years, there is a remarkable shift seen in the Indian trade policies and practice. The businessmen have started to benefit consumers more than protecting local producers (Mcentire, 2012). This is because the tariffs, import duties and trade tolls are reduced, which inevitably favors international business allocators (Mcentire, 2012). Bilateral trade agreements of India and projections of direct foreign investments are further evidences that show the flexibility of the Indian trade policy (The World Bank, 2011). In eyes of the liberal business man, protectionism never favors countries in economies of scale, in-fact it derails the system if kept for the large aspect of time. Protectionism is damaging and can surely not be the secret of success for the emerging markets “India” (Plummer, 2012). The trends are globalized and so as the international framework in Indian automotive. This is to make the business ocean spreading and to make the Indian market a podium for trade, investment and expansion (Mangaldas, 2009). Within the Indian trade legislation there are two methods by which companies can bring their investment (Mangaldas, 2009). First is the FDI method (Foreign direct investment) which is when the company is entirely on its own, and the second is FVCI method (Foreign Venture Capital Investment) when the company is looking for a merger within the country. The methods are comprehensive and will give a clear way for our company to get established. The company being a well reputed automobile firm will adopt the FDI route of investment. The route is adjustable as it will have low tariffs, low tax rates and less government pressures to appear into the market. These are all international trade barriers which need to be managed at the start of the SHM expansion (Mangaldas, 2009). Analysis of the Exchange System between UK and India Assessment According to the empirical evidences, local exchange trading systems are community oriented. Such systems are for the benefit of the National exchange and work on the exchange of goods and services for the development of economics (Krueger, 1983). The local exchange trading system operates to domestic level, where core aims are to stabilize the local bodies and their income generation process. There are mainly two types of exchange systems, floated systems and fixed systems (Krueger, 1983, pp. 123). The floated systems allow fluctuation of the local currency with respect to the foreign exchange market, while fixed systems deduce the shocks as they make the currency highly independent and free of foreign market situation. Indian exchange regime is market driven and highly market determined which is because of the regulations adjusted by the Level Committee on Balance of Payments, and The Reserve Bank of India (Dua & Ranjan, 2010). Though the floating market of India project risks and uncertainty for new enterprises whether they are in textile, consumer goods, retail or automotive, but due to the floating feature the market holds a succession figure too (Dua & Ranjan, 2010). According to Mundell-Fleming Model, an economy cannot sustain with a fixed exchange system, especially if it is an emerging market like “India” for new and innovative sectors “automobile” (Wang, 2009, pp. 140-142). The model describes “trinity”, three forces that dysfunction the country’s market status. Such forces are the fixed exchange rate, free capital movement and independent monetary policy, which are highly damaging when the market is on to the progress (Sarno & Taylor, 2003, pp. 99). Risk Management India holds a flexible but a risk floating monetary policy. The exchange rates are market driven and are parallel to the risk of the foreign market situation (Mangaldas, 2009). This shows that if the price of oil gets increased internationally or there are international energy shortages, it will increase our operation costs (production-distribution cost) in India (Peng, 2008). This requires a comprehensive risk control tactics that would be made by our specialized risk managers (The World Bank, 2011). Apart from Indian floating exchange system, UK is a semi-fixed exchange system. The system has periodic fixations in the exchange rates but there are frequent times when the system becomes floated. This indicates similarities in both the systems which will help our specialists to devise a profit driven strategy (Dua & Ranjan, 2010). Analysis of the Risk in Exchange System and Measures to Control According to a study, the exchange rate risk is the risk that prevails in the floating exchange system, and which is due to the exchange rate changes in the system (Sivakumar & Sarkar, 2008). The changes in the rates brings two types of risks and that are risk of the devaluation of currency in which the enterprise is operational and the risk of devaluation of enterprise resources which is due to the dissolution of the national currency status (Sivakumar & Sarkar, 2008). Actually, the intensity of risk depends upon the economic exposure or spectrum in which the business operates. The company being a franchised operator in India will have the national economic exposure. This means that the enterprise will take all the risk which a domestic operator takes in India or a local automotive manufacturer takes to manage. India being a floating exchange system will bring international threats, which later on will affect our local operations in India (Peng, 2008). Operations of procurement, production, inventory, supply and distributions all will be affected if there are threats on the foreign exchange system. The changes, threats or risks could be like raised oil prices, crash of an international stock market or a long term recession in any international sector, will have certain direct or indirect effects on our company operations (Papaioannou, 2006). This requires a strategic and a vigilant approach from our specialists to monitor macro level changes, foreign exchange changes and the risk that have damaging for key business operations (Bragg, 2011). There are different methods to manage risk in a changing exchange rate situation. The Fisher effect states that when exchange rates are modified then interest rates can be equalized to balance the status of the exchange system (Bragg, 2011). This is done by domestic authorities in order to divert threats from the local manufacturers. India being an emerging automotive market holds the tendency of interest rate modification, as Government knows that this is must to strengthen the local body manufacturer. Meanwhile, if there are fewer concerns shown by the Governments, firms have alternate routes to control the international fluctuations (Sivakumar & Sarkar, 2008). Price tactics is one of the methods which firms can utilize to control the exchange system risk. The method is effective when there is a high rate of inflation and also when the authorities are showing less interest to benefit the local manufacturer. The company holding an extensive demand in India can utilize price tactics to manage risk if posed by the exchange system (Peng, 2008). By setting right prices, right in terms of the risk evaluated and in terms of the market situation will effectively control and balance the threat of the change exchange rate situation. According to the Power Parity Model, firms can lead to price offsets which are tools to manage international exchange risks (Sivakumar & Sarkar, 2008). Risk is detrimental if it is not managed at the right time and with a right effective strategy. To develop a strong risk management strategy, the specialists should be highly pro-active. They should be well prepared, well engaged both in terms of the macro and micro level of business operation (Bragg, 2011). These are fundamental rules of business especially when enterprises are expanding on the international business domain. The company being a market seller brand knows the tactics to meet risk and its components (Peng, 2008). There are highly trained professionals who can access the Indian market risk and its threats on the long term basis. Employee’s potential and personal skill are pre-requisites of risk management, and this is what we find in our staff quite persistently (Peng, 2008). Corporate Social Responsibility Concept It has been noticed that firms are part of societies. They have a relationship with the society and its system whether they operate on smaller scale or large. It is because firms take origin from societies so they need to return them back as well in the form of corporate social responsibility (Vicianova, 2011). In European district organizations have close associations with societies, their systems and their cultures. The firms understand that they are part of the system and hence to stabilize it they have to come up on the notion of corporate social responsibility (Vicianova, 2011). Applying CSR in Indian Automotive Corporate social responsibility is a management concept, a concept that supports organization on diversified business environment. In Indian automotive sector, the firms are expected to bring a high implication of corporate social responsibility. The Indian society just as European district expects that automotive firms are highly sustainable. Sustainability in terms of economics, finance, society and environment is expected from firms operating at the automotive side (Vicianova, 2011). This is beneficial for both the firm and also the society in which it is operating, because when organizations sustain on resources, they have viable opportunities present for the large aspect of time. Recycling and sustainability are highly accentuated especially when firms are on automotive side and going to apply corporate social responsibility (Vicianova, 2011). Conclusion In a nutshell, the company can plan to expand its business on the Indian soil, as the opportunities are way stronger than the challenges there. Since India being a thick populated country with a growing economy currently, there is enough room for foreign companies to invest and bring business in India. However, the competitive automotive market in the country would ask the company to modify its cost and quality standards, as the automobile need description of the Indian market varies largely from the UK market. Also, establishing a good reputation in India, the company’s future aim to target other Asian markets of Pakistan and Srilanka would also be fascinated. Recommendation Considering facts of Indian market growth and the risk to opportunity ratio in the country, it can be recommended that the company should move ahead with the plan of going international by selecting the Indian soil. Cheap labor, low government taxes and a flourishing market for automotive in India makes it the best site to ensure speedy growth in revenue and reputation. The advanced and hi-tech machinery can be altered with less superior technology that can meet the quality and cost effective need of the country. Moreover, the company can first introduce its older models in the Indian industry to test and visualize the response of the people. By this technique, the company would be able to forecast its future in its industry without spending more in its inventory and designing procedures. Therefore, the step to move towards Indian automotive industry is affirmative. List of References Ajami, R. & Goddard, G., 2006. International Business: Theory and Practice. New York: M.E. Sharpe, Inc. Bragg, S., 2011. Risk Management: Foreign Exchange. New Jersey: John Wiley & Sons. British High Commision, 2013. India-UK relations. [Online] Viewed at: http://ukinindia.fco.gov.uk/en/about-us/working-with-india/india-uk-relations [Accessed 21 January 2013]. Car Dekho, 2013. Maruti Eeco. [Online] Viewed at: http://www.cardekho.com/carmodels/Maruti/Maruti_Eeco [Accessed 21 January 2013]. Casson, M. & Lundan, S., 1999. Explaining International Differences in Economic Institutions: A Critique of the "National Business System" as an Analytical Tool. International Studies of Management & Organization, 29(2), pp.25-42. Contractor, F., Kundu, S. & Hsu, C., 2003. A Three-Stage Theory of International Expansion: The Link between Multinationality and Performance in the Service Sector. Journal of International Business Studies, 34, pp.5-18. Dua, P. & Ranjan, R., 2010. Exchange rate policy and modeling in India. Research Report. Mumbai: Development Research Group. Friedman, M., 2009. Institutional and cultural influences on international human resource management. Research Report. London: International and Comparitive Human Resource Management. Gesteland, R. & Gesteland, M., 2010. India-Cross-Cultural Business Behavior: For Business People, Expatriates and Scholars. Oxfordshire: Narayana Press. Ghemawat, P. & Reiche, S., 2011. National Cultural Differences and Multinational Business. Research Report. Chicago: Globalization Note Series IESE Business School. Griffin, R. & Pustay, M., 2010. International Business: A Managerial Perspective. London: Pearson-Prentice Hall. Hill, C., 2010. International Business: Competing in the Global Marketplace. New York: McGraw-Hill. Krueger, A., 1983. Exchange-Rate Determination. New York: Cambridge University Press. Mangaldas, A., 2009. Doing Business in India. Research Report. Hyderabad: Lex Mundi. Marsh, P., 2013. UK Car Export Drive Industry Survival. [Online] Viewed at: http://www.ft.com/intl/cms/s/0/579a5da2-6097-11e2-a31a-00144feab49a.html#axzz2Ibo81ovk [Accessed 21 January 2013]. Mcentire, R., 2012. Doing Business in India. Research Report. Washington: US Commercial Service. New Business, 2012. The benefits of trading in India. [Online] Viewed at: http://www.newbusiness.co.uk/articles/travel-advice/the-benefits-trading-india [Accessed 21 January 2013]. Papaioannou, M., 2006. Exchange Rate Risk Measurement and Management. South Eastern Europe Journal of Economics, 6, pp.3-19. Peng, M., 2008. Global Strategy. Singapore: Cengage Learning. Plummer, R., 2012. Protectionism: Is it on the way back? [Online] Viewed at: http://www.bbc.co.uk/news/business-18104024 [Accessed 21 January 2013]. Sinha, T. & Sinha, D., 1995. Financial Deegulation in India. Research Report. Sydney: Bond University Bond University. Sivakumar, A. & Sarkar, R., 2008. Corporate Hedging for Foreign Exchange Risk in India. Research Report. Kanpur: Indian Institute of Technology. The Gemeni Geek, 2013. What are Various Theories of International Business? [Online] Viewed at: http://www.thegeminigeek.com/what-are-various-theories-of-international-business/ [Accessed 21 January 2013]. The World Bank, 2011. India: Foreign Trade Policy. [Online] Viewed at: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPINTECOTRA/0,contentMDK:20592520~menuPK:579454~pagePK:34004173~piPK:34003707~theSitePK:579448,00.html [Accessed 21 January 2013]. Vogg, E., 2012. The Indian Automotive Industry. Research Report. New Delhi: International Business Development International Business Development. Read More