International Business Environment - Example

International Business Environment Contents Contents 2 Executive summary 3 Introduction 3 Discussion 4 Answer 1b) 4 Answer 2d) 6 Answer 3e) 8 Conclusion and recommendation 9 References 11 Executive summary This report deals with the entry of a coffee chain named Coffee Bean in the developing market of China. The company is already existent in the United States of America and is a much valuable brand in the country. The report briefly describes the functioning of the coffee chain in the food and beverages segment of the United States and describes the opportunities and risks that may be encounter by the company while expanding its operations into the foreign market of China. The report is prepared to understand the complexities in the international business environment and to evaluate the factors which may be the major influencers of a company’s success and sustainability in its international expansion endeavours. The report is started with an introduction of the overall structure and with a short background of the company. This is followed by the discussion section which consists of three main parts that are aimed at understanding the business environment in China and the scope of the company in this new market. The findings of the report suggest that though the food and beverages segment of China is a complex and intensely regulated sector, yet the selected company may benefit greatly by entering into this new market segment because of the increasing number of opportunities in this market and because the food and beverages sector in China is expected to grow multiple times in the future years in terms of revenue generation and consumer volume. Introduction This report is prepared with the aim of analysing the international business environment by selecting a company that belongs to a developed market and which plans to enter into an emerging or developing market. A fictional company named Coffee Bean is selected for the report. The developed country chosen is that of the United States of America and the country in which Coffee Bean plans to expand its operations is the People’s Republic of China. The report would include a discussion regarding the trade patterns and investment activities in the Chinese economy with special attention given to these trends in the food and beverages segment of the country. This would be followed by a discussion regarding how the company can create competitive advantage in the new market. An evaluation of the governance of trade policies and systems by the international trade institutions like the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA) and the Europe Union (EU) is also done. The impact of the policies and regulations set by these international institutions on the functioning of the new company in the food and beverages market in China are also discussed. The political environment of China and the regulatory policies that may affect the operations and success of the coffee chain “Coffee Bean’ in this new market is also taken into consideration. The ways of mitigating the political and other external business environment risks are also analysed. The report is suitably concluded with recommendations that may help the CEO of the company to take his decision regarding the feasibility and profitability of the plan of the company to expand its operations into the Chinese market. Discussion Answer 1b) The economy of China is a developing economy which has many opportunities for new businesses. The foreign investors including the individual and institutional investors prefer China as the most feasible option for their investment purposes (Johansson, 2002). The trade patterns for the country are not stable but the economy seems to provide ample opportunities for foreign businesses to enter into the market. The major investments in China are carried out by the state owned entities which are generally controlled by the local governments. Sometimes over investments are noted in the economy (Floyd, 2000). The government of China has tried to internationalize the currency of the country Renminbi since the year 2000. In 2013, Renminbi has been recognized as the 8th most commonly traded currency in the globe. The investment climate in China has been modified dramatically after the political reforms were introduced in the country in the 1980s. After the introduction of the economic and political reforms the country has experienced higher inflows of capital investments from both Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII). Today, the foreign invested companies in China account for more than 60% of the total imports and exports in the economy (Hassan and Kaynak, 2014). The government of China has allowed foreign enterprises to manufacture and market a wide array of products and services in the domestic market and has also removed the restrictions that were there regarding the establishment of partnerships and joint ventures. As of 2014, the government of China grants a number of preferential tax treatments for the contractual ventures and wholly foreign owned subsidiaries in the country. The economy of China is a socialist market economy. Also, the economy is the second largest one in the globe as computed by nominal Gross Domestic product (GDP). The country is the largest exporter of products and services in the world and also the fastest growing consumer market in the world. The food and beverage sector of China is a dynamic sector which has been seeing major shifts in the recent years. Though China is a primarily tea loving country, yet some companies like Starbucks has been able to introduce the westernized culture of drinking coffee into the Chinese society. As such, the new company Coffee Bean should focus on following successful business models of coffee houses and try to take up strategies that are known to be successful in the country (Schuster and Copekand, 2002). This would ensure that the company is able to achieve competitive advantage. The number of competitors for Coffee Bean in China is limited because coffee is a less consumed product in China. However, of late, the people of China are showing more interest in taking up western flavours which can be seen as an opportunity for the new company to enter into this market. Answer 2d) The European Union (EU), the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) are the three largest international trade monitoring institutions that govern the trade processes and systems in countries across the globe. All the domestic and international companies functioning in the Chinese economy have to follow the policies and guidelines imposed by these three international trade institutions. These institutions also have specific rules and regulations corresponding to the food and beverages segment of China like all other industries in the country. The accession of WTO by China and the signing of the NAFTA by the country has made it necessary for all the domestic and multinational companies operating in this market to comply with the regulatory policies and global standards established by these institutions. (Source: EU SME Centre, 2013). The food and beverages industry in China is a strongly regulated industry sector. The regulatory systems in the Chinese economy pose several threats to foreign companies that would try to operate in the food and beverages sector of China (Alon, 2003). The regulations in the economy make it much difficult for companies which want to function in the market face many restraints and challenges for functioning. Following its WTO accession, China has remained committed towards the extension of the automatic registration mechanisms in the whole economy. The accession to WTO has led to decrees in the tariff rates for businesses in the country and has created more opportunities for foreign businesses in the various sectors of China (Hollensen, 2004). According to the rules set by the WTO, all the companies operating in China will have the right to export and import goods and services from and into the country (Lipman, 2011). This rule is also applicable for the foreign companies which have opened up their wholly owned subsidiaries or joint ventures in the country. After joining the World Trade Organisation (WTO) in the year 2001, the government of China has decreased the tariffs on a wide range of products and services which are imported into the country. However, a number of restrictions including labelling restrictions and hygiene restrictions still make the food and beverages market in China a difficult sector to operate, especially for the foreign companies. The enforcement of policies and regulations are often uneven and haphazard which makes it difficult for a foreign company to comprehend the ways in which it can remain fully compliant to the necessary rules and regulations. The market entry costs are high because mandatory certification acquiring costs as well as the cost of resources for functioning are high. These include product registration, product quality maintenance and labelling activities which require strict certification and standardization for any company whether it is from a domestic or foreign origin (Hennessey, 2004). The regulations in China often change without any proper notice given to the companies and as such accommodating to these changes in the regulatory requirements can be much expensive and time consuming. Answer 3e) There are a number of political risks and challenges that may be associated with functioning in the food and beverages sector of China. Registering a new company in the market of China is a tie intensive and complicated process. The political environment is such that, without the partnership with a local entity it becomes more difficult for a foreign company to enter into this market. Most of the food and beverages sector of China is dominated by the joint venture enterprises (Morrison, 2003). The only other opportunity for opening up a business in the country by a foreign company is through the establishment of the Wholly Owned Foreign Enterprise (WOFE). This system was allowed after the political reforms of the country and was strengthened after the WTO accession of China in November, 2001. The system of WOFE enables the foreign companies to hold 100% of shares in their business units in China. The food and beverages segment of China is highly regulated and additional licensing requirements need to be acquired for setting up the operations of a company in this market. For a company originating from a developed economy like the United States or the United Kingdom, it would be highly difficult to apprehend the complexities and intensive regulatory requirements for operating in the Chinese food and beverages sector (Terpstra and Sarathay, 2000). The setting up of a business in this segment needs at least 4-6 months depending on the individual requirements for Food and Beverages licensing. It is also estimated that for setting up a running and fully functional business in China, a foreign company would require at least a year (Lardy, 2007). Conclusion and recommendation The recent changes in the regulatory requirements in China have made it tougher for companies to gain profits from tax reductions in the country. Partnering with a company in the main areas of China may help to make the registration process faster and simpler and would also enable the transfers of dividends across the cross national borders of China more efficient in nature. Virtual offices of a company are far easier to and lesser expensive to operate and if a foreign company wants to expatriate the tax levels then it should ideally partner with a domestic company. Coffee Bean should remain focused on complying with the local as well as the international regulatory requirements for functioning in the Food and beverages segment of China. The management of the company should employ local people as a part of their enterprise in China which will ensure that the company becomes more acquainted with the needs, demands and regulations prevailing in the local market. Subsequently, the company should also take effective steps to understand the legal and regulatory requirements and to ensure that the products, supply chain, human resource management, marketing and all other business functions are in adherence to the global standards of operating in the food and beverages market. Therefore, the company should focus on the country specific regulations as well as the internationally accepted regulations that are applicable for the Chinese food and beverages industry. References Alon, I. 2003. Chinese Economic Transition and International Marketing Strategy. Westport, Connecticut: Praeger Publishers. EU SME Centre. 2013. The Food & Beverage Market in China. [Pdf]. Available at http://www.liaa.gov.lv/files/liaa/attachments/eu_sme_centre_report_the_food__beverage_market_in_china_en.pdf. [Accessed on 5th January 2014]. Floyd, D. 2000. International Business Environment. Journal of Management & Development. Vol.15 (5), pp.48-52. Hassan, S. & Kaynak, E. 2014. Globalization of Consumer Markets: Structures and Strategies. Philadelphia: Haworth Press. Hennessey, J. 2004. Global Marketing strategies, 6th Edition. Boston: Houghton Miffing. Hollensen, S. 2004. Global Marketing, 3rd Ed. New Jersey: FT prentice Hall. Johansson, J. K. 2002. Global Marketing: foreign Entry, Local marketing and Global Management, 3rd Ed. New York: McGraw Hill. Lardy, N. 2007. China: Rebalancing Economic Growth. Washington D.C.: Peterson Institute for International Economics. 2007. P Lipman, J. K. 2011. Law of Yuan Price: Estimating Equilibrium of the Renminbi. Michigan Journal of Business. Vol. 4(2), pp.101-102. Morrison, W. 2003. How Reform Worked in China. New Jersey: Princeton University Press. Schuster, C. P. & Copekand, M. 2002. Global Negotiations: Planning for Sales and Negotiations. Stamford: Thompson Learning. Terpstra, V. R. & Sarathay, R. 2000. International Marketing, 8th Ed. Stamford: Thompson Learning Read More