Influence of International Business on the Revenue of an Organization Entering New Markets - Term Paper Example

Business Executive Summary Industrialization as well as globalization is regarded as the catalyst for improving the prospects of international business. Numerous multinational organizations get fascinated towards the concept of international expansion and it increased the profitability and market demand of the products. Moreover, the customer base and reputation of the new entrant also enhanced significantly, thereby, augmenting its dependency and reliability within the minds of the target mass. This assignment spotlights the influence of international business over the revenue and position of an organization entering new markets. Along with this, it also highlights varied types of issues such as political risks, exchange rate regimes as well as the impact of the rules and regulations of the nation. The researcher has also tried to focus the ways through which the above mentioned issues may be mitigated so as to maintain the operations in an effective way. However, failure to tackle such types of issues in an accurate way may prove problematic for the organization in the long run as compared to many other rival contending players. So, it may be revealed that, organizational functioning and country regulations are inter-dependent and need to be followed accurately to attain best results. Table of Contents Table of Contents 3 1.0 Introduction 4 1.1 Overview of ABC retail 4 2.1 Impact of national institutional systems on ABC retail while entering China 4 2.1.5 Labour market of US and China: 6 3.0 Exchange regimes 7 4.0 Type of political risks in China 8 5.0 Recommendations 10 6.0 Conclusion 10 Reference list 11 1.0 Introduction With the dawn of industrialisation and globalisation, the trend of international business enhanced and became more popular. Along with globalisation, radical alteration in technology also propelled the growth of international business of the organisations. Extensive competition in the domestic markets forced the organisations to look beyond the home market for inventive opportunities. However, removal of the trade barriers as well as inflow of FDI investment also acted as a boon for the multinational enterprises to increase the trading activities. So, the rules and regulations of the international countries also need to be followed by the organisations in order to maintain its operations in an effective way. This assignment stresses the national institutional, exchange rate regimes issues as well as political risks faced by an organisation, while entering an international country or market. In this assignment, the selected country A is US and the country B is China and the industry is retail. The chosen company is fictional in nature named as ABC retail. 1.1 Overview of ABC retail ABC retail is a departmental store situated in the Florida of United States. It is established in the year 2009 with the founding head Charles Turner. It operates successfully in the segment of retailing with a wide range of grocery products at lowest cost. This helped the organisation of ABC retail to increase its presence and position in the market as compared to other contending players. Its total revenue is $234 million and net income is $100 million approximately in the year 2014. It maintains its online business through: www.ABC.com. 2.0 Issues faced: 2.1 Impact of national institutional systems on ABC retail while entering China At this age of transformations, a decade age, China attained a significant economic growth and expansion. The prime cause behind its success was its policy to join hands with World Trade Organisation (WTO) to increase the scope of foreign investment. In this regard, Hill (2010) mentioned that the opportunity of retail sector flourished in the markets of China mainly after opening its fiscal gates to the outside globe. The factors or national institutional systems affecting the retail sector in China and US are presented below: 2.1.1Per capita income: The retail market of China has been booming and expanding with rapid leaps and bounds in the recent decade and so it offered wide range of prospects to the foreign investors. As a result, the retail sales of China increased to ¥12.5 trillion ($1.8 trillion) by 2009 and it is mainly due to the improvement in the per-capita disposable income of household individual. In urban regions, the per-capita disposable income improved by ¥17,175 and it signifies an increase of 9.8 percent (Gartside, 2010). So, the living standards offered a considerable change over the thinking power of the individual towards satisfaction of the basic needs. Therefore, the purchasing power of the citizens of China enhanced over the foods products rather than others. Approximately, 42.0 percent has been spending by the rural household citizens and 37 percent by the urban individual (Griffin and Pustay, 2010). This acted as a boon for the retail organisations and hence its total sale and growth rate increased by a considerable extent as compared to US as shown below: Figure 1: Retail industry Growth (Source: Gartside, 2010) Improvement in the disposable income of the populations in US by an average of 4669.82 USD Billion led to the augmentation in the consumption rate is also quite low (Peng, 2011). Hence, the scope of improvement of the profitability in US retail sector is considerably lower as compared to China. Thus, in order to augment the sustainability and prosperity, ABC retail tried to pierce the market of China and it attained a significant growth. 2.1.2 Gross domestic product (GDP): Another effective cause that influenced the growth of retailing is GDP improvement. The GDP growth in China augmented from 2268.5 in 2006 to 10360.2 US dollars in 2014 that amplified the scope of success of the retail firms (Gartside, 2010). On the other hand, the GDP rate of US is quite lower than China and so, most of the reputed retail firms desired to move towards Chinese markets. This might result in an improvement of the profit margin and total revenue of the retail players, despite of extreme domestic market saturation of US (Proff, 2010). 2.1.3 Financial Institution of US and China: The financial institution of China always tries to offer credits to the organizations for both voluntary as well as commercial purposes (Child et al. 2009). This may prove effective for the management of ABC retail. On the other hand the financial institutions of US is entirely based on Capital base (stoke/shares) and so the banks try to offer the loans on the basis of the total capital amount (Gartside, 2010). So, the organisation had to face varied types of problems in regard to monetary requirements, as the capital amount may not fulfill the loan amount. On the contrary, ABC retail may easily attain the requisite amount as loan from the institutions of China. 2.1.4 Nature of the State: US and China: The US is a democratic state and China is a sovereign state governed by the communist party entirely. So, it is quite easier to implement any sort of decisions as compared to US nation (Peng, 2011). 2.1.5 Labour market of US and China: The cost of labour in US is quite low as compared to China and this acted as a problem for the ABC retail as the rate of profitability reduced considerably (Gartside, 2010). 2.1.6 Educational system of US and China: The education system of US is operated by federal government but in China, the education is operated by state public teaching system. As a result, the skills and knowledge of the individual of China is effective than US (Gartside, 2010). 2.1.7 Foreign Investment: Foreign investment enhanced the scope of trading activities and so the export and import activities increased. Hence, the profitability of the retail players segmented significantly within the region of China despite of others. Such a strategy was introduced by China in order to enhance the scope of trade. However, in case of US, it is limited to an average point. This is also another important point that attracted the ABC retail towards China. Therefore, the total revenue of ABC retail may get enhanced in China rather than in US. 2.1.8 Reduced government restrictions: To improve the trade activities, the government restrictions in China reduced significantly, just after the joining to WTO. Moreover, the international economic cooperation also increased its multilateral trading system and augmented the economic position of the nation. This was mainly due to the establishment of the option of wholly owned foreign enterprise (WOFE) rather than joint venture (JV) for the new entrants (Child et al. 2009). Despite of reduction of certain restrictions, the government of China also posed varied types of limitations on certain restricted product sellers such as oil, sugar and tobacco (Gartside, 2010). This product seller needs to sell the products through JV rather than WOFE’s within the market region of China (Gartside, 2010). In spite of the presence of such limitations, the retail players became successful in increasing its profitability in China due to the positive impact of national institutional systems. 3.0 Exchange regimes Child et al. (2009) denoted that the exchange rate regime is tactic as a procedure used by the authority of a country to manage its currency as per the other currency rates as well as international exchange markets. The most common types of exchange rates are fixed and floating and it’s may create varied types of discrepancies within the nations at the time of trading. Similar scenario might be viewed within the currency regime of China and it may become a threat for the nation of US. The current currency exchange rate regime of China is a mixture of both fixed as well as floating. Due to this, it becomes quite difficult to maintain a fixed price structure for the products that an organisation desires to sell. Till 2005, the exchange currency regime of yuan as per US dollar was fixed but after that it became floating (Gartside, 2010). Therefore, in the year 2005, the government decided to revalue the current rate of yuan so as to reduce the confusion among the retailers functioning in diverse market regions. So, the government of China appreciated the value of yuan by 17.5 percent after 2005 and hence the citizens would accomplish the retail products at a quite lowest price (Morrison, 2006). So, the total sale of the retail players of China would get increased, thereby, lowering the net income as compared to US (Peng, 2011). The prime cause behind it is that, the currency exchange rate of US is quite higher as compared to China and so the net income rate of the retail organisation is also quite higher. Such a managed float exchange currency regime might prove detrimental for the ABC retail player in the market of China as its position and operating income would reduced day by day. Therefore, in order to mitigate such type of managed floating exchange rate regime, the government need to decide a currency in between it (Gartside, 2010), so that it may not prove effective for the organisations operating in that region. Apart from this, currencies basket system might also be followed as one of the most important strategy of exchange rate regime. It comprises of varied types of individual currencies of diverse countries and unlike weights. It is one of the most effective ways to peg the rate of any currency with no over-exposition (Hill, 2010). With the implementation of such types of exchange rate currency regimes, the nation may retain its economic growth despite of the negative impacts of inflation, fluctuations of currency and others. Thus, the fluctuations in the rate of profitability and total revenue also reduced to a significant extent among the retail brands functioning in these markets (Peng, 2011). So, Child et al. (2009) argued that failure to implement such types of currency rates might prove detrimental for the retail players, thereby, hindering the organisational prosperity and market share. 4.0 Type of political risks in China Child et al. (2009) determined that political risk is recognised as the interference of the government within the affairs of the organisations operating in different market regions. It may range to risks regarding confiscation, expropriation, currency inconvertibility as well as contract repudiation. As per the views of the Child et al. (2009) the property or product lines of an organisation are damaged or exploited without any sort of approval of the owner. For example: the economic distress or turmoil of the nation is recognised as confiscation of the organisational asset. Therefore, a large amount of total revenue and profitability of the organisation might get hampered resulting in downfall of the prosperity of the organisation. Furthermore, expropriation is also another type of risk in which, the government seizes any specific private property so as to be utilised for public interest. Such type of risks might also occur at ABC retail (Gartside, 2010). For the public interest, the Chinese government might grab the company and it would reduce the scope of export facilities. This may hamper the expansion facilities and hence the brand value and position might get declined considerably among other existing players. Currency inconvertibility is also another noteworthy political risk for the countries in Chinese market. This means that the currency may not be converted or exchanged gold, silver or in to any other currency units (Child et al. 2009). Such an error might prove problematic for the organisation in the long run. However, as per the contract repudiation presents a clear set of rules as well and regulations that need to be followed by the organisation functioning in the market of China. Due to the introduction of the above mentioned policies and rules, the total sale and brand value might get declined to a considerable extent. Thus, Griffin and Pustay (2010) determined that failure to analyse the above presented risks might act negatively over organisational growth and profit margin in this market. Therefore, in order to mitigate such types of issues effectively, risk-reducing strategies need to be designed. Only then, the organisations operating in such type of challenges might reduce its negative effects, thereby, increasing its total revenue and brand image in the market (Gartside, 2010). So, the organisations may function in an effective way in this age of high economic inflation and anguish. Thus, it may be revealed that tactical decision making and evaluation power is the only way to function accurately in this problematic scenario. Similarly, ABC retail might design its own strategies so as to retain its operations in this age of extreme competitiveness and bargaining rivalry (Gartside, 2010). 5.0 Recommendations The management or CEO of ABC might implement the bewlo mentioned recommendations for future improvement: Operation with local partners: By functioning with the local organisations, ABC retail may attain a better knowledge and preferences of the local customers. Along with this, valuable information regarding the local suppliers may also be attained by the local organisations such as business network, suppliers, government relations and others. Aligning the business strategies as per the Peoples Republic of China: ABC retail might try to study the rules and regulations of PRC in an effective way. Only then, ABC retail may align its strategies accordingly so as to improve its total revenue and profit margin. 6.0 Conclusion By referring to the above mentioned points, it may be analysed that rules and regulations acts as the cornerstone of an organisation in order to retain its prospective in the market. Otherwise, due to improper maintenance of the national institutional systems or policies of any region or country, the organisation may not retain its prospective and reputation in the market. Thus, to survive within any new market region, proper recognising of the opportunities is essential for an organisation. Therefore, the organisation also needs to evaluate the underlining threats of the country to reduce its negative impacts over the brand image of the concern. Hence, the organisation may function effectively within a risky situation. If ABC retail might follow the above mention points in an effective way, then its operation within the region of China would become easier and effective. Consequently, ABC retail may increase its profitability and demand in this complex situation in the newly entered market of China as well. Improper examination of the prospects and threats of the country or region might prove detrimental for the organisation and it may hamper the entire popularity. Hence, ABC retail would surely start its operations of trade and commerce in the region of China. Reference list Child, J., Rodrigues, S. B. and Frynas, J. G., 2009. Psychic distance, its impact and coping models: interpretations of SME decision makers. Management International Review, 49(2), pp. 199-224. Gartside, L., 2010. Commerce – A Guide to the Business World. London: Pitman Publishing. Griffin, R. W. and Pustay, M. W., 2010. International Business, 5th ed. New Jersey: Pearson-Prentice Hall. Hill, C., 2010. International Business: Competing in the Global Marketplace, 8th ed. Water Street: McGraw-Hill. Peng, M., 2011. Global Strategy. Boston: South-Western Cengage Learning. Proff, H., 2010. Business unit strategies between regionalization and globalization. International Business Review, 11, pp. 231-250. Morrison, J. (2006). The International Business Environment, 2nd ed. Palgrave Macmillan Read More