International Trade - South Beauty Restaurant in Singapore - Case Study Example

International Business

Kwok Tsz Kit Gary: 54385226

Assignment 2: 143 19210 BA

BA (Hon) International Business Management

Oxford Brookes University

20 April 2016

List of Tables

Table 1: Country Comparison for the Investors Protection (Export Enterprises, 2012)6

International Trade: South Beauty Restaurant in Singapore

South beauty is a magnificent restaurant located in Shanghai Pudong district. It has chains of restaurants in China including Beijing, Shanghai, Chengdu, Shenyang, Suzhou, Shenzhen, and Tianjin. The restaurants are high-end and lavish. It is aiming to start its chain in Singapore but through franchising. Singapore is found in the South East Asia with countries, such as Japan and Taiwan but it is considered the smallest state. It has enjoyed remarkable economic growth in the past three decades and this has made it the twenty-third wealthiest country in the world. Singapore does not contain any natural resources but that has not hindered it from having a mature economic structure that is steady and technologically advanced. Due to the modern technological advanced sector, Singapore has a high competitive advantage next to the United States.

Its exports have attributed Singapore growth, for South Beauty restaurant to thrive in Singapore it should apply the neoclassical theories, which stresses the degree of exports in the country should be higher than its imports to ensure trade surplus and reduce the trade deficit. The neoclassical theorems tend to operate under free trade and have minimum government interventions. However, Singapore success is based on the government’s effort to promote exports by encouraging export incentives, such as tax rebates, subsidies, privileged access to imports licence, appropriate interest rates, and other financial measures to improve the economies of scale in the production sector of exports. Through the economic models, the consumers relatively prefer the export products due to the friendly costs as compared with the import products (Export Enterprises, 2012). The government efforts lead to more foreign exchange and increase the balance of payment account. Besides the substantial government involvement to ensure the success of Singapore, other macroeconomic factors have attributed too; these include openness to international trade, human capital formation, and the availability of environmental friendly encouraging foreign and private investment and competition.

The objective of this article is to understand the international theories that influence the international trade through franchising in Singapore, analyse the substantial government intervention in export promotion, and examine other factors such as foreign direct investment and macroeconomic by proving their necessary influence toward economic growth.

Theoretical Framework

For South Beauty to engage in franchising in international trade, it must understand various concepts encompassing the trade depending on the relations of different countries. To understand the government efforts in export promotion, we need to define the theoretical framework that supports the international trade in Singapore while stating its benefits and constraints. The studies of the theories will entail its considerable primary factors, assumptions, advantages and origin. The international theorems that define the global trade in Singapore are neoclassic- they promote exports while discouraging imports. They include the Hecksher-Ohlin theory, mercantilism, and theory of the developmental state.

Heckscher-Ohlin Theory

The Heckscher-Ohlin trade is built on the classical comparative advantage theory because it is product based. The theory affirms that the countries will export products depending on their utilisation of cheap production factors such as labour, price, and economies of scale and import products that the country has scarce factors to produce. The factors of production determine the utilisation of Hechsher-Ohlin theory. The products that are produced locally with the abundant natural resources, they will be cheaper while the imports will be expensive. The Heckscher-Ohlin trade promotes the exports while discouraging the imports (Lan, 2001). The factors of production influence the revenue generated from the business. The theory states that countries will exports products that they highly specialise and the production cost is relatively friendly, for instance, Singapore because it has a substantial amount of capital and land but labour is scarce, it should produce products that are capital-intensive.

The theory is based on the assumptions that 1) the trading countries have an identical production output of the commodity since they have the abundance of the same capital, labour or land factors. 2) The countries producing the goods have an identical technology thus have homogeneous returns of scale. 3) To make the trading intriguing, the technology of the countries varies. 4) In Singapore, for the production of different commodities, the labour and capital invested can be reused, or reinvented.

Theory of Developmental State

The theory of developmental state justifies the export promotion strategy used in the East Asian countries such as Japan, South Korea, and Singapore. The political economy supposes that they have a concrete strategic role to enhance in controlling the local and international marketing factors to ensure they result in the national economic gain. By taming the marketing economies, the country tries to achieve its objective by shifting every possible concept to result in what is profitable. It restricts the market depending on the industrialisation priority hence owning the comparative advantage.

The government tends to intervene in the market economies precisely when the market brings certain influences or while regulating against certain forces thus does not limit itself to the provision of infrastructure, intervene when its industries are in trouble, or proves to adopt the strategies incorporated in the west. The government intervenes based on the fact some companies are significant to the future economy growth compared to the others; hence, they receive subsidies, incentives, and tax reductions. The other companies are left to take care of themselves; this way the conception of long-term investment is ensured.

Reasons to Franchise in Singapore

The foreign direct investment greatly influences International economic independence. The FDI has expanded and overtaken the international trade since the 1980s. Most modern firms are focused on cross-border mergers and acquisitions. The FDI global stock is increasing rapidly than anticipated. The FDI is firm-based that concentrates on the technology transfer, business models, and control techniques while influencing the supply side effects on the host economies (Daniels, Radebaugh &Sullivan, 2013). In foreign direct investment, a resident from one economy invests with an objective of establishing a long-term interest in a company belonging to another economy. FDI comprises of mergers, takeovers, loans, reinvested earnings, capital transfers between entities and new investments.

Table 1: Country Comparison for the Investors Protection (Export Enterprises, 2012)

Singapore

E. Asia &Pacific

United States

German

transaction transparency index*

10.0

5.0

7.0

5.0

Manager’s Responsibility Index**

9.0

5.0

9.0

5.0

Shareholders’ Power Index***

9.0

6.0

9.0

5.0

Investor Protection index****

9.3

5.4

8.3

5.0

In Table 1, the greater the index, the conditions of transactions tends to be more transport. The index degree influences the performance of the managers, the shareholder power, and the protection of investor.

Singapore has encouraged and attracted foreign investors using the trade openness and this has made it be ranked as the easiest country globally for performing business. It has environment-friendly for foreigners’ investors to lend money, tax incentives, simple regulatory system, due to its political stability and lack of corruption, Singapore has opted as a foreign investment destination by investors.

The strategies implemented to attract the foreign investors are through the establishment of free zones mostly the Export Processing Zones (EPZ). The EPZ are industrial areas that have excellent infrastructure, telecommunications and are offered at a highly subsidised rate. Foreigners who desire to invest in Singapore and lack sufficient fund, they can be offered assistance by particular institution or state organisations. Before any company is registered, the incentives and subsidiaries are established

Franchising

Franchising is the activity of expanding a business whereby an independent business owner (franchisee) is granted a company licence (franchisor) to sell its products or render its services. The franchisee and franchisor venture into business because it offers a legal right to gain other companies (Johnson, 2013). For restaurants such as South Beauty, the best franchising method that it can adopt is the business format franchises. The South Beauty will expand in Singapore by supplying independent business owners with the trademark and recognised name. The interested business owners will be paying the South Beauty fees and royalties and the franchisee will mostly be purchasing supplies from the franchisor.

Advantages of franchising

The franchising type of business grants the franchisor benefits of expanding at a faster rate than initially anticipated. Through franchising, the franchisor always contributes subtle capital or labour, regardless of the financial status of the franchisor, the business will expand because the franchisee is catering for every factor of production. The franchising companies always ensure they have qualified managers in every outlet (Encyclopaedia, 2016). The owners of the business are highly cautious concerning the success of the firm thus, provides competent people for smooth and satisfying operations run them. Additionally, the franchising rights are granted to qualified individuals. In case the franchisor requires the funds, it can use franchising as a source of capital.

The South Beauty restaurant through franchising, they would face less risk as compared to if they were starting the business from the ground. The franchisee is offered guidance concerning business operation by the franchisor because they are more experienced thus, reducing the risks (Twarowska and Kąkol, 2013). The franchisor provides advice to the franchisee on ways to obtain finances for the outlet and formulate business strategies and plans.

Disadvantages of franchising

Besides the advantages that the franchisee gains from franchising, they suffer some drawbacks. Franchising is costly since the franchisee must pay the franchisor a fee that might range from five thousand to one million dollars (Encyclopaedia, 2016). The franchisee also pays royalties occasionally to the franchisor depending on the life of the agreement. Franchising can be expensive.

Franchisee suffers the pressure of the finances since the franchisor does not provide financial aid. The more the franchise costs, the severe the challenges the franchisee encounters while trying to gather the necessary funds from potential operators (Twarowska and Kąkol, 2013). For an individual who are capital disadvantaged, franchising is not the appropriate option for a career path. However, when a person has stable capital, franchising has paid off substantially.

Franchising also subjects the franchisee to losing their identity; they lose some control over their enterprise. They are subjected to strict supervision by the franchisor, which is a drawback (Johnson, 2013). They cannot choose differently from the business agreement because it will be seen as breaching the contract, every decision the franchisee makes about the business, the franchisor must approve. Selecting the appropriate company might be challenging because the numbers of franchisors have increased and the choosing process is complicated. However, the franchisee must choose the company carefully because a business with problems might influence the performance of the business negatively.

International Business Strategy

The enthusiastic business personalities must understand that venturing in the global trade can be done through many channels. However, the entities must select a business model that suits their level of resources, such as capital, land, and labour; they should evaluate the foreign market potential before investing in the international business (Lawton, Doh & Rajwani, 2013). In Singapore, foreigners can invest in the firm through diverse channels, for instance, foreign direct investment, licencing and franchising agreements, joint ventures, takeovers/acquisition, and multinational corporations. These options sometimes vary in nature, although their variation can be subtle at times.

South Beauty might opt to go international because of its goal to expand and develop. Most companies prefer international strategy because of diversity in the workforce; the company is granted the opportunity to employee foreigners and can acquire global clients (Guy 2009). The technological breakthroughs in Singapore provide South Beauty Restaurant with the expansion capacity because of the simplified global communications (Twarowska and Kąkol, 2013). Singapore offers attractive reduced overhead costs to foreign investors thus lessening the cost of workforce South Beauty restaurant might require.

In conclusion, South Beauty Restaurant will attract competent executives globally and reduces the dependency on the local market. Due to the availability of free zones, it can expand the products and services they are offering and gain the market dominance with the foreigners and locals.

Conclusion

Singapore was ranked the easiest country to invest in by World Bank. Singapore economic success is influenced by its government intervention, which has insisted on free trade and granted zones that are specifically for the international trade. The country operates a capital-intensive factor since they have abundant capital but low labour factor. Singapore government has been around the clock creating an environment that would attract foreigner investors. Singapore operates under the neoclassical theories that promoted exports while discouraged imports. However, even if the foreign investment has significantly influenced Singapore economic growth, the government has ensured monopolisation in particular industries and had control over those companies.