Following declining sales and reducing profits, Qantas Airlines, an Australian airline, is probing the possibilities of an Asian hub that it intends to operate from, to extensively cover the Asian nations…
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One of the bases that the airline is considering in Asia to avoid the high costs and the geographic isolation that Australia faces is China (The China Post, 2011). Before making the move, it would be necessary to evaluate the external environmental factors that could affect the organization’s decision. Markets, competition and airline regulation in China would be equally important to be considered. 2. External factors affecting the organization External factors are those that are external to the organization and over which the organization has no control but still is influenced by it. In this analysis only two such factors would be considered – the macroeconomic environment and the markets, competition, and regulation in the airline industry in China. A country’s institutional environment affects the boundary choice for an organization because this reflects the extent to which a firm can participate in the business environment. According to Brouthers and Hennart (2007) five types of risks influence the decision - product, government policy, macroeconomic, materials, and competition. 2.1 The macroeconomic environment Macroeconomics deals with the economy as a whole and the factors that it encompasses include the economic output, unemployment, inflation, savings and investments (Investopedia, 2011). These are the key indicators of economic performance and are closely monitored by the governments, business and consumers. 2.1.1 Economic output The People’s Republic of China (PRC) is one of the fastest growing economies in the world. According to a government report its annual output should be US$ 3,000 per person by 2010 which is 3 – ? times of the level that it was ten years ago (China Digital Times, 2008). By 2010 China has surpassed Japan on the list of world’s largest economies and stood at the second position behind only the United States (Politics Daily, 2010). The PRC has low vulnerability to external shocks and this has helped it to maintain macroeconomic stability. The PRC has a large internal market, large foreign exchange reserves, low dependence on high technology and has high consumer and investor confidence (ADB, 2005). Macroeconomic stability is essential to attract private investment and create pro-poor markets. Economic growth in China has been consistent under different leaderships. Inflation and unemployment are low when the Communist Party is in power (Feng, 2010). The Party embraces economic performance as its top priority. According to International Monetary Fund (IMF) Beijing will take just five years to become the world’s largest economy (China Economic Net, 2011). The PRC attracts the highest FDI in the region and has been the second largest recipient of the FDI in the world (ADB, 2005). However, there are concerns that the government controlled market system in China prohibits the development of the Chinese economy (Sheng, 2011). Because of its liberalization reforms and investment in infrastructure China has been able to attract considerable FDI. China is now implementing a socialist market economy where the government carries out marketization management of the economy. 2.1.2 Unemployment The International Labor Organization (ILO) defines unemployed workers as those who are currently not working but are willing to work (IndexMundi, 2011). The unemployment rate stands at 4.1 percent in China which is a matter of concern. However, this data is only for the urban areas and if the migrants are included the figure could go up to 9 percent. Besides substantial unemployment and under employment exists in the rural areas as well. Moreover, higher
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