留学生essay格式范文|The Global Business Environments

Being on the modes of entry to the foreign markets, Foreign Direct Investment or simply FDI, plays great role on the development of not only emerging economies of the world, but also on the welfare of the well developed economies of the world.

 

In this assignment, first of all we would like to attract your attention by explaining what Foreign Direct Investment actually is and compare it with alternatives mode of entries to the foreign market.

 

In the main part of the assignment, we want to explore what sort of barriers can face Multi National Company, which is in our case IKEA, in entering one of the foreign markets. We have chosen as an emerging economy India, as this country has from our point of view great opportunities for foreign companies to enter as well as tough barriers on some spheres. We will grab you attention on country's political factors i.e. political system and political stability, assess market size and market potential, assess trade and investment barriers.

 

And in the final part, we would like to state our findings as well as some recommendations as to the management of the company on whether investment should go ahead and how the investment should go ahead i.e. location choice, entry mode choice, how to deal with cultural differences.

 

Company we have chosen is IKEA. Being privately held Swedish company and founded by 17 years old Ingvar Kamprad in 1943, currently IKEA is one of the largest and one of the most successful furniture retailer in the world. The company is known for its modern architectural designs on various types of appliance and furniture, often associated with a simplified eco-friendly interior design and affordable price. In addition, company is continuously striving to lower operational costs and product development cost, which allows it to decrease the price of its goods on average 2-3 percent per annum. This continuous strive to lower the price of its goods is competitive advantage of the company, which differentiates it from its competitors. Mission statement of the company is offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. Target segment of the IKEA is lower-medium and lower class people. Today, IKEA trademark represents the leading home furnishings brand in the world with more than 330 stores in 40 countries and close to 154,000 permanent time workers throughout the world.

 

Country we have chosen as an potential target to enter for IKEA is India. Seventh largest country and second most populous country in the world with population of 1.2 billion people, India is one of the most attractive market to any MNC company. According to the World Bank database, India is the world's tenth largest country by nominal GDP and third largest by Purchasing Power Parity (PPP) just after China and USA. India is multilingual and multiethnic society. Over the past decade the Indian economy has witnessed a paradigm shift and is a robust growth trajectory. As per the data available from various published sources, the Indian economy opened up to the globe in 1991 and has not looked back since. As a result of the liberalization, average GDP growth rate rose to nearly 6% per year the 1990s, compared to moderate rate of 4% per year which was the norm during the first 40 years following the independence. Furthermore, it is notable to say that India is one of the few countries who has weathered recent global financial crisis and its GDP has been growing and will continue to grow in excess of 8 percent per annum. India has a young population with approximately 65% of its population in the age group of 15 to 64 years. The median age in the country is around 26.2 years, which is lower than many countries in the world. Hinduism, Islam, Christianity and Sikhism are the four main religions followed in India. Hindi is official language of India, along with other 24 official languages including Bengali, Tamil and etc. However, English is widely used in national, political and commercial communication.

 

As an economic profile of the country, we can say that India has seen a systematic transition from being a closed door economy to open economy since the beginning of economic reforms in the country in 1991. These reforms have had far reaching impact and have helped India unleash its enormous growth potential. Today, Indian economy is characterized by a liberalized foreign investment and trade policy, a significant role being played by the private sector and deregulation. India has grown to become a trillion dollar economy with a largely self-sufficient agricultural sector, a diversified industrial base and a stable financial and services sector. Among the growing economies of the world, India is ranked in the second place after the PRC. The GDP of India has been growing at an average rate of 8,6% for the last five years.

 

Increasing urbanization and modern technology have brought about a remarkable change in the lifestyles and consumption pattern of Indians. Private domestic consumption accounts for more than 50% of the country's GDP and is one of the key factors driving overseas investments into the country.

 

The country ranks higher than many countries in key parameters such as market size (4th place), and also it has a sound financial market (17th place). India has robust, transparent and stable, and highly controlled both financial and credit market.

 

With an estimated market size of US$395 billion in 2011, India's retail sector is at peak of its appeal for International and Indian players. Being the second largest employer after agriculture, this sector is expected to grow to US$785 billion by 2014, ensuring that the retail sector continues to be one of the mainstays of the Indian economy. Modern retail accounted for approximately 9.4% by 2013-14 with the entry of a number of corporate organizations into the segment. From January of FY2012, up to 100% FDI is allowed under the automatic route in cash and carry wholesale trading and export trading. Many large worldwide known conglomerates and business houses are showing the strong interest or making a significant headway in the retail sector. It is estimated that the organized retail segment will grow at 22.3% annually to reach a market size of approximately US$57 billion by 2013-14. The demand for international brands is showing a healthy uptrend. Further the growing presence of domestic companies across the different retail verticals is giving the Indian organized market a strong boost. Changing lifestyles, strong income growth and favorable demographic patterns have resulted in huge expansion of Indian retail. Small town and rural evolution in India is also proliferating rapidly, driven by rising purchasing power, changing consumption patterns, easy access to information and communication technology, as well as improved infrastructure and government initiatives to boost the rural economy.

 

The foreign Direct Investment (FDI) regime has been progressively liberalized during the course of the 1990s and continuing into the 2000s, with most restrictions on foreign investment being removed and procedures simplified. With limited exceptions, foreigners can invest directly in India, either on their own or as a joint venture.

 

We found some barriers those IKEA may consider before entering the Indian market

 

1. Infrastructure

 

Infrastructure in such areas as electric power, roads and telecommunications networks has not been developed and this is the principal barrier to the enlargement of overseas investment in India.

 

Foreign companies in India are required to pay additional costs to avoid breakdown of machinery due to blackouts and voltage changes. The bad condition of roads inflicts damage on commodities during transportation. Transportation between Delhi and the South takes one week due to the lack of express highways. Economic losses are incurred because of the long transportation time and high gasoline cost caused by traffic jams in urban areas.

 

Improvements in airlines, railroads, sanitation, hotels and social security would also be likely to attract more foreign visitors.

 

Inconsistent Industrial Policy and Rules

 

Laws, regulations and rules are often and suddenly changed. Labor Regulations and Protections Under the Industrial Labor Law, in the case that any company employing more than 100 employees lays off staff, it must first acquire permission from the state government. As it is extremely difficult to obtain such permission from the state government, not only does this regulation directly affect flexible business plan changes, but it also makes business closure difficult. In a market in which business exit policies are inflexible, it is difficult to attract new investment.

 

Discriminatory Rate of Corporate Tax

 

The corporate tax for domestic corporations is 35%, while that for foreign corporations is 40%. This difference is quite large. According to the abovementioned regulations on foreign investment, companies including banks, trading companies and airlines are not able to have a majority share. If these companies choose the form of a branch of a foreign corporation, that results in a high rate of corporate tax being imposed in them.

 

Main Part

 

We made PESTLE analysis of the India. PESTLE stands for:

 

P - Political;

 

E - Economical;

 

S - Social;

 

T - Technological;

 

E - Environmental;

 

L - Legal;

 

In business environment, PESTLE analysis plays vital role in analyzing the environment into which company is going to enter. Originally designed as a business environmental scan, the PESTLE analysis is an analysis of the external macro environment in which a business operates. These are factors which are beyond the control or influence of a business, however are important to be aware of when entering the market.

 

So, Political factor, which is first in the PESTLE analysis, defines the degree of government intervention to the economy of the country. In this stage company should define which products have governmental support in kind of subsidies or reliefs and which products are restricted by the government with high import duties and etc. "India is the biggest democracy in the world"- states the author of the research paper "PESTLE analysis of India", Vishwas Chakranarayan. He states that political situation in the India is quiet stable compared to other emerging countries. Indian government is doing deregulation policy and following International Trade Regulations policy which sufficiently eases doing business in India. Also, it is notable to say that during the last decade government of India had done significant changes such as decreasing the number of compulsory licensing spheres to just 6 and increasing foreign equity participation rate up to 100% in majority of spheres, in order to facilitate doing business in India.

 

From Economical perspective, India is also quiet attractive for foreign investment, as it has moderate interest and inflation rates, which directly affects doing business, and annually growing national income which will boost demand for products.

 

About Social issues, change in social trends can impact on demand for a firm's products and availability and willingness of individuals to work.

 

So, to conclude we can say that companies while entering the foreign market, should make extensive analysis of the environment using strategic tool such as PESTLE, should consider both political as well as economic stability, take into account social affects of running business and its influence to the environment.

 

After careful analysis, company's management should decide on mode of entry. The decision of how to enter a foreign market can have a significant impact on the results. Companies can expand into foreign markets via the following five mechanisms: exporting, licensing, acquisition, joint venture and direct investment. All of them have their advantages for the firm to explore as well as disadvantages which must be considered by the firm's top management. "What entry mode that a multinational company chooses has implications for how much resources the company must commit to its foreign operations, the risk that the company must bear, and the degree of control that the company can exercise over the operations on the new market." (Charles Hill et al. 1990).

 

In the table, you can see both advantages and drawbacks of each type of mode of entry.

 

MODE OF ENTRY

 

ADVANTAGES

 

DISADVANTAGES

 

APPROPRIATE when:

 

EXPORTING

 

Low initial investment

 

Reach customers quickly

 

Complete control over production

 

Potential costs of trade barriers

 

Transportation cost

 

Tariffs and quotas

 

Foregoes potential location economies

 

Difficult to respond to customer needs well

 

Low trade barriers

 

LICENSING

 

Low initial investment

 

Avoids trade barriers

 

Access to local knowledge

 

Easier to respond to customers' needs

 

Lack of control over operations

 

Potential for creating competitor

 

Strong Property Rights

 

ACQUISITION/ DIRECT INVESTMENT

 

Access to targets local knowledge

 

Control over foreign operations

 

Control over own technology

 

Difficulty in "absorbing" acquired assets

 

Uncertainty about targets value

 

Market is developed for Corporate Control

 

Absorptive capacity

 

JOINT VENTURE

 

Both parties have some performance incentives

 

Reduction concern about overpayment

 

Potential loss of Proprietary knowledge

 

Conflicts between partners

 

No full control

 

No full performance incentive

 

Large mutual gains in the long run

 

From the table above its clear, that each type of entry has its own benefits as well as associated risks. So, it depends solely on company's management as to which type to choose. It also worth to note that, most successful MNC's have used combination of these modes of entry. For instance, Starbucks, one of the most well known brands in the world, in order to enter Asian countries have created Joint Venture with one of the local coffee houses and after while switched to licensing, which had in fact tremendous success.

 

As for IKEA Company, we would probably advice to use Foreign Direct Investment or Joint Venture. And we would strongly recommend IKEA not to enter into Licensing Agreement as it would probably lead to the creation of Competitor instead of a strategic partner.