Unit 3.3.3 - How does a company decide which countries to target?

Location Factors
1. Infrastructure
2. Exchange Rates
3. Consumer Profiles
4. Language/Culture
5. Labour market and technological capabilities
6. Natural Resources and Commodity Prices
7. Ease of setting up a business
8. Government Policy
9. Level of Economic Development
10. Legal Framework
11. Political Stability/Corruption Levels
12. Demographic Attributes
13. Corporate Policy
Key Terms
1. Human Development Index (HDI)
  1. Constructed by the United Nations Development Program
  2. Provides a measure of development based on access to healthcare and education, as well as national income
2. Commodities
  1. Raw materials or semi-manufactured products that are traded in bulk and aren't recognisably originating from any particular business
  2. E.g. Iron ore and oil
3. Infrastructure
  1. All transport and communication facilities as well as the provision of basic services such as energy and water supplies
  2. E.g. telephone systems, roads, drains, etc
4. Specialisation
  1. People/Economy making the most of their skills by concentrating on what they do best. As an appropriately skilled person produces more, output per head rises.
  2. This only works when people or economies are in a position to trade their output for thing they need but do not produce
5. Absolute Advantage
  1. Exists when the real resource cost of a product is lower in one country than another
6. Comparative Advantage
  1. If two countries each specialise in the product with the lowest opportunity cost, and then trade, real incomes will increase for both countries
Human Development Index (HDI)
1. Usefulness
  1. For a business seeking new markets or a place to manufacture
  2. Access to education is an important indicator for businesses which want to hire skilled labour
  3. Can indicate the existence of potential markets for the product/service
  4. Products/Services could be adapted to suit the level of development
Legal System
1. Legal Framework
  1. Businesses rely on a sound legal framework to protect their interests
    1. Including IPR (Intellectual Property Rights) as well as being able to use the law to enforce contacts and payments
  2. If some of the law enforcement agencies are corrupt, the system may fail to protect foreign investors' interests
  3. No adequate legal safeguards - businesses more reluctant to invest
2. Government Policy
  1. Tax regime can be an important factor (attitude of a government to businesses can have a big influence on where they locate)
  2. Degree of protectionism can be important - high tariffs (import duties) can be a deterrent as it can make potential export markets unattractive
3. Political Stability & Corruption
  1. Businesses need a stable political situation and no wars or civil unrest
  2. Countries that have a history of political unrest tend not to attract businesses, unless they really do need to be there (e.g. oil companies)
  3. Corruption can also be a problem and is endemic in many developing countries (this may affect ethically motivated companies)
Business Start-ups
1. Ease of setting up a business
  1. Ease of doing business index; dealing with permits/regulations, cost & time needed to export/import, tax payable as a share of gross profit, time/cost/minimum capital needed to open a business and ease of hiring/firing employees
  2. Easiest to do business is Singapore/Denmark
2. Natural Resources and Commodity Prices
  1. For some businesses, expansion overseas is all about finding new sources of resources that they can exploit
  2. Mining and oil companies go to where the resources are and then export them to where there is demand for them
  3. The inexorable rise of China has increased the demand for raw materials and commodities generally - More incentive to seek out new sources for businesses due to price rise
Demographic Attributes
1. Structure of the population may influence companies selling to a particular demographic market segment
  1. Socioeconomic factors such as age, income, occupation are taken into account when deciding location
    1. Segmenting a population into demographic groups allows companies to assess the size of a potential market and also whether their products/services are likely to succeed
      1. Fast good companies were especially keen to enter the Indian market because of its high amount of young people (a key market segment for their products)
Comparative Advantage
1. Identify products with lowest opportunity cost
  1. Specialise in this area
    1. Exchange surplus with another country in exchange for its lowest opportunity cost product
Specialisation
1. Advantages
  1. Leads to increased output & efficiency
    1. Leads to economies of scale
  2. Goods/services produced more cheaply
  3. Enhanced competitive advantage
  4. Export earnings increase
  5. Competition amongst producers lowers price and drives innovation - benefits domestic/foreign consumers
2. Disadvantages
  1. Can lead to over-reliance on one area of the economy
  2. Over-specialisation can lead to severe structural unemployment if demand falls
  3. Comparative advantage can move elsewhere
  4. Reliance on imports for other goods and services
  5. Fluctuating commodity prices can be a problem
  6. Emerging economies often rely heavily on one commodity product
Corporate Policy
1. Some businesses want to diversify in order to reduce risks, some want growth, some may go for inorganic growth by buying up appropriate businesses abroad, others look to cut costs and cheap labour and others grow organically by setting up their own factories
Language and Culture
1. Clear and accurate communication is vital for business success
2. India & Egypt have been successful in attracting Western FDI due to the high amount of English speakers there

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Unit 3.3.3 - How does a company decide which countries to target?

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