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Unit 3.3.3 - How does a company
decide which countries to target?
- Location
Factors
- Infrastructure
- Exchange Rates
- Consumer Profiles
- Language/Culture
- Labour market and
technological
capabilities
- Natural Resources
and Commodity
Prices
- Ease of setting up a business
- Government
Policy
- Level of
Economic
Development
- Legal Framework
- Political
Stability/Corruption
Levels
- Demographic
Attributes
- Corporate Policy
- Infrastructure
- Key
Terms
- Human Development
Index (HDI)
- Constructed by the United
Nations Development Program
- Provides a measure of
development based on access
to healthcare and education, as
well as national income
- Constructed by the United
Nations Development Program
- Commodities
- Raw materials or
semi-manufactured products
that are traded in bulk and
aren't recognisably
originating from any
particular business
- E.g. Iron ore and oil
- Raw materials or
semi-manufactured products
that are traded in bulk and
aren't recognisably
originating from any
particular business
- Infrastructure
- All transport and communication facilities as
well as the provision of basic services such as
energy and water supplies
- E.g. telephone systems, roads, drains, etc
- All transport and communication facilities as
well as the provision of basic services such as
energy and water supplies
- Specialisation
- 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.
- This only works when people or economies are in a position to
trade their output for thing they need but do not produce
- 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.
- Absolute Advantage
- Exists when the real resource
cost of a product is lower in one
country than another
- Exists when the real resource
cost of a product is lower in one
country than another
- Comparative
Advantage
- If two countries each specialise in the product with the lowest opportunity
cost, and then trade, real incomes will increase for both countries
- 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)
- Human Development
Index (HDI)
- Usefulness
- For a business seeking new markets or a place to manufacture
- Access to education is an important indicator for
businesses which want to hire skilled labour
- Can indicate the existence of potential markets for the product/service
- Products/Services could be adapted to
suit the level of development
- For a business seeking new markets or a place to manufacture
- Usefulness
- Legal System
- Legal Framework
- Businesses rely on a
sound legal framework to
protect their interests
- Including IPR (Intellectual
Property Rights) as well as being
able to use the law to enforce
contacts and payments
- Including IPR (Intellectual
Property Rights) as well as being
able to use the law to enforce
contacts and payments
- If some of the law
enforcement agencies
are corrupt, the
system may fail to
protect foreign
investors' interests
- No adequate legal
safeguards - businesses more
reluctant to invest
- Businesses rely on a
sound legal framework to
protect their interests
- Government Policy
- Tax regime can be an important factor (attitude of a government to
businesses can have a big influence on where they locate)
- Degree of protectionism can be important - high tariffs (import duties) can be a
deterrent as it can make potential export markets unattractive
- Tax regime can be an important factor (attitude of a government to
businesses can have a big influence on where they locate)
- Political Stability & Corruption
- Businesses need a stable political situation
and no wars or civil unrest
- 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)
- Corruption can also be a problem and is
endemic in many developing countries (this
may affect ethically motivated companies)
- Businesses need a stable political situation
and no wars or civil unrest
- Legal Framework
- Business
Start-ups
- Ease of setting up a
business
- 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
- Easiest to do
business is
Singapore/Denmark
- 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
- Natural Resources
and Commodity Prices
- For some businesses, expansion overseas is all about finding
new sources of resources that they can exploit
- Mining and oil companies go to where the resources are
and then export them to where there is demand for them
- 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
- For some businesses, expansion overseas is all about finding
new sources of resources that they can exploit
- Ease of setting up a
business
- Demographic
Attributes
- Structure of the population may influence companies
selling to a particular demographic market segment
- Socioeconomic factors such as age, income, occupation are
taken into account when deciding location
- 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
- 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)
- 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)
- 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
- Socioeconomic factors such as age, income, occupation are
taken into account when deciding location
- Structure of the population may influence companies
selling to a particular demographic market segment
- Comparative Advantage
- Identify products with
lowest opportunity cost
- Specialise in this area
- Exchange surplus with another country in
exchange for its lowest opportunity cost product
- Exchange surplus with another country in
exchange for its lowest opportunity cost product
- Specialise in this area
- Identify products with
lowest opportunity cost
- Specialisation
- Advantages
- Leads to increased
output & efficiency
- Leads to
economies of
scale
- Leads to
economies of
scale
- Goods/services
produced more cheaply
- Enhanced competitive advantage
- Export earnings increase
- Competition amongst producers
lowers price and drives innovation -
benefits domestic/foreign consumers
- Leads to increased
output & efficiency
- Disadvantages
- Can lead to over-reliance on
one area of the economy
- Over-specialisation
can lead to severe
structural
unemployment if
demand falls
- Comparative advantage
can move elsewhere
- Reliance on
imports for
other goods
and services
- Fluctuating commodity
prices can be a problem
- Emerging economies
often rely heavily on
one commodity product
- Can lead to over-reliance on
one area of the economy
- Advantages
- Corporate Policy
- 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
- 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
- Clear and accurate communication is vital for business success
- India & Egypt have been successful in attracting Western FDI
due to the high amount of English speakers there
- Clear and accurate communication is vital for business success
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