International managers need to understand variation in unit labor costs (ULC) in various countries so that they can be able to form solid decision during internationalization. Unit labor costs weigh the mean cost of labor per unit output. Managers must understand unit labor costs in operation in the countries they are targeting to start a business (Dustmann et al., 170). United States Bureau of Labor Statistics has documented data that implied ULCs differs in various countries.
Understanding variations in ULCs will enable managers to initiate business only to countries with a lower unit labor costs and refrain from countries with a comparable higher unit labor costs. Increased ULCs have adverse impacts on a company. First, it increases the cost of production as the corporate will be required to offer higher wages. Moreover, the profits margins will substantially decrease. Finally, rising unit labor cost can trigger inflation and decreasing the business competitiveness (Steenkamp et al., 58). It is, therefore, rational for managers to understand ULCs in different countries before business internationalization.
Foreign Exchange Exposures
Foreign exchange exposures are a financial risk experienced by corporate when a financial transaction is transacted in a foreign currency other than the domestic currency of the corporate. There is three major currency exposure encountered by multinational corporate: Transaction, Translation, and Economic exposure (Steenkamp et al., 62).
Translation exposure occurs during reading of books of accounts from foreign currency into the domestic currency. Transaction exposure is realized when there is a change in currency exchange rates after the corporate have already signed financial obligations. Economic exposure is the risk that a foreign corporate investments, earnings, and cash flow may suffer as a repercussion of shifting foreign currency exchange rates.
Natural hedging and financial hedging are two significant alternatives that corporate can adopt to manage foreign exchange exposures. The former involves minimizing the difference between payments and receipts in a given foreign currency while the latter involves purchasing foreign currency hedging instruments (swaps, currency options, and foreign exchange forward contracts) that are sold by financial institutions and brokers.
Hedging allows the company to match currency outflows and inflows. It also allows the corporate to hedge against exposures while benefiting from favorable currency move.
Natural and financial hedging cannot be sake from commendatory currency move. Secondly, guarantees are required in a swap and forward exchange contracts. Finally, hedging instruments cannot be canceled unless by taking a reverse position.
Advantages and Disadvantages of a Global Brand
Global brands attract high-profit margins. Global brands command higher prices in the marketplace as well as high sales volumes, therefore, increasing company’s profit. Global brands enjoy constant emphasis, therefore, offering corporate stability and longevity (Krishnamurthy, np). The global brand creates and maintains corporate goodwill thus high sales. Finally, global brands enjoy economies of scale.
Global brands have limited flexibility. Developing a global brand can limit joint flexibility from moving forward. For instance, a corporate ingrained as a major leader in a particular product can experience challenges in extending the brand. Global brands can create a negative image for the corporate once a name fails. Part of the customers may not be willing to pay an extra cost for the branded product; therefore, the firm can lose some of its clients.
Strategies to Reduce Interest Rate Risk
Interest rate risk exists in an interest bearing asset (bond or loan) as a result of a possible change in the asset’s value necessitating variability of interest rates. Forward rate lock agreement and interest rate cap are strategies that can reduce the interest rate risk to the firms.
Forward rate lock agreement (FRAs) is signed between two parties with an aim to protect themselves from future fluctuations in the interest rate. Once an FRA is signed, both parties lock in an interest rate for a set duration of time and starting on a fortune settlement date. The end payments are summed up basing on a nominal principal amount and liquidated at intervals predetermined by both parties. FRAs enable an organization to evade future rise in interest rates. A combination of FRAs can constitute an interest rate swap, where parties exchange sets of cash flows.
Interest rate caps are an agreement between parties aimed at providing the client with an interest rate ceiling on interest premium per floating rate debts. The rate cap itself bestows a periodic payment founded upon the active aggregate by which the primary index rate surpasses the strike rate.
A firm with the intention of entering a new foreign market should have sound knowledge concerning the education mix of the target country. Education mix determines taste and preferences of the consumers. For instance, highly educated individuals tend to consume products that promote health wellbeing, but this can be a non-issue to less educated people (Menon, 440). Moreover, education mix determines the labor force available in a target country. Finally, education mix also reflects the level of developments, a country with educated individuals tend to have many entrepreneurs whom a firm can form partnerships with and market its product.
Tariff and Non-Tariff Barriers
Tariff barriers are obstacles to trade between different countries or geographical areas that arise from abnormally high taxes charged by a government or a state on imports or exports for raising revenue, protection, and support of the balance of payments (Mackey et al., 69). The primary examples of tariff barriers are Ad valorem duty, a particular duty, sliding scale tax, revenue tariff, compound duty, and countervailing duty.
Non-tariff barriers are any barriers rather than a tariff that escalate an obstacle to the free flow of products in international markets. Major examples of non-tariff barriers include import bans, complex rules of origin, export subsidies, quota shares, inadequate infrastructure, state subsidies, and minimum import price fixation.
Factors Determining the Attractiveness of Specific International Markets
Political stability determines attractiveness to particular international markets. Availability of skilled and non-skilled personnel in the specific foreign markets is also a factor. Moreover, legal and economic structures of the respective international market determine the attractiveness. Finally, the purchasing power of the population at the particular international markets will determine how a market attracts investors and entrepreneurs (Minkov, Michael & Hofstede, 22).
Problems of Brain Drain to Developing Countries
Brain drain has caused significant adverse impacts on developing countries. Developing countries lose an enormous percentage of skilled personnel to the developed countries. The end results are that developing countries lack the skilled personnel to implement development programs. Brain drain has expanded the problem of health care inaccessibility in developing countries (Garriga, Elisabet & Mele, 80). The brain drain of healthcare personnel has caused a significant decrease in some doctors and nurses in developing countries thus compromising the health care sector.
Industrialization and corporate development have also been halted by the brain drain of skilled personnel. Trained staff that would have otherwise fueled industrialization and business development are poached by developed countries. For instance, many Information Technology (IT) specialist brain drains have halted development of IT companies in developing countries.
Geert Hofstede Cultural Dimensions
Geert Hofstede cultural dimensions tend to explain how values in a corporate and workplace environment are influenced by culture. Power distance index is one of the Geert cultural dimensions, as well as uncertainty avoidance index (Moncada et al., 590).
Power distance index measures the dissemination of wealth and power between people in a culture, business or nation. Uncertainty avoidance index measures the level of acceptance of ambiguity and uncertainty within the society and in unstructured situations. In international business, low uncertainty avoidance aids in customers’ acceptance for a variety of products compared to consumers with high-risk avoidance. Power distance index in international business affects the distribution of authority and how employees can question their seniors.
Asian and Latin Americans scores a relatively high on uncertainty avoidance and power distance. Citizens in these countries emphasize on fostering laws that high-risk avoidance and centralization of power distance. Operating a business in these countries will require the corporate to incline their decision to offer services and products with little to no uncertainty and power distance.
Ethical Issue in International Business
Human rights are fundamental freedoms and rights to which all individuals are entitled to, often include the right to live, equity, freedom of expression, liberty, and freedom from torture (Kern et al., 320). Internal business has in many instances bleached these fundamental human rights, for example by exposing its employees to the harsh working environment and subjecting the employees to physical and psychological torture.
Corruption is any fraudulent or dishonest activity conducted by those individuals in power, generally involving bribe. A manifestation of corruption in international business can be seen when a company pays some money the tendering department so as to have some advantages when bidding the tender.
Environmental pollution ethical issue addresses how companies activities impacts on the natural environment. It is a social responsibility of businesses to ensure they engage in sustainable operations and respect national legislation regarding environment protection. Mitsubishi Corporation was fined by the European Commission for the destruction of forest in Siberia and Asia.
Moral obligation refers to a duty to act in an ethically accepted way. International business is obliged to execute their activities by instituted laws and regulation within a society or a country. The ethical issue of moral obligation is manifested when a business bleach a business contract (Zahra et al., 928). This moral issue if not well counteracted they can limit the potential for business growth in international market.
Politics, Economic, and Legal in Business
The political system represents how the country is governed politically. Political stability is a fundamental element in drawing the set of structure to globalization. American investors will tend to establish their business in a political stable country. Secondly, another aspect that determines the structure is whether the power is well distributed or is it concentrated in the hands of few individuals.
Economic factors are the primary influence that directly affects corporate financial matters such as interest rate, tax, stock markets, and banks. Economic factor will influence significantly the decision for an American willing to internationalize his or her business.
The legal system also plays a significant role in determining the standard operating procedure in a country. The legal system is divided into civil, common, and religious law; all this laws will affect an American with an aim to explore overseas market. Entrepreneur or a manager should understand these three drivers of globalization since their interplay determines success or failure of a business. Political and economic ideologies of a country have a direct impact on its legal system.
Strategies for Competing in Global Market Place
The multi-domestic strategy is a marketing plan that seeks to focus and understand the needs of a domestic market and tailor marketing entry into this local market. An example of a multi-domestic strategy is when a company identifies there is a need for pasta in Arab countries and a company tailor its production in pasta production (Kern et al., 320). The primary benefit in multi-domestic strategy is that the corporate can command a higher price hence more profit. The major drawback is that the firm may face more uncertainty.
International strategy is adopted once a corporate sells its products outside its domestic market. For instance, a milk processing company can decide to sell some of its cheese product to overseas market. The main advantage is that the business enjoys an enormous market size thus an increase in profit margin. The main drawback is that the company may be subjected to export duty and other charges reducing the profit margins.
An organization can locate production facilities of manufacturing and assembly in different countries to enjoy cheap labor and production raw materials. Secondly, shipping product components are much cheaper than shipping the end product. Finally, organizations evade customs duty and taxes attached in exporting the final product from the manufacturing country.
Approaches to New Market Entry
There are various methods that a corporate can use to gain entry to new markets. Exporting, it involves the direct selling of products overseas. Secondly, there is a strategic partnership: Forming a strategic joint venture with a corporate that has already established business infrastructure. Moreover, companies can engage in franchising, royalties, and licensing. Both models require that the licensee or franchisee make remittance to the brand or intellectual property owner. Finally, a company can use contract manufacturing. Contract manufacturing involves the prior signing of product contracts with the customers.
The company should expand internationally to improve profits, to expand abroad will boost the company sales hence more profits. Secondly, companies internationalize to have short-term and long-term security. Multinational corporate are less vulnerable to periodic downturns and fluctuations in the marketplace since changes rarely occur simultaneously in different countries. Moreover, companies internationalize to enjoy economies of scale and evade stiff competition in the domestic market. Companies also expand internationally to improve their sales share by diversifying its marketplace to less competitive countries (Alexander, np). Finally, companies internationalize to enjoy government incentives such as reduced tax, rewards, and interest-free or subsidized loan.
Economies of scale refer to the total reduction of per-unit production cost achieved by increasing the production volume. The following kinds of scale economies are available in international marketing: economies of information, international marketing facilitate collective efforts in conducting research as thus the company enjoy the economies of information.
Economies of disintegration, when a corporate expands internationally, it is possible to disintegrate some of the services offered by the business to be carried out by one specialized branch (Browning et al., 19). Moreover, the company benefits in economies of risk bearing. The more diverse the organization is, the more likely that its losses will be spread to various branches, therefore, easing the net loss. Finally, the corporate enjoys marketing economies.
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