International Business Management

Set up and operate a Business in Foreign Country
Abstract
This paper deals with the international business. It emphasizes on the means to start the business and the cost associated with the initiation of the business. It also describes the most important aspect of managing human resource. Because of the competitive environment, the need to do the business internationally has increased. This paper provides the overview of the two countries i.e. china and South Africa.
Broad description of the legal processes that were supposed to be followed by the company to initiate business in the China has been explained. Apart from this, the staffing of local and expatriate staff along with the labor organization and legislation of the foreign country has been described. Therefore, the paper provides detailed analysis of the conditions that should be kept in mind while establishing business in the foreign country.
Introduction
International business is a term, which is used collectively to describe issues relating to the firm’s operations with interests in numerous countries. These firms are sometimes referred as multinational corporations. The main area of concern in the international business is the cultural considerations. These considerations include dissimilarity in law and legal systems, living standards, language barriers, climate and many more (Cherunilam, 2005). All these issues need to be overcome for an MNC in order to obtain success in an overseas venture.
Nationwide economic growth and globalization of the economy provide an outstanding background for businesses in China as compared to the South Africa. Nevertheless, the growth of the company and sustainability can be hampered by the factors like industry consolidation, economic reform and globalization. The project of building substantial companies and integrating them effectively into the global marketplace is a complicated task.
Reasons: Why Company Going Global
Many companies and businesses get into international selling because of the existence of competitive environment. This environment compels the company to move further rather than staying at the same stage and size by just focusing on the quality. Another reason of growth and expansion is the fear of loosing the customers.
If the company would not show sustainable growth, competitors would move ahead and chances of loosing of customers will increase (Cherunilam, 2005). Other general reasons for going international are: political changes like changes in the regulation of work and safety and economic changes that include cost of production. If there is an increase in the cost of production at home, company looks for places where cost of production is reasonable.
The four major objectives that compel the company to go for international business are: to enlarge the sales, to successfully get hold of the resources, to diversify the sources of sales and to look for the diversifying the supplies (Kazmi, 2002).
Overview
Population
China: China is a socialist republic and the most populous country with population over 1.3 billion. It is having 90.9% literacy rate (male: 95.1% & female: 86.5%). The average educational achievement in China is low.
South Africa: South Africa is a nation of diverse origins, languages, cultures and beliefs with population over 47-million. It is having 86.4% literacy rate (male 87% & female 85.7%) of total population. The average educational achievement in South Africa is very low.
Geographical Location
China: China is located in Eastern Asia bordering the East China Sea, Korea Bay, Yellow Sea and South China Sea between North Korea and Vietnam. China has mountains, high plateaus, deserts in west and plains, deltas, and hills in eastern region. The geographic coordinates of China are 35°00'N, 105°00'E. The total area coverage of China is 9,596,960 square kilometers (land area is 9,326,410 square km and water is 270,550 square km).
China is the world's third-largest country in total area after Russia and Canada, and the second largest country by land area. The total land boundary is 22,117 km and the border countries are Afghanistan, Bhutan, Burma, India, Kazakhstan, North Korea, Kyrgyzstan, Laos, Mongolia, Nepal, Pakistan, Russia, Tajikistan and Vietnam. China’s coastline is 14,500 km (China, 2008).
South Africa: South Africa is located at the southern region of Africa. The geographic coordinates of South Africa are 29 00 S, 24 00 E. The total area is 1,219,912 sq km. The total land boundary is 4,862 km and the border countries are Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zimbabwe. Its coastline is 2,798 km. South Africa’s northwest region is desert and eastern is well watered.
GDP, Per Capital Income, Current Inflation Rate, Unemployment Rate
China: The GDP is $3.42 trillion and officially recorded GDP growth rate is 11.4% in 2007, per capital income is $ 2000, inflation rate is 7% in 2007 and it has jumped to 8.7 percent in February after severe winter storms disrupted the economy and worsened food shortages (China's inflation at decade high, 2008). Unemployment rate in urban area is 8%-10% (China Unemployment rate, 2008).
South Africa: The GDP is $283 billion, real GDP growth rate is 5.1% in 2007, per capita income is $ 5700, inflation rate is 7.1% and unemployment rate is 23% in Sep. 2007 (South Africa: Profile, 2008).
Type of Legal System
China: The legal system is based on civil law system. It is derived from Soviet and continental civil code legal principles. The legislature holds the power to interpret the acts. There are seven categories of laws in china’s legal system; these are: the constitution and related laws, civil and commercial laws, administrative laws, economic laws, social laws, criminal laws, and litigation and non-litigation procedural laws (The Constitution and Legal System, 2008).
South Africa: The legal system is based on Roman-Dutch law and English common law. There is an independent judiciary in South Africa. Constitutional Court and Supreme Court are the highest court in the country. Constitutional Court deals with constitutional matters and Supreme Court deals with the final appeals of all the other matters. The bill of rights provides fundamental political and social rights to South Africa's citizens (South Africa, 2008).
Type of Economic System
China: China is a major economic power and it has great potential of the development. Previously, the public sector was in dominant position, but after 2001, a socialistic market economy is taking place in China and the intensive mode is replacing the extensive mode of economic growth (Economic System, 2008).
South Africa: The South African economy is an industrialized and productive economy. It has inadequate distribution of income & wealth. Labor is divided into formal and informal sector. Formal sector is more developed, which is based on agriculture, manufacturing, services and mining. South Africa is looking forward for privatization along with free market economy and favorable investment climate (Economy: South Africa, 2008).
Type of Political System
China: The National People Congress is the highest authority of state power in China. The people congress system is the fundamental political system in China. The representatives are elected by people at all levels.
South Africa: The South African Republic is a federal state constituting of a national government and nine provincial governments. The constitution of South Africa was adopted in 1996 and implemented officially on 4 February, 1997. President of South Africa is the executive head of the state and leads the cabinet. He is elected for a two five year terms by the parliament (South Africa, 2008).
Estimates of Future Economic Growth & General Economic Projects
China: China has become the world’s fastest growing economy after the economic reforms in 1979. It has achieved 11.4% GDP growth rare in 2007. Industrial manufacturing expansion has contributed in China’s rapid economic growth. European Union, Japan, United States, Hong Kong and ASEAN are the major trading partner of China. Rapid economic growth of China results in an increase in income, which in turn makes China a huge market for a variety of goods and services. So it would be beneficial for any company to start operation in China.
South Africa: In previous years, South African economy was not doing well. Government was facing the problem of unemployment and poverty. But in recent years, country is seeking to achieve stable growth rate.
To promote economic growth, South Africa is making optimal use of available resources and reducing completer dependence on primary sector industries. South African companies are now investing in retail, banking services, telecommunication and shipping industry. Government is seeking to liberalize its economic policies to attract FDI and increase future economic growth and now outsider companies may think to start its operations in South Africa.
Social and Cultural Factors
Social factor in China: In China, the main focus of the business entities is on the corporate social responsibility. The Chinese region has become the region full of opportunities for MNC’s in these days because of the rapid rise, elaborating receptiveness and growing consumer market. The social factors reflect the true picture of society’s attitude towards the corporate. The symmetrical society structure stimulates forces on businesses for concentrating on corporate social responsibility (Kyoon, 2007).
Cultural factors in China: Understanding the culture of a country is one of the important factors in front of modern organizations. The traditions and customs vary among towns, cities and provinces in China. The social network structures in China assist in understanding the information sharing between the people (Kyoon, 2007). The Chinese environment is now open for the outsiders. The cultural values include the belief in God, unity, optimism and readiness to work together according to the rules of law.
Social factor in South Africa: The social environment of South Africa is highly imbalanced and not much developed. It suffers from the problems of increasing population, poverty, illiteracy and lack of resources. The population of South Africa was 40.6 million in 1996, which is growing rapidly at the rate of 2% per year. If the same trend continues, then by the year 2035, the population of South Africa will be approximately 86 million. This will be a problematic situation as the country has limited resources to support its increasing population. There is already a pressure on the resources to meet the needs and requirements of the people (Social Environment, 1999).
Many people in the country live in informal and inadequate houses and just half of the population lives in towns and cities. Many people living in rural as well as urban areas even do not have access to water supply, electricity, sanitation and other services. Nowadays, the urban population of South Africa is rapidly increasing because of factors like growing employment opportunities, land reform and restitution and immigration from other countries.
Unemployment and poverty are the major problems in South Africa that affect the social life of the people. The poverty level is the highest among the Black population of South Africa. It has reached up to a level of 60%.
The education level of the country has increased as compared to the previous year levels, as the country has reformed its educational system. Almost, all South Africans now have access to education but still about 7.5 million people are functionally illiterate. Such factors contribute to high crime rates in the country that have noticeably increased in the urban areas. These and other factors contribute to the high crime rates currently experienced in many urban centers.
To promote sustainable development and reduce social imbalances such as poverty, unemployment and pressure on natural resources, the Government has developed a number of policies and passed a number of laws aiming at some constructive work in this direction. These include the Reconstruction and Development Programme, a White Paper on Population Policy, and the National Crime Prevention Strategy (Social Environment, 1999).
Cultural Factor in South Africa: Africa has a diverse cultural environment with about 800 languages spoken all over the continent. Among these, South Africa have 11 official languages of its own, i.e. English, Afrikaans, Tsonga, Xhosa, Ndebele, Southern Sotho, Zulu, Tswana, Venda, Northern Sotho, and Swati. There are many cross-cultural challenges that are critical to success and organizations should be prepared to face these challenges.
Analysis
The company has chosen china for its operations as china has successfully emerged as the best suitable market for the consumer products, especially in terms of the growth rate, potential and the market size. China is providing huge benefits to attract the players from the United States.
The growth graph of the china depicts that the market of the consumer electronics is growing with a CAGR of 11.7 percent from the year 2002 to 2006. Future also shows the greater intensity of market growth. There is a greater possibility of bright future in Consumer Products. The Company is willing to start its operation.
Another major factor for establishing operation in china is the population as it is regarded the driving factor for any business. Apart from this, there is a well established market of credit card, which has increased the popularity of the consumer products in the country (Windsor & Jones, 1999).
China is the highly populous country and demands for consumer products are fuelling with greater pace. In china, urban centers are emerging which are called secondary cities, which comprise of 8 to 10 million people. These cities have huge buying power and industrial development.
These cities would be best for the company’s operations and are located interiorly away from the cost. Tsingtao is a city, which is suitable for the operation of the company because its urban area is quickly expanding. It is also having excellent connections with the countryside. The disposable income of the people is quite similar to the people in the bigger cities. Another reason for selecting this place is that the people in this city show greater likeability towards the product of the United States and relate the product with greater degree of integrity. People show positive view and experience towards the U.S consumer products.
Operations
In order to establish operation in china, company’s chairperson should visit these cities, must talk to the local officials and begin networking. Apart from this, the most important thing is to analyze the competitors’ working and strategies. Another step that the company can adopt is subcontracting, which can be done by forming joint ventures with the manufacturers of china.
If the company doesn’t possess enough resources for joint venture, company can go for forming the partnership or consortium in the United States. This consortium acts as the legal entity, which can form partnership with the Chinese manufacturer. The advantage of the consortium is that it reduces risk and the cost for the company (Barron, 2006).
While selecting the operations, evaluation should be made based on the analysis of cash accounting and not on absorption accounting. As in absorption accounting, the fixed costs are prorated over small volume of production and thus the number obtained can deter company from moving production to a subcontractor.
The other operations include: integrity of product and trade safety, fair & balanced economic development, financial sector reform, security & energy efficiency, sustainability in environment and bilateral investment. All the above mentioned reforms would help the company to establish business opportunities in china.
The agreement between the United States and China that relates to conduction of business with extensive cooperation covers the issue of climate change, environmental sustainability and energy security. This type of agreement would advance the innovation in the technology and the acceptance of extremely-efficient and clean energy technology will encourage the development of technology so as to address the changes in the climate and promoting natural resources.
Three major factors, which can determine the success in the Chinese market and should be kept in mind, are: * Culture: Understanding of Chinese culture and behavior can provide better option to fulfill the demands of the customers. * Value Proposition: This includes having the knowledge of technical know how and understanding the level of competitiveness. * Negotiation: The Company should implement negotiation technique as per the way of Chinese.
Success of doing business in China depends greatly on the extent of adoption to the requirements of the local customs instead of the value proposition of foreign investors.
Legal processes
In the process of starting a new business, Legal and regulatory processes play a very vital role. Legal processes include several restrictions, intrusive bureaucracy, dissimilar understanding of regulations from place to place even between authorities and recent formulations of policies that are aimed at safeguarding the domestic companies. Therefore, before starting any operation in the foreign country (china) the company should understand regulations and their applications before entering into any agreement.
The company should look for legal proposals from experienced professional firms. Due attention should be given to the financial and legal background and also on the reputation of key partners. Apart from this, partners and employees should be educated on the protection of the intellectual property. If required, the rights can be enforced but for this, all the terms and conditions should be well known.
Management Organization Structure
Organization structure plays a vital role in determining the success of the company in the host country. Therefore, there is a requirement of change in the organization structure in order to accommodate a firm’s internationalization approach in answer to the worldwide competition. Significant research has shown that the structure of the firm must be conducive to the strategy implementation. In simple words, it can be said that the structure should “fit” the strategy. Managers should work towards achieving the fit between the structure and the strategy (Gupta, 2007).
Management organizational structure refers to the representation of a formal structure, which describes relationship inside an organization. The level to which authorization is assigned ascertains centralization and decentralization.
Most of the MNC’s in their initial phases of globalization utilized an international section traversing certain regions of the world to manage the functions in those regions. Matrix organizational structure is very effective for the business. The structure of the organization is decentralized, which merge the advantages of being large with the agility and concentration of smaller organizations.
The small segments of the business assist in concentrating more on the needs and requirements of the customers and employees effectively. The company’s employees are associated with the goals and objectives for an established global enterprise. The organization is mainly focusing on the way in which the products and services are delivered to the customers. The development and marketing of products and services in an effective provision provide specialized and quality services to external and internal customers.
The autonomous operating companies broaden the geographic reach of the associates around the world and provide larger marketplace and product focus. This way, the employees get closer to the customers and business. The employees would be able to gain more sensation of ownership in driving the business. The employees are authorized to aim their business to fulfill the varying needs of customers inside their regions (Mathew, 2003).
The decentralized operating companies, associates and business sections are joined in the organization structure, which ensures that the activities are aligned with the overall strategic objectives. All the employees perform their work systematically with the high ethical standards.
As the company rises, the structure also develops, assuring the effective growth of the business portfolio. In recent years, the business sections have constituted shared service groups that raise and confirm the capabilities of the individual companies in the elementary domains of responsibility.
The corporate headquarters in the U.S. function with the family of companies for producing great synergism and efficiency by collaboration, dispersion of better patterns and organization of shared business information. The corporate headquarters render direction and services in different critical areas, which include human resources, finance, advertising, and law.
The consequences of environmental circumstance (instability of technology), industrial circumstance (production technology) and organization structure on the involvement of customer in product development are the main areas of concentration in China (Windsor & Jones, 1999). The earlier results demonstrate that for going through customer orientation in the firms at China, the company has to modulate towards market driven economic entities.
Product Distribution
Distribution is the key factor for successfully implementing the business strategy in other countries. Consumer product requires an effective distribution strategy for increasing awareness among the Chinese customers, as China is a diverse country with cultural and economical differences.
The goal of reaching the estimated sale of the product according to the schedule would not be possible to achieve if the product will not reach to its prospecting customers appropriately. There are various ways to distribute the consumer product effectively such as creating network of wholesalers and retailers, establishing factories and networking.
Creation of the network of wholesalers and retailers: It refers to the creation of an effective network of wholesalers and retailers, which assist the organization to distribute the consumer product in an efficient way. Both of them will be responsible for the functioning of distribution in a scheduled time period (Cherunilam, 2005).
Establishing factories and depots: It refers to the establishment of factories and depots, which are required for the manufacturing and processing. It will assist the organization to work effectively. For ensuring plenty of inventories, the company should have its factories and depots near the demographic areas.
Creation of large warehouse: It refers to the establishment of large warehouses in the demographic areas. It will assist the company to distribute the consumer products in China.
Networking: It refers to the development of effective network of distribution channel. It will assist the company to distribute the consumer products in an effective way. It requires establishing contacts with different persons who have the perfect knowledge of the market.
Foreign invested commercial enterprise (FICE): It is the facility through which any foreign country can distribute its products in China without the approval of government. So it is another arrangement for the organization to distribute its consumer products in China effectively (Sharan, 2005). It is an effective tool for the company to engage in the activities such as wholesaling, retailing and franchising.
Distribution Channels
It refers to the channel for distributing the product in direct or indirect way.
Indirect channel: Marketing middlemen and cooperative organization come under the Category of indirect channel, which performs the task of distributing the product in the foreign country in an effective way.
Marketing middlemen: There are two important categories of marketing middlemen, one is merchants and another is agents.
Merchants: the domestic based export merchant assist the company to distribute the consumer product in an effective way.
Agents/brokers: Agents and brokers play an important role in the distribution of the consumer product. They assist the company in achieving the sales target within a specified time period.
Cooperative organization: These organizations carry the function of both the channels whether direct or indirect by exporting combination and allied company arrangement (Sharan, 2005).
Direct channel: It refers to the direct marketing of the product in a foreign country. It assists the company to distribute its consumer product in China in an effective manner. Direct channel performs its function of distribution with the help of sales subsidiary, export department and cooperative export company.
Process of selecting Local and Expatriate Staff
An international business must procure, motivate, retain and effectively utilize services of the people. International human resource management is the process of procuring, allocating and effectively utilizing human resources in an international business. Many factors influence the staffing policy for international business like the cultural dimensions of the host country, the subsidiary characteristics, parent company characteristics, cost to be incurred and the host country considerations. While dealing in international business, it is an important consideration of how to select the local and expatriate staff (Gupta, 2007).
Selection of local staff is determined by a number of factors. The persons to be selected should be perfect in the local language and should necessarily be residents of the host country. The skill levels of all the persons should be examined properly. They should have the required experience and knowledge of the job.
Selecting local candidates can reduce the training expenses and the HRM cost. Increased growth opportunities for the nationals will motivate them and they will be committed to their work. Also, the company can get positive support from the Government of the host country. It also reduces the turnover among the employees.
Another option is to select the expatriate staff i.e. selecting the staff from the home country to employ in the host country. This is a tedious task as people from home country generally do not prefer to shift and work in the host country. The considerations for selection of expatriate staff are that the candidates should be talented and capable enough to handle the work responsibilities. They should be able to adapt to the culture of the host country (Sharan, 2005). There should be a feeling of unified corporate culture. They should be expert in handling the resources of the company and should know to manage the competencies of the company.
Training concerns
The local staff does not require much training except the work training and a small training session concerning the legal and ethical concerns of the company. So, the local staff can be given on the job training through lectures, conferences and seminars. But, there is a lot of training expense required for expatriate staff (Mathew, 2003).
The expatriate staff needs to be trained to adjust according to the culture of the host country such as the food habits, dress sense, ethical and moral values of the country, etc. They should also be taught the local language of the host country, which will help them to communicate well in the organization.
This kind of training is necessary because the expatriate staff needs to adjust in a strange country along with his family (Gupta, 2007). They are also given training of how to react in different situations and solve different problems related to the workplace. Most of the times, the expatriate staff is given off the job training like role playing, vestibule training, case studies, etc.
Motivation concerns
With regards to motivation, both the local and the expatriate staff need to be motivated. They should be assured for regular appraisals based on performance and also pay increase based on the same criterion of best performance. But the expatriate staff will be motivated much by attractive salary packages and extra benefits with it.
Both should be given fixed discounts on the products and services of the company. Employees should be given rewards for their performance (Gupta, 2007). There should be recreational facilities for the employees, especially for the expatriate staff as they might feel home sickness in a strange country and will take time to adjust. Parties and picnics should be organized for the employees.
Compensation concern
In case of compensation, the basic salary package should be enough attractive for the expatriate staff and accordingly for the local staff. The basic salary for the expatriates includes cash payment along with Foreign Service premium, cost of living allowance, housing allowance etc. The employees should be given extra benefits with the salary (Mathew, 2003). They should be given fringe benefits and a number of incentives along with their pay. Bonus and various attractive gifts should be there for the employees on occasions and also according to their performance.
Labor Organization and Legislation
The labor organizations in China are committed to safeguard workers’ political, economic and cultural rights. These unions are under the influence of Chinese Communist Party. These unions are voluntarily constituted by the workers of all the enterprises, government department and institutions regardless of their age, sex, nationality, occupation and religion.
The Constitution of China acts as the basis for the activities of labor unions. These labor unions perform their activities and exercise their rights according to the rules of unions and laws of constitution. The national congress of trade union is the superior body of Chinese trade unions. There are 31 state trade unions, 10 national industrial unions and 2 trade union federations in China.
The All-China Federation of Trade Unions was established on May 1, 1925 as a united, unified and powerful national organization to work as a federation of trade unions at local level and industrial unions at national level. Presently, 130 million workers are the members of ACFTU. In China, the workers of an institution, organization or government department form their trade unions.
China is a member of International Labor Organization (ILO) and the basic obligations of Chinese Labor Law are from the conventions of ILO. Chinese trade unions are developing contacts with other international labor unions maintaining equality, interdependence, mutual respect and non-interference in their affairs. Trade unions of more than 140 countries and regions are associated with Chinese trade unions (All-China Federation of Trade Unions and Its Work, 2002).
The Chinese trade unions are playing an important role in China’s political and economic condition. The Trade Union Law protects the trade union by providing them legal assurance. The trade unions are having a sound organizational structure because they are at all the levels such as national, township, municipal and grassroots level within the country. These unions are funded by workers and worker welfare business.
Chinese Labor Law integrates many local and national laws. The Labor Law Act (Labor Law of the People’s Republic of China) came into being on January 1, 1995. According to the Chinese law, if there is any affair related to the interests of the employees, the trade union representatives have to be invited to the meetings. The trade unions are not very active in China and the legal position of workers is not much strong. Employers are carrying an influencing role on the workers.
According to a new administrative directive on December, 2004, employees are protected centrally by the state. This provides a better control to the authorities related with wage, working hour, workers’ rights and social security. The Foreign Invested Enterprises (FIE) can not directly recruit the workers in China. They have to take the approval of local labor authorities for this purpose. Employers are directed to present the employment contracts to the labor authorities. Income distribution is not equal in all the areas of China. In China, uniform and nationwide security law is to be established.
The Foreign Invested Enterprises have to provide justification about the employment of an employee from their country. They have to convince the local labor authorities that they could not found any well qualified persons who can fulfill all the requirements of any particular position.
Thus, trade unions in China are working for the welfare of employees and with the new directive, they are provided with some more legal authorities. Foreign Invested Enterprises can start their operations in China but they have to follow the rules and regulations of Chinese Labor Law and approval of local labor unions for recruitment.
Additional Risk
Additional risk prevailing in china aroused due to its withdrawal from the network of economy and social welfare (Ying Ma). This has engendered the country into a stage of massive unrest and unemployment and has developed the situation of political risk. Rate of unemployment in the rural area is 20 percent (Doing business with China, 2007). Occurrence of riots has increased every day in china. A major currency risk of doing operations in China is the difficulty in collecting full payment on required time. Effective steps should be taken to minimize these risks.
Conclusion
Based on the above study, it can be concluded that company can successfully carry its operation in china despite of the risks. Company should take effective steps to mitigate these risks like adequate diligence, experience and proper communication. Apart from this, effective planning and pursuing with the right partners can play a significant role. Realistic decisions should be taken along with the market analysis by using news and media sources.
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