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Socio and Economic Factors in Global Business

Socio and Economic Factors in Global Business When a company decides to take their business international, there are many different sociological and economic factors that they need to take into account. There are differences in management styles, international laws and treaties that regulate international business, as well as cultural customs that come into play. Each of these are significant and needs to be taken into account in order to minimize potential problems. Many times, lack of knowledge can create serious problems. Although there are a myriad of socio- and economic factors, this paper will focus on three key ones: 1) political barriers; 2) labor practices; and 3) cultural barriers. Additionally, real world examples will be offered on how some businesses have successfully overcome these barriers. For purposes of this discussion, political barriers refer to the geo-political situation of a country, as well legal barriers such as tariffs, taxes, etc. Countries set up barriers to foreign entities conducting business within their borders (especially imports and exports) for several reasons. Duties and taxes can create some government revenue. If there is a high tariff then there will be less exporting, therefore more of that product in the country, thus making the price of that product in the country lower since there will be a greater supply. So trade barriers can be helpful to a country. On the contrary, trade barriers can have a negative effect on a country as well. Consumers will have to pay a higher price on imports, and for similar products produced in the country the price will rise due to consumers buying the imported products. In order to regulate the barriers on international trade, there have been organizations formed. GATT (General Agreement on Tariffs and Trade), WTO (World Trade Organization) and NAFTA (North American Free Trade Agreement) are just a few examples (Czinkota, 1999). Other considerations in overcoming political barriers are the governments themselves. Conducting business in Cuba is virtually impossible for American companies probably until the fall of the Castro regime. Domestic and international pressure on human rights, governments considered to be corrupt or "illegal" may also hamper an organization’s ability to do business in certain regions of the globe. Although these factors are challenging, they are not insurmountable. Take Wal-Mart’s entrance into the mainland China market. The benefits of building a business in this market are enormous, and every company in the industry that considers itself a global player has spent the past five years trying to win the favor of Chinese officials. While most continue to lose money, including Wal-Mart, they've come to realize that loss is the cost of admission to a market offering the potential for enormous sales and profits as it transitions to a market-based economy and the standard of living increases for its 1.2 billion people. To get in on the ground floor, Wal-Mart entered the market in August 1996 with a supercenter and a Sam's Club. It added another supercenter in 1997, two more in 1998 and one in 1999. Expansion was more aggressive last year with five supercenter openings giving Wal-Mart a year-end total of 10 supercenters and one Sam's Club. The increased comfort level is the result of China's growing friendliness toward foreign investment in the retail sector of its economy. China is in the process of gaining admittance to the 140-member World Trade Organization. Inclusion is expected to reduce trade barriers eventually leading to sweeping changes in its economy (DSN Retailing Today, 2001). Wal-Mart is positioned to capitalize on this growth with a store format that has enjoyed strong acceptance since day one. Changes have been made to accommodate Chinese customers and different traffic patterns in stores. For example, customers shop stores more frequently and purchase smaller quantities. It can take five times as many Chinese customers to achieve the same volume as a U.S. store. The result is a more congested store where the product assortment has been narrowed to ensure items are in stock. Wal-Mart's emphasis in its Chinese stores is on food. Food accounts for 50% of sales in China, and the presentation of food and its freshness is viewed as superior to U.S. operations because it has to do with meeting the expectations of Chinese customers. They are very selective with produce and demand freshness. In China, fresh means live, so Wal-Mart has tanks with live fish, snakes and frogs (DSN Retailing Today, 2001). Doing business in China (or most Asian countries for that matter) comes down to time and patience. These things don't happen overnight. Technology companies have the best odds of getting fast approval for projects. China wants to modernize as quickly as possible (Orange County Business Journal, 2001). While corruption is common in China, often being a good corporate citizen is enough to help get business done in the country. Conexant, which has offices in Shanghai, Shenzen and Beijing, trains Chinese engineers in the U.S. That plays well with the Chinese government. China also has a long-running tradition of lobbying and bureaucracy. Historical records indicate that lobbying Chinese feudal lords was a socially accepted occupation as early as 200 B.C. during the Han Dynasty. "Lobbying is and probably always will be a part of Chinese culture," said Gerald Hamilton, vice president of sales for Mindspeed Technologies, a unit of Conexant Systems Inc (Orange County Business Journal, 2001). Labor Practices Labor practices can be a hot issue when doing business in a foreign country. What every company tries to avoid is the type of negative publicity that circulated around Nike and Kathy Lee Gifford’s clothing line a few years back. But there are varying opinions on this issue. Human Rights organizations denounce "sweat shop" practices. They claim they take advantage of the poor and uneducated. Corporations counter argue that they are providing a better wage and benefits than what the average employee could obtain otherwise. Yet, a third opinion prevails. What exactly is a sweat shop anyway? Because a factory in a foreign nation does not meet U.S. standards, but abides by or even exceeds the host country labor laws, does that make it a sweat shop? Does the United States have a right to enter a sovereign country, and impose their labor standards on that country? ( Ward's Auto World, 2000). No matter what side one aligns their views with, corporations must be wary and cautious when dealing with this issue. The clothing manufacturer The Gap has handled this situation quite admirably with their manufacturing sites in Honduras. Honduras is a big clothing exporter to the United States, thanks partly to the Caribbean Basin Initiative, which allows some clothing to enter duty-free. This has drawn foreign manufacturers. South Koreans in particular have moved to Honduras to exploit its access to the American market (Economist, 1997). But unlike the reputation of South Koreans, who have been charged with employee abuse, The Gap has signed on, through an initiative sponsored by the U.S. and Honduran governments, to allow Honduran human-rights groups and churches to monitor conditions in their Honduran factories. This gives them a decided advantage over their other foreign competitors, who have yet to embrace such "quality of working conditions" scrutiny ( Economist, 1997). A country's culture has long been defined as an environmental characteristic that influences consumer behavior, and the many aspects of a culture affect differently the needs consumers satisfy through the acquisition and use of goods and services (Hofstede 1984). Many companies invest in an emerging foreign market without advance planning. Whether it is a multi- million dollar corporation or a fledgling entrepreneur, some initial legwork will insure against a variety of possible pitfalls. There is some help, however. The Overseas Private Investment Corp. (OPIC), a quasi- governmental agency that supports U.S. investment in some 140 developing countries, offers a variety of services. It provides political risk insurance, which gives protection against war, political unrest, government seizure of assets, or sudden inconvertibility of currency (www.opic.gov). Other agencies offer numerous services. The U.S. Department of Commerce (www.doc.gov) can help match U.S. firms with local business partners or suppliers. And as with the U.S. Chambers of Commerce found in many countries, the U.S. Foreign Commercial Service gives market intelligence on local business and commercial The fall of Communism (in the late 1980s and early 1990s) created not only a countless number of entrepreneurial opportunities in emerging markets embracing capitalism but also a minefield's worth of potential problems. American entrepreneur Ervin Latimer knows this all too well. Retiring from professional basketball in Finland in 1989, Latimer, along with his Finnish wife, decided to open a catering business in neighboring Estonia. With little or no preliminary research, Latimer dove in. In retrospect, he knows, that was a mistake. The wiser choice would have been to start slowly, because he was unfamiliar with the market. When he came to Estonia, Latimer had the optimism of a true entrepreneur. He saw an opportunity to open a restaurant in a city where privately owned restaurants hadn't been permitted since World War II. He knew that Estonia had a nearly tariff-free economy with a freely convertible currency and limited government interference. Foreigners can own 100% stakes in companies in all but the most ratified sectors, such as banking and mining, which isn't true in most former Soviet bloc nations. That's why Coca Cola and giant insurer American International Group has outposts there (Fortune Small Business, 2000). Drawn by the lure of an authentic American experience, Estonians and Russians started coming in droves as word spread about the high quality of the food, which included a Tex-Mex cuisine, ballpark hot dogs, and pizza. Latimer's biggest mistake was in not aligning himself with an Estonian business partner. He figured that because he knew Finnish (close enough to Estonian so he could understand it) and had enough capital, he didn't need local help trying to garner bank financing. But as a cultural outsider, he misunderstood the business dynamic. So much of global business success depends on negotiating, selling and dealing with the local authorities. A local partner/consultant can help, but it has to be a bicultural local partner who understands what your desires are as well. Understanding this concept now after going through some "growing pains", Latimer has built a million dollar catering/restaurant enterprise in Estonia. By immersing himself into the Estonian culture, as well as taking some local partners, he has avoided any major trouble that has plagued other firms and starry-eyed entrepreneurs who has set up shop in the former Soviet bloc: employee theft, bribes, payoffs, dealing with self-proclaimed organized crime, etc (Fortune Small Business, 2000). This discussion has highlighted but a few socio- and economic factors that must be considered when deciding to conduct business in a foreign country. As one can demise, the risks are there, but the potential for profit is very alluring. With prior proper planning, the risks can be limited. However, it will serve businesses well to incorporate economic factors into their overall global business strategies. Bibliography: References Czinkota, M., Ronkeinen, I., Moffett, M. (1999) International Business. Fort Worth: The Dryden Press DSN Retailing Today (2001, June 5). Open trade in billion-man market creates empire of opportunity. Economist (1997, June 21). 99% perspiration. Vol. 43, Issue 8022. Fortune Small Business (2000, April). East meets Mex. Hofstede, G. (1984). Culture’s Consequences. Beverly Hills, Ca: Sage Publications. Orange County Business Journal (2001, April 23). OC companies do business in China over tea, gestures. Winter, D. (May 2000). Facing globalization. Ward’s Auto World. Vol. 36, Issue 5. (www.doc.gov) (www.opic.gov) (www.usatrade.gov)

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