Set Up and Operate a Business in Foreign Country Essay Example for Free

Set Up and Operate a Business in Foreign Country Essay 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 °00N, 105 °00E. 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 worlds 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 (Chinas 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. % 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 Africas 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 arket 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 he 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 â€Å"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 equirements 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.