Discuss about the Global Business for Journal of Conflict Management.
Consider an automobile company that also produces automotive parts and thinks of expanding business in a new market. One easy way of business expansion is to gain access to a new market through export. Now, both the country A and B import automobile or automotive cars. In order to choose export destination, a number of macro variables needs to be considered. Gross Domestic Product of is the measure of overall productivity a nation (Uribe & Schmitt-Groh?, 2017). GDP of country A is US $ 2.081 trillion. The GDP for country B on the other hand is US $ 216 billion. The per capita income is also higher in country A than that in country B. The country A has an average income (GDP per capita, PPP) is US $ 15,000 and that is country B is US $ 6,900. Most of the population in country A is live above the poverty line. Only 3.7% people in country A is living below the poverty line. However, this statistic for country B is 11.3%. Country A is highly urbanized with 86.2% people resides in urban. The share of urban population in country B is only 34.9%. All these suggest as an export market of Automobiles Country A is in a better position than country B.
Consider the situation of a petrochemical company that refines petroleum oil and engages in production of petroleum products. Crude oil is one primary resource needed for this business. To supplement domestic supply, however the business need some source of import of crude oil. Country B’s one of the major export is crude oil. This implies the country has abundant supply of crude oil. However, the country is not much developed as country A. This is reflected from the percentage share of employment in three major sectors of the economy. In country A, the share of agricultural employment is 10%, industrial employment is 39.8% and service sector employment is 50.2%. The corresponding shares for country B are 48%, 21% and 31% respectively. The share clearly shows country B is an agriculture dependent nation. Because of lack of industrial development the demand of crude oil in country B is greater than that is country A. Petroleum products belong to the major importable of country B. Therefore, country B has appeared to be a better source of importing crude oil for the business.
The last conclusion that can be drawn looking at the socio economic data for the two countries is the decision regarding choice of location for Foreign Direct Investment (FDI). Suppose, a company is deciding to expand business of producing transport equipment in some foreign market. FDI is one direct mode of entering in foreign market. The factors that needs to be considered while selecting FDI location include economic and political stability, geographic location, availability of skilled laborers, market size, operation cost and other (Lien & Filatotchev, 2015). GDP and per capital GDP are two important indicators of economic stability. In terms of both indicators, country A is in a more stable state than country B. The adult literacy rate though slightly higher in country B (94.7%) than country A (92.6%) but the industrial and service sector is more developed in country A as compared to country B. This attracts FDI in country A. The rate of unemployment in country A is 13.1 percent while than in country B is 2.3%. The foreign direct investment creates more job opportunities in the nation. Therefore, government in country A might provide tax concession or other incentives to the entering business firm.
Foreign market entry mode- international joint venture
The beneficial effect of entering in a foreign market depends on the mode of entering in the market. The four common channel of entering in a foreign market exporting, Licensing, Joint venture and direct investment. In Joint venture, two business firms located in two or more nation enter in a mutually beneficial partnership. The five common objectives of such a partnership include enter in a new market, share of risk between partners, share of technological knowledge, development of joint product and confront government regulation (Wong et al., 2018). The key aspects to be considered in a joint venture are control, ownership, length of agreement, pricing strategy, technology transfer, capabilities and resources of local firms and intention of government.
A wholly owned subsidiary on the other hand makes independent operation as a parent company. Here, the entering firm has its own structure of management, clients’ base and products. The main advantage of international joint venture is the risk sharing among the partners. Entering in a new market involves different kind of market risks. In the wholly owned subsidiary, such risks had to borne by the single company (Yan & Luo, 2016). In joint venture, however the risk is shared among the partnered firms. When one business fails then the resulting losses are shared between companies. Joint venture also minimizes risk by providing a greater access to local resources and capital to the newly entered firm.
However, there are some potential risk or disadvantage in a joint venture. As like risks, profits are also shared between companies. Therefore, in a joint venture firm receives a lower profit as compared to a wholly owned subsidiary company (Wong et al., 2018). Problem may occur in a joint venture in case of interest of partner contradicts.
Lien, Y. C., & Filatotchev, I. (2015). Ownership characteristics as determinants of FDI location decisions in emerging economies. Journal of World Business, 50(4), 637-650.
Uribe, M., & Schmitt-Groh?, S. (2017). Open economy macroeconomics. Princeton University Press.
Wong, A., Wei, L., Wang, X., & Tjosvold, D. (2018). Collectivist values for constructive conflict management in international joint venture effectiveness. International Journal of Conflict Management, 29(1), 126-143.
Yan, A., & Luo, Y. (2016). International joint ventures: Theory and practice. Routledge.