3 International Business Essay Assignment Sample
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What are the key challenges faced by multinational enterprises when operating overseas? How can they overcome these challenges?
Introduction
Many large companies explore their home market first but sooner or later, the growth slows and in order to continue they must go global. MNE’s provide the countries in which they expand into with financial infrastructure, resources, improved quality of goods and services and extensive opportunities for economic and social development. At the same time, MNE’s faces several challenges while operating overseas in a global dynamic business setting. Even though MNE’s are global, they have to act locally in order to compete in the market of the foreign country as locals have more knowledge about the place and people. One of the biggest challenges is to understand the culture and social norms of the place they are operating in, as some products might not appeal to a certain group or region of customers and there are various overcoming communication barriers while negotiating with the local suppliers, labours and other stakeholders (Sauvant, 2009). MNE’s operational overseas face another strategic challenge of political instability as it may lead to economic uncertainty with fluctuating inflation/recession rates, taxes and foreign laws and policies affecting the exchange rates, cost calculation and global pricing strategy. Another challenge faced by MNE’s is to deal with the worldwide environmental issues related to the industry and its impact in the local environment. Resistance by consumers to standardised global products, supply chain complexity and risks of labour exploitation are the few other challenges faced by MNE’s when operating abroad. However, to be effective in the international market, the companies should consider feasibility studies and explore market entry as a region and not as a country and be able to use this knowledge to their advantage.
Challenges faced by MNEs
The first challenge that will be discussed in this paper is the communication barriers and cultural differences faced by an MNE abroad. Every single part of the company should be taken into account when appealing to the foreign market. Many companies fail to take into account the effect of their strategy on the culture leading to negative consumer reactions. For instance, Mc Donald’s and Heineken both during the 1994 world cup soccer tournament introduced a promotional campaign by featuring the flags of all the nations qualifying for the championship on its hamburger bags and under the bottle cap. Amongst that was the flag of Saudi Arabia which bears a holy passage in Arabic (Krechowicz, 2009). This cultural oversight offended the Muslims as they felt that the sacred words should neither be associated with the alcoholic beverage nor be thrown in the trash. Even though it was an honest mistake and both the MNE’s had withdrawn the bags and bottles from the market, this episode caused great customer disappointment.
Global enterprises operating in different continents have to often find their headquarters in host country struggle to communicate and control its subsidiaries because of different time zones and localised perspectives of managers. An MNE has to mainly compete with the local companies and if every time they go back to the headquarters and then come back; they are to lose to the local competitor in the country of their operations. Something that the MNE’s are unsuccessful in doing is to authorise their subsidiaries to act on their own initiative (Tan, 2009). For example, in 2013 Amazon faced a lot of difficulty while entering the German market due to communication issues. According to the local and Die welt, workers brought in from crisis hit countries were intimidated and harassed by the security services hired by Amazon wearing clothes similar to neo-Nazi groups. Even though Amazon immediately cut ties with the security firm, their delayed response to the accusations in poorly translated German from the headquarters with only little details harmed their image. Time difference between America and Germany and underestimation of cultural differences by the managers also played a major role in their distorted communication.
Western giants seeking growth overseas should not only focus on the demographics and purchasing power of the consumers in the host country but also understand the market based on regional ethnography. MNE’s fails in the international market mainly due to their ignorance, incomplete analysis of religion, dialects, values and traditions. Even though companies employ translators and consulting firms but the absence of understanding of a culture and the need to internalise it in their company doesn’t help them mitigate the impending risks (Boets, 2008). Translation changes the meaning of a word when it is translated from one language to another. A common example is that of General Motor’s Chevy Nova. It has failed in the Mexican market mainly because Nova in Spanish means ‘not going’. The relationships of MNE’s with their stakeholders are also affected by different communication styles as a less aggressive approach of communication is used in China compared to the western world (Guillen, 2013). In Germany and America connections inside the boardroom, punctuality and keeping to schedules is considered important whereas in Middle East or Latin America maintaining long term relationships with patience and socialising is considered more important. For decades, diversity and complexity of cross culture has resulted in the strategy conflicts for multinational companies. According to a Bata shoe company’s sales executive when women workers came to talk business with the male supervisors, they had to sit on the floor facing the wall. This is because sending a woman for business negotiations was looked down upon in Asian countries.
Factors affecting International expansion
International expansion is tricky particularly in emerging markets due to the political and economic uncertainty. Political uncertainty is one of the biggest challenges faced by MNE’s in 2018 mainly due to North Korea missile crisis, Trump administration in America, ongoing Brexit negotiations and trade protectionism in United Kingdom, succession risks that dominate in African countries, Italy’s general elections due in March this year and Spain’s continuous political instability. War against terror has destroyed US based MNE’s potential target market in Muslim countries making it economically unstable.
Feasibility studies should be undertaken by MNE’s to explore entry into the market on the basis of region to avoid breach of any industrial policies, tax laws or employment and labour requirements (Bartlett, 2008). Spanish market is less risky and more competitive to enter now than it was five years ago because of its new Entrepreneur’s law which decreases the risks and tax burdens for MNC’s investing in Spain. According to Harvard Business Review’s 1970 issue, Spain had set explicit sales and export volume conditions before allowing Ford to establish production facilities there to an extent that Ford had to take government authorisation to even broaden its range of automobile lines. The Spanish government had even limited the company’s sales volume to 10% of the previous year’s total automobile market and required its export volume to be two thirds of the total production in Spain (Lenartowicz, 2007). Similarly, according to the employment law 14 weeks of maternity leave is granted in European countries whereas there is no such law for American employers. Adverse government actions taken by the government of host country is the most common political risk faced by MNE’s investing in foreign countries. For instance, Berlin Airbnb has suffered when the number of Airbnb hosts reduced substantially after the new housing law; banning regular short term letting of rooms without permission from the authority took effect. Airbnb had to also pay a fine of €30,000 for breaching local housing tourism laws in Barcelona.
Social instability, adverse government actions and terrorist threats are among the most common political risks that multinational organizations now face when trading or investing in foreign countries.” Issues such as ill-defined or unstable policies and corrupt practices can be hugely problematic in emerging markets (Diaconu, 2008). Changes in governments can also lead to changes in policy, regulations, and interest rates that can prove damaging to foreign business and investment. For instance, companies like Facebook are banned in China, partially in preference for national social networks and also due to government regulation over internet content. Monitoring political developments and planning accordingly can mitigate political risks of doing business abroad. Succession risks dominate the political risk landscape in many African countries, Marsh said, and the threat of terrorism remains a concern, evidenced by attacks in Europe, Africa, Asia and elsewhere in 2017.
Overcoming the challenges faced by MNEs
The multinational companies are expanding rapidly in emerging foreign markets but they need to consider various challenges and overcome them for enhanced success in the international market. First of all, the company need to understand their nature of work, target customers, capability of expansion, risk taking abilities and scope, time and money requirements for investment and most importantly, the selection of countries for expansion.
The language and cultural challenge is one of the biggest challenge faced by the companies while expanding in international market. It is important that at least one person of the team should speak local language especially while expanding in completely different countries and not nearby countries (Schwab, 2014). And the team need to consider the local language differences. Any scope of confusion due to language differences should be avoided by the company in advance. Also, it is important to understand the way of working of the target country as in some countries, the customers expect the services on the next day while in some countries, and the customer service can be prolonged for weeks. For example, Mc Donald has faced major cultural challenges due to beef burger in India while there was no market for beef and it has hurt the culture and sentiments of consumers in India. The company has soon realized that local sentiments are being hurters and discontinued its offerings of beef in Indian market. The host company need to consider the risk alienating the customers while expanding in other countries (Bennet, 2002). The host country can also adopt a go-to-market strategy to face the realities of new market and ensure that the company is totally fit to the new environment. The understanding of target country over the time can help in building new market strategy that can be applied to different situations.
Another challenge is local competition, which is very common in the case of international expansion. It will be difficult because the host country need to deal with import fees and tariffs that will increase their turnaround time as compared to the British counterpart. This challenge can be resolved by finding the right partner and building good relationships with the local business. The company can build working relationship with the international companies for logistics, storage and shipping concerns. With the expertise and knowledge, the host countries can bring numerous benefits (Rugman, 2005). The products can be delivered seamlessly to the customers of international market and the overall transition can be much easier within the target country. For example Costco Wholesale have done a tremendous job in going global and it has gone global by opening over 150 warehouse clubs across the world. It is an American company and faced competition challenges in different market but it has sustained in the market due to its localized service offerings.
The tax and legal compliance issues are another major challenge while expanding in international market. The host country need be aware of trading regulations and standards as failing to comply with the regulations of target country can hamper the expansion plans and also, create additional costs to the company. This can be resolved with due diligence to sort out the tax, legal and finance matters in appropriate manner (Bartlett, 2008). The host country need to understand their nature of work, target customers and required legal compliances for the company so that the tax and legal requirements and fulfilled before the implementation of international expansion of the company.
The supply chain risks also pose great challenge for the companies while expanding overseas. The shipping, imports, logistics, exports are common departments of the organization but while expanding in different country, these departments need to be managed very carefully. These risks occur in case of trading internationally and it is important to develop a specific strategy, budget and a business plan to avoid these issues (Tan, 2009). The conduct of due diligence and a solid plan can avoid the unexpected situations, overstocking or understocking of key products and also, reduce the spending on shipping and logistics.
The operational risk with the hiring staff is another challenge for the multinational companies while expanding in different countries. The company need more staff to handle the increased work in business (Guillen, 2013). The company may recruit new staff in the target country. However, hiring staff in different country also poses great risk not only because of increased overheads but also, trust in new people. It can be resolved by ensuring that the product and organization are ready and establish an efficient team. The host country needs to ensure that the organization is completely prepared for the challenges of internationalization to grow effectively in the new market.
Challenge faced by MNE in detail with examples
There are many challenges like language and cultural barriers while expanding in international market. For example, an Australian company is trying to export thongs in UK, then the company need to address or refer it as flip flops because thong means completely different thing in British English. The challenge of local competition is also a major issue while expanding in international market. For example, the company is selling unique handmade knives in Australia and plan to expand in UK with the same business model, but at the same time, another company in UK is already selling handmade knives in the target market. The supply chain risks lead to very high costs for the host countries if they are not handled properly. For example, if the host country is shipping goods from APAC region to America, the geographical distance need to be contended. The time and cost of the shipping is not a challenge but the delays and custom issues are major concern for the companies.
Another popular example of international expansion failure is of Starbucks. Starbucks is a large coffee chain and operates across the world. The company has interested in the Australian market in 2000 and opened 84 stores but soon after in 2008, the company has announced to close most of their stores due to declined earnings, rising costs and the main reason was that the consumers have cut down their spending on luxurious gourmet coffee due to economic downturns. The reason of failure is that Starbucks have not considered product optimization for new market and entered the Australian market with the old tactics and failed miserably.
Conclusion
There are many emerging markets across the world but it is important for MNEs to consider the aforementioned challenges i.e. political, cultural, technological, economic, social and overall market. In the process of internationalization, it is recommended to consider the nature of work, market approach, target customers and economic conditions of the country to gain success. Moreover, it requires an effective business plan to deal with the challenges of human resources, supply chain, import and export, tariffs, local competition, language and cultural barriers so that the challenges can be managed in proactive manner. In context to emerging market where the development rate is high, there is a lack of market and communication system and the political, legal and economic environment is also unstable. The challenges for MNEs in the international market exists and continue in one or the other ways as it takes these nations to consider radical improvements and reforms in their existing way of business operations, economic reforms, infrastructure, human resources etc. So, the MNEs need to act more responsibly and socially in the interest of business organization as well as community.
References
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