An ends of the political spectrum. ‘Democracy

An
accumulation of recent political and social events has caused a profound shift
to the global economic landscape. The most prominent example is perhaps
Britain’s withdrawal from the European union (universally referred to as
Brexit). Speculation and uncertainty surrounding Brexit, including projected
increased costs of trade, has substantially reduced inflows of Foreign Direct
Investment (FDI). ‘FDI refers to the flow of capital between countries’
(Economics Online). Consequently, Brexit explicitly emphasises the importance
of companies understanding the key features of the economic climate of another
nation before deciding to initiate any international business activity. This
report will provide a detailed insight in which critically analyses the key
factors companies must recognise before deciding to instigate business in other
countries.

 

Countries
vary in a number of ways and as a result, international business is deemed far
more complex than domestic business. The most apparent way in which countries
are different, is the variances in ‘the system of government in a nation’
(Hill/Hult International Business). Political systems can be assessed according
to whether a country is running either a democratic or totalitarian regime.

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Democracy and totalitarianism are situated at opposite ends of the political
spectrum. ‘Democracy refers to a political system in which government is by the
people exercised either directly or through representatives. Totalitarianism is
a form of government in which one person or political party exercises absolute
control over all spheres of human life and prohibits opposing political
parties’ (Hill/Hult International Business). Democratic regions and transparent
governments often attract Multinational Enterprise’s as they provide political
stability. Overall, stability contributes to an environment that encourages
enterprise where businesses and citizens have the ability to voice their
opinions thus allowing them to contribute to the improvement and enforcement of
laws and regulations. Transparency is a key feature in a political environment
as not only does it allow effective enforcement of the law, it also assists an
enterprise to develop the knowledge it needs to construct a strategic business
plan thus to enhance and maintain high levels of business competition.

Consequently, this will not only enhance the success of the business but it
will also promote economic growth for the country leading to greater
development. On the other hand, under a totalitarian regime, governments in a
foreign country can often motivate political instability. Consequently, this
will directly impact and deter any form of foreign direct investment as
political instability can very often lead to corruption. Government corruption
has a number of economic impacts on a business including inefficiency and
resource misallocation both of which lead to damaged revenue streams and reduced
productivity. Therefore, a business must be aware of the political system under
which a country is operated before deciding to initiate any business activity
within that region.

 

Changes
in the economic cycle of a country has a profound impact on a company’s
decision to expand business activity internationally. Perhaps the only
similarity between international and domestic business is the immense
volatility of FDI. Investment requires a stable economic climate, and any major
changes in the economic cycle does not inspire stability but rather, promotes
uncertainty. The economic structure of a country is potentially the most vital
factor a company must evaluate before deciding to pursue business abroad. For
some countries, taxing international corporations is a main source of income
that aids and facilitates fiscal policy. Therefore, it can either act as an
incentive or a deterrent for most international corporations as it directly
impacts their ability to make profit. In some situations, where tax is too
high, companies run the risk of making a loss which is why it is imperative
that they are aware of the current state of the economic environment they wish
to invest in before actually doing so. Ireland is an extremely clear example of
how a country uses tax incentives to promote FDI. Large U.S. corporations such
as Apple and Microsoft were heavily enticed to the low business tax in Ireland
from the early 2000’s that eventually in 2009 U.S. investment stood at $166
billion (U.S. Department of State). Economics covers a wide range of factors
that companies must be aware of. Including changes in the level of the national
minimum wage of which, has a huge impact on a company’s decision to expand
business activity abroad. Businesses must be mindful of how much it will cost
to run operations abroad. Similar to tax incentives, countries are increasingly
using the national minimum wage as an incentive to promote FDI and attract more
enterprises thus taking advantage of their lower national labour costs. Higher
wage rates in a country will increase the production costs and therefore,
discourage a company from investing. A company must understand that the
differences in the level of economic development in different countries has a
direct impact on the level of infrastructure. Infrastructure is fundamental to
any business operation as it supports growth and expansion through either
improved communication technology, transport links or facilities for research
and development. Businesses looking to enhance performance and growth will
require a good level of infrastructure which is dependent on the level of
economic development. A more economically developed country with good
infrastructure is far more likely to attract foreign direct investment.

However, companies should be aware that investing in a less economically
developed country could increase transportation costs (and by default overall
production costs) as a result of poor road and rail links. It is vital that the
economic environment of a country be evaluated in depth before any company
decides to invest and pursue business abroad.

 

A
country’s overall attractiveness to potential inward foreign direct investment
can take many forms and depends on what the risks and rewards are for doing
so.  Social and cultural values are among
the factors that directly relate to whether a country is attractive in its
appeal as a business investment opportunity. Culture is best defined as ‘a
system of values and norms that are shared among a group of people and that
when taken together constitute a design for living’ (Hill/Hult International
Business). There are a number aspects of a culture that vary in their impact.

Take language as a key aspect of a culture. Communication is essential to
ensure the success of any enterprise. Differences in language across the globe
make it increasingly difficult for an enterprise to thrive and be successful. A
company must be aware and educated in the practices of the culture of the
country they wish to invest in and this can be achieved by cross-cultural
literacy ‘an understanding of how cultural differences across and within
nations can affect the way business is practiced’ (Hill/Hult International
Business). Consequently, any business that is ill informed about the common
practices of another culture are unlikely to reach success in that country.

Cultural distance which is defined as ‘the differences in cultural values
amongst countries, organisations and stakeholders’ (IGI Global) can cause
uncertainty as it creates information gaps which makes it increasingly
difficult for the business to predict challenges facing the firm and
orchestrate a business plan that effectively deals with them in the foreign
market. 

 

International business is
radically different, and in many ways far more complicated than domestic. It
can be highly lucrative for a company however, it can also be extremely
challenging and risky. Conducting business in foreign markets is achievable if
the business is flexible and willing to work with the legal and regulatory
systems of that country. When companies consider international expansion, it is
imperative that they evaluate all of the vital factors that influence business
activity and how they might change in a foreign country. By developing a key
focus on the economic, social and political factors that impact a business on
an international scale, provides an insight to the dangers and risks associated
with doing so. There are a wide range of other factors to analyse such as
technological, environmental and legal of which, also contribute to a company’s
decision to begin business in a foreign country. The term political economy is
used to ‘stress that the political, economic and legal systems of a country are
interdependent; they interact with and influence each other, and in doing so,
they affect the level of economic well-being.’ (Hill/Hult International
Business). Therefore, each individual factor is as significant as the next and
as a result, heavily emphasises the importance of a company’s awareness and
understanding of foreign business culture before deciding to expand production
internationally