Page 233 - DMGT401Business Environment

Business Environment

Notes European nations, USA, Canada, Japan, etc., have a stagnant population growth and very
low GDP growth.
All these factors led to companies searching for a new market. Emerging economies like
India, China, and South East Asia form a significant market-perhaps more than 35% of the
world market. This has given them opportunities and MNCs have started expanding their
wings in these parts of the world.
India and China are amongst the top five countries of the world in terms of Purchasing
Power Parity. All this attracted many organizations to tap new markets in emerging
economies. Besides this agreements/groups like GATT, GATS, ASEAN, EU, SAPTA,
NAFTA, etc., have also created huge opportunities of business for organizations and to tap
these, they are going abroad.
3. Diversification: No organization wishes to keep all its eggs in one basket. Every
organization wants to diversify its risk and internationalisation is a good manner to do
that, along with sticking to its core competency or old business. Different countries have
different trade cycles for the same product. When there is a recession in one economy,
there could be a boom in the other and an organization can cover losses in one country by
profits.

Example: The Ispat group has steel plants almost all over the world. It is number two in
most of the countries but it is number one in terms of sales in India. Unilever which is behind
P&G in USA, is much ahead of P&G in India.
Thus MNCs diversify risk through internationalisation.
4. Resources: In today's cut-throat competition, cost cutting is the key to success. Prices are
controlled by consumers and the only thing which can be manipulated to increase profit
is cost. Organizations go abroad in search of economical sources of supply. A truly global
firm always locates its processing in the best available location in the world and outsource
HR and other physical resources from the best suited place available. In fact, this is the
reason that more and more companies are establishing their call centres in India.

Example: Even Wal-Mart, the biggest retailer of the world, does not have any retail
shop in India but it does have a purchase office in India. Nike gets its shoes manufactured in
South East Asia. Besides Nike even Nokia, IBM, Toyota, Sony, Philips, Samsung, Mitsihuta,
Boeing, Airbus, Adidas, GM, Ford, etc., have their manufacturing capacities, research centres,
and ancillary units at places best -suited for their purposes.

Thus, companies cross borders to have access to economical resources.
5. To Protect Market Share: Firms also become MNEs in response to increased foreign
competition and a desire to protect their home market share. Using a "follow the competitor"
strategy, a growing number of MNEs have now set up operations in the home countries of
their own major competitors. This approach serves as a dual purpose: (1) it takes away
business from their competitors by offering customers other varied choices and (2) it lets
competitors know that, if they attack the MNEs home markets, they will face a similar
response.
6. Tariff and Non-Tariff Barrier: Organizations establish their operation overseas to deal
with tariff and non-tariff barriers. Many time countries impose tariff and non-tariff
restrictions on import in such cases. Organizations establish their production unit in the
host country so that it can be treated as a local company.

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