Page 98 - DMGT545_INTERNATIONAL_BUSINESS

Unit 6: Modes of Entering International Business

As with costs, the risks of doing business in a country are determined by a number of notes
political, economic and legal factors. Political risk has been defined as the likelihood
that political forces will cause drastic changes in a country’s business environment that
adversely affect the profit and other goals of a particular business enterprise. Political
risks tend to be greater in countries experiencing social unrest and disorder or in countries
where the underlying nature of the society increases the likelihood of social unrest. Social
unrest typically finds expression in strikes, demonstrations, terrorism and violent conflict.
Economic risks can be defined as the likelihood that economic mismanagement will
cause drastic changes in a country’s business environment that adversely affect the profit
and other goals of a particular business enterprise. One visible indicator of economic
mismanagement may be the country’s inflation rate, another may be the level of business
and government debt in the country. Economic risks are not independent of political risk.
Economic mismanagement may give rise to social unrest and hence political risk.

The legal risks may be defined as the likelihood that a trading partner will opportunistically
break a contract or expropriate property rights. When legal risks in a country are high, an
international business might hesitate entering into a long-term contract or joint-venture
agreement with a firm in that country.
The overall attractiveness of a country as a potential market and/or investment site for
an international business depends on balancing the benefits, costs and risks associated
with doing business in that country. Generally the costs and risks associated with doing
business in foreign country are typically lower in economically advanced and politically
stable democratic nations and greater in less developed and politically unstable nations.
3. Study of factors such as the size of the market (in terms of demographics), the present
wealth (purchasing power) of consumers in that market, and the likely future wealth of
consumers. While some markets are very large when measured by number of consumers
(e.g. China and India), low living standards may imply limited purchasing power and
relatively small market when measured in economic terms. Further the costs and risks
associated with doing business in a foreign country are typically lower in economically
advanced and politically unstable nations.
4. Potential long-run benefits bear little relationship to a nation’s current stage of economic
development or political stability. Long-range benefits depend on likely future economic
growth rates, and economic growth appears to be a function of a free market system and a
country’s capacity for growth (which may be greater in less developed nations).
5. By following the above process a firm can rank countries in term of their attractiveness and
long run profit potential. Preference is then given to entering markets that rank highly. In
the case of ING, their latest international venture in the financial services business has been
focused in Europe and North America. These regions have large financial services markets
and exhibit relatively low political and economic risks, so it makes sense that they would
be attractive to ING. The company should be able to capture a large enough share of the
market in each country to justify its investment in setting up business there.

timing of entry

Once attractive markets have been identified, it is important to consider the timing of entry.
The advantages frequently associated with entering a market early are commonly known as
first-mover advantages. One first mover advantage is the ability to preempt rivals and capture
demand by establishing a strong brand name. A second advantage is the ability to build sales
volume in that country and ride down the experience curve ahead of rivals, giving the early
entrant a cost advantage over later entrants.

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