International_Business_Environment

Executive Summary This report is conducted for the electric bicycle company for their decision of expanding internationally. In order to find out the existing or potential opportunities and threats in both UK and India, we analyze these two economies from political, economic and cultural aspects. In UK, the trade policy and legal system are favorable for the company to do business. Although the economic situation is relatively unsatisfactory, the potential market of electric bicycle can be explored. The final aspect is the overall cultural environment in UK, which should be adjusted properly by the company when entering this market. In India, the economic aspects, the most important ones, reveal a great potential for the company because of the increasing GDP, mass private consumption and completed road network. On the political side, the company will encounter a complicated legal system in different areas and the prevalent corruption atmosphere situation of the political environment while the government strongly supports foreign investment. In addition, education, language, communication and the theory of Hofstede will be analyzed in the culture part. Since both of the UK and India markets are prospective, we recommend the electric bicycle company to enter both of them   Content  UK Policy -------------------------------------------------------------------- 1  UK Economy --------------------------------------------------------------- 2  UK Culture ------------------------------------------------------------------------ 3  Recommendation --------------------------------------------------------------- 4  India Economy ------------------------------------------------------------------------ 5  India Policy ------------------------------------------------------------------------ 7  India Culture ------------------------------------------------------------------------ 9  Recommendation ------------------------------------------------------- 10  Reference ----------------------------------------------------------------------- 11  Appendix -------------------------------------------------------------------- 15 UK Policy As a member of World Trade Organization, UK follows the WTO agreements. The members in WTO agree to trade without discrimination, with lower trade barrier and under fair competition(WTO, 2011). It enables Chinese companies to do business in UK at a lower level of trade barrier and more efficiently. Additionally, the point of trade freedom in UK is 87.6 in 2011which is higher than last year (Appendix B Table 1), indicating a relatively high free trade environment for foreign companies. Although the free trade and low barrier policy in UK allows Chinese company to enter the market easily, it has weakness as well.To illustrate, such an open economy will attract other electric bicycle competitors, which may lead to fierce competition and impose potential threat on the company. In addition to trade policies, the completeness of legal system is essential to the entry decisions of foreign companies. There are mainly four general entry modes can be taken under the UK Companies Act 1985, which are establishing a place of business, establishing a branch, setting up a subsidiary, or appointing a third party. The legal protection is similar for the first three mode of business, such as contract enforcement and property rights. However, the company should pay attention to the fourth mode, which takes the risk of agency problem. If the agency acts beyond its authority, the principal may still be legally bound by the contract (Bircham Dyson Bell, 2008). Another issue should be considered is the tax and employment laws in UK may be different, or even stricter than in China. As a result, the companyshould be aware of and in accord with the accounting, tax and employment regulations in order to maintain or expand business in UK, which may cause additional cost to the company. In general, the legal environment in UK is favorable for a foreign company.As showed in Appendix A, UK ranks the 7th out of 183 countries in the regulatory environment for the ease of doing business. But undesirable situations should be taken into account. For example, on August 6, 2011, the riot began from London caused huge loss to many robbed stores (The Guardian, 2011). Although it had been quelled eventually, it exposed weakness of the system such as the delay and inefficacy of policing force while dealing with the violence, which may affect the stability of thecompany in the future as well. UK Economy The deregulation and privatization in UK taken place since 1979 have brought this country driving forces for economic development. According to IMF, in 2010 the UK is the 8th largest economy in the world with the GDP of 2,182,004.5 million dollars measured at purchasing power parity, and its gross national income (GNI) in 2010 is 36,978.0 dollars per capita at current prices, based on the annual exchange rate (Appendix B Table 1). The UK economy has experienced a serious recession since the 2008 financial crisis. Presently, according to OECD Economic Surveys (2010), “The UK economy is recovering but headwinds are significant”.The overall declining market in UK may shift the consumption from high-end to economic goods. Since the electric bicycle is relatively cheap and environmental friendly, there is a potential in the UK market. Economic freedom, which has been highly recommended as the indicator of long-run economy progress, is essential to the overall business environment for the electric bicycle company (Carden and Hall, 2010).In reaction to the global financial and economic turmoil, the British economy has undergone far-reaching adjustments, which reduces the economic freedom in UK. For example, in order to reduce the high debt aggravated by the 2008 crises, the UK has introduced an austerity plan of cutting public spending and implementing a new wave of tax increases, which may influence the profit of the company. According to 2011 Index of Economic Freedom (Miller et al.2011), those reactions make the 2011 overall index score of the UK 74.5 (Appendix B, Table 2), 2 points lower than that of 2010 and out of “the top 15” in Europe countries for the first time. Therefore, despite of some of the actions, such as action to release debts, aim to benefit the long-run economy, the data in Appendix B (Chart 1) showing an overall loss of economic freedom, which may indicate lower future growth rate and capacity of the British economy, casting gloom on the further of electric bicycle business in UK. Besides the analysis of the overall trend of UK’s economy, several specific economic factors should also be highlighted to determine whether a Chinese company should enter the UK market or not. Economic factors such as national economic interests and goals of the host country can considerably impact the political exposure of a foreign company (Alon, I. and Herbert, T., 2008).The UK’s current account of balance deficit in 2010 was 71,560.0 million dollars, ranking the sixth in the world, and accounted for -3.2% of its GDP. The trade with China so far seems having an overall positive force to the increase of this gap (Weeler, T. 2008). In the UK-China trade, due to the comparatively low labour cost and consequent low price level in China(Appendix B Table 3), UK’s domestic manufacturing companies face increasing competition and lower domestic prices, as illustrated in Appendix B (Graph 1). Thus the UK is seeking ways to lessen the import and relieve the trade deficit with China, which often need to be remedied through trade or currency controls. According to IMF, the China’s Exchange Rates against Pound Sterling has increased dramatically from 15.2 Yuan per pound at the end of 2007 to 10.5 Yuan per Pound at the end of 2010 and it tend to continue growing under pressure. The appreciation of RMB may reduce the Chinese company’s competitiveness in cost and decrease the electrical bicycle business’ potential benefit from entering the UK market. UK Culture One significant advantage of entering UK is the high quality labor pool in UK. Electric bicycle industry is proved the most innovative, environmentally sustainable transport vehicle in the world (Parker, 2006). The high degree education situation of UK helps foster the excellent research facilities in UK, which can remedy weakness of R&D in China local industry (Jefferson, 2006). The significant increase of young graduates has generated both relative cheap high intelligent labor pool with matched skills and large segment of consumers who can quickly accept innovation (Chevalier, 2000; appendix C1). In addition, UK education has created the awareness of the importance of environment protection, precedent can be arguably that Haier non-Fresno freezer turned out successful when introduced in UK. Bicycle industry will enjoy the intelligence and acceptability of UK culture. Hofstede’s work indicates a clear risk and challenge for the company to adjust to the host country, as the significant differences existing in IDV, PDI, and LTO between China and UK (Hofstede, 2011; appendix C2). Firstly, the Chinese company standing for collectivism caught in western culture will be facedwith the individualism. It challenges the company to keep their employee's loyalty which is unquestioning in China, or they will suffer the risk of high turnover rate and lose its constancy which is crucial in R&D. Secondly, in the dimension of PDI, UK employees are less tolerated to the inequity. Traditional Chinese electric bicycle flow assembly line requires abundant cheap labor whose salary is quite lower than managers and engineers'. Companyentering UK will suffer higher wage payment and has to deal with a more powerful union. Thirdly, the LTO of UK people are much lower than Chinese, and the difference contributes to different opinions about the long-term decision. In addition, the low context and high context difference might lead to communication misunderstanding, as Hall states (Hall, 1990). Company should pay close attention to the culture difference which could erode the cooperation and cause loss, a nonnegligible threat to the development of the company. In addition, the factors that shape the norms and values are not consistent, and with the push of globalization and co-communication, the long-term perspective provides an opportunity for electric bicycle industry to achieve long-run business in UK. Considering language differences, the spoken and non-spoken linguistic gap has been noticed, and the mandarin school in UK has increased to 130 (CPE, 2011). At the same time, some religion believes in two countries gradually become similar (Steve, 1995), the less difference will flatten the cultural gap, which is beneficial for the entering of Chinese companies. Recommendation To conclude, the lower growth rate and capacity expectation may reflect a downside of the UK economy. Meanwhile, the risk of currency revaluation makes the future profit unstable. Despite of the unsatisfactory economic situation, the free trade policy and sound legal system in UK, which have been analyzed previously, provide a favorable environment for our company. Finally, take the cultural factor into account, electric bicycle industry in UK can enjoy the advantaged factor endowments created by its high education. The competitive capacity can be achieved only when itrealise the existing difference and adapt to UK culture. As a result, the UK market is considered promising. India Economy According to the data published by the Ministry of Finance in India (Appendix D), although the GDP growth rate of India experienced a slowdown in 2008-2009 due to the global financial crisis, with 8.6% estimated in the 2010-2011, India seems to recover from the crisis and continue to develop rapidly. The strong growth of GDP in 2010-11 is mostly raised by an increase in savings and investment and a growth in private consumption (Beniwal, 2011). The rising GDP and large private consumption in India provide a great opportunity for the electricbicycle company. Attributed to the world second largest population of 1.5 billion people with 300 million in the middle class level, India can be a potential market for theelectric bicycle company. As the graph shows below, average spending on transport occupies 13% of total expenditure and the transportation expense proportion will grow until 2025, indicating a big customer resource (Beniwal, 2011). (Beniwal 2011) At present the economic system of India is mixed economies, a combination of market economies and command economies. In this kind of economic system, some certain sectors of India are still under control of Indian government while others are affected by free market mechanisms. Considering the sector to which the electricbicycle belongs is not controlled by Indian government, it is assumed to be easily accessible to Indian market through electric bicycle product. Cited from the data reports (UNCTAD, 2009), the road network of India has covered nearly 3.3 million kilometers, carrying 65% of freight and 80% of passenger traffic.Moreover, the Indian government has promoted the construction of road across the whole country recently. With the development of road network, domestic demand for two-wheelers has risen by 16% in June 2011, up to more than 880,000 units compared with 761,000 units in June 2010 (ibid). (Beniwal 2011) Meanwhile, India consumes large amount of oil that only 25% domestic oil demand can be satisfied by its oil reserves (Central Intelligence Agency, 2011). It is reported that India has imported oil that is worth$82.1 billion from other countries in the first three quarters of 2010, intensifying the current account deficit (ibid). The electricbicycle produced by the company can meet the demand for two-wheelers and will benefit from the reality of oil shortage due to the enormous demand from automobiles in India at the same time. As for market size, there are two types of markets to be analyzed, including labor market and money market. First of all, Indian labor is cheap and most of them are maintaining relatively high English skills. Referred to the graph below, the labor cost in Indian is lower than that in China, imposing an advantage on the running of business in the land of India. (India International Packaging &Environmental Symposium 2009) Considering the money market, Indian money market has a close connection with the foreign exchange market. The average exchange rate of Indian rupee, which is the only legal tender accepted within this country, is relatively stable during recent years (Appendix D). The stable exchange rate guarantees the cost of production fluctuating within a controlled range. India Policy When assessing the India market, political risk is a fundamental aspect taken into consideration, because variouspolitical regulationswill bring increasingly uncertainties for the success of the electric bicycle company. First of all, it should be identified that India is a country promoting individualism and democratism, illustrating that the government stands for the majority party’s benefit in the country (Hill, C.W.L. 2011). There is an opportunity for the electric bicyclecompany to invest in India, as the holding power party established some policiesto restrict oil purchase.For instance, the day after the India winter parliament session in 2010, the state-owned Indian Oil company announced to raise petrol prices by 5.6%approximately(Reuters, 2010). This policy which aims at controlling the usage of petrol by increasing price will bring the electric bicycle a growing market demand. However, corruption is a risk for foreign investors to get into Indian market asit influences the efficiency of government executive force. For example, the India telecom license scandal in 2008 displayed the officials deeply influencedby patronage system and people in power always tryto achieve extra benefit beyond their salaries (India Knowledge@Wharton, 2010).Thus corruption issue will influence the efficiency and fairly competition in this economy to a certain extent and increase the risk for foreign enterprise to invest in India. In addition, India operates a federal system of governmentwith28 States and 7 Union Territories. These different states and Union Territories have the right to operate the detailed policiesdifferently based on their own situations. This provides more complicated political situations for foreign business to operate throughout the whole India. Although India has been a member of WTO and encourages foreign business to invest in India, every state and Union Territories promotes some regime policies in specific industries to fit the local environment. This situation could impose restrictions for the electric bicycle business to start at a particular area in India. As mentioned previously, every state has rights to publish detailed rules to regulate foreign business’s operation and competition environment, ensure employees’ warfare, and enforce contracts. While this complex legal environment may protect the electric bicycle company’ property in some particular circumstances, it sometimes will limit business operation of the electric bicycle company. Sadiq Ahmed and ShantayananDevarajan (2007) suggested that the huge number of labor laws throughout all districts should be simplified and improved to ensure employees’ rights rather than employment rate. Moreover, Indian judiciary system isfacing problems such as case backlog andcorruption related delaying of judgments, which adds the risk and cost to the electric bicycle company. The World Bank provides the 2011 index to evaluate the ease ofdoing business in 183 countries (Appendix A). However, it ranked Indian political and legal environment the132th out of 183, With Registering Property, Dealing with Construction Permits, Protecting Investors and Enforcing Contracts ranking 97th,181th,46th and 182th respectively.Thus,it would be an adventurous choice for the electric bicycle company to invest in India considering the risk of political and legal situations. India Culture In this section, the situation of education, the prevalence of official languages, and the pattern of communication in India will be analysedfollowed by the application of Hofstede model. In the perspective of education, the illiterates amount to about 25 percent of the population, while the number of illiteratesis shrinking due to the implementation of compulsory education for children (Masani, 2008). As for the computer popularization in India, it is expected to have 2.2 billion internet users in India by 2013, indicating a huge number of Internet shoppers (Times of Inida, 2009). Along with the local project, such as the Akshaya project in the South India, the number of people equipped with basic computer skills is increasing (Pyati, 2010: 412).Combining two factors together, India has a large qualifiedlabour pool and a promising market for E-business, which is a main distribution channel of electric bicycle in China. In terms of language, the primary official language in India is standard Hindi, followed by English. However, the English is regarded as the fundamental business language, facilitating theoff shoring of foreign companies (Britannica World Data, 2010). According to Hall, India is a relatively low context country compared with China (Hall, 1990: 91). As a result, Indian would be more direct and explicit in the verbal communication, posing a challenge for Chinese businessmen. In theHofstede model, China and India have apparent differences in attitude of long-term orientation and individualism (Hofstede, 2001: 359). To illustrate, India is a short-term orientation country compared with China, since the score for India in this dimension amounts to half of that for China. Hence, in India, people would emphasis more on the present and the results in the near future (Tidwell, 2010). Meanwhile, people would concentrate less on the long-term issue such as environment protection (Christie, Kwon, Stoeberl, and Baumhart, 2003), which is highly advocated in China. Electric bicycles, which are environment friendly, have been gladly accepted by Chinese consumers, but do not have the same advantages in India. Another discrepancyis the degree of individualism in two countries. India is the country with individualism culture while China is highlycollectivised (Hofstede, 2011). In India, people concentrate more on personal development (Zhao and Hu, 2003: 133). They appeal for the independence and non-conformity, which generates a question that how uniqueness of the electric bicycle that Indian consumers hold. It indicates a challenge to the design of electric bicycle. In other three dimensions of Hofstede model, which are power distance, masculinity and uncertaintyavoidance, India has similar score to China (Hofstede, 2011). This represents opportunities to Chinese companies, because they need to alter less to adapt to the new market. The low level for uncertaintyavoidance in India indicates that Indians are readiness to accept new concept of electric bikes. It is beneficial for the Emma electric bike company (Christie, Kwon, Stoeberl and Baumhart, 2003). Recommendation In economic perspective, which we consider the most important factor, India is suitable for the business due to the increasing GDP and PPP, sound infrastructure, cheap labor cost and stable exchange rate. The complexity of Indian policy and legal environment with corruption problem increase the uncertainty of the electric bicycle company’s operation. Even though with some disadvantages in cultural aspects, India is claimed to be a promising market for electric bikes since advantages weighted these drawbacks. Therefore, we recommend the electric bicycle enter the Indian market. Reference Alon, I. and Herbert, Theodore T. (2009) A Stranger in a Strange Land: Micro Political Risks and the Multinational Firms, Business Horizons, 52(2), pp.127-137 Andrew. [online] Available at:[11th October 2011] Beniwal H. (2011) Proud to be among the Indian Middle Class [online] Available at : [10th October 2011] Bircham Dyson Bell. (2008) Setting up Business in the UK: A Guide for Foreign Corporations [online] available from [12th October 2011] Britannica World Data. (2011) India Available at: [12th October 2011] Carden, A. and Hall, J. (2010) Why are Some Places Rich While Others are Poor' The Institutional Necessity of Economic Freedom, Economic Affairs, 30(1), pp.48-54 Central Intelligence Agency. 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(2003) A Cross-national Comparison of China, India, Japan, and US [online] Available at: [15th October 2011] Appendix A Note: 183countries are included in the ranking, to see more countries, go to: http://www.doingbusiness.org/rankings Appendix B Table 1Overall economic condition Table 2 The economic freedom of United Kingdom in 2011 Chart 1Country (UK)’s economic freedomover time The Heritage Foundation & the Wall Street Journal Table 3 Wage in manufacturing in The UK and China Graph 1The effect of lower price inflation in China while exporting to UK (OECD Economic Surveys United Kingdom March 2011 Overview) Appendix C 1 2 Appendix D Ministry of Finance (2010) Appendix E