MGF2351: International Business - Paradox - Assessment Answer

International Business Assignment

Assignment Task

Governments across nations generally increase the risk and the cost of doing international business. Paradoxically, they need to play a significant role in creating international business effectiveness.

Introduction

International trade refers to the act of exchanging capital, goods, services or technology across international borders or territories. The local government of any country plays a very significant role in shaping the status of global marketing in its region. Thus legal/political aspects become crucial for promoting or discouraging international trade or business. The term ‘International law’ defines the rules, policies and principles followed by the states and nations while dealing with foreign countries. There are two features which make international laws very interesting (Carter, 1997)-1) All these laws are individually made by each nation and based on their internal needs and the degree of willingness to relinquish their rights, 2) There exists on judicial and administrative body at international level to keep a check on all the nations and build a truly comprehensive international legal system.

Benefits of international business for a host company

The economy of the country hosting the foreign companies get directly affects in terms foreign direct investment as it starts receiving a good supply of money, technology and management resources, otherwise not available to their common people. Such transfer of resource accelerates the economic growth of the host economy. Multinational companies (MNCs) invest huge capital in host countries for various long-term projects. Owing to the virtue of their large scale business and good will in the market, these MNCs are capable of borrowing money from capital markets much more easily in comparison to the host countries. These kinds of acts make it possible for these small countries to gain access to financial resources otherwise not available to them (Kurtishi-Kastrati, 2013). Whenever feasible, they purchase land, goods, and services locally.

Another aspect where international business proves beneficial for the developing countries is the transfer of advanced technology in their nation. They get access to more recent and environmentally ‘cleaner’ products or production process technology in comparison to what is locally available. These MNCs also create employment opportunities for the locally residing people in their firms leading to flow of knowledge as well. They are trained with technical, executive, accounting and managerial skills (Dunning & Lundan, 2013). And once they acquire skills and leave MNCs, this knowledge helps them in establishing the local enterprises there. The increase in the job prospects of the local nationalists can be supported by the fact that Toyota’s investment in France opened up 2000 direct jobs and around another 2000 more in other sectors related to their work (Kurtishi-Kastrati, 2013). Therefore any international business is allowed to operate within a host country only if substantially benefits the country.

Role of government in promoting and discouraging international business

Looking at the benefits that can be availed by promoting international business, governments formulate and implement various policies to encourage foreign investors to either come and invest in the local companies or come and set up their own enterprises. Some of the common ways in which governments across various nations encourage international business are- 1) they are creating various free-trade zones (Walter, 2014)and free-trade agreements, 2) they provide export insurance to safeguard the rights of exporters against commercial and political risks in their host countries , 3) they are helping in finding out new international markets to promote and sell their products there, or establishing new manufacturing plants in cheaper countries, in terms of raw material, production cost and labour (Dlabay & Scott, 2005).

Despite of all the benefits associated with indulging in international business, there are certain policies and of governments across the nations will directly or indirectly discourage or prevent the growth of international business in their countries. Some of the main reasons for it include protection of the rights of their local people, safeguarding their health, protecting the local businesses from foreign competition. Government thus establishes various trade barriers to slow down the encroachment of foreign traders in their areas. These trade barriers are government actions and policies that make it difficult to trade across borders.

Sometimes the laws of the nations to protect their workers are quite stringent. For example in many countries the occupational protection laws are created to protect their workers from unforeseen dangerous situations. They make it mandatory to wear protective gears like eye goggles, hard hats, and earplugs. Child labor is strictly prohibited in many countries, though they form the cheapest class of labor everywhere. This drastically increases the cost of doing business in such countries (Dlabay & Scott, 2005). In addition to occupational protection laws, many countries have highly regulated consumer protection laws. This ensures that the products marketed to their local people are safe for use. For example, it is compulsory to list all the food ingredients used in the manufacturing of the food product on the packing. Proper electrical safety standards are maintained by many developed countries to ensure the quality of the electrical appliances used by their people. Some of the laws observed in various countries regarding the same are- 1) it is mandatory in Canada to have all the package label instructions in both French and English (Mackey & Metz, 2009), 2) in Venezuela, every retail product must have the price as well as the date on which it was marked on the packet, 3) in Belgium, there is a limit on the sound that a lawn mower engine can produce, 4) the degree of inflammability must be written on the nightclothes of kids in Australia (Horrocks, Nazare, & Kandola, 2004), 5) similarly advertising toys on social media is not allowed in Greece (Bandyopadhyay, Kindra, & Sharp, 2001). To abiding by these protection laws increases the overall cost of business making the product less competitive. So if a same product is being manufactured in both Canada and Mexico, the one developed in Canada will cost more even if both are sold in the same third country (Dlabay & Scott, 2005).

The governmental act of protecting local or domestic industries from foreign competition is called protectionism. There are several measures taken by the governments to confine the extent of foreign competition. Some of these include increasing the price of goods being imported by creating tariff or custom duties; limiting the quantity of goods that can be imported, called quota; some time they force the local companies to boycott particular countries; or they form legislations for restrictive licensing requirements for importers products (Dlabay & Scott, 2005).

Tariff or duty refers to the tax applied on products that are marketed from international companies. Because of these extra charges in the form of duties, the cost of the product increases for the importing party. The high prices force the consumers to look for other alternatives. Tariffs are one of the most common barriers in international trade. To illustrate it, we can use the example of Pakistan. Exporting goods to Pakistan was not an easy task few years back. The customs duties applied by them ranged from 20 to 90%. All the imported products were also charged education tax (5%), import license fee (6%), asales tax (12.5 %) and import surcharge tax (10 %). So a product with marketing price of 100 dollars used to turn into a 223 to 250 dollar commodity after clearing the Pakistani Customs Office (Dlabay & Scott, 2005).

Government may also limit the quantity or monetary value of goods that can be imported into the country. So once the limit gets over, no more of the product can be traded into the country. This directly contributed in protecting the domestic business from high foreign competition. Import quotas have been used to protect the textile, shoe, automobile, and steel industries in some countries. The Sweden, the government controls the import of all alcoholic beverages and tobacco products using defined quota, whereas the import of coal in France is monitored by the same approach (Dlabay & Scott, 2005).

There are cases where, certain goods from specific countries are completely restricted for import. This type of act is called boycotting. There are many products which are prohibited from import In India. Along with protecting the local business men, this approach has another advantage. This boycott forces the foreign companies which wish to approach India for marketing to invest here locally, set up there manufacturing plants and here local people to make goods. Similarly in Japan, the import of rice is completely banned (Allen, 1993)and in Norway apple and pear producers are protected from foreign competition as import is allowed only when the domestic stock gets over (Dlabay & Scott, 2005).

Another way is to grant a license to the importers and the government has all the rights to take it away from them.

The other complain that the players of international market have is that government taxes them too much. This is called ‘red tape’. Since the foreign people also use the resources of the country they have to pay welfare tax for many programs. These may include building of roads, bridges, health insurance and support for military forces. Revenue is thus collected from them in the form of taxes on purchases, property, income as well as wealth (Dlabay & Scott, 2005).

Political risk in international business

Also the actions or political policies formed by government can change at any time depending upon the situation prevailing locally. This can have an adverse effect on the foreign companies. Such effects are called political risk and mainly include trade sanctions, expropriation, economic nationalism, civil unrest or war.

Situations have been observed in past where government has restricted all the trade with a country to simply protest its behavior pertaining to some political dispute. In August 1993, US banned the export of all high-technology equipments to China as they were not happy with their decision to sell missile technology to Pakistan, which violated an international arms-control agreement (Woon, 1989). These trade sanctions can range from a small act to big decisions. In recent years, the US again issued an order for restricting trade with several countries because of political differences, one being international terrorism (Dlabay & Scott, 2005).

Conclusion

As we have seen international trading or business contributes in accelerating the economic growth of both the host as well as home country. It brings wealth, technology, knowledge and employment for the people. Various policies and acts have been made by the governments across various nations to promote globalization, however on the other hand to protect the mainly the local business of the country, these also impose restrictions on international business. Though both the faces of the coin, promoting and discouraging international business are supported by solid evidences, there is still a need to maintain a balance between the two to gain the benefits along with protecting the rights of the local people.