Globalization of both the economy and the society has confronted the world over the past decade (Kim & Weaver 2000, 121; Ohmae 1990; Naisbitt & Aburdene 1990). Among the important contributors to world confederacy and the global economy are the advances in computerization, telecommunications, and other forms of information technology. A shift of focus and interest from the local market to the international setting has demanded innovation not just in corporate leadership as new information, forms of communication, and technology. These are being offered to be utilized in encouraging and reinforcing interaction among individuals and the operating enterprise. Since globalization represents the shift of the main venue of capital accumulation from the national to the supranational or global level (Teeple 2000, 4) and due to the adverse effects of such phenomenon, international businesses plan to venture into new horizons catering to the needs of the new markets and countries. However, before achieving specified goals, there are several matters to be considered and are imperative for in-depth scrutiny and probing. The potential expansion of a business enterprise into a new location requires sufficient amount of information that are affecting to such process. Thus, the introduction of the new division of international labor calls for evaluation and reorganization of the business operations as well as a reassessment of the governing economic policies of a country.
In this regard, the role of developing countries in economic growth of the world is emerging. Over the past half century, the developing countries have grappled with their relationship to the world trading system, the role of their trade policies in their economic growth, and the influence of the world economy on their prospects for growth (Krueger 1995, 1). The eventual recognition of the developing states and their contribution to the world economy enable firms to expand and apply their operations to such countries. Given the opportunity, firms that plan to operate into developing countries recognize the possible constraints and challenges that the company has to overcome in order to achieve the goals set by the management. This include the unstable economy, the market and the potential customers’ profile such as people’s income and needs, culture and customers’ behavior, conflicting trade policies, state legislations and political instability of other nations, aggressive competition with other operating companies and marketing strategies, the issue on technological and information advancements for high-tech production machines and equipment.
This paper sought to answer the following inquiry: Using examples, what is the major difficulties firms face in establishing a presence in developing states?
After enumerating the potential barriers and difficulties, there are also some suggested actions to be considered in dealing with the identified factors. Further, this report will utilise descriptive kind of research using existing knowledge and conditions in various countries and available published materials as reference.
The Developing Countries and its Characteristics
Developing countries are often characterized as countries that posses relatively low standard of living, undeveloped industrial base, and moderately low human development index (HDI). It is otherwise termed as poor nations, Third World, less developed countries (LDCs), least economically developed countries (LEDCs), “underdeveloped or undeveloped nations”, the South, and non-industrialized nations. These states are the opposite of rich nations, First World nations, developed countries, the North, most economically developed countries (MEDCs), and industrialized nations (Wikipedia contributors 2006).
Basically, development of countries is based into economic foundation but it is often argued that such depiction is not accurate. There are other determinants of development such as those present in every given society like education and literacy, life expectancy, healthcare, and other factors present in social development and the likes. In relation to this, The World Bank (2006) classified countries according to data reported in terms of operational and analytical purposes. Operational categories are low-income, middle-income, high-income economies. Analytical purposes include geographic regions, income group, and indebtedness. In geographic regions, low- and middle- economies are referred as developing countries. This implies that every existing economy of the group is experiencing the same development or the other economy has achieved the preferred or final stage of development (The World Bank 2006). Meanwhile, income group classifies developing countries according to the 2004 Gross National Income (GNI) per capita calculated using the World Bank Atlas method, such as low income ($825 or less), lower middle income ($826 - $3,255), upper middle income ($3,526 - $10,065), and high income ($10,066 – above. Indebtedness, on the other hand, varies into severe and moderate levels.
“Severely indebted means either of the two key ratios is above critical levels: present value of debt service to GNI (80 percent) and present value of debt service to exports (220 percent). Moderately indebted means either of the two key ratios exceeds 60 percent of, but does not reach, the critical levels.” (The World Bank 2006)
These group classifications are just among the other factors considered by the World Bank authorities. Meanwhile, among the states categorized as developing are China, Mexico, India, Brazil, most countries in Africa like Somalia, Sudan, Ethiopia and South African nations, other Asian states such as Indonesia, Malaysia, Singapore, Thailand, the Philippines, and Brunei. With the basic attributes given about developing countries, it is more imperative to look into some more concepts that will eventually affect the future of the firm.
For instance, the country of China has long bee recognized as the “Sleeping Giant” of Asia. Its geographic territory and the population that it embodies, distinguish it from other big countries in the world. The resources, human and economic, make this country the most promising country in Asia in the ability of its people and the nation itself to make a stand in the global community that defines the information world at present (Zhao & Tong 2000). Aside from China, other developing nations possess sparks of potential in new business engagements. However, there are setbacks to be faced and scrutinized by firms before dealing into its operation.
The Ambivalent and Fluctuating Economy
As the world approaches the 21st century, business prophets are predicted the dawning of a new era for businesses everywhere. Political, economic, technological, and sociocultural forces are coming together to herald a new and radically different global economy (Maddox 1993, p.1). Being the most popular and considered the basic foundation of development, the economy of a nation is among the main considerations of a business organization. Before initiating a profitable endeavor to a place, there is a need to study the economic status, growth, trends, projections, and developments in order to predict the viability of the business. As depicted, developing countries have low and middle economies. With this consideration, the firm will be able to distinguish the potential drawbacks that will appear in case they will continue to operate on the chosen location. Upon knowing the economic standing of the developing nation, the firm minimized its potential risks and may devise strategies and make decisions that will alleviate, reduce, solve, and do away its enumerated weaknesses. A strong economy results to company growth as well as economic development. Vasquez-Barquero (2002) discussed that economic growth and structural change are the result of investment strategies and decisions of enterprises operating in the market and integrated into the cultural milieu that conditions economic dynamics of territory affecting the production of the organization, the relational system and innovation as well as the learning process.
As the economy is being studied, the firm must also deal on the target market and the profile of people inhibiting the prospected locality. Every firm, before its official operations, must identify goals and several specifications that concern its whole mechanism. The need to enumerate the diverse factors of the given society is vital before the proper implementation and achievement of plans and goals.
The Market and People’s Circumstances
As foreign in origin, a firm must identify the aspect of its production that may be hindrance to its eventual success. Among the possible challenges and pitfalls firms may encounter is the product, income, and needs of people; culture and consumers’ behaviour; state policies, legislation and political turmoil; and geographic consideration among others.
Product, Needs, and Income. The firm offers a product to a specified market. Products are deliberate and cater to the need of the people. Thus, this is the main consideration of the firm before operating to the locality – the primary needs of people. In general, a producer first needs information about consumer preferences in product markets and the specific demands of market channels in order to derive the required product characteristics (Van Dijk & Rabelloti, ed 1997, 68). As needs are enumerated, the economic status of people must also be studied. This could be done through the evaluation of their income and its distribution (Cairncross & Puri 1976, p.16; Kuznets 1955). By doing so, the firm will accumulate data that are imperative to the planning and development for the improvements of the organization. As an example, most African developing nations need an all-inclusive feasibility study on opening a real state business in the area. Although shelter is among the basis need of people on the area, the business is risky due to the income distribution of people.
Culture and Consumer Behaviour. Culture is one of the most important segmented structures of the market. Basically, Murphie and Potts (2003, pp.4-6) believes that the function of culture is to establish modes of conduct, standards of performance, and ways of dealing with interpersonal and environmental relations that will reduce uncertainty, increase predictability, and thereby promote survival and growth among the members of any society. Culture influences behavior and explains how a group filters information; cultural meanings render some forms of activity normal and natural and others strange or wrong. Diversity involves unlike viewpoint, methods, and sensitivities of background, culture, inclination aspirations, age, responsibilities, and productive abilities. It deals with concepts such as race, ethnicity, minority, and gender. In an organization, especially those in the international setting, there are several groups that are normally not taken into account by the management but are great in numbers. Therefore, it can be concluded that managing diversity denotes the formation of an inter-national and intra-national environment wherein these viewpoints are incorporated and improved in order to deal with diversity in a way that the full potential of both organizations and their employees may be achieved (Yeh 1995, p.626). On the other hand, consumer behaviour oftentimes related to culture every people put into practice. According to Wilkie (1990, p.3), consumer behaviour is “the activities that people engage in when selecting, purchasing, and using products and services so as to satisfy needs and desires such activities involve mental and emotional processes, in addition to physical actions.” The behaviour of the consumer with regards to the product is an essential consideration of the firm.
For instance, India is a very multifaceted developing nation. Opening a fast food restaurant requires inclusive analysis and feasibility study. Because India is among the world’s richest country when it comes to culture, emigrant managers should be familiar with the host culture (Maddox 1993, p.19). Firms cannot offer products that are from cattle since they view it as sacred to their religion and culture. Believing that the cultural incorporation will solve all of the cross-cultural problems, it is essential that the expatriate need not to be only technically proficient but to have an overly simplistic view of the cultural integration of the firm's activities and existing culture on the host culture. According to Hodgetts and Luthans (1991), using an integrator can help. It will give an idea on how will a foreign culture will mix up with a host culture.
Another example, the Philippines and its inhabitants were westernized by the Spanish and American occupations. Despite the influence of westernization, these are Asian people and a unique breed of Asian people, with their own culture (Agoncillo & Guerrero 1987, pp.3-4). Thus, opening a business opportunity that is similar to any western origin is a potential boom. However, there are several factors to be considered such as state policies, legislation and its political situation.
State Policies, Legislation and Political Turmoil. Before a firm can expand its operation to a developing country, it must be given that the management is aware of the existing laws on that particular nation. Different states worldwide have various state legislations. In developing countries, one of the most direct and visible method for governments to influence small businesses is through taxation. It is the system used by national administrations to acquire money from both people and organizations. Collected taxes are used in order to support the government itself as well as to finance public services. Taxation is not only relatively permanent but compulsory as well. Since 1945, one hundred developing countries such as Kenya, Malawi, Pakistan, and Thailand (all in 1987) attempted to reform and had reformed their taxation (Gillis 1989, p.7). In business, taxation is also a significant matter of discussion. While businesses greatly contribute to the national development through taxes, it is also important that tax systems can help businesses, especially the small ones, to grow and develop in the most effective way. However, in some cases, the issues on tax complexity and compliance appear to hinder this significant objective. The problem on taxation complexity has long affected most national taxation systems. In the article written by Bartlett (2004), complaints from entrepreneurs due to taxation complexity had been reported even way back 1928. Previous investigations concluded however, that the complexities in most taxation systems are brought about by the businesses themselves. Businesses nowadays are very much complex, which in turn limits the possibility for tax simplification.
Further, the political situation of a country is also important. For instance, Thailand and the Philippines are into controversial political situation nowadays. Because of this fact, economic activities as well as social order are affected. Thus, operating a new business this time is not advisable and uncertain.
Geographic Consideration. The geographic location of a new market is also crucial for a firm to consider. For instance, China’s fast developing areas are coastal areas and main regions like Beijing, Shanghai, Tianjin, Liaoning, and Guangdong. The need to extend such economic development in the interior regions is distinguished and highlighted (Zhao & Tong 2000, p.549). Openness to international trade and development of regional comparative advantage must be studied properly. Though these economic zones and cities enjoyed relatively better tax treatments and preferential resource allocations (Litwack & Qian 1998, pp.119-22), the geographic location is ambivalent. There are several potential interferences for its effective business process. Thus, in the late 1980s, the government extended the policy to all coastal areas of China which put the non-coastal provinces at great disadvantage as economic development was centralized in the coastal areas (Hu 1996, 182; Shi 1996). Due to the coastal areas relative inaccessibility to the international market compared to the interior provinces of China, as well as the inefficient land routes and underdeveloped roads and highways and other transportation problems in reaching the central and regional parts of the country, more favourable conditions in terms of economic policies were given and established in the coasts. Foreign investors also failed to recognize the potential business ventures and larger market segment in the poor provinces of China. The capability of the people who live in these provinces as promising work force was likewise undermined. To answer the problem of geographic disadvantage that the majority of the provinces of China face, the government of China should start implementing the projects that it considers to hasten the economic development in the economically lagging parts of the country. This will develop as well the capabilities and potential of the material and human resources that the country has. Investigating and taking advantage of exhausting all means of national economic development will awaken the “Sleeping Giant” of Asia.
Competition and Marketing
Business firms are now competing, and will compete in increasing numbers, for a share of this new world market (Maddox 1995, p.3). In general, international businesses ventures operate competitively. Transnational corporations (TNCs), for instance, driven by their technological change and the liberalization of policies on trade and investment are growing rapidly and considered to have the fastest expansion is in the developing world (Lall 1995, p.521). The corporate integration strategy of the TNCs concerned also influences the subsequent effects of foreign investment. Increased market competition identifies continuous adjustment and improvement in the production lines of countries to recognize the participation of smaller units of the society. Analysing the characteristics of the labour market, the main problems emphasised by firms were, in order of importance, the low availability of a skilled workforce and the high turnover of the labour force (Van Dijk & Rabelloti, ed1997, p.48).
The presence of various profit earning institutions in developing states require in-depth investigation with the possible threats in the business of the firm. There are some Third World nations that are not viable for any competition, thus maintaining a monopoly in the industry. On the other hand, there are also places that are already occupied with such business opportunity so the threats of competition are high. For instance, Malaysia tourism industry is flourishing. Starting another tourism or hospitality related business is highly competitive. The firm management must devise a new marketing strategy that will make it different for the competitor.
The Insufficiency of Technology and Information Management
The advances in communication technology make it easier to enter the international market through the efficient marketing and advertising strategies that a number of international business organizations invest in by utilizing the services provided by the World Wide Web (WWW). Electronic data communication (EDC) facilitates the exchange of data at tremendous speeds and it sorts and integrates data with other information available to the recipients (businesses, banks, capital markets) from other sources. Individual countries and trading and currency blocs alike view the fast-moving e-business sector as having a direct impact on the countries’ and blocs’ competitiveness in the global market. Today, technology and its role in economic development is the subject of debate and argumentation (Kumar & Marg 2000).
Conversely, Earl (1998) acknowledged the importance of good information management in the ever-increasing demands of the global business industries which are common nowadays. He emphasized the relevance of the search for global efficiency, local responsiveness, transfer learning and external alliances through proper information management in a particular business organization.
In mounting the economy and technology of developing countries, foreign direct investments (FDI) play a significant role (Kumar & Marg 2000). For instance, China, India and Vietnam are successful in attracting foreign investments, including export-oriented joint ventures because of FDI. Furthermore, the opening of India and China to foreign companies has caused a lot of excited slavering over the prospect of billions of new consumers. Thus, it is a fact that technology is a great contributory factor to be considered by a firm who wanted to operate in a developing country.
Recommended Actions
With the convergence and divergence of the developing nations (‘Convergence and Divergence in Developing Countries’ 1993), development in all aspects especially on the economy is possible. Before operating a business in a developing state, a firm must study the feasibility of goals and plans, its implementation and management. There is a need to comprehensively study the affecting variable of the specific country towards the organization and its function as a whole. The knowledge acquired from initial researches and explorations are imperative in building and making decisions, functional and practical to the improvement of the firm.
Firms that operate on a developing country environment may adopt clustering, trade association, and networking among countries (Van Dijk & Rabelloti, ed1997). This is an effective style to be utilised in cooperation collaboration with existing institutions. International integration (Haggard 1992, p.2; Krueger 1995, p.58) is also essential to firms who want to open business in developing states. Economically speaking, the ambitious agenda for deeper integration among advanced industrial states and developing ones ranges from harmonization of standards to macroeconomic policy coordination (Carl 1986, 3).
Aside form economy as the primary consideration, culture and diversity are big barriers for firms’ entry to Third World country business operations. Cultural integration is another way to understand the commonalities of people especially to the aspect of consumers’ behaviour. Products and needs of people must be prioritized. In this manner, the viability of the firm is guaranteed. Further, state trade policies and legislations like the future of taxation system can be improved by means of coordinated government-business relationships, simplified taxation systems and reduced tax legislation burdens. Political stability is nothing but a predictable situation.
The concept of competition and marketing is premeditated by the firms’ management. Before they chose to operate in a given locality, they are already equipped with essential information that is related to the success of the venture. Thus, effective human resource efforts are recognized especially to the planning stage. Marketing of the product is another challenge to the firm and its people but then again, the presence of innovative ideas will help.
Additionally, the role of technology is evident to developing countries and its economic activities. Ghoshal (1987) has described how an organization may extend its economies of scope through external alliances between companies with different skills and cultures. Inter-organizational information systems can provide new opportunities to activate this concept. In the vertical dimension, some firms use IT to support what Johnston and Lawrence (1988) call ‘Value Adding Partnerships’ (e.g. Benetton) with manufacturers and retailers. In the horizontal dimension, Konsynski and McFarlan (1990) have described the global 'information partnerships' is a potential way to connect developing states into developed ones. However, as Kumar and Marg (2000) suggest, it is necessary to reduce the technological gap between the developed and the developing countries. Again, the role of technology in speeding up Third World countries is apparent. With this, it is always a basic consideration for firms to evaluate the most suitable and available source of information and technology applications.
Conclusion
The penetration of a firm to a developing nation needs a lot of tedious studies and preparation. The scenario is made complicated by the fact that international expansion of businesses especially among less developed nations could greatly downplay the active and productive trading activities. Politics, culture and financial stability of the participating countries will not always be in synch with each other. Any misunderstanding will prove critical on the general treatment that countries will bestow to each other in the future issues and concerns that need to be addressed internationally. These business operations issues, despite the efforts to liberate international trade, appear as the most crucial challenge to be faced by firms in operating to developing nations in pursuit of their entry level of expansion of projects.
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