International Business Expansion in China: Business Drivers, Trade Barriers, and Ethical Considerations

This report discusses the business drivers behind a company's expansion in China, including a PESTLE analysis. It also explores trade barriers in China and ethical and social issues to be considered. The case study focuses on Neal's Yard Dairy, a UK SME aiming to sell UHT milk to children in China.

INTERNATIONAL
BUSINESS
CONSULTANT FOR
SME

Table of Contents
INTRODUCTION...........................................................................................................................1
BUSINESS DRIVERS BEHIND COMPANY’S EXPANSION....................................................1
PESTLE Analysis...................................................................................................................1
Key Business Drivers.............................................................................................................4
TRADE BARRIERS........................................................................................................................4
Four Trade Barriers in China..................................................................................................4
ETHICAL AND SOCIAL ISSUES TO BE CONSIDERED..........................................................6
Ethical issues..........................................................................................................................6
Social Issues...........................................................................................................................7
CULTURAL PREFERENCES........................................................................................................8
EXPANSION METHODS..............................................................................................................9
Joint Venture..........................................................................................................................9
Franchising...........................................................................................................................10
Licensing..............................................................................................................................10
Evaluation.............................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
International Business covers a range of operations, techniques and approaches that are
required to be adopted by an organisation in order to expand it on international grounds.
Internationalisation has several reasons for an organisation that is pertaining to high profitability,
productivity, as well as enhanced market share. Moreover, a company’s success on international
grounds is associated with the aspects that are linked to its adaptability towards different cultures
and customer mindsets, as well as selling up offerings that are required by the marketplace (Alon
and Herath, 2014).
Therefore, in regards to this, the report below is based on Neal’s Yard Dairy, which is a
upcoming high profile SME of the United Kingdom. The company aims at expanding itself
within the Chinese markets by selling UHT milk to children from age 3-11 years. In this context,
the report would be covering contemporary issues relating to organisations involved in
international business, along with identification and evaluation of global context. Moreover, the
assignment also covers appraisal of alternative methods of entry in foreign markets, as well as a
detailed impact of multinationals on both home and host nations.
BUSINESS DRIVERS BEHIND COMPANY’S EXPANSION
PESTLE Analysis
For an organisation which is planning to expand its operations effectively in other
countries, it is very necessary to evaluate certain business drivers which facilitate this expansion
of an organisation. As per the current scenario, Neal’s Yard Dairy is a prominent UK SME,
which deals in dairy products, especially in cheese. However, the firm wishes to expand its
operations in China, where it seeks to provide UHT Milk to children of age 3-11 years.
According to the company, this could be a prominent target markets at parents within this stage
looks out of offerings that are affordable, possess high quality and are organic. The reason for
this is because with enhancing pandemics and diseases globally such as Coronavirus and other
lethal health problems (Peng, 2016). Chinese individuals now prefer healthier alternatives for
food other than from their local companies. Hence, for this purpose, PESTLE analysis is being
used, which is a framework to determine the external pointers which influences operations and
functions of an organisation. Hence, this framework is applied in context of Neal’s Yard Dairy
below.
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 Political Factors:
These factors are associated with the political situation within a country which has a direct
impact and influence over the functions of an organisation which wishes to enter the market.
With respect to China, it is one of the most effective and political stable countries in the world,
where the power lies with the Communist Party of China. In regards with expansion of Neal’s
Yard Dairy, China maintains fair trade ties with the United Kingdom. In addition to this, both the
entities are in talks to enhance their trade ties in light of Brexit (China, UK aim to enhance trade
ties, 2020). Hence, such political stability and appropriate ties are effective drivers for Neal’s
Yard Dairy to expand their business within the country smoothly.
 Economic Factors:
These factors cover the economic performance of the market in which the company is willing
to enter that also directly impacts the expansion of this SME. The economic grounds of China
are very strong and effective as there is a huge money supply and investment Capacity.
Moreover, the company has a contributing economic infrastructure which has effective
opportunities regarding Foreign Direct Investment (FDI).
Another very favourable aspect for the organisation to enter China is its ease of doing
business.
Illustration 1: Ease of Doing Business Ranking, 2018
(Source: China Macroeconomic Trends Market Research Report, 2020)
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According to the graph presented above, it could be denoted that though the ranking of China has
fallen in terms of ease which it provides to the companies for doing business, it still is a
prominent location to expand. The progressive economic condition, cheap labour and effective
demand and supply are several drivers for Neal’s Yard Dairy to expand its business in China.
 Social Factors:
These factors are the ones that are related to all the social trends and preferences that are
required to be taken into account by the firm in order to ensure that its products become popular
amongst the masses. In relation to Neal’s Yard Dairy, it is currently targeting young children
aged 3-11 years. Due to the Cornavirus pandemic, the parents of kids in these ages, as well as the
general customers are demanding offerings that are healthier and organic. Hence, this becomes
another driver for the company to expand its business in China to help the country in filling the
market gap.
 Technological Factors:
All the technological advancements within a country are taken into account by these factors.
China is known to be a nation with effective access to technology. Furthermore, its online market
has one of the world’s largest e-commerce customers in the world, which acts as an opportunity
Neal’s Yard Dairy to expand its market in offline, as well as online markets. Furthermore, there
are several technologies such as Artificial Intelligence, as well as Automation which could be
used by the company in order to manufacture, package and distribute its products to the target
market.
 Legal Factors:
All the legislation and regulations that are prevalent within the chosen market are considered
in these factors. Currently, the dairy market in the country has been more strict and regulated to
improvise the product quality that is entering in China. Hence, this would be having a direct
impact on the company and its supply chain. However, this might drive the operations slower in
context of importing the milk and other offerings from various international suppliers into the
country (Cantwell, 2017).
 Environmental Factors:
These are the factors that are related to the environmental concerns of the country. Currently,
there are several major concerns such as global warming and climate change, for which, the
government is taking a lot of initiatives in relation to protecting the environment against these
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negative factors. Therefore, it could be an opportunity, as well as a driver for the organisation to
expand its operations in China and contribute towards this initiative through sustainable
manufacturing and distribution (Gray, 2019).
Key Business Drivers
After PESTLE analysis, it is imperative that several appropriate and effective business
drivers are identified from the above analysis. Therefore, with respect to the organisation, below
are certain drivers for the organisation: Political Stability:
A very prominent business driver towards expansion of the company is the stable political
environment of China and favourable trade ties with UK, which represents opportunity for the
company to effectively expand with government’s support.
 FDI and Ease:
Another key driver for business of the company is related to the ease of doing business in
China, which does not require the company to indulge in heavy paper work or other regulatory
delays. Moreover, the country welcomes FDI, which is an opportunity for the firm to invest and
get higher returns. Demand for Healthier Drinks:
Coronavirus stands as a very big and devastating global pandemic, which has cost lives of
millions in the whole world. Therefore, this is a key driver for the company to establish its
market in China and provide the toddlers with clean and healthier milk. New Technologies:
With advancements in technologies, such as AI and Automation, opportunities are created
towards better productivity and enhanced product quality and distribution, which is imperative
for market success, as well as a key driver for the business.
TRADE BARRIERS
Four Trade Barriers in China
For an organisation that is looking to expand its business operations in another country, it
is imperative that several trade barriers in context of the company are identified in the foreign
market. Moreover, it would also allow them to assess various opportunities and threats in relation
to executing expansion of their businesses in the international nation.
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In relation to Neal’s Yard Dairy and China, there are certain trade barriers within the
nation that are explored below in context of this market:
 Import Tariffs:
For any business which operates at a smaller scale, trade tariffs and taxes within a country
are along its biggest barriers in to situate, operate and expand. However, this has been one of the
biggest opportunities for the company while expanding in China. The reason for this is that UK
currently is going through Brexit and under its transition period. Hence, both the nations are
currently forming trade ties Post-Brexit which would allow the businesses of UK a reduction in
tariff rates while they operate in China. Moreover, following the trade war from US, China is
believed to reduce these rates even further which again will be opportunistic for Neal’s Yard
Dairy (Karabarbounis, 2014). Custom Clearances:
Custom clearances are another trade barrier which would be faced by Neal’s Yard Dairy
while it operates within the UK. Despite using the country’s name as one of the most influential
aspects to expand in China, the firm will have to go through the clearances that would be
imposed each time the organisation would get raw materials, milk products or other stock from
its international suppliers. The Chinese government has released a blacklist recently, which
includes several safety and risk warnings for food items that are being imported by the
organisation in the boundaries of China. This threat even gets severe as there are multiple
companies from countries like US and Europe which are subjected to additional control
measures. Hence, in order to convert this into opportunities, Neal’s Yard Dairy must ensure that
all the legal requirements are fulfilled and its exporters are certified to execute trade operations
in the country.
 Labelling and Packaging Requirements:
This trade barrier is related to appropriate packaging and labelling of the food items or other
equipments that are required to be imported by Neal’s Yard Dairy to China after establishing an
enterprise there. The reason why this is a barrier is that because if the firm fails to meet the
requirements, then the company’s products might be banned from being shipped. Hence, in order
to appropriately and effectively overcome this barrier, it is imperative that a registered and
certified shipping agent is being contacted by the company and its suppliers to ensure that all the
necessary commodities are perfectly packed and labelled before being shipped to the country.
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 Regularised E-Commerce:
This trade barrier is associated with the fact that there are several regulations which the
Chinese Government has imposed on e-commerce companies to conduct their businesses
through online platforms. The notion on which this regulation works within the country is the
government is putting customers’ safety to be one of the biggest centred points to control the e-
commerce operations. As for the aspect of this being a barrier, it restricts free flow of goods from
the company, as well as its UHT Milk to reach to its target markets in a flexible manner, which is
yet again a very problematic uncertainty for the company to work there. However, the firm could
get itself registered and authorised by the government, along with several of its third party
international suppliers which would be allowing the company to operate online as well (Cravino
and Levchenko, 2017).
ETHICAL AND SOCIAL ISSUES TO BE CONSIDERED
After the economic considerations, it is necessary that the target market and their concerns
are taken into account by Neal’s Yard Dairy so that their company is accepted within the country
and holds significant status amongst customers. For this purpose, several ethical and social issues
are necessary to be considered by the organisation which would be directed towards children of
age 3-11 years to whom the SME would be selling its UHT milt. The ultimate reason as to why
this could be considered by the company is associated with its Corporate Social Responsibility
(CSR). Each organisation is required to work in a manner which contributes to the welfare of all
its stakeholders, as well as to the community. Hence, below are certain issues that would also be
highlighting the importance of CSR.
Ethical issues
When CSR is to be taken into consideration, it becomes imperative that several ethical issues and
their responses are effectively analysed by the organisation (Derudder and Witlox, 2016). These
must be concerned with the business ethics and is required to be related to the firm and its nature
of operating within the company. Hence, in relation to Neal’s Yard Dairy, the ethical issues are
evaluated below: Consumer Rights:
One of the most important ethical issues that must be considered by the company is related to
the consumer rights within the country. As for the information from several sources, the nation
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was subjected to a scandal in 2008 that was related to food safety issue including a milk
manufacturing company and a certain adulterated infant formula. Hence, whether import or
export, China emphasises on effective consumer rights. Hence, this presents the importance for
Neal’s Yard Dairy to follow CSR, as the firm could engage into external and internal audits for
its UHT milk in context of health, organic and safety basis.
 Pollution:
Another major ethical issue within China is the Environmental Pollution that is being a heavy
cause of concern within the whole country. The main cause for heavy pollution within the
country is due to the industrial process (Ghauri, Grønhaug and Strange, 2020). Moreover, there
are several heavy laws imposed for manufacturing and food and beverage sector companies in
regards to crossing the industrial limits in context of pollution and food wastage respectively. In
order to deal with the issue, it is imperative for the organisation to set up a plant that uses
sustainable techniques like Lean production and distribution. Along with this, Neal’s Yard Dairy
could also use AI and Automation to monitor waste and performance level appropriately
throughout the operations.
Social Issues
Apart from ethical issues, there are several social considerations as well that must be taken
into account by the firm as it also requires effective CSR application towards the same. Hence,
some of the most prominent social issue in context of the target market is related below:
 Language:
One of the most prevalent social issues within China in comparison to the United Kingdom is
the language barrier. There are very few individuals within the country who are English speaking
individuals. This creates a problem for the firm to reach to its target market. Moreover, as a
social issue, this also might create a taboo or a havoc which might drive off potential customers
from the target market. Hence, in terms of CSR, it is necessary that the company head, managers
and other workers must learn the language to necessarily communicate with the customers.
Furthermore, training must be given in order to ensure that a positive and accurate two way
communication is executed by the firm (Strange and Zucchella, 2017).
 Conservative Culture:
Another prominent social issue in the country is its conservative nature. Asian countries are
known to be filled with people who are highly religious and traditionally inclined. They usually
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don’t trust or affiliate themselves with foreign companies due to their nature and social
education. However, this social issue could easily be dealt with the company by gaining
experience with the culture that is supported by the individuals in the target market and act
accordingly through promotions and marketing. For further benefits, the company can also hire
local individuals as part of their CSR initiatives, which would make the things better for the
organisation in China.
CULTURAL PREFERENCES
As explained above, culture is one of the most prominent issues and aspects of
considerations for a company that is willing to expand in other markets. As for Asian countries
like China, culture holds effective significance that also impacts international business. There are
several activities within the business of selling UHT milk to children of age 3-11 years which
holds the importance associated with culture. Hence, in this context: certain preferences of the
target market are evaluated as under: Networking:
A crucial cultural preference that is necessary to be mapped by Neal’s Yard Dairy is related
to networking in order to ensure that the culture of the firm is in adherence with that of the
society. The Chinese individuals value relationships and networking. Through this, the company
would be effective in minimising the failures and risks in operations. Moreover, to build a strong
supply chain and customer base, the organisation requires to build networks with officials, local
individuals and prominent businesses which supports the SME in an appropriate and effective
expansion in the country (Picciotto, 2017).
 Equality:
Another social consideration which is necessary to be evaluated and adopted by Neal’s Yard
Dairy is related to equality. The networks which the firm would be making must be treated with
respect and mutual considerations in order to ensure that the equality is promoted by the firm’s
actions. This would be applicable when the company would be hiring local employees. They
must be treated with respect and must be allotted effective opportunities to grow to receive the
same amount of respect and equality from their side. It would be promoting employee
engagement that would contribute in its sustainability (Stahl and Tung, 2015).
 Collectivism:
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In comparison to the United Kingdom, China is a more collectivist society. The whole group
is considered while taking decisions for the company and not just its leaders. Hence, while taking
business decisions related to the target market, it is crucial for the firm to ensure that each
stakeholder of the firm is benefitted from their actions. This would be supporting the cultural
requirements within China which is would be providing more benefits to the firm, in terms of
revenue and market image. Benefits to Society:
Retaining customers is a necessary task for any business that is operating on international
grounds. For Neal’s Yard Dairy too, customers would be necessary to be retained so that the
business functions of the firm remains constant and expands well in the country. The customers
within the target market follow Chinese cultures, according to which, gifts and greetings are
given utmost priority to showcase respect and considerations. In case the firm wishes to building
effective market in the country, then it is surely required to bring in certain schemes into effect
that enhances the benefits it could provide to the customers, along with its high end and organic
product (Hovhannisyan and Keller, 2015).
EXPANSION METHODS
After analysis of the external environment, drivers, barriers, social and ethical
considerations, it is now imperative that the firm also analyses its expansion methods within the
Chinese markets in order to execute its operations in a strategic and sustainable manner within
the country. Thus, Neal’s Yard Dairy has certain methods through which it could enter and
expand its functions in the Chinese market with its new product UHT milk for children. Some of
these methods are analysed and evaluated as under.
Joint Venture
This method is related to the aspect when the firm expands in a geographical location by
adjoining itself with another company that is already existent within the city. Its major benefit is
associated with the fact that the company gets a head start due to the already built customers and
market image by the other company. However, its limitation is inclusive of lower motivation of
staff due to changes in working conditions, longer decision making, as well as possible conflicts
in strategy development (Picciotto and Mayne, 2016).
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Franchising
Within this method, the organisation gives permission to independent companies to take up
its franchises within the country and operate the firm as per the requirements. One merit
associated with this strategy is that the full control of management and operations is associated
with the franchisor, which in this case is Neal’s Yard Dairy. However, if the strategies didn’t
apply as per the requirements, then the brand image might be hampered.
Licensing
As per this method, license is given to the local companies of the region to sell the firm’s
products under their own brand name. Advantage related to this is that if the licensee holds
significant reputation and customers, then the firm might experience high financial gains.
However, with full control to the licensees in relation to running the company, it might result in
conflicts and ineffective business decisions.
Out of all these methods, the firm must adopt Franchising as its method for
internationalisation, as in comparison with the two options, it is simpler and has high scope of
profit and revenues (Kolk, 2016).
Evaluation
According to the above discussion, franchising has been chosen as an appropriate method
for better strategic internationalisation in the Chinese market. However, the same is evaluated
using strategic evaluation framework elaborated below:
 Reviewing Underlying Basis:
Within this step, the internal strengths and weaknesses are judged as per the external
opportunities and threats. The company has a strong brand image in the UK, along with better
financial capacity. This could be linked with the ease of FDI, which could be beneficial for the
firm to set up multiple franchises in China.
 Measuring Organisation’s Performance:
In this, the managers of the firm are required to measure the performance of the firm by
comparing actual results by the planned ones. This could be done using Key Performance
Indicators, where positive feedbacks, profit and customer base could be used as indicators.
 Taking Corrective Actions:
There might be certain aspects where the firm might fail to perform as per the set
requirements. Hence, in this case, Neal’s Yard Dairy must modify its methods and strategy
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which could suit its plan and other required strategic actions to expand and internationalise in a
competitive manner in China (Cavusgil and et. al., 2014),
CONCLUSION
Thus, it is concluded from the report above, that international business for an SME is an
opportunity in relation to enhancing its operations and acquires more benefits from international
markets. Moreover, it is necessary that several drivers behind this expansion are evaluated using
PESTLE analysis to determine all the external pointers that could act as a driver. Furthermore, it
is crucial for an organisation to take into account several trade barriers, which might become
roadblocks towards its success in the new markets. In addition to this, it is very important that
several ethical and social issues to be considered by the firm, along with certain cultural
preferences, so that the organisation operates with effective Corporate Social Responsibility, as
well as in proper adherence to the norms and values of the international markets which it wishes
to operate on. Lastly, it is very imperative that a company analysis variety of market expansion
and internationalisation options available to it, along with determining the best methods through
strategic evaluation methods to ensure effective success and sustainability within the
international fronts.
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REFERENCES
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Ghauri, P., Grønhaug, K. and Strange, R., 2020. Research methods in business studies.
Cambridge University Press.
Gray, D.E., 2019. Doing research in the business world. Sage Publications Limited.
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innovation?. Journal of Economic Growth. 20(1). pp.75-104.
Karabarbounis, L., 2014. Home production, labor wedges, and international business
cycles. Journal of Monetary Economics. 64. pp.68-84.
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environment to CSR and sustainable development. Journal of World Business. 51(1).
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Peng, M.W., 2016. Global business. Cengage learning.
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Picciotto, S., 2017. Rights, responsibilities and regulation of international business.
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Strange, R. and Zucchella, A., 2017. Industry 4.0, global value chains and international
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Online
China, UK aim to enhance trade ties. 2020. [Online] Available Through: <
https://www.chinadaily.com.cn/a/201808/27/WS5b8356c4a310add14f387dde.html >
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