International Business: Navigating the Chinese Market for UK SMEs

Desklib provides past papers and solved assignments for students. This report analyzes Morgan's Dairy's expansion into China.

INTERNATIONAL BUSINESS
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Executive summary
This study provides an understanding of the factors that plays a key role in the international
business process. The external environments of China are discussed here followed by the
different trade barriers. Moreover, the list of different method is provided that will provide
guidance to the company while entering the country markets of china. Therefore, the important
data of Chinese market is provided and evaluated. This study has the purpose of providing
guidance to the small-medium company of Unite Kingdom that is planning to enter Chinese
market.
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Table of Contents
Introduction......................................................................................................................................4
Business drivers behind company’s expansion into the given country...........................................5
Expansion Methods to be chosen by the company........................................................................11
Trade Barriers................................................................................................................................14
Ethical and social issues................................................................................................................15
Cultural preferences.......................................................................................................................15
Reference list.................................................................................................................................19
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Introduction
In the modern era, the small and medium enterprises have been more important as these
companies have started contributing to the development of a country. The SMEs in the UK are
focusing more on the internationalisation of their business. International business is important for
the economy of a country as this process provides people with multiple benefits. The list of
benefit includes the opportunity of exchanging foreign currencies, managing the risks of the
business, benefitted by the government and others. The study guides the Morgan’s dairy, which
is one of the most popular small to medium enterprises in the United Kingdom.
The Morgan’s dairy is a London based company, which was purchased in 1947 by Mair and
Luean. The company specialises the production of UHT milk and other dairy products
(morgansdairy.co.uk. 2019). The company has targeted the Chinese market for
internationalisation of the business. The key factors related to the international business will be
discussed here.
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Assignment 1
Business drivers behind company’s expansion into the given country
The dairy market is a subset of the agricultural industry and deals with consumption, production,
and sale of milk related products. Several issues like political, economic, social, technological,
environmental and logical faced by the Morgan’s Dairy company are:
Factors Impacts
Political Political factors play an important role in the
development of the dairy industries.
 Politics overshadow China’s state-dominated
economy
 Corruption in China has become an
important issue as the Communist Party in
China’s norms, institutions and policies have
clashed with current market liberalisation.
Many issues like theft, kickbacks, bribery
and misspending of public funds cost a
minimum number of 3% GDP each year.
Communist can add their theories to reduce
private ownership
 The Chinese Government has exhausted a
huge amount of money on government office
buildings and high profile infrastructures
companies and invests in high resource
consumption, low job creation, and high
pollution
 Several political backgrounds force the
employees of the company to join their union
and forced to pay the extra money to the
union
 The country imports the agricultural products
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instead of producing the products itself.
Hence, the import laws and the government’s
foreign dealings affect the company. Again,
the company should take care of its products
in the time of export to obey the policies of
its own country (Mialon and Mialon, 2017)
Economic  The economic factor is also an obvious fact
that affects the dairy industries
 Milk is the basic and essential product;
people make effort to purchase although they
have the low economic condition. As a result,
the sales of milk become significantly low
according to the family income. Again, the
increase in the purchasing of the milk
products expands the business of the
company. This also results in an increase in
the sales of mil products. The reduction of
sales of the products causes an expansion of
inflation
 The growth of debt in China is also an issue.
Infrastructure is the top priority for the
government of China including rails,
electricity, roads and telecommunications
and others in which China’s investment has
slowed down their growth. A research of
Oxford University found that more than half
of Chinese investment in infrastructure in has
decreased in economic growth (Singbo and
Larue, 2016)
Social  China is the most populous country in the
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world having a total population over one
billion. This is a huge market to start the
dairy business. Again, the ageing factor is
an important issue for the company. The
company will not be able to find the
energetic labour
 Migration is a major factor in Chinese
society. More than 30-40% of peasants
have to relocate from china.
 Most of the companies in China use the
Chinese language in the work places.
Hence, the London based dairy company;
the Morgan’s Dairy Company will face a
language problem in the operation of the
company as the company generally uses
the English language. The will create a big
problem in the company’s workplace
 Again, China includes five religions and
that are Taoism, Islam, Buddhism,
Protestantism, and Catholicism. Hence,
the shift of the people to the vegan type,
the company will face a major difficulty
as the people will not use the products of
the company (Ding et al., 2018)
Technological  China is very much advanced in technology.
Hence, it will be difficult for the company to
match the Chinese technological structure
(Liu et al., 2015)
Environmental  Pollution is the main factor of environmental
issues from acid rain, water pollution from
untreated wastages, water shortage,
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deforestation, and prohibited trade in the
endangered group. Again, flooding is also an
issue
 Environmental degradation causes moved
mountains, wiped out of animals, diverted
rivers and others can be a major issue to grow
the Morgan’s Dairy Company in the Chinese
market (Groot and van’t Hooft, 2016)
Legal Some of the legal issues should be kept in mind to
enter in Chinese Market:
 A form of Representation: a UK company
need to acquire several forms of
representation in China before distributing the
products. The company should evaluate the
cost and resource structure, tax format
 The company should make a proper
registration, certification, and license by the
relevant Chinese authority. The products
should be concerned about human health. In
addition to that, China recently approved a
new Food Safety law in 2009 that fixed that
all the foreign manufacturer company should
register with appropriate authority earlier than
importing the food products in China
 Business scope: In China, every industry has a
particular extent of business, put forward to
the company’s registration papers. This is a
scope of industries to produce and deliver the
services. Hence, the Morgan’s Dairy
Company must be ensured that the future
operations of the company will not be reduced
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according to the permitted business scope
 Foreign Exchange Regulations: the Morgan’s
dairy company needs to evaluate the foreign
exchange regulation in China. There should
not be any further implications on the
designed transaction as per the formation of
the transaction
 Depend on the formation of the transaction;
the Morgan’s Dairy Company may acquire tax
responsibility under Chinese law. In adding
together to that, value-added tax and import
duty may be applied to all the imported
products. Hence, the company needs to
understand these issues before starting the
business in the Chinese market (Chen and Yu,
2018)
Trade regulations of China: After becoming a part of the World Trade Organisation (WTO) on
11 December 2001, China has steadily reduced the administrative barriers to trade and also
liberalised the overseas trading scheme.
According to the organisation, China’s applied Most Favoured Nation (MFN) tariff rate has
reduced to 9.8% in 2017 from 15.3%. The State Council Executive Meeting decided to take a
step to promote the import and export of the customers’ products (Yang et al., 2016).
Language barriers:
The company will face a language problem to start a business in China. As many people use only
the Chinese language in the company. The Morgan’s Dairy Company in London based company.
Hence, the people of both the country will face the language problem. In this consequence, the
company will face a serious problem in hiring the bets people for the company. Due to what, the
company will face a massive loss in future (Chan et al., 2016).
Highly competitive market:
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China is a country of huge population. Due to what, the competitive environment is also very
high. Many companies cannot stand properly due to the competition in the starting off the
company. China is also very advanced in the technological area. Hence, the Morgan’s Diary
needs to match their technological part with the china. Therefore, there may be a barrier to start
the diary industry for Morgan’s Dairy Company.
Shortage of skilled employments:
Due to the big populatio0n of china, the birth rate is very low in china. Hence, the aged workers
can be a big barrier for the Morgan’s Dairy Company. The company may not find the skilled and
young workers to work to much enthusiasm and effectively. Hence, that will cause a reduction in
the productivity force of the company. Due to that, the company will face a big loss in the
market.
Trade Description and Labelling:
All the products of the Morgan’s Dairy Company must be labelled with the Chinese language.
Otherwise, the Chinese people may not understand the concept of the company.
Free Trade Agreements:
Recently China has implemented 17 free trade agreements (FTA). It is currently negotiating the
trade agreements with many countries and industries including Regional Comprehensive
Economic Partnership (RCEP), Norway, Sri Lanka, and others. As a result, the decreased import
tariff charge may be applied to the products and services imported from FTA countries into
China.
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Expansion Methods to be chosen by the company
The alternative methods for entering a country market are listed out below:
 Joint venture: The joint venture process helps the company to accomplish the (Yan and
Luo, 2016). In this way, the company can start a joint initiative with a company, which is
already established in the markets of the Chinese market. This will help Morgan’s dairy
to achieve recognition in the local markets. The company will be able to learn from its
partner companies by this process. The joint venture will help the company to develop
the resources and protect the proprietary resources.
 Licensing: The licensing process helps the company to attain the rights of operating
business in a new country market. The rights include the trademarks, patents and other
such things that are beneficial for production and selling process in a country (Townsend
and Maxfield, 2015). This process is responsible for reaching such markets and expands
the business without thinking about risk and capital investment.
 Franchising: In this method, the business owners will have to pay royalties and fees to a
company so that the company can easily be identified with the trademark. This process
can lower political risks. The dairy company will be able to expand and operate a
business in the Chinese market in a comparatively low cost. This process will also benefit
the company with managerial capabilities as well as financial investments.
 Turnkey project: In this process, the suppliers are responsible for the supply of a
completed project to the client company. This process provides companies with several
benefits while entering a new market. The foreign direct investment is limited and the
company will be able to exploit with the help of this process. The company should
maintain the secrecy of the data, as there are some risks in this process.
 Strategic alliance: In this method, two business firms prepare a corporate agreement for
starting the international business venture. This concept is becoming popular in the
markets of the UK. This provides a company with several benefits such as the
opportunity of exchanging technology, fighting against the global competition. This
method also reduces the risks by sharing the risks with the other company.
This figure shows that china is developing and the country overtake the United States in the next
few years so that the expansion of business in such country market will be beneficial for the
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dairy company. Strategic evaluation is beneficial for determining the effectiveness of a strategy.
The company will have to examine the desired results with their achieved results. The company
will have to develop strategies and implement that correctly into the business operation so that
the company can exploit from the Chinese markets. The strategic evaluation process will help the
company to check the suitability of strategies that they have chosen.
Figure 1: Strategic evaluation framework
(Source: created by the learner)
List of theories of internationalisation
Absolute cost advantage: According to this theory, the company should have the capability of
producing goods and products in a higher quantity. The labour productiveness is used as the
input in the context of international business. Additionally, this theory states that not all countries
can be rich in a similar time span. Morgan’s dairy will be able to identify the absolute advantages
by comparing the productivities of labours. This theory does not cover the comparative
advantage of the international business.
Comparative cost advantage: This theory states that the two countries can be benefitted from the
trade if one of the companies can be able to avail the relative advantage in production. The
principal of this theory states that the companies will be able to produce more under free trade.
This describes how the comparative advantage can be gained by the individuals, firms and other
factors. Morgan’s dairy will be able to identify the opportunity costs by comparing the costs of
production across different countries.
A gravity model of trade: The gravity model is beneficial for predicting the bilateral trade flows
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