Challenges of Expansion to a Foreign Location

Increases in accessibility and interconnectedness in the global market place make it necessary for business leaders and entrepreneurs to consider the risks involved in the expansion of business and doing business abroad. Expanding business to other countries consists in acquiring new clients and boosting the profits of a business. In the process of expansion, entrepreneurs and companies are affected by numerous factors relating to the structures and systems in the host country. These factors are important determinants of performance and thus require consideration. In this paper, I discuss the challenges relating to political stability, government financing, capital controls, exchange rate risk, and comparative advantages and the recommendations for improved performance in operations in other countries.

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Challenges of Political Stability

The system of government and politics in a country has a significant impact on the ease of doing business. Political stability is a significant determinant of economic performance when investing in new countries. Political stability affects consumer and investor confidence and the general state of the economy. Firms seeking to invest abroad have a responsibility to abide by the local rules and regulations that apply in the country of operation. The business and communication rules in a country can determine whether or not a business will operate in a state successfully (Hussain, 2014). Some countries have specific marketing and production standards that prevent producers from engaging in certain behaviors. For example, in countries such as India, advertisers have to state the effects of products such as cigarettes. Also, baby food adverts must insist that breast milk is the most critical food option for babies and that the advertised food is just a supplement.

Political stability also determines the propensity of a government to collapse due to competition between political parties and the presence of conflicts. Political stability could also be a result of the change of government. The effects of balance are fueled by the interconnection between the state of politics or government and economic growth, such that a stable political environment reduces the speed of financial investments and as such reduces investments. On the contrary, politically stable environments are conducive for investment and economic growth (Hussain, 2014). However, there are times when political stability is a result of oppressive governments, in which case, issues such as impunity and cronyism would come up. Thus, the fragility of the political system is an antecedent for business failure.

Government Financing

The actions of the government are essential in determining the success and performance of a business in another country. The government can finance enterprises in many ways such as improvement of infrastructure and other facilities that promote foreign investment. Governments can also provide direct subsidies to local companies to increase their outputs and enhance economic growth. The provision of grants to domestic producers affects the profitability of external investors. Provision of subsidies for domestic producers improves their levels of production and renders foreign companies non-competitive.

Capital Controls

Most investors seek to invest their capital in countries with desirable capital controls. Capital controls are beneficial in that they improve the macroeconomic adjustments in economies with rigid or undesirable monetary policies. Also, capital controls promote financial stability and enable countries facing risks associated with disruptive outflows and inflow surges. Therefore, capital controls are beneficial to the host country as a means of controlling and managing foreign direct investments and currency valuation (Alfaro, 2015). However, capital controls affect investors negatively as they reduce the availability of external financial services and products and thus limit the growth of the company. Companies are denied the chance to utilize external sources of debt or equity, thus forcing them to use non-attractive and sometimes expensive sources. Capital controls on investment have more negative impacts on businesses compared to capital controls on equity.

Exchange Rate Risk

The profitability and success of companies operating in other countries are primarily affected by changes in exchange rates and currency volatilities. Firms that have expanded to new countries experience three forms of exchange rate risks including transaction exposure, operating or economic exposure, and translation exposure. Transaction exposure originates from the need of the company to pay or receive the payment that is in different denominations. These risks can result in the loss of money in the exchange process. Economic or operating risks arise from the unexpected fluctuations in the value of the currency, which affects the future market value and cash flows of the firm. This exposure can cause substantial, long-term risks and can lead to the loss of a company's competitive power and position due to the effects of exchange rates on prices. Lastly, translation exposure comprises the effects of fluctuations in currency on financial statements.

Comparative Advantage

The business will experience comparative advantages in terms of resources. Investment into a country with natural resources of higher quality and quantity is beneficial. The comparative advantage in funds will be derived from the benefits of geography and climate, making it more profitable to produce in the host country than in the home country. Before the expansion, the state would only enjoy the natural resources through imports, which led to high costs of production. Also, the company will enjoy a comparative advantage in terms of demographics (Brencic, 2001). The readily available workforce and customer base will enable the business to improve speed in production and also boost sales. Additionally, the company will enjoy a comparative advantage in terms of reduced import controls such as quotas, subsidies, and tariffs.

Position

The company will utilize price and non-price strategies to increase profitability and improve market expansion in the new market. The price factors that the firm will use include land, capital, and labor, while the non-price factors will consist of the provision of quality goods, location and environment, flexibility, innovation, knowledge, and human resources. The business will ensure maximum utilization of the price factors and ensure maximization of quality in the non-price factors.

The business will sustain its success by utilizing its comparative and competitive advantages. Also, the company has a strong market in its home country, meaning that the export market is strong and viable. This gives it an advantage over local firms as it has a larger customer base. Also, the firm can access financial services from outside (Brencic, 2001). Expansion of production will rely on the utilization of resources and observance of the business rules and regulations in the new country. However, the country will be at a domestic market disadvantage because of the subsidies and financial aid that local firms receive from the government. As such, to acquire the price advantage, the firm will have to increase quality and position its brand in a manner that makes it superior.

References

Alfaro, L., (2015). The Effect of Capital Controls. Retrieved from https://www.weforum.org/agenda/2015/01/the-effect-of-capital-controls/

Brencic, M. M. (2001). Analyzing competitive advantages on the basis of resource-based view: the concept of price and non-price factors. Journal for East European Management Studies, 313-330.

Hussain, Z. (2014). Can Political Stability Hurt Economic Growth? Retrieved from http://blogs.worldbank.org/endpovertyinsouthasia/can-political-stability-hurt-economic-growth

Challenges of Expansion to a Foreign Location