What Are the Economic, Political and Cultural Arguments for International Business Expansion?

Song Han Nguyen

IM 345 Spring 2015

What are the economic, political and cultural arguments for international business expansion?

Winner of Nobel Prize for Economics 2001, Joseph Stiglitz, once discussed how “the enormous reduction of costs of transportation and communication and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge and (to a lesser extent) people across borders”^[1] results in the spread of globalization. The increase in globalization creates opportunities for businesses to expand their target market, encouraging financial growth and consolidating their presence in different parts of the world. However, the development in “transportation and communication”, the loosening of trade barriers mentioned by Stiglitz are not the sole reasons for international expansion. It is essential that organizations take into consideration all economic, political and cultural factors of the target foreign market. With full knowledge of the host country, the organization would be able to enter with a sound strategy and truly benefit from internationalization; otherwise, international expansion would remain as an investment with considerable risks to the company’s capital, business values and worldwide reputation.

A strong economy has a balance between production and consumption, which determines whether a foreign product or service would have an opportunity to succeed, given a good strategy. In order to better understand the importance of economic analysis to internationalization, let’s take a look at China to see how its economy has been a double-edged sword to foreign luxury firms. On the one hand, Chinese economy is very ideal for expansion. China is the second largest economy in the world with its GDP accounting for 15.40% of the world’s GDP (2014)^[2]. Its growth rate from 2010-2014 has been about 7.7% in comparison to that of the USA of 2.2%^[3]. Unemployment is no longer a large issue in the country, since many corporations have been outsourcing to China, which helps create jobs, especially for those without higher-level education. Having the largest population in the world, together with the fact that branded products are culturally perceived as a symbol of status, high-end brands are attractive to a large number Chinese consumers. As the majority of these luxury consumers belong to younger age groups: about 80% are under 45, China’s luxury market grows even faster than Europe’s^[4]. In 2013, Louis Vuitton, the world’s most valuable luxury brand with 39 boutiques in China (and only 20 in its home country, France) reported that China accounts for 25% of its revenue^[5]. For these economic reasons, China is absolutely attractive to luxury companies worldwide. Yet on the other hand, not many people know that this picture is not always the situation of luxury goods in China these days. Inflation has been high for the past 8 years: it pushes up retail prices so much that many Chinese choose to travel abroad for their purchase. Prices are also under the influence of high import tariff and distribution costs while companies rarely offer sales^[6], thus consumers pay a lot less for the same item abroad by getting tax refund. Another reason for this purchasing abroad trend is due to a change in market demand: “As the luxury industry matures, the Chinese are becoming much more sophisticated about the products that they buy. It’s not just about the bling aspect”^[7]. Companies thus spend a lot more on marketing to attract customers, pushing prices up further. Besides, luxury brands in China are exposed to the threat of fake products. From my experience visiting China, it is not hard to find a fake market in Shanghai, because they are not black markets but legit plazas with large name signs and multiple elevators. One can find almost any branded watches, clothing, shoes or handbags there. I found out that a lot of women in China own one or two real bags, and the rest are fake. The trick is “not to wear a fake bag if you drive a cheap car,” said one of the seller I met. Hence luxury companies are not only experiencing sales difficulty, but their reputation is also affected, as luxury goods are facing the risk of losing the value and status that they are supposed to represent. This example shows the significance of economic analysis in international expansion, yet it also demonstrates that it is not the most reliable measure of potential expansion success. Indicators such as growth trends, population and employment statistics are very useful, but a closer look into the market in practice, something that can be done by sending someone to the country for field trips, is equally essential in understanding market trends and consumer behavior.