Considering Labor Costs in Foreign Expansion

by Guest Blogger Nick Rojas

Ever since the National Science Foundation ended its sponsorship of the “NSFNET Backbone Service” on April 30, 1995 any remaining restrictions on using the Internet for commercial purposes were lifted. This resulted in a revolution for many industries, especially those focused on information and communication.
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All of a sudden, you did not have to go to the local library to look up information on subjects you were researching. You also no longer had to contact newspapers and magazines to issue job postings.

What was happening on a local level would soon cross international borders and connect entire workforces, industries, and populations. Outsourcing labor and expanding export and import infrastructures soon became a trending topic for an increasingly connected, global society of the 21st century.

Why Outsource?

The U.S. and large parts of Europe underwent massive economic growth in the second half of the 20th century. With all the growth, however, came the increase in local labor and energy costs.

This was one of the main reasons why many Western corporations began to invest into production facilities in foreign markets, where labor costs were comparatively low and where they could give local economies a boost.

Made in China

One of the nation’s becoming most popular during this era was China, which made a name for itself by offering high productivity at low wages – as low as 100$ a month for non-skilled labor in Chinese factories. The “Made in China” label, to this day, is synonymous with cheap manufacturing labor, as opposed to, for example, the equally famous “Made in Germany” (representing high quality engineering).

Even though China is a Communist country, it was able to build a capitalist economy integrated into the World market. This, however, combined with the increased exposure to Western standards and philosophies among the Chinese population – due to the Internet – has in recent years led to many demonstrations and a generally more pressing uprising of the Chinese labor force against corporations and the government, echoing what Europe went through during its Industrial Revolution in the 19th century.

So while China is still a cheap manufacturing market, investments into the nation’s cheap labor force are becoming increasingly risky considering the latest political developments, which are only now gaining momentum and will continue to raise awareness as the rest of the world learns more about the situation.

India – a Valuable Tech AllyNick2

If China is known for cheap manufacturing labor and Germany for first class engineering, then India is the nation that offers the highest density in talented software developers and other computer-based services.

There are two main reasons for this, the first one being that not only colleges, but Indian companies also invest into technology-related education of young adults. Secondly, since India’s industrial infrastructure is still catching up to Western standards, the chances of landing a job in the mechanical, electrical, or chemical fields are low. In addition to that, many American and European companies are increasingly outsourcing software-related labor to the Indian market, so this trend is not going to change anytime soon.

While China is struggling with an increasingly difficult political situation, an interesting synergy is starting to develop between Western and Indian people. The latest generation of entrepreneurs of companies like Facebook, Uber, and WhatsApp consists largely of Millennials, the first generation that grew up with access to the Internet.

Their exposure to global information and cultures has turned them into a tolerant, curious, and cosmopolitan generation. For Millennials, globalization is not a new development, but status quo.

As a result, they don’t see their Indian counterparts as just another source for cheap labor, but as potential partners who share the same passion and interest – technology. So while wages in India are still much lower – an experienced programmer in the U.S. makes up to $200 an hour, whereas Indian developers charge closer to $20-30 an hour – this growing “partnership” between generations and nations will have an impact on Indian labor costs, especially in the area of software development.

Other Markets

China and India have certainly become very popular for their outsource-friendly workforce, but South America and Africa are going to be interesting to watch over the next few decades as the United States is making significant investments into their local infrastructure, renewable energy, and banking system.

Conclusion

It might seem like commercial Internet has been around forever, but it has really only been around for two decades. Considering the massive impact on the global marketplace it has already had, it is clear that we will see dynamics shifting between foreign markets over the course of the next century, and labor costs will be one of the most important factors to watch.

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Nick Rojas is a business consultant and writer who lives in Los Angeles and Chicago. He has consulted small and medium-sized enterprises for over twenty years. He has contributed articles to Visual.ly, Entrepreneur, and TechCrunch. You can follow him on Twitter @NickARojas,. or you can reach him at NickAndrewRojas@gmail.com.

Overcoming barriers to int’l trade

BY KELVIN TAN for Business Times

Tariffs and duties are among the most important factors dictating the ability of companies in Asia to increase their exports, and underscore the importance of easing trade access within the region and beyond. For companies looking to import or export goods, understanding custom and excise requirements can be challenging as different countries and economic blocs have vastly different rules.

In Asia, ambiguities remain despite the efforts of member governments to reduce or alleviate tariffs when trading with one another. For example, while developed states like Hong Kong and Singapore impose import duties on a limited number of goods, developing nations like Cambodia and Myanmar impose import duties on hundreds of goods and the rates and list of goods are subject to constant changes. These differences can cause much confusion and can deter businesses from trading with a particular market.

In a bid to boost and facilitate international trade, governments and economic blocs turn to free trade agreements (FTAs) with the aim of increasing export and import volumes.

Export Promotion Rationale Continued – Part 2

In each one of these stages, firms have different concerns. For example, at the
awareness level, firms worry mainly about information on foreign markets and
customers. At the interest stage, firms become concerned about the mechanics of
exporting such as packaging or shipping. During the export tryout, communication,
supply chain management, and the sales effort become key considerations. At
evaluation time, regulations and financing take on greater importance. In the
adaptation stage, service delivery and control are major issues.

As a firm moves through these stages, unusual things can happen to both risk and
profit. Management’s perception of risk exposure grows. During domestic
expansion, the firm has become more familiar with the market, and has seen its
risk decline. During international expansion, the firm encounters new factors such as currency exchange rates,, greater distances, new modes of transportation, new government regulations, new legal and financial systems, new languages, and cultural diversity. As a result, the firm’s actual risk increases. At the same time, due to the investment needs of the exporting effort, in areas such as information acquisition, market research, and trade financing, the immediate profit performance may deteriorate. Even though eventually international market familiarity and diversification effects will reduce the risk and increase profitability, in the short and medium term, managers may face an unusual and perhaps unacceptable situation: rising risk accompanied by decreasing profitability. In light of this reality, and not knowing whether there will be a pot of gold at the end of the rainbow, many executives either
do not initiate export activities or discontinue them. Therefore, a temporary gap in the working of market forces exists. Government export assistance can help firms over this rough patch to the point where profits increase and risk heads downward. Bridging this short-term market gap, which lasts typically for 2 to 3 years, is the key role of export assistance, and the major justification for public sector involvement.

The Rationale for Export Promotion : Part 1

Exports are important. Yet, why should firms be enticed into exporting through the use
of public funds? Profit opportunities for exporters should be enough of an
incentive for firms to export. To explore this issue, I will use our Georgetown University research, which was  initially published in the AMA  Journal of  International Marketing.  First off, it is helpful to understand the export process within the firm. Typically, firms evolve along different stages to become experienced exporters. They start out being uninterested in things international. Management frequently will not even fill an unsolicited export order. Should  international market stimuli continue over time, however, a firm may move to the stage of export awareness, or even export interest. Management will begin to accumulate information about international markets and may consider the feasibility of exporting. At the export trial stage, the firm will fill selected export orders, serve a few customers, and expand into countries that are geographically close or culturally similar to the home country. At the export
evaluation stage, firms consider the impact of exporting on overall corporate
activities. Unless initial expectations are met, the firm is likely to discontinue its export efforts, seek alternative international growth opportunities or restrict itself to the domestic market. Success will lead the firm over time, to become an export adapter, make frequent shipments to many customers in more countries, and incorporate international considerations into its planning.

By: Michael R. Czinkota

 

Expanding into Global Markets: Direct Investment

Some companies find that they cannot meet their global marketing objectives by continuing to export, so they make direct investments in international markets to gain access to manufacturing facilities, supplies, or labor, among other reasons. They become multinational corporations which the United Nations defines as “enterprises which own or control production or service facilities outside the country in which they are based.” While this definition makes all foreign direct investors “multinational corporations,” large corporations are the key players.

Building and managing operations outside the domestic market requires skills and resources beyond those used for exporting. Multinational firms with subsidiaries and other investments in other countries also deal with issues ranging from local versus headquarters control, to product or service standardization versus customization for individual market needs. At the highest level of marketing globalization, companies integrate thie international and domestic operations into relatively seamless enterprises that have portfolios of nations that they market to with unified strategies.

Putting products into the hands of customers overseas involves some degree of direct financial investment, whether it is done by acquiring assets in other countries or gaining access to another company’s assets through contracts. International marketers invest directly via full ownership, strategic alliances, or joint ventures to create or expand a permanent interest in an enterprise. It typically requires substantial capital and an ability to absorb risk, so the most visible players in this arena are large multinational corporations who invest either to enter new markets or to ensure reliable supply sources.

Foreign direct investment is defined by the United Nations as “enterprises which own or control production or service facilities out of the country in which they are based.” U.S. firms have significant investments in the developed world as well as in some developing countries. It is a major avenue for global market entry and expansion.

The top multinational companies come from a wide range of countries and depend heavily on their international sales, with their original home market accounting for only a fraction of total sales. Some have revenues larger than the domestic output of some countries. Many operate in more than 100 countries and do not even reference “global” and “domestic” anymore. Through their direct investment, these companies bring economic vitality and jobs to their host countries, often paying higher wages than the average domestically owned firms. At the same time, though, trade follows investment, and companies that invest in other nations often bring with them imports that could weaken a nation’s international trade balance.