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.
Nick1

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.

COUNTRY OF ORIGIN EFFECTS

Buyer behavior is affected by the national origin of products and services. Many consumers are relatively indifferent to where a product is made. Other consumers favor goods produced in their home country. Country of origin (COO) refers to the nation where a product is produced or branded.  Origin is usually indicated by means of a product label, such as “Made in China”. When consumers are aware of a product’s COO, they may react positively or negatively. For example, many people favors cars produced in Japan, but would be less upbeat about cars made in Russia. Most people feel confident about buying clothing made in Italy, but would be less receptive to clothing from Mexico. Such attitudes arise because consumers hold particular images or conceptions about specific countries. Consumers assume that Japan produces high-quality cars and that Russia makes low-quality cars. While such beliefs are often rooted in reality, many are simplified opinions, false stereotypes or effect the slowness of accepting change.

Buyer reactions to COO are influenced by various factors.  First, COO stereotypes vary depending on the origin of the judge and on the category of the product being judged.  For instance, while Japanese cars are disdained by Indians, they are prized by Russians. While people in Brazil love Japanese consumer electronics, they spurn Japanese apparel.

Second, opinion varies depending the national origin of the firm and the location where its product is actually made. Many consumers love German Volkswagens, even if the car is produced in China, Poland, or some other location outside Germany.

Third, as the capacity of countries to perform well in specific industries improves, the COO phenomenon varies over time. Until recently, for example, few Westerners would have visited India to undergo surgery.  However, many now perceive India as an excellent value for obtaining medical care for various conditions, and spend the time and money to travel there to receive heart operations, cosmetic surgery, and other procedures.

Finally, the tendency of consumers to discriminate against foreign products varies by demographic factors.  For example, senior citizens and people with limited education tend to shun products that originate from abroad.

Export Promtion Rationale – full text version

Here is the full text, at the end of this text is a link with the full text in pdf format. Please Enjoy!

A RATIONALE FOR EXPORT PROMOTION

Prof. Michael R. Czinkota

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.

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.

If export assistance and promotion are to be rendered, budgets and efforts should be expended in the most effective manner.  Organizational key determinants of business and export success are size, human and financial resources, technology, service and quality orientation, information system, research capabilities, market insights and connections, and the firm’s ability to manage regulations. The managerial characteristics that research has most closely linked to export success are education, international exposure, expertise, international orientation, and commitment. These two corporate dimensions, organization and management, are subject to the opportunities and constraints of the international market environment, and will determine the degree of the firm’s export involvement. This involvement in turn will result in export performance, which can be measured in three different ways. Efficiency refers to the relationship between corporate input employed and the resulting outputs achieved. Typically, efficiency is measured through the proxy of export profitability. Effectiveness refers to relative business success when compared to other competitors in the market, and is often measured in terms of market share and export sales growth. Competitive position addresses the overall strength of a firm arising from its distinct competencies, management style, and resource deployment. Typical indicators here are the overall quality and competence of a firm’s export activities.

Export assistance can aim at the organizational characteristics and capabilities of the firm and try to improve those. It can also work with the managerial characteristics and contribute to their positive change. Export assistance providers must also be deeply involved with the international market environment, both in terms of learning from as well as shaping the environment.

 Export assistance will be most effective when it either reduces the risk to the firm or increases its profitability from export operations. For example, providing information on market potential abroad is likely to decrease the risk (both real and perceived) to the firm. Offering low-cost credit is likely to increase profitability. Macro assistance in the foreign market environment can consist of international trade negotiations designed to break down foreign barriers to entry. Micro assistance consists of learning from the foreign market and its customers, and using that knowledge to adjust to that market.

Here are my conclusions about the seven dimensions that should guide export assistance efforts, in particular where new and growing businesses are concerned.

One needs to determine what export assistance is to achieve. Some of the current objectives are global fairness and the opening of world markets. Public funds and government attention are too scarce to invest solely to right wrongs or for the sake of fairness. The key focus must be on the benefits to U.S. employment.

The time frame involved should be a long-term orientation, which concentrates efforts on introducing more and new firms to the global market.

Export assistance needs to achieve either a specific reduction of risk or an increase in profits for firms. It should be concentrated primarily in those areas where profit and risk inconsistencies produce market gaps, and be linked directly to identifiable organizational or managerial characteristics that need improvement. Otherwise, assistance supports only exports that would have taken place anyway. The measurement of success should be based on the export involvement of the firm, focusing on the number of customers, transactions, and locations served.

Coordination is crucial. Within government, one must avoid that well established industry sectors with relatively low employment effects consume resources in an over proportionate fashion while priority growth industries would be left to seek export success on their own with insufficient support. Externally, export assistance must ensure that the policy gains abroad are actually used by domestic firms. Rather than concentrate only on well entrenched industries, the focus must be on sunrise industries.

Export assistance should emphasize those areas where government can bring a particular strength to bear-such as contacts or prowess in opening doors abroad, or information collection capabilities. Externally, programs should aim at the large opportunities abroad. As far as firms are concerned, attention should not assist industries in trouble, but mainly help successful firms do better.

Export assistance programs should start out by analyzing the current level of international involvement of the firm and then deliver assistance appropriate to the firm’s needs. For example, help with after-sales service delivery is most appropriate for firms at the adaptation stage; firms at the awareness stage worry much more about information and mechanics. Assistance must also take foreign market conditions and foreign buyer preferences into account. It is easier to sell what is in demand rather than being guided by what’s in ample supply.

There should be a spark of boldness which goes beyond ensuring that things are done right, but checks whether one can do more right things. One could, for example, think about domestic and international efforts to set standards for technology and quality, and include the grading of enzymes, meats, hormones, and other products developed by biotechnology firms. Or one could think about the development of a national forfeiting institution and the delivery of training to banks,  to be of major assistance in handling the financial and documentation aspects of exporting.

In a world of shifting goal posts and rapidly changing realities, all firms should be prepared for the global marketplace. If they can grow and successfully meet international competition, they will strengthen themselves and the nation.

Michael Czinkota researches International Marketing issues at Georgetown University. He served in trade policy positions in the Ronald Reagan and George H.W. Bush administrations. His blog is michaelczinkota.com

 

The rationale for export promotion

Export Promotion Rationale Continued – Final Part

Here are my conclusions about the seven dimensions that should guide export
assistance efforts, in particular where new and growing businesses are
concerned. One needs to determine what export assistance is to achieve. Some of the current objectives are global fairness and the opening of world markets. Public funds and government attention are too scarce to invest solely to right wrongs or for the
sake of fairness. The key focus must be on the benefits to U.S. employment. The
time frame involved should be a long-term orientation, which concentrates efforts on introducing more and new firms to the global market. Export assistance needs to achieve either a specific reduction of risk or an increase in profits for firms. It should be concentrated primarily in those areas where profit and risk inconsistencies produce market gaps, and be linked directly to identifiable organizational or managerial characteristics that need improvement. Otherwise, assistance supports only exports that would have taken place anyway. The measurement of success should be based on the export involvement of the firm, focusing on the number of customers, transactions, and locations served. Coordination is crucial. Within government, one must avoid that well established industry sectors with relatively low employment effects consume resources in an over proportionate fashion while priority growth industries would be left to seek export success on their own with insufficient support. Externally, export assistance must ensure that the policy gains abroad are actually used by domestic firms. Rather than concentrate only on well entrenched industries, the focus
must be on sunrise industries. Export assistance should emphasize those areas where government can bring a particular strength to bear-such as contacts or prowess in opening doors abroad, or information collection capabilities. Externally, programs should aim at the large opportunities abroad. As far as firms are concerned, attention should not assist industries in trouble, but mainly help successful firms do better.

Export assistance programs should start out by analyzing the current level of international involvement of the firm and then deliver assistance appropriate to the firm’s needs. For example, help with after-sales service delivery is most appropriate for firms at the adaptation stage; firms at the awareness stage worry much more about information and mechanics. Assistance must also take foreign market conditions and foreign buyer preferences into account. It is easier to sell what is in demand rather than being guided by what’s in ample supply.

There should be a spark of boldness which goes beyond ensuring that things are done
right, but checks whether one can do more right things. One could, for example, think about domestic and international efforts to set standards for technology and quality, and include the grading of enzymes, meats, hormones, and other products developed by biotechnology firms. Or one could think about the development of a national forfeiting institution and the delivery of training to banks,  to be of major assistance in handling the financial and documentation aspects of exporting. In a world of shifting goal posts and rapidly changing realities, all firms should be prepared for the global marketplace. If they can grow and successfully meet international competition, they will strengthen themselves and the nation.

Peru: Worth a Visit and an Investment

Lately, many of us have been culling our list of countries to visit. Many nations carry warnings because of civil strife, ubiquitous explosions or just random violence. Too bad for those of us who like to travel and see new things. Too bad also for nations for whom tourism is a key income source. Yet, here is some good news for a change: Visit Peru!

I just returned from a visit there, invited by the University Ricardo Palma for lectures. With lots of travel under my belt, I was impressed by Peru and recommend a visit. The Lima airport is large, transparent and well organized. No moment of mutual distrust at customs. You push a button and get a randomized response: Red –they’ll want to see your luggage, green you go on. Luggage carts are available and free (unlike in Washington D.C.’s Reagan Airport where you have to pay three dollars). The hotels are very nice, friendly, and, unlike in Paris, with free internet access as a basic service. Given the high altitude, reduced oxygen can result in a breathing problem. That is
why many locations offer complimentary coca tea or mate de coca, which, due is
the local remedy for fatigue and pain.

Traffic was heavy, but drivers skillfully negotiated the roads (though they did use every available inch of room). Parking is difficult – you’re better off to be driven. Sure they have earthquakes, but so does Washington D.C. There is good logistical thinking for troublesome times. When flooding had torn away part of a highway, a detour parallel to the road is rough but the re-routing takes only 10 minutes.

People are very kind and welcoming. When they say ‘mi casa es su casa’ they really want you to feel at home. They immediately provide appetizers or tea. Employees are empowered: At lunch at my hotel I told my visitors how hammering in the room next to us had awakened us. The lunch manager overheard our conversation, expressed his apology, and resolutely refused any payment for lunch for all four of us (including our two outside guests).

All University events we attended were accompanied by music, poetry, flowers, dance and song. There was ongoing reference to the need for balance in life.  Work has to be within a context of enjoyment. What an inspiring idea!

The country’s mountain city of Machu Picchu reflects Inca history, capability and determination. It also shows an extraordinary clash of cultural values in the 16th century. The Inca used gold for wallpaper on rocks, to reflect the much revered Sun. The invading Spaniards saw gold as treasure, and wanted lots of it. The Inca complied by filling rooms with treasure (or wall paper) only to be murdered in appreciation. It turned out to be beneficial for Spain not to keep any gold artifacts, but to melt them
all down and re-issue them as coins of the realm. That way, nothing had to be returned to Peru. But even today, Peru continues to be a leading producer of many valuable commodities, among them silver, gold, and copper.

Peru and Peruvians like to be part of the world. For example, there are at least 8 towns and villages in the United States carrying the name of Peru. The government has initiated contact with all of them, with a particular focus on Peru, Nebraska in order to build relationships. Peru’s athletes are quite successful, with women world champions in both featherweight boxing and ocean surfing. Peruvian chefs have opened highly rated restaurants, both in Lima as well as in New York.

The minister of the economy (U.S. educated at Johns Hopkins) discusses, with help of many precise power point slides, how the gap between poor and rich can be bridged. There is little talk about socialism, but much about how to boost simultaneously the economic performance in the Peruvian beach areas, the mountains, as well as the desert. Foreign investment is welcome and sought after. There are many ideas floating about how to serve clients better, and make investment opportunities more attractive in order to achieve a minimum annual growth rate of six percent.

Here are my lessons learned for take away: 1.when it comes to narrow, dusty and curvy roads, Mercedes busses seem to have it made.  So if you have some really heavy duty motoring tasks, you know what to do. 2. You can hike the Inca trails to Machu Picchu for four days and three nights to get to the top – a memorable achievement. 3. Don’t
underestimate the train getting you there from Cusco in 90 minutes. Its design is
modern with a crew offering fashion shows of desirable Peruvian products. It runs on time every half hour, and affords spectacular views. 4.  Tourists have to pay more for services than locals.  Discriminatory, yes, but fair when looking at income levels. 5. The favorite local alcohol is the pisco, a brandy made from grapes. Combined with egg whites, lime juice and bitters it becomes pisco sour, deserving of a global reputation.

There remains much to be discovered. Peru wants to be friends – even with Spain. Hundreds of years of overgrowth has lead to jungles and ingrown mountain sides which still hide many mysterious artifices. Peru and the Andean area have already saved the world from starvation due to presenting us with potatoes and corn. The future may bring more benefits as well.

Prof. Michael Czinkota