Pest Analysis: Nigeria, China, US And UAE

No two countries in the world are exactly alike. The differences are based on various demographics, legal systems, economic/political frameworks, etc. A tool enabling comprehensive analysis of countries’ differences is PEST. The PEST framework analyzes the ‘Political, Economic, Social and Technological’ facets of a country.

COUNTRY ANALYSES

Four different countries were chosen based on their differing systems of government and economic frameworks which are summarized in the following PEST analysis:

3.1 Nigeria

Political

According to Khan S.A (1999), CIA (2010) and EDC Economics (2009);

Democracy with intermittent military rule in periods with elections at all government tiers.

Suffers entrenched/institutionalized corruption as well as polarization between the North and South for positions within government.

Unrest in the oil producing region of the country has led to instability and safety concerns

Favourable fiscal regime with CIT of 30% except for oil sector which has a different regime.

NEEDS policy aims to attract investment however, strategic sectors still neglected.

Economic

According to CIA (2010);

Oil dependent economy with oil revenue as 80% of total revenues and 95% of export earnings causing Dutch disease – a steady decline in other sectors.

GDP increased to 5% to $357.2 billion in 2009 making GDP per capita about $2400; one of the lowest worldwide culminating in 70% of the population below the poverty line.

Debt/GDP is 18% inflation rate of 11.5%.

Social

According to CIA (2010);

Young population of 152 million. 250 ethnic groups distributed religion wise as 50% Muslim, 40% Christian and 10% traditionalists.

High interest in new foreign technologies (about 70 mobile million users in 2008)

Influenced by foreign trends and fads which determine the local scene.

Technological

Despite research institutions, R&D is still sub-par. (Federal Government Public Service Rules (2008)

Low automation due to -1.8% growths in industrialization.

3.2 China

Political

According to CIA (2010);

Communist state headed by a President who is elected by the legislature which is elected by lower level legislatures.

The effects of China’s civil war have given rise to the contention of Taiwan’s sovereignty.

Policies centre on socialist ideals with state ownership and soviet codes.

Economic

According to CIA (2010);

Experienced rapid growth after opening up economy by “liberalization of prices, fiscal decentralization” and foreign trade.

GDP of $8.8 trillion but a low per capita GDP of $6,600.

China experienced growth of 8.7% in 2009.

It has poverty rate of 2.8% and low income disparity.

China’s debt/GDP is18.2% and had deflation of -0.8%.

Social

According to CIA (2010) and Kwintessential (2010);

Ageing population of 1.3 billion.

Religion distribution dominated by Taoism/Buddhism while Christianity/Islam account for 4-6%.

The ethnic make-up is 91.5% Han Chinese and 8.5% various minorities.

The languages are Mandarin and Cantonese.

Interactions heavily influenced by Confucianism which stresses obligations and collectivism. Chinese are very in-tune with and influenced by Chinese culture.

Technological

Very industrialized however relatively poor in energy efficiency as power generation uses 40% more energy than required. (Itamar Meideros, 2006)

Technology/Innovation is dominant in China with 30% expenditure increase. Strong emphasis and R&D in environment/climate change, biotechnology, nanoscience, space science etc. (Hepeng Jia, 2010)

3.3 United States of America

Political

According to CIA (2010);

Federal government steeped in democratic practice with elections held every four years.

High political stability due to defined succession procedures. However, anti-west sentiment is directed largely towards the US and has seen it become susceptible to terrorist acts which prompting protective warfare outside its shores.

Relatively high tax rates though softer fiscal regime (lower tax/higher spending) has risen out of the economic crises.

Economic

According to CIA (2010);

“The US has the most advanced economy in the world” with a GDP of $14 trillion and per capita GDP of $46,000 and a 2.9% decline caused by the recession.

With a budget deficit of about $1.5 trillion, it is no wonder that the debt/GDP 52%. Inflation rate of -0.7% brought about by tight credit and decreased purchasing power.

Social

Aging population of 310 million broken down ethnically as white 79.96%, black 12.85%, and Asian 4.43% and religiously as 78% Christian, 12% unaffiliated and others. (CIA, 2010)

Cultural mix of domestic innovation and European import and is divided across liberal and conservative and the in-betweens. The key values are military and scientific competitiveness, meritocracy, defined political structures, risk taking and free expression (Everyculture, 2010).

Technological

The US is considered the most technologically powerful and industrialized nation in the world. Industries include power generation, computer systems, auto, automated, aviation, steel digital etc. (Naomi R. and Kenneth L., 2007)

Furthermore, the list of US inventors and patents is reflective of the prevalence of innovation. From 1964 to 2009, the US has granted 4,548,072 patents on utility innovations alone. (uspto, 2009)

Strong R&D culture with spending as high as 3% of GDP. The government is responsible for about 27% while industries are 69%. (Aps, 2000)

3.4 United Arab Emirates

Political

According to CIA (2010);

Loose federal state with seven member emirates enjoying relative autonomy and an autocratic government.

Due to its inherent monarchy, stability is ensured as succession is defined while the president (appointed by 7 member monarchical council) selects all cabinet members including Prime Minister. Government policies are geared towards growth a move from the oil based economy through diversification.

Foreign investment is also encouraged through the designation of tax free zones and lenient business laws.

Economic

According to CIA (2010);

High diversification from oil as only 25% of GDP output is oil based. GDP and per capita GDP are $201.4 billion and $42,000 respectively.

The global financial crisis as well as reduced international credit led to a 4% fall in GDP. Debt/GDP is 47.2% and inflation is 1.5%.

Social

According to CIA (2010);

The population of 5 million is 81% non nationals: 19% Emarati, 23% Arab/Iranian, 50% South-Asian, and 8% others. Religion is 96% Muslim and 4% others. Official language is Arabic.

“The country is a unique blend of traditional values merged with a modern, advanced society.” UAE is very conservative arab/muslim society with activities like social drinking, inappropriate dressing, and gender mingling frowned upon. However, with the migration of expatriates, such behaviors have become more common in urban areas.

Despite reservations, there is a taste for foreign goods and services.

Technological

According to CIA (2010);

Strong communication and technology infrastructure which has positioned UAE as a leading industrial centre in the Middle-East. Prevalence of Dubai Internet City for e-Commerce and heavy investments in IT infrastructure.

Government priority is to promote innovation and automation for higher industrialization making UAE not only a leader in the Middle-East but competitive at a larger scale.

CONCLUSION

A combination of political/economic systems culminates in differing nations. In this instance, the major difference in the comparative analysis of the four aforementioned countries lies in the economic state of each nation with different figures and composition for macroeconomic indicators.

Social environments also depict differing values and demographics for all countries. Political systems also range from autocratic to democratic with communist in between. Understanding the nuances of countries is a great facilitator of international trade and relations; two factors that nations need to engage in to prosper.

NO 2 – REVIEW OF THE ECONOMICS AND POLITICS OF INTERNATIONAL TRADE AND INVESTMENT

INTRODUCTION

No nation is self sustaining producing all consumed. Consequently, the need for trade across borders arises. Furthermore, the laws of comparative advantage which serve as the most potent advocate of ITI promotes the specialization in production of goods that a country produces efficiently for export and import the goods that it cannot produce or produces less efficiently.

While in the past protectionism was a dominant economic policy, today countries are encouraging ITI as it impacts favorably on their economies.

ECONOMICS OF INTERNATIONAL TRADE AND INVESTMENT

Increased ITI has had positive impact on national economies. According to CIA (2010), ITI affects the economic growth, income, trade balance/payments.

Economic Growth

Countries more open to international trade achieved twice the average growth rate of other countries (OECD, 1999). Also, an analysis of 17 developing countries found that those with ‘outward economic policies’ experienced higher growth in GDP per capita than those without (Council of Economic Advisers, 1999).

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Income

Increase in international trade leads to an increase in income irrespective of income distribution. Based on empirical studies, a 1% increase in international trade/GDP raises income per person by at least 1.5%. This results in higher standards of living and purchasing power (CIA, 2010).

Trade Balance

ITI affects a country’s balance of trade and payments. If inflows exceed outflows, a country has a surplus and vice versa. Relatively small trade imbalances are common and do not have severe economic implications. However, where trade imbalances/deficits are huge and frequent, it poses a problem as it means more money is flowing out of the country than into it (Griffin and Ebert, 2002).

Exchange Rate

An exchange rate is the rate at which another country’s currency is purchased. This is necessary in ITI as countries possess individual currency which needs to be purchased to operate in that country. ITI affects this rate in that demand for one currency for trading in that country appreciates the value of the currency (Griffin and Ebert, 2002).

Foreign Direct Investment

FDI, a form of international investment, is the ownership of assets in a country by a foreign investor. It is considered a measure of economic activity i.e. the more FDI a country has, the better off its economy. The major advantages to the receiving country are increased output/GDP, taxes and employment. (Griffin and Ebert, 2002)

China

China is an ideal country to analyze for effects of international trade as it was previously a closed economy until the late 1970s.

China’s macroeconomic indicators drastically improved after it opened with rates’ increase of 70% in the immediate period following reform and the economy has grown more than tenfold.

Also, the trade surplus increased and has been maintained. As of 2009, China recorded about $273 million in the balance of trade, the average income was $6600 while the FDI amounted to about $576 billion (CIA, 2010)

2.2 USA

The US possesses one of the highest ITI indices and is the largest importer and trading nation in the world.

From 1992-1997, exports accounted for 1/3 of its Gross Domestic Product (GDP), the yield for promotion of international trade in 1996 was $12 billion, total elimination of barriers to international trade in 1996 would have yielded $15 billion in welfare gains for the US.

Due to its numerous imports, the US dollar became a widely accepted currency and is the standard currency for oil and gold (CIA, 2010).

POLITICS OF INTERNATIONAL TRADE AND INVESTMENT

Governments design policies and frameworks for ITI due to its importance to their economies. It is obvious why governments would promote ITI due to the benefits but a common occurrence of protectionism points to the contrary. This part analyses government influence in both encouraging and discouraging ITI.

Promoting ITI

According to Council of Economic Advisers (1999), governments encourage ITI in the following means:

Market liberalization

Integration of the economy

Preferential trade arrangement

Implementation of favorable policies

Discouraging ITI

Countries engage in trade restriction policies despite the economic/welfare loss for a major reason of protectionism for domestic goods/services and local/infant industries from being dominated by foreign goods. According to Council of Economic Advisers (1999), some means used by governments to curb trade are:

Import tariffs

Import quotas

Laws and regulations

Domestic content requirement

3.1 China

China is one such country where politics have affected ITI. China used to operate a closed economy with little or no ITI in all sectors. However, globalization and poor economic conditions led to market oriented reforms in the 1970s. (CIA, 2010)

In order to maintain its trade surplus, China while having liberated its market, still maintains some protectionist policies. Several attempts made by foreign companies to purchase companies in China have been stalled by the government. Furthermore, the devalued currency ensures greater demand for Chinese products abroad while limiting imports.

CONCLUSION

ITI has increased in significance as more countries have realized the benefits in terms of economic and income growth. However, for protectionist purposes, some countries employ means such as quotas and tariffs to curb imports.

Needless to say, it has been proven by numerous empirical studies that despite the cons to domestic producers, ITI and investment is a propellant of growth and should be adopted by all nations.

NO 4 – STRATEGIES AND STRUCTURES OF INTERNATIONAL BUSINESS

INTRODUCTION

The value of global trade in 2007 of $25 trillion is indicative of the importance of international business (Ira Machefsky, 2008). With rapid growth and numerous entrants into the international market, the world economy has become an interdependent system as globalization manifests itself.

International business benefits such as new markets, higher revenues/profits and economies of scale prompt firms to expand into international markets after examining their capabilities and the environment.

INTERNATIONAL STRATEGIES

This is defined as the approach undertaken by a firm in expanding its products or services to consumers across national boundaries (Economy watch, 2010). Below are structures/entry strategies available to firms on an international expansion:

Export-Import

Exporting involves the production of a good for sale in another country (David P. B., 2010). It can be undertaken directly through an agent – foreign representative of an exporter’s interest in a foreign market responsible for selling the exporter’s products, collecting payment and customer service (Griffin and Ebert, 2002), a distributor, government or an overseas subsidiary; or indirectly through counter-trade, export management companies etc.

The benefits of this structure are as follows:

Manufacturing is home-based

Opportunity to study market before full mortar and brick entry

Limited overseas risk

The major disadvantage is the limited control a firm would have as most activities in the importing country would be undertaken by agents or export companies. (Pavord and Boggart, 1991)

Licensing and Franchising

Licensing is where firms give foreign individuals or companies exclusive rights to manufacture/market their products in that market.

According to Ian Cockburn (2010), franchising is usually considered a special form of licensing and is defined as a He further describes the advantages of licensing are as follows:

Opens the door to low risk manufacturing relationships

Linkage of interests of both parties

Capital not tied up in foreign operation

Options to buy into partner exist or provision to take payment in stock

Strategic Alliance

Strategic Alliance is when a company finds a partner in the importing country and they agree to invest resources into a joint venture or cooperate in some way for mutual benefit (Griffin and Ebert, 2002). According to Kogut (1988), such strategic alliances are “used for the transfer of organizationally embedded knowledge that cannot be easily blueprinted or packaged”. The advantages of strategic alliances are:

Easy way of entering new markets

Fulfils some countries’ requirement of local participation

Greater control of foreign activities and operations

Knowledge and expertise sharing especially from foreign partners.

The major disadvantages are that assigning profits could be difficult and expensive to set-up (Griffin and Ebert, 2002).

Foreign Direct Investment (FDI)

FDI is the act of “buying or establishing tangible assets in another country” (Griffin and Ebert, 2002). The FDI measures foreign ownership of tangible assets such as plants and factories and is usually a long term investment in a country. Major types of FDIs are mergers and acquisitions and in some instances, joint ventures.

Mergers and Acquisition (M&A)

Mergers are the consolidation of two or more companies as one while acquisition involves one company taking over another. Joint venture involves two separate companies sharing ownership. (Investopedia, 2010)

The advantages of using FDI are:

100% ownership of assets

Products are closer to the market/reduced transport costs

Economies of scale/scope

100% knowledge protection as owner does not have to share product/process trademarks with licensees

The major disadvantages of FDI are the high costs and the high risk of foreign ownership.

CONCLUSION

Irrespective of the reasons why firms become interested in international expansion, the structure or strategy they choose to adopt in achieving this determines to a large extent whether they succeed or not.