International Business

Abstract

Capitalist and mostly single family centered, Zaibatsu led to a static system with weak competitive forces resulting in what is known as ‘cordial oligopoly’. (Niciejewska, 2007, pg 17) Keiretsu networks on the other hand, with its cross stockholdings is more dynamic and provided a more competitive business economy that continued to drive the Japanese economy during the post war period. The high cohesion that existed between the participating firms in the vertical keiretsu resulted in production and operational efficiency that gave Japanese manufacturers significant advantages in international markets. The impact of information technology and the internet in particular enabled the western countries implement modular production strategies and improved value chain management with setting up of contracted production centers across the globe. The japans keiretsu firms struggled to fight the American companies that specialized in single core functions leading to what is known as the mega competition. Keiretsu networks are unsuitable under modern, globally competitive, and technologically advanced market conditions. There is definitely a shift towards a more western centric business organization.

Introduction

Japanese corporate governance has undergone a lot of change since the Meiji restoration in 1868. It was during this time that the industrial revolution flourished across the world. The Zaibatsu originated when the Meiji government sold out certain government undertakings to a select few private and influential families namely Mitsui, Mitsubishi, Yasuda and Sumitomo. These government controlled firms slowly developed into different industries that helped Japan grow economically strong. During this period Japan practiced a closed economic system and foreign technology was totally shunned except in areas concerning domestic development (Thorson & Whitney, 2003). The Zaibatsu which could be loosely translated as monopolies emerged as the corporate structure that underlined the Japanese economy from this time till the end of the Second World War. In particular, the Zaibatsu or the industrial and financial conglomeration of the Japanese empire controlled a large percentage of the national economy during the first few decades of the twentieth century. In the aftermath of the World war 11 and the occupation of Japan by American forces, the Zaibatsu system was broken down and this gave rise to what is what is known as the Keiretsu system which is nothing but a group of companies with cross shareholdings and preferential business practices. Though the American government was bent on totally destroying the protectionary policies that the Zaibatsu system represented and proceeded with the dissolution of many Zaibatsu such as Asano, Furukawa, Nakajima, etc they stopped short of complete dissolution owing to fear of the intrusion of China’s communist practices into Japan. The formation of Keiretsu was an attempt to democratize the Japanese economy and to eliminate the restrictive policies (Thorson & Whitney, 2003). A brief overview of the firm structures in the Keiretsu and flourishing of Japanese economy between 1950-90, and its implications to the current Japanese economy would be discussed in this paper.

Zaibatsu (Upto 1945)

As briefly mentioned above, the Zaibatsu promoted a strong monopoly with holding companies at the top of the pyramid controlling all the operations between the various enterprises within the pyramid. Holding companies typically enjoyed the majority of the stocks of these businesses and more than 50% of the overall stocks of all the small companies that constitute the Zaibatsu were owned by its members (Thorson & Whitney, 2003). Stock options were never sold out to any third parties not connected with the zaibatsu making it a totally closed economic structure. The Zaibatsu was in short, a government led economic drive with strategies as well as resources provided for by the government. Japan’s industrial growth witnessed a rapid upswing under the Zaibatsu system. Buoyed by it success at home, the Japanese government forced the Zaibatsu system in Korea when it colonized the country (Shim & Lee, 2008, pg 49).

The Zaibatsu enjoyed complete domination with Mitsui, Sumitomo and Mitsubishi, enjoying as much as 28% of the assets in Japanese companies by 1929. Just when the World War II was about to finish the Zaibatsu had 22.9% of the Japanese company stocks. Thus a handful of Japanese families had control over a vast majority of the Japanese enterprises under the Zaibatsu system. The structure of the Zaibatsu changed very quickly and soon there was intense diversification. For instance the single Mitsubishi Corporation rapidly diversified its business in to mining, shipping, insurance, trading, etc in a very short period of time and soon transformed into a holding company that was at the top of the Pyramid controlling a range of individual yet affiliated businesses. The Iwasaki family owned and controlled the entire business network of Mitsubishi (Lincoln & Shimotani, 2009).

Keiretsu

Keiretsu represents a cluster of enterprises that are linked to each other by way of cross shareholdings and preferential trading practices creating mutual interests in the business progress. Keiretsu are basically divided into two main types’ namely Vertical keiretsu and horizontal keiretsu. However there are also other keiretsu such as the distribution keiretsu that relate to the distribution networks of big manufacturers. For instance the distribution networks of Matsushita, Fuji Photo Film, etc come under the distribution Keiretsu (Shimotani, 1995). Keiretsu emerged as a protective response to the dissolution and distribution of the largely family owned stocks of the Zaibatsu. When hostile companies were taking over the zaibatsu firms the three main Zaibatsu leaders convened and arranged a solution of cross shareholding and preferential trading policies that enabled them to retain the overall control of the enterprises among themselves. For instance the Mitsui, Sumitomo and Mitsubishi zaibatsu formed this strategic pact of cross shareholdings to maintain their stronghold in the business. This is how the Keiretsu emerged from the Zaibatsu. Soon by the 1960’s a few big financial institutions in Japan such as Dai-Ichi Kangyo, Fuji and Sanwa joined with the Mitsubishi, Sumitomo and Mitsui to constitute what was popularly known as the six horizontal Keiretsu (Lincoln & Shimotani, 2009). Periodic meetings between the president’s council (shacho-kai) members and executive exchanges and cross share holdings formed the glue between these six Keiretsu. The horizontal Keiretsu is centered around a large bank.

On the other hand, the vertical Keiretsu are the large manufacturing companies and supply chain companies, the distributors etc. Unlike the Horizontal Keiretsu there is no president’s council in the vertical Keiretsu but the groups of suppliers of a manufacturing firm represent that role (Miwa and Ramsayer, 2006). Similar to the horizontal Keiretsu, the firms in the vertical keiretsu are also linked together by share holdings across firms and preferential business policies. In vertical Keiretsu there is improved knowledge sharing by way of business transfers including exchange of experts and technical staff members across the vertical network. Overall, vertical Keiretsu promotes improved cohesion among the network firms. In fact, the increased dependence of main firms on the supplier firms in the vertical Keiretsu even lead to large scale investments by these ancillary Japanese firms in US following the footsteps of the Japanese automobile manufacturing firms setting up their FDI in that Country (Banerji & Sambharya ,1996). In technology intensive industries of Japan vertical Keiretsu has greatly improved their international competitiveness by facilitating rapid knowledge sharing across the partnership firms. Empirical studies that measured the effects of such knowledge sharing across the firms in the vertical Keiretsu clearly suggest positive productive gains (Branstetter, 2000). One of the important advantages of the vertical keiretsu is the improved coordination between the suppliers and the assemblers. In the keiretsu automotive industries the suppliers receive plenty of support in products manufacturing , processing and people management. This is distinctly different from the US approach where the suppliers and the assembly line operate entirely independently. This model of operation facilitates both the parties as it helps to reduce the overall risk for either party. (Lincoln & Shimotani, 2009) Thus the Keiretsu improved knowledge transfer among the networked firms, improved productivity, reduced risk for the firms and gave the Japanese companies clear advantage in the international market.

Furthermore, Gerlach (2004), also notes that the Keiretsus were particularly important due to their one-set principle and networking. For instance, synergies were achieved in input and output, especially in the case of manufacturing. Centralized systems and departments were used in conducting basic support operations, which helped all subsidiaries in cost savings (Lincoln & Shimotani, 2009). Also, profit-trapping mechanisms were used in place, by distributing them effectively through subsidiaries (Lincoln & Shimotani, 2009). Cross shareholdings were also particularly important as it helped avoid takeovers, encouraged risk taking amongst companies, and had a long term outlook on strategy (Sturgeon, 2006). One of the important examples of the vertical Keiretsu is the Toyota group. In fact, Toyota has a unique distinction of being both a horizontal keiretsu as well as a vertical keiretsu. They key difference is that the massive size of the Toyota organization makes it possible to exist without being controlled by a central bank as is the case with horizontal keiretsu. Toyota with more than $72 billion in annual revenue has the financial might to stand for itself without the dependence of any major funding source. However, it is associated with the Mitsui group horizontally. Toyota is also widely diversified like a horizontal keiretsu company with its firms representing industries as varied as real estate, computer development, aircraft development, nonlife insurance, etc.

The disintegration of the Keiretsu (Why keiretsu failed?)

The keiretsu system started to decline slowly by the early nineties and one study by Gerlach (2004) that analyzed the cluster networking pattern of 257 Japanese organizations between 1978 and 1998 found clear evidence indicating this shift away from the Keiretsu. Analysis of cross shareholdings further confirmed the decline of the keiretsu structure (Lincoln & Shimotani, 2009). By the late nineties many major banks that were previously the core of the Horizontal keiretsu had already sold off major portions of their shares to international financial institutions (Ahmadjian and Robinson, 2001). Several Bank mergers further shook the keiretsu structure. Starting with the Mitsui and Taiyo-Kobe Bank merger in 1990 to the 1998 merger of Industrial Bank of Japan, Fuji and Dai-ichi Kangyo bank the largescale mergers of Japanese financial institutions led to consolidation of the related keiretsu firms (Lincoln & Shimotani, 2009).

Globalization and technological changes further led to the withering of the Keiretsu. The numbers of board of directors were reduced and many foreign personals took up the position. International investors further demanded the selling off of the stocks in supplier firms and other affiliate firms. Furthermore, the global shift towards modular production system and the production efficiency that it gave rise to, along with a degree of independence between the firms that are involved, kind of eroded the production line advantages that Japanese firms specialized in mass production under the keiretsu system had enjoyed for a long period. The growth of information technology and the adaptation of computer simulation technologies in production testing and experimentation and swift data exchange between the firms reduced the need for physical communication (which was key in Keiretsu) and drastically improved value chain management.(Sturgeon, 2006)

Modular production is propelled by ease of systems integration facilitated by information technology. By the 1990’s modular production system was already in place in the US electronic industry with its contract manufacturers spread across the globe. While the American firms capitalized on the internet enabled modular production systems and dominated the electronics industry and related computer hardware industry, Japanese electronics industry was still sticking to the ‘components plus products’ strategy. Cisco systems for instance enjoyed total domination in the network routers market enjoying as much as 80% of the market share while simply outsourcing its device production to contracted producers such as Solectron and Flextronics. Often the production centers are located in low cost regions such as China giving a distinct advantage for the modular production strategy. This contrast between the modular production strategies of the American firms and the in house ‘integrated production system’ of the Japanese keiretsu firms gave a clear advantage to the American firms. In other words, the Japanese keiretsu firms could not handle the ‘mega competition’ from the American firms which specialize in single core functions or narrow core competencies. The following figure 1 illustrates the loss suffered by the Japanese keiretsu electronic industries in the early years of the new millennium. (Sturgeon, 2006)

Another factor that accompanied global trade is the fluctuation of the exchange rates and its influence on the profit margin. Furthermore, the expansion into international markets and the associated transportation costs motivated many of Japan’s manufacturing firms to move their production facilities abroad as a cost effective solution. Though some suppliers too moved and invested in these new countries, in most cases the central firms such as Toyota started building trust and relationships with the local suppliers. Furthermore, changes in Japanese economic reforms including the Tax policies did not tolerate risk sharing measures as they used to before which clearly undermined one of the key Keiretsu principles.

Conclusion

The Large capitalist and mostly single family based zaibatsu companies flourished during the early twentieth century creating industrial monopolies that were closely controlled by the government. Zaibatsu led to what is known as a static system as most of the stocks are retained by the family that controls the business. Furthermore Zaibatsu promoted weak competition leading to what is known as ‘cordial oligopoly’.) Keiretsu on the other hand with its cross stockholdings is more dynamic and provided a more competitive business economy that continued to drive the Japanese economy during the post war period. The high cohesion that existed between the participating firms in the vertical keiretsu resulted in production and operational efficiency that gave Japanese manufacturers significant advantages in international markets. However, the Keiretsu principles of ‘preferential business’ affected foreign companies from entering the Japanese markets.

Globalization and increasing pressures from international organizations to sell off stocks in affiliated firms affected the cohesion that previously existed between the participating firms in the keiretsu network. Furthermore, the successful integration and mass production strategies of the keiretsu networks that helped Japanese manufacturing firms flourish were soon affected by the shift in global production strategies. Particularly, the concept of modular production where product design could be isolated from its manufacture and the shift towards outsourcing in the western world created a dent in the Japanese manufacturing sector which was still stuck with the ‘in house production’ policies. The impact of information technology and the internet in particular enabled the western countries implement modular production strategies and improved value chain management with setting up of contracted production centers across the globe. The japans keiretsu firms struggled to fight the American companies that specialized in single core functions leading to what is known as the mega competition. These fundamental shifts in organizational structure and strategies in the West have made the Keiretsu networks unsuitable under modern globally competitive and technologically advanced market conditions. There is definitely a shift towards a more western centric business organization.

Bibliography
Ahmadjian, Christina L and Patricia Robinson. (2001). Safety in Numbers: Downsizing and the New Political Economy of Structural Adjustment and Globalization, New York: M.E. Sharpe.
Jae Seung Shim & Moosung lee, (2008), The Korean Economic System, Ashgate Publishing Ltd. England.
James R Lincoln & Mashiro Shimotani, (2009), Institute for Research on Labor and Employment, Working Paper series, [online] University of California, viewed Mar 9th 2012,
Katharina Niciejewska, (2007) The Influence of Social networks in Japanese business. Keiretsu as a Japanese Network. Auflage , Germany.
Kunal Banerji PhD & Rakesh B Sambharya, (1996), Vertical Keiretsu and international market entry: The case of the Japanese automobile ancillary industry, Journal of international business studies. Vol 27, No 1.
Lee Branstetter (2000), Vertical Keiretsu and Knowledge Spillovers in Japanese Manufacturing: An Empirical assessment, Journal of Japanese and International Economies , Vol 14, Issue 2, pg 73-104
Miwa, Yoshiro and J. Mark Ramsayer. 2006. The Fable of the Keiretsu: Urban Legends of the Japanese Economy. University of Chicago Press, 2006.
Thayer Watkins, The Toyoto Group: The One and Only Horizontal and Vertical Keiretsu, [Online] San Jose State University, viewed Mar 9th 2012, <
Timothy J Sturgeon, (2006), Modular Productions Impact on Japan’s Electronic industry, MIT, IPC Working papers series. Viewed Mar 10th 2012,

I am now going to focus on a few financial services organisations and identify how they are coping with the current ‘credit crunch’ and recession in our economy and the different problems they are facing in the global market. More importantly, I will look at how effectively they are coping with these problems. First of all, it is important to note that “financial services have also grown very rapidly in the last twenty years and now account for about one in five jobs” (ONS 2003).

This quote explains how the financial services industry is expanding rapidly and has become a very successful industry generating income and employment. The two main reasons for growth of this industry is high income elasticity, which means “consumers have become increasingly wealthy and the demand for financial services has grown” (G. Arnold, 1998, p. 31). The other reason is international comparative advantage. The first financial institution I will look at is HSBC. “HSBC is one of the largest banking and financial services organisations in the world [which] is headquartered in London” (HSBC website, 2008).

I have chosen HSBC as one of my financial institutions to identify how big organisations deal with consequences and implications of globalisation. As they are a big international company, they will have to face many global forces on a much wider scale. Therefore, the impact may be greater or shorter impact on them. HSBC provide a range of financial services worldwide. “HSBC Global Banking and Markets is an emerging markets-led and financing-focused business that provides tailored financial solutions to major government, corporate and institutional clients worldwide” (HSBC website, 2008).

At present, the banking industry isn’t in a good position and is experiencing a ‘rough time’. This is a result of banks being “hit hard by the recent slump in the financial market” (The Workplace Law Network website, 2008). As a result the Government has introduced a i?? 500bn bank rescue plan which is “intended to stabilise the banking system, with a plan to reduce the financial burdens of businesses as a partial consequence” (The Workplace Law Network website, 2008). This shows the banking industry is declining and its financial performance is detrioating.

This has a significant impact on HSBC as consumers will be loosing their trust and faith in banks which results in a poor repuatation and a fall in demand for products. In November 2008, HSBC incurred a i?? 2. 7bn loss as a result of the US housing market crisis. “HSBC said its US losses reflected the continuing weak housing market and rising level of unemployment” (The BBC Business website, 2008). These are two global forces that have had a major effect on HSBC because the US economy isn’t performing financially well.

This is having an impact on HSBC’s activities as demand for financial services is falling. After the announcement of their i?? 2. 7bn loss, HSBC announced they were “cutting 1,100 jobs worldwide because of the current financial turmoil” (BBC Business website, 2008) to help deal with the large loss. However, in despite of their i?? 2. 7bn loss and 1,100 job cuts, HSBC’S operations in Asia had helped recover and balance out the large loss. “The bank said that its asset sales and growth in Asia helped offset the worsening US economy” (BBC Business website, 2008).

The next financial insititution I am going to look at is the American International Group Inc. (AIG) which “is a holding company; it is engaged in insurance activities including general insurance, life insurance and retirement services. The group primarily operates in the US and Far East region” (AIG Corporate website, 2008). AIG is a global financial service organisation with operations in more than 130 countries. As the company primarily operates in the US, the US economy will have a big impact on its activities. Depending on how well the US economy is, will affect AIG’s performance in the US.

According to the BBC Business Website, in September 2008, The US Federal Reserve announced a “$85bn (i?? 48bn) rescue package for AIG, the country’s biggest insurance company, to save it from bankruptcy”. The BBC website states the cause of AIG loss comes from “the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world’s financial markets”. Prior to this bail out from The US Federal Reserve, Rob Young (2008) reported that “AIG had posted losses in each of the last nine months …

it was badly affected by the collapse of the US housing market … owing to the underwriting payments it was forced to make when customers defaulted on their loans. This article shows that the failing US housing market has had a major impact on AIG especially as they are based in the US. As the US economy is financially declining, the demand for AIG’s insurance products is falling because consumers cannot afford the insurance payments. As a result of the second Government bailout, “AIG announced a salary freeze for its top seven executives ….

the pay freeze comes in the wake of two government bail-outs, which saved the insurance giant from bankruptcy this autum” (G. Farrell, 2008). AIG responded to this bail out from the Government by reducing their costs, thus freexing the excuetives salaries in the hope of recovering some of their losses. At present, AIG are receiving a poor repuatation from US taxpayers because of the rescue plan made to them from the Government. Mr Liddy, AIG’s chief executive said that “The taxpayer is going to do very well out of this deal” (F. Guerera, 2008).

At present the UK economy is experiencing the credit crunch and we can be considered to be going through a slight recession because our economy isn’t growing that well. The teach me finance website defines the term credit crunch as “a sudden reduction in the availability of loans and other types of credit from banks and capital markets at given interest rates”. This definition explains how banks are being very cautious with whom they lend money to and are reducing the number of loans and credit that is available for consumers making it harder for consumers to lend money.

“Where banks lend, they will charge higher rates to cover their risk” (D. Budworth, 2008). This is because banks are in a very weak financial position at present. To some extent, I think quite a lot of globalisation factors has lead to the cause of the credit crunch. However, I think other non-globalisation factors have also contributed to it as well. For example, one of the biggest globalisation factors that have had a major impact on the credit crunch is the collapse of the US housing market, which has lead to it being a weak market.

Also the rising costs in oil and also the UK’s declining housing market can also be considered to be a cause because house prices are rising and consumers are finding it harder to obtain mortgages. On the other hand, globalisation factors cannot be considered to be the cause of the credit crunch. This is because in some ways, globalisation can be seen as a positive process for many industries/countries as it can bring many benefits. For example, it generates income and employment, which is particularly helpful for poor/less developed countries.

Thus it helps sustain and build their economy and generate wealth. Also for the businesses this means cheap labour which leads to a reduction in their costs and a rise in their profitability. P. Dickens (2007) explains how “growth of the global economy …. has dramatically increased the well-being of many people”. Thus is another argument that globalisation factors haven’t significantly lead to the cause of the credit crunch because globalisation can be considered to help build and grow economies and generate wealth, not cause a credit crunch.

However, all in all, I do think at the present time globalisation factors are the cause of the credit crunch because many industries, markets and economies are declining because the globalisation process is failing. This is because global companies are operating in the wrong places where their economies and industries are failing. This is leading to a decrease in the demand for products from consumers For example, businesses operating in the US will not be performing as well because the US economy is declining and losing money.

Abstract

Walt Disney is a well diversified amusement company with global presence and China is a blooming market and the global economic engine. With the theme park business in both the US and Europe already saturated, and a dwindling number of visitors affecting the profits, it is an opportunistic moment for Disney to enter China. The proposed joint venture with the State owned ‘Shanghai Shendi Group’ would definitely guarantee the government support and remove any possible administrative hurdles that would otherwise hamper any new business investment in a foreign land. The prevailing climate of political stability, economic viability and significant growth prospects that China offers and the comparative economic stagnation in US and Europe, offer strong economic reasons for Disney to venture into China which holds great possibilities for future business growth.

Introduction

The Walt Disney parks and resorts is one of the leading entertainment businesses in operation across the world. With more than 66,000 employees and well over $1.2 billion in annual payroll, Disney is most visited theme park and recreational resort in the US. (Kok, 2009) Originally started as Disneyland in California 1955, Disney’s business has today rapidly expanded with several theme parks and resorts across America, Canada, Europe, Japan and Hongkong. With the theme park business virtually saturated in the US and Europe, Disney is now actively looking for expansion of its multi billion dollar entertainment business into mainland China. The robust economic growth of China and its growing middle class population present an opportunistic environment for Disney, the leading entertainment theme park in the world. However, opening a theme park and successfully running it in a different country is not so easy. Disney’s own past experience reveals the phenomenal success in Japan while the parks in Paris and Hongkong are reportedly running loses. (SMG, 2009) This paper would address the international business issues, discuss the market conditions and recommend an entry strategy that is most conducive for Disney’s breakthrough into China.

Disney in China

China presents a huge business prospect for Disney. Chinese GDP has been growing at an average of around 10 % every year over the last decade or so. (Holmes, 2011) Particularly with the backdrop of the economic stagnation in the US and Europe, the thriving economic growth makes China the engine of the global economy in the years ahead. Also, China has the largest population in the world and with this phenomenal surge in its economy a great number of Chinese people are now within the middle class section of the society. Furthermore, since the entertainment industry is one of the fastest growing industries, tapping into this section of the population that is willing to spend a lot for entertainment is a judicious business policy. Disney has been trying over the last two decades to gain entry into China but had been rejected by the protectionist government polices. Currently however, Chinese government has approved Disney to set up theme parks and stores across the country. Disney has to capitalize on this new window of opportunity and commence its Chinese operations as early as possible. The next few sections will discuss the political, socioeconomic and technological factors present in China as well as the strength and weaknesses of Disney and the opportunities and threats that the company has in setting up its entertainment business in China.

PEST analysis

Political Factors

Political factors are crucial for the establishment of any business as they directly impact the macro environmental variables. China has remained a politically stable country since the 1980’s and also the previously strong communist centric focus is now slowly giving way to the possibility of a democratic transition. Even the Chinese premier Mr. Hu openly expressed his thoughts about this when he said that “There is a need to … hold democratic elections according to the law; have democratic decision-making, democratic management, as well as democratic supervision; safeguard people’s right to know, to participate, to express and to supervise.” (Hill, 2011) Both the domestic policies as well as the international relationships of China over the last decade or so attest to the inclination of the Chinese government to create a stable and secure national structure as the basis for propelling its continuing economic growth. With the Country entering the WTO in 2001, there has been a string of policy changes that led to lesser government intervention in developmental projects and greater encouragement for industrial investors.

Economic Factors

China is the fastest growing economy in the world and as mentioned earlier, the country has witnessed stable GDP growth averaging around 10% over the last two decades or so creating a favorable economic climate for new investment. By the measure of GDP, China currently ranks as the sixth biggest country in the world. (Cui, 2009) Availability of resources, low cost labor force and the infrastructural improvements including mega projects that guarantee availability of power to match the growth pace of new industries are some of the favorable factors that sustain this continuous economic growth in china. These are also factors that encourage foreign investment. China’s entry into the WTO and its subsequent open policies that allowed 100% FDI in many sectors including the energy and retail sectors saw the phenomenal surge in foreign direct investment into the country. The following table released by the Chinese government indicates the latest figures about the number of FDI projects as well as the investments during the previous year.

The strength of the Chinese economy could be measured by its continued ability to attract FDI inflows even when the developed economies of the US and the Europe were reeling under recession. In 2011 during the recession in Europe, China attracted a record $116 billion in FDI. (Edwards, 2012) Also, as the industrial progress and the continuous economic growth of China continues, the standards of living of the huge Chinese population also continues to increase which only translates to increased purchasing power and increased demands for amenities. In particular, the entertainment spending of middle class Chinese people would create an explosive growth opportunity for the amusement industry.

Social Factors

Social factors should also be assessed before any investment venture. China has a huge population in the middle aged segment. Currently the population segment in the range of 15 and 64 represents the majority in China. (Banister et.al, 2010) A significant number of Chinese people are still in their twenties and middle age which is the target population for the theme parks. Also, traditionally Chinese are a nuclear family and hence theme parks are usually visited as a family. Also the huge population of China implies that the aging population does not create an economic stagnation as retiring workforce is rapidly replaced by skilled workers. (Banister et.al, 2010)

Technological Factors

China is a technologically advanced economy and hence there is immense scope for innovation in the amusement market. Even in the local amusement market there is a constant surge of innovative amusement themes and new facilities to entertain the public. There would be no dearth of talent and lack of scope for the application of technology into the development of the theme parks. Only last year an international ‘Theme parks expansion Summit’ was organized in the country and several new technologically innovative solutions were disclosed. For instance, Nanotron technologies, one of the main sponsors of the conference introduced the ‘Child Loss Protection System‘(CLOPS) and spoke about its introduction into the Chinese Theme parks, while another company, Dynamic Motion Rides, introduced the 4D simulation effects into the Theme parks. (Blooloop, 2011) So the Chinese theme park industry is a technologically thriving and competitive industry.

SWOT analysis
Strengths

Financial Might

Disney has a powerful financial base and there fore could invest significantly for innovative attractions and features in the proposed Theme park. Disney already has a dedicated channel in China which it could utilize for marketing purposes. Already the company has proposed to invest as much as $3.8 billion for setting up its Shanghai theme park. (Rapoza, 2012). Disney’s huge experience (almost 80 years) in the entertainment industry is one of it’s main plus points. (De Groote, 2008)

Brand Recognition

Disney is a well established brand across the world. Even in China Disney’s Mickey Mouse and Donald Duck characters are well known among the public. Disney could capitalize on its brand value to attract public to its theme park. For a new entrant into the Chinese market, Disney’s brand recognition would definitely ease the difficulties which any new and unrecognized brand would face. One other advantage for Disney is the qualified and educated workforce that it employs. Disney also has a variety of attractions and thematic features that would help bring more people into the theme parks. (De Groote, 2008)

Opportunities

Globalization and the easing of barriers of entry in many countries provide Disney the ideal opportunity for expansion and with its financial muscle Disney can easily carve a niche market for its amusement parks in the global arena. Since China has already given the green signal and allowed Disney to enter the market it is the ideal time for the company to establish itself and gain a significant share of the growing Chinese amusement industry. Its diversified products and established brand power give it a clear advantage compared to any other international entrant into China.

Weaknesses

Disney is known to suffer from management problems. Its international diversification has furthered its management woes. Managing over 1, 37,000 employees across the world is not an easy job and it leads to communication problems and administrative bottlenecks. (De Groote, 2008) With the proposed expansion in China there will be a significant addition to the workforce which would complicate the management still further. Corporate officers are frequently shuffled across which also contributes to management difficulties. Chinese customers though they are huge in numbers and willing to pay could not be expected to spend as much as American customers would. The increasing fixed costs which directly relates with expansion and the increasing operating costs due to its large workforce imply that Disney has to spend considerably with any new venture. Furthermore, in the case of Disneyland in Paris the French government contributed over a billion dollars to help out Disney during the initial struggling phase. The same could not be expected from the Chinese government if Disney ventures alone. (De Groote, 2008) Its main threats are from a growing number of Chinese theme parks that are more culturally oriented and cater to the tastes of the local population. Disney has to modify its themes to make them appealing to the cultural tastes of the Chinese people. The Chinese currency value fluctuation is one other major issue to be considered.

Strategic Entry

Entry into the Chinese market involves huge amounts of investment. As already indicated, Disney plans to invest as much as $3.8 billion into the Chinese venture. Though Disney has the financial might to bear the expenses by itself it would be a prudent risk management strategy to involve a large number of outside participants to cover the initial investment costs. In fact, Disney employed such a strategy when it entered the European market. The Saudi Prince Alwaleed owned 10% of the company stocks while the 50.2% were owned by others while Disney itself owned 39.8% of the stocks. (De Groote, 2008) In the case of Disney in Japan it was a Licensing agreement between Walt Disney and Oriental Land Corporation of Japan with Disney getting 7% of the sale proceeds in exchange for transfer of technical and managerial knowledge. (Misawa, 2005) Unlike the retain industry or the energy industry , the Chinese government is not opening up for a 100% FDI in the entertainment industry and has so far only agreed to a joint venture. This is however, a welcome opportunity for Disney as not only the cost is shared but also a joint venture with the State owned ‘Shanghai Shendi Group’ would definitely guarantee the government support and remove any possible administrative hurdles that would otherwise hamper any new business investment in a foreign land. (Bloomberg, 2010) With risk sharing also divided between the two, Disney can look forward to capitalizing on the great market prospects that China promises. Disney’s entry into the blooming Chinese amusement park industry with the government backing (as a joint venture) would be an ideal entry strategy for the Company.

Conclusion

Walt Disney is a well diversified amusement company with global presence. China is a blooming market and the global economic engine. With the theme park business in both the US and Europe already saturated, and a dwindling number of visitors affecting the profits, it is an opportunistic moment for Disney to enter China, the economic powerhouse of the world. As indicated by both the PEST analysis as well as the SWOT study, Disney is well poised for a successful venture into china. Since 100% FDI is not permitted in the Chinese entertainment industry, the proposed joint venture with the Chinese State owned firm, is a good entry strategy for Disney in China. Such an approach shares the investment costs, promotes equal interests in the operation and removes any possible administrative hindrances as well as contributes to equal risk sharing. The prevailing climate of political stability, economic viability and significant growth prospects that China offers and the comparative economic stagnation in US and Europe, offer strong economic reasons for Disney to venture into China which holds great possibilities for future business growth.

References
Bloomberg (2010), Walt Disney signs joint venture to build first mainland China Theme Park, viewed march 28th 2012, < http://www.bloomberg.com/news/2010-11-05/disney-signs-joint-venture-contract-with-shanghai-for-first-park-in-china.html>
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Introduction

International trade is not a novel phenomenon. For centuries, traders and merchants have wandered across national and regional boundaries to conduct international trade. However, it has never been conducted with such an enormity or with such an impact on national economies, firms and individuals, like it has been done in the past few years (Czinkota et. al. 2005). The widespread trend of globalization is establishing a new world order, in which localized firms, industries and economies are being swept away by the fast moving international corporations. Despite the widespread trend of globalization, some researchers content that local economies and industries will be able to retain their importance and remain competitive through the formation of industrial clusters. The formation of clusters will enable local industries to attain specialization in specific business areas, and subsequently gain competitive advantage. The focus of this essay is to critically evaluate the contribution of cluster theory in international business management.

Globalization and the International Business Management

The innate characteristic of globalization i.e. the insignificance of geographical boundaries and national borders for conducting trade, has enabled companies to source their capital, goods, information, and technology from around the world, often with the ease of a mouse click (Porter, 1998) . Laudon (2010) describes a Hewlett-Packard (HP) Laptop’s path to market. The laptop computer comprises of components and involves services that are sourced from across the globe. For example its idea and initial design came from United States. Its graphic’s processor is designed in Canada and made in Taiwan. Its LCD display and several integrated chips come from Taiwan and South Korea. Its hard disc drive is manufactured in Japan. China, Japan, Singapore and South Korea and the US all supply several other parts of the machine until it is finally assembled in China (see fig.1) (Laudon, 2010 p. 555). This example illustrates that the open global markets and faster means of transportation and communication have moderated the role of local competition. As Michael Porter contends that globalization has annulled all those sources of competitive advantages that can be efficiently sourced by networked corporation through international trade. With the ever expanding network of a global supply chain, the conventional wisdom about the way in which nations and local industries compete needs to be revamped (Porter, 1998).

Fig.1: An HP Laptop’s Path to Market

(Source: Laudon, 2010 p.555)

Porter’s argues that competition in the modern business world is much more dynamic. He proposes that despite the growing insignificance of geographical distance, location is still valued when it comes to specialized industrial clusters. For instance, the likelihood of finding a top notch mutual fund service in Boston is much higher compared to any other place in the world. Similar is the case in finding a high-performance auto company in South Germany or a fashion shoes company in Italy. All these businesses are industrial clusters operating within a region. Today’s global economy is comprised of ‘clusters’, which are critical masses of businesses whose activities complement each other. The agglomeration of these businesses collectively gains an unusual competitive advantage in particular business fields (Porter, 1998). The Institute for Strategy and Competitiveness defines clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region” (ISC, 2012). For example, the presence of full range of highly sophisticated financial services within the city of New York is an industrial cluster.

Macroeconomic Stabilization and Cluster

It is widely acknowledged that clusters enhance employment level much quickly than the same industry in the economy having limited presence within a cluster. According to Delgado, Porter and Stern (2011), a cluster enables greater agglomeration of an economy by attracting a large number of skilled employees, specialized suppliers and buyers, connected industries and strong local competition. Through the establishment of clusters, an economy is able to attract the best talent of a particular field in terms of entrepreneurs and individuals with ideas (Porter, 1998). Propinquity of associated industrial activity also reduces transaction costs. Moreover, clusters enhance accumulation of information through research and development in specialized fields and enhance knowledge transfers while speeding up the flow of information. Clusters also influence the facilitation of specialized training and infrastructure development through the provision of educational programs and quality of certification organizations (Delgado et. al, 2011).

These factors combine together to reinforce complementarities across related industries. Complementarities refer to a host of connections amongst members within a cluster. Through the formation of these connections, the “cluster members result in a whole greater than the sum of its parts.”(Porter, 1998) For instance, in a typical tourism cluster, it is the sum of the appeal of a primary attraction and the efficiencies of related businesses such as hotels, transportation, restaurants and shopping areas that result in a superior tourist’s experience. All these businesses complement each other and are mutually dependant, i.e. good performance of a business within a cluster boosts the success of others.

Importance of Cluster for Competition

According to Porter (1998), competition within the modern business world depends upon productivity. The sheer size of an individual firm and its access to goods no longer serves as a sustainable competitive advantage as it is nullified by the advent of globalization. Clusters have a significant impact upon competition as they increase the productivity of industries through the provision of complementarities. They also drive the trend and rapidity of innovation which is important for future productivity. Clusters also stimulate the formation of new complementary businesses which broadens and strengthens the cluster itself.

In order to gain a more pragmatic view to the cluster theory, we now consider the previous example of the HP’s Laptop computer. As it portrays the prevailing phenomenon of globalization and international trade, it also signifies the importance of industrial clusters. HP sourced various components of its Laptops from different location across the globe. Its choice for sourcing its components from those locations was determined by the high efficiency and productivity of those economies in producing particular goods. Thus it was the presence of industrial clusters in Japan, China, Taiwan, Singapore, and South Korea, that attracted specialized global buyers i.e. HP towards them. It signifies the role of productive industrial clusters in international trade, and how they sustain local competitiveness.

Conclusion

Businesses within a cluster share common technologies, knowledge, inputs, and cluster-specific institutions, thus they benefit from complementarities. The presence of a cluster enhances national, industrial and firm level growth by increasing the efficiency of an industry, driving productivity, and creating employment opportunities. It also drives expansion, attracts talent, and fosters innovation (Porter, 1990; 2003). It is through the formation of such industrial clusters that an economy uses its available resources at the most optimal level rendering the optimal development of the national economy.

References

Czinkota, M., Ronkainen, I. and Moffett., H (2005) “International Business”, Wiley.

Delgado M., M.E. Porter, and S. Stern, (2011), “Clusters, Convergence, and Economic Performance,” Journal of Economic Geography, 10 (4), pp. 495-518.

ISN (2012) Clusters and Cluster Development {online} http://www.isc.hbs.edu/econ-clusters.htm (Accessed on 6th May 2012)

Laudon, K. (2010) “Management Information Systems: Managing the Digital Firm”, Pearson Education India

Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press, New York.

Porter. E.M (1998) “Cluster and the New Economics of Competition”. Harvard Business Review November-December 1998 pp 77-90

Porter, M.E., (2003), “The Economic Performance of Regions,” Regional Studies, 37, pp. 549-578.

Political Aspects of International Business International Business (INBU350) The political aspects regard the International Business has been passing through changes that in one way or another affect the organizations. Countries fighting for defend of their territories against others or internal conflicts to keep the democracy alive; for instance the war between Iraq and Iran, or the citizens of Venezuela fighting for the survival of their democracy. As a result the pressure of the non-business situations stimulated the manner that the entrepreneurs do business internationally.

Politics and the governments own interest have a direct connection with these change. The managerial method to deal with international business has been transform to better understand the foreign government’s politics. (Fitzpatrick, 1983). They have stimulated the evolution of managerial function involves with the assessment and evaluation of the non-business environment that has current relevance. Companies has to start comprehend how the different governments rules and policies works.

Firstly the study of the culture, religion, ethnic, and how others companies making business in that particular country has been successfully. In case of those companies that don’t have the capital to invest in researching companies, can use the internal resources like an embassy together with the local government agencies. Furthermore of the strategy of the organizations to introduce products and services to the foreign nation they have to improve the managerial knowledge about it. Entrepreneurs can avoid unnecessary monetary looses if they watch closely any political movement.

However companies have no control of any political status that can affect suddenly their business. In the meantime by tracking the governments issues can minimize any unwanted situation that directly or indirectly affect the company status. On the other hand is not guaranteed that everything going to be under control. Meanwhile the international business has a grow pattern ascendance that will dictate the future of how to make business. Every political issue has a cause and effect besides it negative aspects.

The important of the globalization and new comportment to make business internationally has transformed the politics, regulations and policies of those restrictive governments. Additionally the endeavor of the international organizations to achieve and regulates the legal system such as ITC, GATT, and others. On the contrary the international law recognizes the right that any country has to accept or refuse any kind of foreign business in their territories. Meanwhile the United States government stimulated companies to establish operations oversea. Government policies can amend and pact relations with international business.

Several reasons may cause governments to modify any deal with the international companies even without notification advance. Politics changes can affect dramatically the manner that international business deal with import, export, and trade with another countries. For example China worked a serious restructuration on their politics and regulations with the international companies, which include better conditions of work for the local employees. (Mcubbrey, 2010) Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware.

Failure to recognize these risks and adjust accordingly could potentially hinder the performance of the overall business ‘As a result’ all this evidence indicates that companies that are looking for introduce of their operations internationally expect in return more than money invested. Therefore is about research and analyze how the country selected works regard the foreign companies. The entrepreneurs have to work with a serious analysis that need to include a investigation about culture, religions, ethnics, needs of the population, government, policies, issues and restrictions.

Finally the result of this will be a considerable investment of money and resources and will be necessary a good planning to secure, a profitable returns on investments. By studying the international market, analyzing pros and con, and structure a serious business plan companies can prevent loss investments as a consequences of political risk. References Fitzpatrick, M. (1983) Academic of management. Retrieved from: www. jstor. org/stable/257752 How managing political risk improves global business. Retrieved from: www. pwc. com/us/en/risk-compliance/managing-political-risk-improves-business-performance. jhtm