Challenges of Expansion to a Foreign Location

Challenges of Expansion to a Foreign Location

ECO/561

June 20, 2016

Challenges of Expansion to a Foreign Location

Introduction

The foreign location whose economy that I have chosen to study and evaluate is Germany; behind the United States, China, and Japan, Germany has the fourth largest economy in the world. This knowledge allows me to match up the German economy with that of other countries similar in size. Germany has financial interests that are operating well within the international market, and this provides the country with the opportunity the chance to intermix with most of the key economic countries their size. Over time there has been a rise in the world population; these encouraging effects associated with the growth of the market have led to an increase in the number of individuals accessible and on hand to work. Therefore, in this paper, I will be discussing the challenges of expansion into a foreign location.

Global Economic Conditions

Germany’s economy, the fourth biggest in the world, has the potential to be influenced by changes in some economic factors throughout the globe. Like many other nations over the years Germany, there has been a fall and rise in unemployment. “Contrary to the claims of the German chancellor, analysis has shown that the principal factors responsible for the decline in joblessness were not government policies but the favorable demographics developments and a strong demand for exports” (Silvia, 2002). Therefore, with the continuous expansion of the global economy, this has led to an optimistic outcome for the German economy by generating jobs domestically. Also, as a product of their continued economic development, the country’s currency continues to stand out among the other major financial systems around the world; thus creating a satisfactory standing of trade for Germany.

Over the years there has been a decline in the cost of energy that is utilized in the industry; this has caused a decline in the amount spent on energy by many of the industrial establishments. In spite of the decline, the general cost of production has stayed steady. This is mainly attributed to a rise in inflation which has resulted in the increasing of the cost of other elements associated with production costs like transportation and salaries. This demonstrates that the economic growth in Germany has risen over the years with the potential for future growth.

According to a report from TradeEconomics.com (2016), it stated that “The German economy grew a seasonally-adjusted 0.7% in the first quarter of 2016, accelerating from a 0.3% expansion in the preceding quarter and matching preliminary estimates. It is the strongest expansion since the first quarter of 2016, driven by household spending.” This may result from a rise in the number of individuals that are working in the varying segments of the economy, thereby increasing the total sum of taxable income. Also with the rate of unemployment increasing, it can potentially be linked to the rise in population. Gross domestic product or GDP illustrates the entire financial worth of every completed product which is manufactured within the boundaries of a country is a specific time frame. In Germany, there has been an inclination of continuous rise of the gross domestic product over the years. According to Brauer (2009), “Production implies earnings. But because one cannot earn what someone else has not spent, GDP also can be measured by adding up all expenditure stream during the same period” (p.24).

The graph in Appendix A illustrates the rising and falling of Germany’s Gross Domestic Product from July 2013 through January 2016. The graph shows that in July 2013 Germany’s GDP was as high as 0.9 percent, to a low of a negative 0.1 percent a year later. However as of January 2016, their GDP is now at 0.7 percent; that is up from 0.3 percent the year before.

Therefore with the steady rise in the country’s gross domestic product, this could suggest a continuous growth in the typical German citizen’s personal income for each, per capita earning. Meanwhile since 2013 Germany has experienced a continual surge in their per capita income (See Appendix B & C). In spite of their economic growth, German has been experiencing a decrease in the volume of export from the country. This can most likely be contributed to the value of the dollar as well as the economic conditions globally. Ultimately this has caused the price of exporting products from the country to be extremely pricey; this as in comparison to the export prices of other exporters within the international market (See Appendix D).

Evaluation of Competition

Because of Germany’s current economic status and many of the areas in which money has been invested in, there are few monopolies; this increase provides for an elevation in the level of competition among the markets within the country. The increased level of competition can result in an increased level of influential and educational promoting of the many products and services that are offered. This can result in an increased confidence level from consumers since they are provided with the chance to become familiar with the market set-up as well as the competition between the merchants; potentially resulting in a decline in prices of the products and services provided. Businesses that operate globally must adjust to the market structure and uniquely operate their companies in a different fashion with the end results being increased sales; since there are a huge number of companies that are considered leaders in the market.

Evaluation of Sales Forecast and Type of Economy

“Despite the sales and earnings pressures, we continued to generate strong adjusted free cash flow of $11.6 billion, increased the dividend for the 59th year in a row, and returned $11.9 billion to shareholders — $7.3 billion in dividends and $4.6 billion in share repurchase” (Proctor & Gamble, 2016). Proctor & Gamble or P&G has a positive reputation within the market. This is apparent from the company’s financial reports illustrating that the company manages to have an elevation in sales. With increased performance from that sale of their many products, P&G predicts their volume of sales to continue to rise and remain a leader in the market.

“Market economies are based on consumers and their buying decision rather than under government control. Market trends and product popularity generate what business produce” (Griffin, 2016). There are three different types of economies that business must study and understand before deciding which economy type to utilize. The three include:

Market Economy – this type of economy is centered on consumers and their decisions about buying rather than government controlled.

Closed Economy – here the government has control of all financial interest.

Mixed Economy – this economy unites qualities of both the market and closed economies in one.

Germany utilizes a fixed form of economy. It lets consumer have buying freedom but also allows the government to interfere with the economic interest to reach their social goals. Here a fixed economy offers positive results since it provides a company with a mixture of both types of economies.

Current Credit Market Conditions and Central Bank

In an article by Worms (2003) it states that for German banks “A crucial condition for the existence of a credit channel through bank loans is that monetary policy should be able to change bank loan supply. The evidence is compatible with the existence of a credit channel cut the result indicate that it is weakened by the network structures that exist in the German banking system.” At the current time, the situation with the credit market in Germany is unfavorable for a variety of businesses to trade in within the economy. Also, the increase in interest rates have had an unpleasant effect, causing the price of debt for several businesses to be extremely high; therefore, companies may not be able to receive credit increase. The negative effect on the economic growth can impact any company including Proctor and Gamble. While the German central bank provides a number of important roles like distributing funds for exchange in the form of paper currency and coins. The bank is also in charge of attaining macroeconomic goals by way of manipulating different monetary and financial regulations in the country.

Evaluation of the Work Force, Supply Chain Challenges, and Comparative Advantages

Many members of the population in Germany are extremely educated. This is because the education structure in Germany motivates their residents to achieve a higher education related to jobs marketed in their country. Many of Germany’s citizens have the experience to guarantee them a job since most are skilled. However being a skilled worker may not mean that one is promised a job.

When looking at the products manufactured by Proctor and Gamble, some can provide problems when dealing with being produced internationally. The first being the political unrest in a few of nations P&G may wish to sell their merchandise to as well as the make-up of the regulatory market in those nations that may force companies to modify their guidelines to suit their market. The exchange rate in many of the countries can be different, presenting a question in the prediction of revenue to be earned. Also, when working with products that are unpreserved, this too can be an issue since businesses would have to buy or lease a building to store their products or run the risk of the product ruining.

“Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another” (Pettinger 2012). The comparative advantage can vary in many ways when dealing with the production of P&G products. The first being multinational. This can decrease the percentage of ads to the quantity of products the company has in a market when matched with other nations. Next, P&G’s brand is known all over the world. Therefore, they have the promise of operative effectiveness; therefore resulting in a comparative advantage (Milward, 1966).

Recommendations and Conclusion

Based on my research and what I studied with respect expanding markets into Germany. I have concluded that at this time I would not expand into this country. This decision is because of the rise, of competitors in this market with similar products. In its place, I would attempt to go into markets that are not as competitive. By doing this, it will provide me the opportunity to operate the business at a lower cost and with minimal competition. Thus producing an environment that is conducive to work in.

References

Brauer, J. (2009, Fall). What Gross Domestic Product Does – and Doesn’t – Mean in a Recession.

Phi Kappa Phi Forum, 89(3).

Griffin, D. (2016). Economics System Types. Retrieved from

http://smallbusiness.chron.com/economics-system-types-1129.html

Milward, A. (1966, June). The German Economy at War. The Economic Journal, 76(302), 418

424

P&G. (2016). 2015 Annual Report and Proxy. Retrieved from

http://www.pginvestor.com/CustomPage/Index?keyGenPage=1073748359

Pettinger, T. (2012, Nov.). Definition of Comparative Advantage. Retrieved from

Definition of comparative advantage

Silvia, S.J. (2002, April). The Fall and Rise of Unemployment in Germany: Is the Red

Green Government Responsible? German Politics, 11(1), 1 – 22.

TradingEconomics.com (2016). Germany GDP Growth Rate. Retrieved from

http://www.tradingeconomics.com/germany/gdp-growth

Worms, A. (2003). Interbank Relationships and the Credit Channel in Germany. Empirica, 30(2),

179-198.

Appendix A

Appendix B

Appendix C

Appendix D