As the economic globalization trend continues, there are many advantages to international diversification, but these decisions are not without risk. There are a variety of issues that could make a business decide not to diversify. For example, if a company fails to have an appropriate organizational structure, or does not have the talent or expertise in the external marketplace, then it is not ready to move out globally. There are many factors, including language, culture, and laws that require knowledgeable leaders in order to navigate the waters of a foreign market. Without this capability, companies trying to enter new markets may have some unpleasant and damaging learning experiences. In addition, currency can pose a variety of problems, from variable exchange rates, which can eat up profits, to cost calculations, payment methods, and accounting practices. Finally, there are additional concerns, like political risks within the country, potential of labor exploitation, and environmental issues due to lax regulations, which companies need to understand before moving abroad.
It is certainly tempting – and arguably necessary in some industries – to locate facilities where business regulations are more lax. The lack of regulation allows for wages to be lower, safety to be more lax, environmental impacts to be greater, and has certainly led to gross abuses in labor practices. Companies choose to do this for one reason – cost. Especially in electronics manufacturing situations, it is much cheaper to produce a product in an area with less safety and regulations. There are entire cities that have been built in countries like China, where regulations are very lax compared to the U.S. However, these decisions are not without risk. Especially when malpractices become public, they can have a negative impact on the perception and bottom line of a country. The most notorious example of lax regulations leading to unethical business practices is Apple, which has had a variety of heavily publicized issues among their supply chain manufacturers, including dangerous working conditions, mandatory overtime, exposure to poisonous chemicals, human trafficking, and partnering with armed groups to procure “conflict minerals” which are used to build their cell phones. All of these situations are examples of issues that were allowed to occur due to lax regulations. Because of these internationally published scandals, Apple has had to implement a variety of programs to ensure that human rights violations are not occurring in their supply chain, with the risk of losing the right to selling in the European Union, due to their support of war criminals for conflict minerals.
Park, S. (2005). How transnational environmental advocacy networks socialize international financial institutions: A case study of the International Finance Corporation. Global Environmental Politics, 5(4), 95-119.
Place an Order