Business Environment

Analysis and assessment of the Malaysian Business Environment

Business is very complex and thus before entering into any new venture evaluation has to be done on the various aspects affecting the locality intended for the venture. Malaysia has good economic attributes though of late the economy has been experiencing problems. Malaysia has a federal government headed by a king and a state government headed by a prime minister. These two governments make all legislatures governing the country. The country has various departments regulating trade, business and finance. Malaysians value culture and ethics.

The country has many resources that are necessary in business. The country is thus very potent for business ventures. Introduction Business is a very diverse and complex sector in any given region worldwide. A proper evaluation of business in a locality thus entails being able to assess all the different aspects and areas that can affect business, whether positively or negatively. In this essay, we shall assess Malaysia and all the aspects and factors that either facilitate or hinder business in the country.

Assessing Malaysia’s Potential for Business The Malaysian profile Malaysia is a country in Asia that neighbors Indonesia, Philippines, Brunei, Thailand and Vietnam. Initially colonized by the British since 1786, Malaysia got independence on 31st August 1957, after which the country entered into a federation with Sabah and Sarawak (Barbara and Leonard 1984, p. 5). They continue to say that the country is divided into two sections by the South China Sea, and thus the country is largely surrounded by water and has a total area of 127,354 square miles.
Malaysia had an estimate population of 28,310,000 as of 2009, making it the 44th most populated country in the world, with the capital city of the country being placed in Kuala Lumpur, although the main administrative city of the country is Putrajava (The Malaysian MITI website 2010, p. 1). The Malaysian Economic attributes Economically, Malaysia has seen both tough as well as good times, with the main influences to the economy being trade, tourism, manufacturing, agriculture and mining (The Malaysian MITI website 2010, p. 1).
Malaysia has worked as a hub for oceanic trade since time immemorial due to the availability of porcelain and spices in the country. It was mainly due to these products that the country was incorporated in oceanic shipping routes. Malaysia was predominantly more engaged in agriculture and mining as the main influence to the economy but presently, manufacturing and tourism take a leading role in economic growth; manufacturing exports range from the vehicles to electronics and electrical products, while tourism is emphasized by the many beautiful beaches and tourist attractions in Malaysia’s rich geography (The Economy Watch website 2010, p.
9). The major indicator of Malaysia’s sustainable economic growth is the Petronas twin towers, one of the world’s tallest buildings. However, the economic growth rate values realized from assessment of the GDP rates for the country over the years indicate that recently the country has been struggling economically, with the GDP falling from an all-time high of 7. 10% in 2005 to as low as -2. 8% in 2010 (The Index Mundi website 2010, p. 1). Despite this problem the country has an official foreign exchange rate of $207.
4 billion with the Malaysian currency, the ringgit (MYR), doing fairly nice against major currencies like the US Dollar. The Malaysian Purchasing Power Parity has also been exceptional, with the latest values being $378. 9 billion, and the GDP rate per capita being $14,700 currently, a clear indicator of the potential that Malaysia has for business (The Index Mundi website 2010, p. 3). For a country with such a huge population, Malaysia has been near ideal in its employment capacity, with the unemployment rate coming just about 5% and inflation rates have been minimized from 5. 4% in 2008, to the meager levels of 0.
4% in 2010. Malaysia has also been very objective in promotion of trade both locally and internationally through its multi-lateral trade system as well as through entering into various agreements and setting of trade tariffs that promote business. One such agreements that Malaysia has entered into to facilitate trade is the Free Trade Area agreement that is made by the Association of South East Asia Nations, which Malaysia is part of, which allows member states free trading without import or export duties under the Common Effective Preferential Tariff scheme (The Malaysian MITI website 2010, p.
2). With regards to Australia and Malaysia, there is one trade agreement made with Malaysia individually and another with the ASEAN body. The ASEAN, Australia and New Zealand Free Trade Area provision agreement was aimed at creation of a Free Trade Area between Australia and ASEAN countries with an attempt to promote trade between ASEAN member countries and Australia in the aspects of investment, trading and financial services.
The Malaysia-Australia trade agreement for a bilateral Free Trade Area was aimed at addressing high product tariffs and non-tariff measures, establishment of mutual recognition arrangements on product standards, and facilitating two-way investment flows (The Malaysian MITI website 2010, p. 3). Politics and the Political System in Malaysia Malaysia houses different political cultures since it is a federal constitution elective monarchy headed by a King elected from the nine hereditary Sultans of the states in Malay every five years (123 Independence Day website 2010, p.
4). The country’s legislation is made jointly by the federal monarchs and the Parliament which is sub-divided into the House of Representatives and the Senate. The country’s executive powers are vested in the Prime Minister, who heads the cabinet of the country. The Malaysian constitution divides power between the executive judiciary and the legislature. Power separation occurs at both state and federal levels, and what the federal assembly enacts as laws affects the entire country (123 Independence Day website 2010, p.
4). However, the power to make laws is distributed between the federal and state governments via the federal, state and concurrent list; the federal list influences external affairs, internal security, defense, civil and criminal law, citizenship, commerce, finance, health and labor; the state list regulates agriculture, land, local government and religion; the concurrent list influences social welfare as well as town and country planning (123 Independence Day website 2010, p.
4). Factors affecting business in Malaysia: The Malaysian Business Environment Business environment evaluation is an important tool in prediction of the profitability of a business and thus it is important to run such an evaluation on Malaysia. Thus, we must assess the various environments that are of most influence to a business, in this case the legal and regulatory environment, as well as the socio-cultural environment. The Malaysian Legal and regulatory environment
Legal processes and petitions in Malaysia are done in various courts depending on their context. There are regional courts for settlement of domestic and criminal disputes, industrial courts to implement set industrial and labor laws, and the tribunal for consumer claims to deal with consumer issues. The Regional Center for Arbitration based in Kuala Lumpur can also be used for settling disputes. Local and international business in Malaysia is regulated by several government ministries in conjunction with each other.
These ministries are: the royal customs and excise department which regulates duties on goods, the Malaysian Central Bank which regulates exchange rates, the Malaysian Industrial Development Authority which regulates investment into the country, the Inland Revenue Board which regulates taxes on commodities, and the Malaysian Ministry of International Trade and Industry which regulates exportations and importations (Hauser Global website 2010, p. 7). The Socio-cultural environment of Malaysia
Malaysia is a country with an amalgamation of different cultures, languages and ethnic groups combined together. We have Bumiputeras making the larger composition, the Chinese taking the second-largest percentage composition, Indians making the third largest group of the population, and also the minority which comprises of foreigners and other ethnic peoples (Hauser Global website 2010, p. 7). The Malaya language is dominant and widely spoken throughout the country. Religious-wise, the country has a mix of Hinduism, Islamism, Buddhism and Animism.
Business in Malaysia is in a major sense based on trust and communication (Hauser Global website 2010, p. 7), and it is thus very necessary to build relationships with potential partners to ensure the success of a business. Most business dealings in Malaysia are guided by subjective feelings and religion-based inclinations rather than empirical evidence. Working practises in Malaysia are also very different from those observed in other world countries since religious aspects have to be incorporated in business processes.
Additionally, punctuality is valued in Malaysia and depending on whether business is being done with the government or other companies; correspondence with the government has to be done in Malay while other companies prefer English (The Geert Hofstede website 2010, p. 3). Protocol and respect for authority in Malaysia are also important factors to observe since vertical hierarchical power structures are used widely and also due to the fact that working relationships between superiors and subordinates is very official in the country and also from the fact that business relationships between colleagues are also based on mutual respect.
Consumer attitudes in Malaysia are guided in a very major way by how much a company or a brand impresses and therefore impression is very important (The CBS Interactive Business website 2010, p. 1). Availability of resources Malaysia is endowed with many human, natural and artificial resources. We can gather this from the fact that the country has a high skilled labor index, it is a major exporter of various agricultural products, and also from the fact that it is also a major player in industrial exports in Asia (The Malaysian MITI website 2010, p.
3). The country is also capable technologically and infrastructure-wise and it has a wide range of educational and social amenities at all levels. Due to the income generated from an economy that is doing well, Malaysia is generally financially adept and very promising in terms of business. Ethics and Social Responsibility aspects It is also very important to consider that Malaysia has very strict rules on ethics and responsibility especially when it comes to business.
This is to say that application of most western practices in business becomes a problem especially since religion has to be incorporated into the culture of most businesses (The Index Mundi website 2010, p. 4). Moreover, Malaysia business culture tends to emphasize that values drive businesses and thus responsibility and ethical practices are the core belief to good business dealings. Conclusion
In evaluation of Malaysia, we can realize that despite the few aspects of religion and culture that can be rather tricky to adopt in any business structure, an investment into the country could bring lots of income especially due to the fact that the country has an economy that generally does well, it has a free trade agreement with Australia and also due to the strength in infrastructure and resources, there would be minimal problems in doing business in the country. Thus, a venture into the country can be very profitable to any company investing there.
It is also advisable to maintain high standards of ethics and responsibility. Recommendations I would however recommend that agreements be reached with a Malaysian bank in the country on the exchange rate conversions of currencies on the income got as well as the cost of setting up the business in Malaysia. Additionally, a working culture that incorporates religion and the Malaysian values should be introduced in the new business. Finally, since impression is a very important in Malaysian business, it should be emphasized, with lots of effort being put in developing good relations with prospective partners and clients.
References 123 Independence Day website. 2010. Malaysia: Politics and political systems, pp. 4. <http://www. 123independenceday. com/malaysia/political-system. html> Barbara S. and Leonard V. 1984. The History of Malaysia: The journey since Independence. Basingstoke, Hampshire, United Kingdom: McMillan Publishing Press Ltd. , pp. 5. Hauser Global website. 2010. An overview of the Malaysian legal system, p. 7, <http://www. nyulawglobal. org/globalex/malaysia1. htm>. The American Central Intelligence Agency website.
2010. World Fact book: Malaysia, p. 37, <https://www. cia. gov/library/publications/the-world-factbook/geos/my. html>. The CBS Interactive Business Network website. 2010. Consumer perceptions on the consumerism issues and its influence on their purchasing behavior: a view from Malaysian food industry, p. 1, <http://findarticles. com/p/articles/mi_m1TOS/is_1_11/ai_n31140809/? tag=content;col1>. The Economy Watching website. 2010. Malaysia Economy Review: Trade, Exports and Imports, pp.
9-21, <http://www. economywatch. com/world_economy/malaysia/export-import. html>. The Geert Hofstede website. 2010. Malaysian Cultural dimensions, p. 3, <http://predicate. wordpress. com/2009/06/17/geert-hofstedes-cultural-dimensions-on-malaysia>. The Index Mundi website. 2010. Malaysian Economic Attributes, pp. 1-4, <http://www. indexmundi. com/malaysia>. The Malaysian Ministry of Trade and Industry website. 2010. Trade Information: Free Trade Agreements, pp. 1-3, <http://www. miti. gov. my/cms/index. jsp? whichSite=MITI>.

Business Environment

International Business Environment Essay

Careful consideration must be given to key factors before a company makes the decision to expand into foreign markets. PharmaMed, a U.S. based multinational manufacturer and distributor of medicines and consumer healthcare company, has identified Mexico as an extremely promising country for expansion. It is true that U.S. commercial expansion in Mexico has grown considerably over the past years, especially since the 1994 North American Free Trade Agreement (NAFTA) began promoting industrial development. Nonetheless, PharmaMed is aware that Mexico is not a straightforward country to operate in and economic, cultural and political forces can dent commercial objectives. This paper seeks to examine the suitability of the target country for further pharmaceutical expansion. We will conduct an analysis of cultural, political, economic, legal and protectionist issues in order to devise an international expansion strategy. The findings will determine recommendations on whether PharmaMed should adopt a trade only policy or venture into Foreign Direct Investment (FDI).
1 Introduction

Globalisation progressed significantly in the past decade facilitated by modern communication, transportation and improved infrastructure as well as political choice to consciously open markets to international trade and finance (WTO, GATT, as well as regional trade blocs: EU, NAFTA, ASEAN, etc). Besides the possibility of increased sales and revenues, there are several reasons why companies should consider targeting the global marketplace. Toftoy (1999) identifies the drive to offset sales decline in the domestic market. Even if the sales are not declining in the domestic market, being present in other markets can act as a safeguard for the future. A further international trade theory is put forward by Vernon (1966, 1971) and Wells (1968, 1969) arguing that a country will begin by exporting its product and later undertaking foreign direct investment as the product moves through its life cycle. Levitt’s 1965 Product Life cycle model illustrates this pattern (see figure 1)
Essentially, macroeconomics risks and operational risks are diversified by engaging in business in more than one country. If operations are underperforming in one country, hopefully, the performance will be offset by profitable performance in another country. Another argument for overseas trade is the idea of improving competitive position. This, ties in with the opportunity to lower manufacturing and labour costs. Additionally, possible funding benefits from the trade block to which the host country belongs may also influence a company to expand overseas.
However, cultural and language barriers, political issues and variations in religious beliefs, societal norms and business negotiation styles impact how business should be conducted with international counterparts.
The aim of this report is to provide guidance to PharmaMed’s proposals to expand overseas into Mexico. Key analysis on the host country will help the company decide whether to engage upon an export only policy or to undertake investment in the country.
1.1 The Pharmaceutical industry: PharmaMed
Consistent with most industries “the economic, social, cultural and political changes that come with globalization create both opportunities and challenges for pharmaceutical industry” (Mansell, 2010). The Wall Street Journal (July 2009, cited in Medical News) pinpoints and an important development in the U.S. pharmaceutical industry in its observation that for the first time in half a century, sales of prescription drugs declined in 2009, historically the industry’s biggest and most profitable market. Consequently, the industry reaction is a more favourable perception of expansion into developing countries. Indeed, Pfizer has set up operations in China, India, Brazil, Russia and Turkey. With sales totalling $1.4 billon from emerging markets in the first quarter of 2009, the company is “benefiting from the belief… in the developing world that branded medicines are worth paying a premium for because they are safer and more effective than generics”(Wall Street Journal, July 2010). A look at such positive success stories both encourages and forces PharmaMed to follow suit in order to maximize revenue growth. Like its competitors PharmaMed has witnessed declining sales in its primary medication distribution offering. As a result senior management has set in place investigative plans to expand into the developing country markets. As such, the focus is on the E7 Countries (China, India, Brazil, Russia, Indonesia, Mexico, and Turkey) in particular Mexico. This interest is based on the literature that ‘the E7 countries represent increasing opportunities for pharmaceutical companies constrained by maturing markets in the West’ (Espicom Business Intelligence, 2010).
1.2 Mexico
Emerging Pharmaceuticals Markets Globally (2008) reports that the E7 pharmaceutical markets are expected to grow at a CAGR 11% between 2007 and 2012, reaching revenues worth nearly $116 billion. In contrast the G7 pharmaceutical markets are projected to grow at CAGR 4.95% between the same periods. The question is what makes Mexico a favourable environment for expansionSignificantly, Espicom Business Intelligence (2010) in its pharmaceutical market analysis report observes that 2010 saw the announcement of regulatory measures to simplify regulatory procedures. Which include the transmission of drug registration or increasing OTC (over the counter) medicines already registered in the USA and Canada. These measures should prove to be attractive to a manufacturer and distribution of Medication Company, such as PharmaMed.
2The business system and the national culture
The concept of National Business System as launched by Whitley (1999) centres around the belief that companies do not operate in a vacuum, but are economic actors affected by numerous influences from the environment. Companies operate in markets, business sectors and have to comply with law and regulations. The majority of these influences are linked to the nation in which the company is operating. The U.S. and Mexico share many common interests related to trade, investment, and regulatory cooperation are closely tied in other areas as well. Indeed, the economic relationship with Mexico has strengthened considerably under the 1994 NAFTA alliance in the form of the 1993 and 1998 Foreign Investment Law (FIL). Which, provided a broad scope for foreign investment and simplified the process of registering foreign companies. Figure 2 shows that as a result trade between the two countries have more than tripled since the agreement was implemented (Villarreal, 2010).
Figure 2: Trade effectives of NAFTA implementation. Total U.S. Mexico trade in goods in billions of US dollars
Importantly, lower NAFTA tariffs on pharmaceuticals have fostered greater choice for imports needed (US Department of Commerce, 1994). A world class patent regime in Mexico, bolstered by NAFTA’ patent provision, gives innovators a favourable environment to launch new components. Indeed, the Mexican pharmaceutical market is the leading and most developed in Latin America and the ninth largest worldwide, with sales valued at US$13.5 billion in 2006 (Massachusetts Office of International Trade and Investment (MOITI, 1996). It is important to take the state as the basic geopolitical unit for studying the operation of companies. States remain the primary unit of political competition and mobilization. Thus, individuals and collective actors usually organize themselves at the national level to compete for state resources and legitimacy. As such an organization wishing to enter trading activities within a given country will be subject to regulations, and the pharmaceutical industry is no exception. Thus, MOITI (1996) cites that according to current regulations, in order to export pharmaceutical products to Mexico, the exporting country must register and import those pharmaceutical products through a host pharmaceutical manufacturer, a local manufacturer holding a sanitary licence for such products. This firm acts a “guarantor” with local authorities vis a vis the foreign company, in particular with regards to manufacturing practices, registration and quality control.
Connected with the national business system are cultural issues that will inevitably come into play in the international trading process. How is this reflective in the pharmaceutical industryAnalytical insight into Mexican culture reveals the importance of the family; the deeply held rooted Roman Catholic religion, the nationalist pride, the high degree of personal sensitivity of Mexicans and the importance given to time. All of which have implications in communication styles, decision-making, negotiating, contracting and planning and business etiquette. Cultural sensitivity must be the foundation of business activities. The literature defines cultural sensitivity in rather general terms, such as “understanding the cultural context of each market and the degree which (markets) are culturally similar” (Toyne and Walters, 1993). There is, however, agreement that cultural sensitivity requires cultural awareness, avoidance of culture-bound thinking and reduction of cultural biases (Douglas and Craig, 1983, Toyne and Walters, 1993). There is also consensus that culture is multidimensional. For example, Hofstede (1991) identifies five dimensions along which culture differs: power distance, individualism, uncertainty avoidance, masculinity and long term orientation. Figure 3 illustrates the results of these dimensions when applied to Mexico.
In carrying out our analysis on Hofstede’s cultural dimensional scores we will draw on information from the itim International website. As can be seen Mexico’s highest Hofstede dimension is Uncertainty Avoidance (82), indicating that society’s low level of tolerance for uncertainty, does not readily accept change and is risk adverse. Mexico’s low Individualism (30) ranking indicates that an inclination to collectivism rather than to individualism. This is manifest in close long term commitment to the ‘member group’, be it family, extended family, or extended relationships. A high Masculinity ranking (69) indicates a high degree of gender differentiation roles. The male dominates a significant portion of society and power structures. Finally, the high ranking Power Distance Index (81) is indicative of a high level of inequality of power and wealth within Mexican society. To achieve an appreciation of Mexico’s and the USA’s cultural makeup it is vital to provide a comparative study of Hofstede’s analysis of cultural dimensions applied to the USA (see figure 4).
Figure 4: Geert Holstede Cultural Dimensional scores for USA
Importantly, the USA’s Individualism score is the highest in the world, demonstrating the high extent to which people look after themselves and their immediate family only. The Power Distance score of 40 indicates that U.S. society is decentralized with a flatter organizational structure, a smaller portion of supervisors and employees empowered to make their own decisions. A high masculine score places greater value on success, money and material possessions. Americans score 62 on the masculinity, 24% higher than the world average. The USA’s UAI score of 46 is 38% lower than the world average. This suggests that Americans tolerate much more risk and are more comfortable with ambiguities and rapid change. Finally, the USA’s low LTO score of 29 indicates that the importance of the beliefs of meeting obligations and also reflect a tendency for an appreciation for cultural traditions.
In order to achieve successful international trading results in Mexico PharmaMed must respect Mexican cultural strong uncertainty avoidance, low individualism, centralized power structures and higher masculinity scores. The purpose of employing Hofstede’s dimensions is to show that U.S. culture and Mexican cultural differences do not doom overseas expansion to failure. Instead, they suggest that cultural sensitivity and cultural adaptation on the part of both countries is especially important to the success of the venture. This chapter focused on how understanding of the local culture and business environment can give managers an advantage in the pharmaceutical industry. Such differences in culture and the way of life in Mexico necessitate that managers develop international expertise to manage on a contingency basis according to the host-country environment. International managers can benefit greatly from understanding the nature, dimensions, and variables of a specific culture and how these affect work and organisational processes. This cultural awareness enables them to develop appropriate policies and determine how to plan, organize, lead, and control in a specific international setting. Such a process of adaptation to the environment is necessary to implement strategy successfully. It also leads to effective interaction in a workforce of increasing cultural diversity, both in the United States and Mexico
3US-Mexico trading patterns in the Pharmaceutical INDUSTRY
Importantly, lower NAFTA tariffs on pharmaceuticals have fostered greater choice for imports needed (US Department of Commerce, 1994). A world class patent regime inMexico, bolstered by NAFTA’ patent provision, gives innovators a favourable environment to launch new components. Indeed, the Mexican pharmaceutical market is the leading and most developed in Latin America and the ninth largest worldwide. According to Business Monitor International‘s (BMI) Mexico Pharmaceuticals & Healthcare Report (2010) the total drug market in Mexico will increase from US$9.79bn in 2009 to US$18.96bn by 2014 at a compound annual growth rate (CAGR) of 14.1%. Thereafter the CAGR will slow to 7.6% to 2019, giving a final market value of US$27.48bn. Per-capita spending on medicines will be US$170 in 2014; up from US$91 in 2009, while the proportion of GDP dedicated to drug spending was 1.13% in 2009 and will reach 1.25% by 2014.
The presence of the US Food and Drug Administration FDA) in Mexico should strengthen existing regulatory ties between the two countries.
BMI (2010) expects the FDA to be in close contact with Mexican authorities regarding food and medicine production in order to boost the safety of all products destined for the US, while also encouraging regulatory harmonisation and knowledge transfer.
How can PharmaMed compete in this marketClearly to survive in such a competitive market PharmaMed will have to be relevant and current in the Mexican pharmaceutical industry, whilst being legally protected. This means being fully up-to-date on all regulations regarding exporting and importing, licence requirements, approval of brand names, labelling requirements, certificates of quality and marketing practices.
We suggest that entry into the Mexican market should initially be aimed at Seguro Popular, the Mexican state-run health insurance scheme for those on low incomes or without other healthcare options. This is because according to BMI (2010) Seguro Popular intends to enrol an additional 12mn people in 2010. In 2011, another 6mn people will be added to the scheme, giving a total of 18mn new additions and comprising the last remaining segment of the Mexican population eligible to be included in the programme. This coincides with changing health patterns in the Mexican population – pointing at an increase in diabetes, cardiovascular diseases, stroke and cancer (Roberts and Stott, 2010). Since we specialise in medications for these diseases, taking advantage of such changes should give us a competitive edge.
4The Exchange Rate Regime
The literature agrees that the Mexican currency crisis of 1994 induced important changes in view of policy makers and economists concerning choice of exchange rate regimes (Villerreal, 2010). A number of authors began to argue that a world of high capital mobility, intermediate regimes are highly prone to currency crisis. The notion gradually started to emerge suggesting that developing countries should either have a pure floating exchange or a hard ‘peg’ regime. As a result after the crisis Mexico let the peso float while using a monetary policy of monetary aggregates to control inflation. In 1999 the country switched to an inflation targeting monetary regime, with monetary instruments to determine interest rates. Forex Realm (2011) report that one US Dollar equates to 13.2085 Mexican pesos. The observation is also made that like the U.S. the Mexican peso is considered to be one of the important national currencies, which is used in millions of currency trading and conversion. However, Pharmaletter (Jan. 2011) states that the current Mexican peso against the U.S. dollar is causing uncertainty, with increasing pharmaceutical costs. This is expected to affect previously registered import levels. The overall pharmacy sector is facing stagnation, into negative growth. On a positive note, the downturn and evolving regulatory environment are fuelling generics consumption. This market doubled in 2010.
In this chapter we also need to concentrate on the falling value of U.S dollar against major currencies (see figure 5).
Figure 5: Deliotte Research Study (2006)
As identified in a Deloitte Research Study (2006) Steep and long term shifts in the foreign exchange rates create discrepancies in cost and revenue models resulting in operational and strategic risk. To formulate effective risk management strategies, PharmaMed needs to assess the risk exposures rising from sensitivities in cost and revenues under various exchange rate scenarios.
Exchange rate shifts can create shifts across the supply chain. If the dollar slides, pharmaceutical companies with offshore sourcing and operations may face soaring input material and shipping costs and supplier risks. PharmaMed would see a hike in labour costs in dollar terms. On the demand side if the company decides to pass on the increased costs to customers it may result in reduced demands or loss of sales. Moreover, the exchange rate risks faced by customers can impact PharmaMed directly, significantly rising strategic and operation risks.
4.1 Political Risks
Risk in international trade is unavoidable, especially when it involves countries in the developing world (Busse, 2005). Among many of the risks involved in it, the political ones are the most difficult to measure, while having the potential of greatest damage as well. The political risks themselves can be classified according to their different origins and etiologies. That is, change of government, violent conflicts, sanctions and political trade risks
4.1.1 Change of Government
The political risks that can confront an international trader can arise in several ways. The most common of these is the ‘change of government’ (Fitzpatrick, 1931).
4.1.2 Violent conflicts
Developing countries face a higher risk of violent conflicts (Oetzel et al. 2007). Violent conflicts, whether internal or external are invariably damaging to trade
4.1.3 Sanctions
Another political risk to international trade exists in the form of conflicts without violence. International sanctions are the main form of these, which may be precipitated by an action of the host country.
4.1.4 Political trade risks
A peculiar form of political risks is changes in trading pattern imposed by politics. An example is a sudden ban on all imports or exports of a particular commodity, due to the sudden popular mood against those trades (Orden, 2004).
How do the above apply to MexicoBremer (2010) argues that raging drug gang violence, a tepid economic recovery, flagging momentum on economic reforms and declining oil output are risks to watch for in Mexico. All of these ties in with the above citations. In relation to the pharmaceutical industry the publication, Pharmaceutical Technology (Jan 2009) identifies that a significant hurdle still to contend with is protection of intellectual property, while the large-scale prevalence of counterfeit drugs remains a major challenge.
How can PharmaMed manage the political riskUnfortunately, there isn’t a perfect solution. Investing always has risks — and political risk is one of them. Yet without risk there would be no reward. To plan for managing a risk, the first step is to compute the probability of its occurrence. Once that is done, a decision needs to be taken as to whether in the light of that risk and the probable loss arising from it; it makes any sense to continue with the business. A difficult and tricky question is to quantify this risk in monetary terms, which alone is a sensible indicator for the need to spend on planning for it. Once it is decided to continue with business in spite of these risks, then necessary provisions need to be made for the losses likely to arise from them, while also attempting to hedge against each of those risks to the best extent possible.
5FDI or Export
In light of our research should PharmaMed choose an exporting strategy or a FDI (Foreign Direct Investments) in expanding into MexicoWhen an organisation has made a decision to enter an overseas market, there are a variety of options open to it. These options vary with cost, risk and the degree of control that can be exercised over them. The simplest form of entry strategy is exporting using either a direct or indirect method such as an agent, in the case of the former, or countertrade, in the case of the latter. More complex forms include truly global operations, which may involve joint ventures, or export processing zones (all of which are forms of Foreign Direct investment). Having decided on the form of export strategy, decisions have to be made on the specific channels. On the other hand, FDI offers more far reaching influences for the investing country because it involves ownership, whole or partial control of a company in a foreign country. Drawing on the research presented in this paper, especially those that relate to uncertain pharmaceutical future growth in Mexico, we propose a mixed foreign market entry strategy.
That is, combining FDI with exporting rather than choosing one single foreign market entry. The research by Johanson and Vahlne (1977) shows that many firms minimize the uncertainty risks in internationalization by adopting an incremental approach. Specifically, they expand their foreign operations gradually, beginning with entry into foreign markets with similar cultures before moving on to the dissimilar ones. And, for each foreign market entry, the process starts with exporting, followed by setting up local sales subsidiaries, and then the establishment of production facilities. We believe that this incremental process will allow us to learn from the experience we acquire in the initial operations, and use this knowledge to reduce the uncertainty we face in subsequent expansion efforts. Additionally, we believe that this will protects PharmaMed from the downside risks of failure by increasing overseas resource commitment over a certain time period, contingent on the performance of prior foreign operations.
This report has assessed PharmaMed’s intended expansion into Mexico, in light of cultural, industrial and macroeconomic factors. The results garnered from this analysis highlight that for PharmaMed to achieve successful operations in Mexico, it must understand its culture and develop the necessary expertise required to manage the host environment business.
Exchange and Political risks are also factors that have been identified as critical to the success of PharmaMed’s expansion into Mexico, and this must be addressed appropriately. The incremental process of foreign expansion has also been found to be an ideal option for expansion into Mexico, which could start with exporting, then setting up local sales subsidiaries, and finally the establishment of production facilities. Therefore, based on these analyses, it is recommended that PharmaMed does expand into Mexico, with particular emphasis on managing political, exchange rate and cultural issues that may arise.
Before acting we have to plan our approach. Here are helpful recommendations for PharmaMed:
1. Research local product requirements
Find out about customer preferences, local standards and product regulations. We may need to change the product’s appearance, or to fundamentally redesign it.
We may need to translate labelling and instructions redesign packaging to suit the local market. We may even need to change your product’s name or logo if they have unfortunate connotations locally.
2. Find out how local commercial practice differs from the U.S.
Find out about local business behaviour.
Investigate how products are marketed and sold, including any legal restrictions.

3. Identify the key contacts we need to build relationships with.
Key contacts may include customers or suppliers, agents, trade organisations and government departments.
4. Decide what use we will make of agents
The way the market operates may mean that it is easier to sell through a local agent (or distributor), rather than directly. In the Mexican Pharmaceutical industry this is a legal requirement.
A local agent can be a valuable source of market information, and can help us find customers and build relationships with them.
Take legal advice before entering into a contractual relationship with an agent or distributor. It can be difficult and expensive to terminate the relationship later on.
The above recommendations are essential for determining success in PharmaMed’s overseas efforts. Researching products and commercial requirements, while aligning with overseas contacts will give PharmaMed a competitive Edge. To the achieve this, the company will have to embark a series of managerial and staff training programmes. Projects should then be delegated to relevant departments to see the operation through.
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