Entering in the foreign market for business expansion is having more opportunities and number of challenges for the business organizations. This is due to the reason that different countries are having different forms of business environments. Business organizations are having the importance to select the countries carefully in order to have the maximum output from the international business (Perlmutter 2017). Ausmed is one of the leading pharma companies currently operating in the Australian market. They are having the turnover of AUD 30 million annually. However, in the recent time, their business is becoming stagnant in the Australian market and they are searching for a potential foreign country for expansion. South Africa and China are being shortlisted for the expansion plan (Penrose 2017).
This report will discuss about the potential risks and opportunities for both South Africa and China in relation to the pharmaceutical industry. The risks and opportunities will be critically analyzed based on different elements and factors. In accordance to the identified factors, the effective country will be selected. An ideal entry strategy will be identified that can help Ausmed to effectively enter in the target country.
South Africa is one of the leading economies in the African regions and posing huge business opportunities for the organizations. On the other hand, China is one of the leading countries in the world with having the status of leading economy. This section will discuss about the major opportunities that may be gained by Ausmed in operating in the South African market and Chinese market.
China is one of the top most countries in the world in terms of economic growth. It is reported that as of 2015, China is having the growth of 6.9. However, it should be noted that economy growth of China was over 10 percent till 2010 (TheGlobalEconomy.com 2018). This denotes that they are facing downward trend in the recent time. On the other hand, South Africa is having the growth rate of 1.3 as of 2015 and they are also facing downward trend in the recent time compared to their growth rate of over 3 percent in 2010. However, it can be concluded that the positive national growth of both the countries is a major opportunity for Ausmed (Tang 2015).
Figure: 1
Economic growth of South Africa and China
Source: (TheGlobalEconomy.com 2018)
In terms of corruption index, South Africa is currently standing at the ranking of 42 that denotes a moderate intensity. In addition, it is also reported that till 2009, their ranking was above 50. This shows that South Africa is improving in terms of relevancy of corruption in the country. On the other hand, current ranking for china in terms of corruption is the 40 that is also denoting the moderate intensity of the corruption (Dai 2013). However, it is also identified that ranking of China in corruption index was 35 in 2009 (TheGlobalEconomy.com 2018). This denotes that they are not improving in terms of corruption.
Figure: 2
Corruption ranking for South Africa and China
Source: (TheGlobalEconomy.com 2018)
According to global competitive index, China is having the ranking of 26 in country credit index. This denotes that financial position of the country is stable and this will reflect in the investment of the foreign companies such as Ausmed (Walsh 2016). On the other hand, ranking of South Africa in terms of country credit rating is 63. This also denotes that financial condition of South Africa is stable and having less risk probability (Mehrara and Zirak 2013). Thus, it can be concluded that Ausmed will have the opportunity of having positive return on investments from operating in both the countries. It is reported that in terms of economic freedom, both the countries are showing positive trend in the recent time. According to the reports, South Africa is having the ranking of 62.5 while China is having the ranking of 52.7 (TheGlobalEconomy.com 2018). The major reason behind the lower ranking of China is their restrictive policies and political approach. However, the recent growth trend of economic freedom for both the countries will help Ausmed to have free trading and business practices.
Figure: 3
Economic freedom of South Africa and China
Source: (TheGlobalEconomy.com 2018)
Market analysis is important in determining the market opportunity and potentiality of South Africa and China. It is reported that in the global competitive index that South Africa is having the ranking of 30 in terms of the domestic market size. This refers to the fact that market size favorable in the South African market (Brandt, Tombe and Zhu 2013). The more will be the market size, the more will be the market opportunities for the pharmaceutical products for Ausmed. On the other hand, China is having the ranking of 1 in market size mainly due to the fact that China is the most populated country in the world (weforum.org 2018). Older aged population is one of most potential markets for pharmaceutical companies due to the reason that older people are having the major need for medicines. In this case, both China and South Africa are having increasing trend of older population. Thus, Ausmed is having increasing market potentiality in both the countries.
Figure: 4
Population growth above the age of 65
Source: (TheGlobalEconomy.com 2018)
Government effectiveness is another major criterion for pharmaceutical companies due to the reason that intensity of regulations and legislations on the pharmaceutical companies are more (Fernald and Spiegel and Swanson 2014). In this case, the Ausmed will have the requirement of effective governance in the country. In terms of this, China is having the score of 0.41 and South Africa is having 0.26 (TheGlobalEconomy.com 2018). This denotes that both the countries are having nearly same level of government effectiveness. In addition, it also denotes that score of the both the countries is not strong but moderate. Thus, Ausmed will find moderately favorable business environment in doing business in both China and South Africa.
Figure: 5
Government effectiveness of South Africa and China
Source: (TheGlobalEconomy.com 2018)
This is also reported that South Africa is having the ranking of 31 in terms of legal efficiency. This refers to the fact that Ausmed will have favorable and positive business regulations in regards to their operation. On the other hand, China is having the ranking of 45 in same index. Thus, it can be concluded both the countries are having nearly same level of regulatory effectiveness with South Africa is having the edge (Wu et al. 2014). It should also be noted that China and Australia is having free trade agreement that can help Ausmed in sourcing the components from their home country seamlessly. On the other hand, Australia and South Africa are not having ant free trade agreements but they are having MOU that extends to different traded goods. In addition, South Africa is the largest export market for Australia in the African region. Thus, both the countries are having positive relationship and cooperation that will help Ausmed to have favorable business.
One of the major challenges that will be faced by Ausmed in doing business both in China and South Africa is high level of corporate tax rate (Badertscher, Katz and Rego 2013). This is due to the reason that it is reported, China is having the score of 25 and South Africa is having 28 in terms of corporate tax rate (TheGlobalEconomy.com 2018). This denotes that both the countries are having considerably higher rate of tax. This will have impact on the pharmaceutical industry due to the reason that there are number of expensive components being used by this industry and added tax will lead to increase in the end price.
Figure: 6
Corporate tax rate in South Africa and China
Source: (TheGlobalEconomy.com 2018)
Regulation is also a major determining factor for the pharmaceutical companies due to the reason that it deals with the health of the people. Thus, it is important for Ausmed to have the favorable quality of regulation in their operating country (Adomako and Danso 2014). It is reported that South Africa is having the score of 0.28 in terms of regulatory quality index and China is having the score of -0.29 (TheGlobalEconomy.com 2018). This denotes that both the countries are not having favorable regulatory environment for the pharmaceutical industry and Ausmed will find it difficult to get adhered with the regulations. Currency valuation will also affect the business operation of Ausmed due to the reason that they will source some of the key components from their home country. It is reported that in terms of units per US dollar, China is standing at 6.23 and South Africa is standing at 12.76. Thus, in both the countries, Ausmed will have to spend more in sourcing from their home country.
Figure: 7
Exchange rate
Source: (TheGlobalEconomy.com 2018)
Figure: 8
Problematic factors of doing business in China
Sources: (weforum.org 2018)
World economic forum identified a number of problematic factors to be faced by the business organizations in doing business in China. One of the major problematic factors is access to financing. This refers to the fact that Ausmed will have difficulty in sourcing fund for their business operation. In the long term, this may cause in the having seamless funding options. It is also identified that inefficiency of the government is also a problematic factor for business organizations in operating in China (weforum.org 2018). This will cause Ausmed to face the added burden of government regulations. Due to the fact that China is a communist county, restrictive policies of the government will case challenges for Ausmed in doing business.
Figure: 9
Problematic factors of doing business in South Africa
Sources: (weforum.org 2018)
One of the major problematic factors of doing business in South Africa as identified is corruption. It is quite relevant in the business environment of South Africa. This will affect the business operation of Ausmed due to the reason that corruption will lead to instability in the policy and decision making of them. In addition, this can also cause increase in cost for Ausmed. Crime and theft are also identified as another major problematic factor for the business organizations in doing business in South Africa (weforum.org 2018). This denotes that Ausmed will have the challenge to protect their assets from the potential thefts. This will lead to added cost for Ausmed. Government instability is another problematic factor in doing business in South Africa. In the case of pharmaceutical companies, huge investment is required in research and development. Thus, instability of government will increase the risk in doing business in South Arica.
From the above analysis of China and South Africa, it is identified that China will be the ideal country for Ausmed for their foreign expansion. This is due to the reason that, in terms of the market potentiality, China is way ahead of South Africa by the fact that China is the largest country in the world in terms of population. The core objective of doing foreign business is to have more market potentiality (Long, Yang and Zhang 2015). Hence, China is the natural choice over South Africa. On the other hand, current economy growth rate of China is more than that of South Africa. This also denotes that business opportunity is getting more increased in China than in South Africa. Corporate tax rate is also lower in China compared to South Africa. Therefore, Ausmed will have lower cost of operation in the Chinese market. In addition, Australia is having free trade agreement with China but not with South Africa. This will further help Ausmed in doing business in China. They can source their components from their home country and indulge in bilateral trading between the two countries without having the presence of added taxes and tariffs (Wang and Wang 2015). Therefore, it can be concluded that China will help Ausmed to have more market potentiality along with having more favorable business environment.
It is recommended that Ausmed should initiate the strategy of Greenfield investment in China. This will enable them to directly investing in the Chinese market and having their own facilities. The major advantage that can be gained from direct investment is high degree of control (Ashraf and Herzer 2014). This is due to the reason that that in the case of direct investment, Ausmed will have own manufacturing facilities and other units in the Chinese market. All these units will work as subsidiaries of Ausmed and thus the control will be entirely with them. In the pharmaceutical industry, degree of control should be high due to the presence of complex activities in research and development of medicines. In addition, the quality control for medicines will become a risky affair if being given to third party (Lee and Ries 2016). On the other hand, the organizational objective of Ausmed is to enhance their brand value and identity in the global market. Thus, with the help of the Greenfield investment, Ausmed will be able to create their brand in the Chinese market. In the above country analysis, it is identified that political and business risks are lower in China and thus the risks related to the direct investment for Ausmed will be less (Tulung 2017).
It is stated in the case study about Ausmed that they are having AUD 30 million annual turnovers. Thus, they are having the financial strength in investing in the foreign country. This will be beneficial in setting up the manufacturing facility in small scale. Having the free trade agreement will help Ausmed to source the expensive materials from Australia in the initial stage. Having own facilities and units in the Chinese market will help Ausmed to compete in the market effectively and offering products in more competitive prices (Ashraf, Herzer and Nunnenkamp 2016). Furthermore, with the help of direct investment, Ausmed will be able to avail the benefits of Chinese government given to the foreign investments. This includes tax benefits and incentives. Thus, it can be concluded that in terms of organizational objective, risks involved in the Chinese market and business pattern of Ausmed, it is concluded that Greenfield investment will be the most effective and ideal market entry strategy. This entry strategy will help Ausmed to establish their brand identity in the foreign market along with regulating the cost of operation by involving the local resources (Farla, De Crombrugghe and Verspagen 2016).
Conclusion
This report concludes that China and South Africa are having number of challenges and opportunities for the business organizations. In this report, the potential opportunities and threats to be faced by Ausmed from operating in these countries are being identified. It is concluded that Ausmed will have more market potentiality and opportunity in doing business in China over South Africa. Different factors are being considered in this report to compare the opportunities and threats of these two countries. In addition, this report also concluded that Greenfield investment will be the most ideal for Ausmed to initiate as entry strategy in doing business in China. There are number of advantages that can be gained by Ausmed from initiating direct investments are discussed in this report.
References
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