Traditionally international businesses prefer to conduct business in developed countries due to the fact that they are far more sophisticated and structured. In third world countries they encounter serious problems with their economic, socio-cultural, legal and political circumstances which present the greatest difficulties with respect to business operations. It is more risky to conduct business in these countries. Returns on their investments have a very high level of uncertainty. We will now discuss in detail the major challenges to international business operations in less developed countries.
The per capita income in developing countries is low. Therefore, consumers’ ability to purchase goods and services are minimal. For example a consumer may desire a new car but the cost of the car and his income may prevent such a purchase. International businesses may have difficulty understanding consumers’ preferences and would have to make additional investments to adapt their products and services to meet the needs of consumers. They may have to reduce the size of their products, use cheaper ingredients or settle for less profit to enable customers to purchase their goods.
The infrastructures in these countries are poorly developed as compared to developed countries where the infrastructures are well established. Multinational Enterprises face serious challenges when operating in less developed countries because much of the infrastructure with which they are accustomed to, such as nationwide distribution channels, transportation networks and high-capacity communication networks are absent in these markets.
The labour force in less developed countries is untrained and less effective than in developed nations. Most of them are poorly educated and are unable to function usefully within the workplace. International businesses will have to invest in education and training for the workforce. Therefore, the employees will have to be educated and trained before they can be effectively employed. Product markets for raw materials are not usually available. These materials have to be imported from developed countries at additional cost to the multinational enterprises.
Uncertainty with respect to the fluctuations in the exchange rate is a major concern for international business companies. Changes in the exchange rate can have serious implications for the profitability of their operations. If the value of the U.S. dollar increases it would have an adverse effect on the purchasing power of customers in less developed countries which would affect their bottom line.
The culture of a nation is the shared beliefs, values, knowledge as well as common behaviour patterns and similar ways of thinking among its people. International businesses must first understand and adapt to the different cultures in third world countries. Any imposition of foreign culture in these societies will be met with resistance, which will not be healthy for their operations. For instance, it took Mc Donald’s in excess of one year to realize that Hindus in India do not eat beef. The company’s sales took off only after they started making hamburgers out of lamb.
On the other hand, international investors would not want to transfer their millions without understanding the morality of the deal. The lesser developed nations are different from the Western world because of their religion, habits, customs, history, ethics and moral standards. These cultural values must be clearly understood by investors before they can invest their dollars. There are also other problems such as language barriers, kinship patterns and time orientation. Fraud, bribery, kick-backs and private investments by government officials must be avoided. There must be ethical and moral standards for capital investments. The motivation for investment must be objective and not based on...