Sample Essay on Opportunities and risk analysis for South Africa and China.
One of the most important strategic plans of AusMed is expansion to the global market. In this context, South Africa and China are the preferred destination countries for expansion. China is an emerging economy which has many firms of pharmaceutical nature. As a result, the market is almost saturated and the quality of pharmaceuticals is relatively low compared to that of South Africa. South Africa, on the other hand, is a less developed country which is now experiencing rapid industrialization and the industry of pharmaceuticals is taking the momentum. In this context, South Africa imports chronic medicine while China imports over-the-counter drugs such as painkillers. With this information, entering into the South African market could be profitable, given that the country imports more pharmaceutical products than it exports to the rest of the world. From opportunities and risk analysis of the two countries, South Africa seems to be a better country for AusMed in global expansion compared to China.
This is a report of strategic plan of Australian based AusMed to expand globally in two preferred countries which are in different continents. More specifically, this report analyses both risks and opportunities for expanding into either of these two preferred markets- South Africa and China. This analysis of risks and opportunities will inform the decision of AusMed to either expand its operations in China where it will major on painkillers or South Africa where it would specialize in chronic medicine. Concisely, South Africa is positioned south of African continent while China is positioned in Asia and it is one among the emerging economies in the globe. This report will also offer an overview of the industry of pharmaceuticals in both countries. Through analysis of both risks and opportunities in these two countries, the best country for global expansion will be determined.
Overview of pharmaceutical industry
China has the biggest market for pharmaceuticals in the globe after United States of America. In 2014, the pharmaceutical market for China was valued at $ 105 billion, which is expected to rapidly increase to $ 201 billion by 2020. China, also is the leading pharmaceutical industry in the whole of Asian continent. China also happens to be one of the most populated countries globally, with about 25% of the global population. Surprisingly, China commands about 1.6% of the global drug market (Desai et al, 2015 p.34). China is also changing its health-care environment with an aim of extending health insurance to its large population as well as giving people greater access to health- care services and commodities.
From the perspective that China is an emerging economy in the world, pharmaceutical industry is expected to expand exponentially by 2022. There are many opportunities for AusMed to expand its operations in China. One of those opportunities is that China is a powerhouse of technology and innovations (Burns, 2016.p.56). With advanced technology, a lot of scientific research has been done in pharmaceutical products which results into high quality products. AusMed, o expanding its operations to China, could take advantage of such innovations to improve their products and hence export them to the rest of the world.
Secondly, China has many bilateral trade agreements with other countries which are purely diplomatic. For instance, through the ministry of Commerce, China has made many trade agreements with countries such as US. An example of bilateral trade agreements is the FTA which US pulled out early 2017. There are other bilateral trade agreements with Australia. By so doing, China has attracted many foreign investments in its territory (Frost, 2016.p.460). The major benefit of these Chinese trade agreements is removal or lowering of tariffs and quotas on exports. With this, AusMed could export more of its products to the rest of the world, especially to those countries in bilateral trade agreements with China, thereby boosting its business. The following table shows some examples of bilateral trade agreements of China and other countries around the globe.
|BILATERAL TRADE AGREEMENT||MEMBERSHIP.|
|Caribbean community||China, Australia and south Korea, among others|
|China Australia Free Trade Agreement (2015)||China and Australia|
|ASEAN||China, India, among others|
|China maldives Free Trade Area||China and maldives|
Thirdly, China has the largest population in the world. Surprisingly, the Chinese population is highly skilled. For this matter, china is able to provide cheap labour from its huge population, and increased subsidies from the state administration which aims to boosting economic development (Galea, 2015 p.65). Presence of cheap skilled labour in China attracts foreign investment, and as a result, foreign direct investment companies in pharma industry make up about 25% of the Chinese drug market. Cheap skilled labour in China presents an investment opportunity for AusMed to expand its operations to China.
The scope of opportunities for global expansion into Chinese market by AusMed is too large. It is also very important to mention other opportunities such as increased government involvement in pharmaceutical industry, existence of both political and economic stability, among many others (Boso et al., 2018.p.33). These opportunities attract multinational corporations and foreign direct investment companies to penetrate into the Chinese market.
The Chinese markets presents all types of business risks; financial risks, political risks, economic risks, et al. However, the major business risk that pharmaceutical industries in China faces are things to do with the industry and products.
The economic risk in China is very low. The country has had experienced robust growth in economy since 1990. Economic growth is attributed to increased public investment, liberalization of market, attempts to move away from industrial productions to service-based economy, as well as subduing consumption. In this way, it has been recommended that China to increase funding for activities such as pensions, and health (Cai, 2013.p.67) Presence of low economic risk could be a potential advantage for AusMed to invest in China.
Another risk that AusMed may come across while expanding into Chinese market is political risk. Political risk, however has been proved to be moderate in China. The president of China is trying to fight the vice of corruption. The government has also extended one child policy to two to address the problem of rapid ageing (Du-tutos, 2016.p.18). The individual tax has been reformed to solve inequality. In analysis of political risk, it can be inferred that China can be a better place of investment despite having a moderate political risk.
Financial system risk
Financial risk is also moderate in China. The Chinese insurance Regulatory Commission is charged with the role of regulating insurance. In this way, the commission has devised a metric to measure risk management. Also, borrowing has been a major driver to economy growth, raising concerns such as weakened ability to withstand shocks. As a result, there is increased financial supervision to control lending (CAI, 2013.p.45). Also, there is increased monitoring of the real estate to help addressing increased demand and speculation in housing.
Pharmaceutical industry overview
South Africa commands one of the largest share in drug market in Africa. The average drug developed by largest pharmaceutical company is valued at $5billion. The pharmaceutical industry is also said to contribute about 60% of the South African GDP. Also, the amount spend on healthcare is around 10%, being the largest in the whole of Africa. Other than producing pharmaceutical drugs, South Africa also imports drugs from other countries in Asia and west. However, the volume of drug imports exceeds the exports, thereby worsening balance of payment deficit (Lasserre, 2017. p.34). The main reason why the balance of payments is still worsening is due to lack of flexible exchange rate regime. In the next part, we will discuss opportunities and risks for AusMed in its strategic plan of expanding its operations globally to South Africa.
There are lots of interesting opportunities for AusMed to expand into South Africa. Firstly, South Africa is among the third world countries that is experiencing high rate of industrial development (Tate et al, 2014 p.382). That said, some characteristics of developing countries are high levels of unemployment, poor technology, high crime rates, and a rapid population growth. These characteristics of developing countries presents a golden opportunity for AusMed to set its operations in South Africa. For instance, the country is trying to fight unemployment and thus the citizens are willing to do any job at any wage rate. This means a cheap labour is available for AusMed to expand in South Africa. Also, the labour is readily available due to high population.
Secondly, South Africa imports drugs from other countries than its exports, thereby worsening balance of payments. The decision of AusMed to set up a local plant for pharmaceutical products will be a valuable idea for the administration of South Africa. A new plant means that the cost incurred in importing such products is lowered or even cut completely. In this way, South Africa will export the pharmaceutical products to other parts of the world rather than importing them. This in turn leads to correction of balance of payment deficit, which is good for South Africa. This presents a golden opportunity for AusMed to expand into South Africa.
Thirdly, Africa is the continent that is one its revolution to first world economies. In other words, Africa is a poor continents that is one its wake. This also presents an opportunity for foreign countries to invest in Africa (O’connor, Lawrence, & Lee, 2016, p.494). In this perspective, South Africa is among the “developed countries” in Africa. This means that a foreign country entering the African market must start with South Africa. Therefore, South Africa is a powerhouse to enter into the African market
South Africa is an African country which is endowed with natural resources. Manufacturing and financial inclusion services contribute more to GDP. Economic risk in South Africa is moderate. The credit score of South Africa has been brought thereby increasing other costs on its high government debt. Economic growth rate is low resulting high unemployment levels and inequalities in income (Moalusi & Coetzee, 2018.p.5). The president was working to adopt a radical economic transformation.
Political risk in South Africa is very high. There are number of cases when the president was accused of corruption. The president was also removed from power following his involvement in corruption. Lack of accountability is prevalent in South Africa, and thus political instability could result anytime (DiMasi et al., 2016.p.25). This is likely to scare away foreign investors in South Africa.
Financial system risk
Financial risk in South Africa is also moderate. Financial Services Board regulates the insurance industry. Also, the country has a good network of capital markets, being the largest stock exchange in the continent (DiMasi et al., 2016.p.25). There is also high performance of banking sector. The financial sector in South Africa seems to be more resilient despite the looming economic growth.
The analysis of risks and opportunities in both South Africa and China sparks three major points which lead to a conclusion that South Africa is a better destination country. Firstly, South Africa is on its developing stage compared to China which is already developed. With this said, South Africa is facing a problem of balancing imports and exports. Its counterpart China, is already a developed economy which does not face such problem (West, Villasenor. &Schneider, 2017.p.345). This means that it will be more profitable to set up operations in South Africa than in China, reason being China is a large economy with many firms, therefore a new firm will almost be not necessary.
Secondly, South Africa is better off in terms of regulation of pharmaceutical industry compared to China. While in South Africa there are regulation schemes such as the prices of drugs, Chinese firms regulate themselves (West, Villasenor &Schneider, and 2017.p.346). And thirdly, it is comparatively cheap to run a business in South Africa than in China reason being China is being preferred by many foreign countries due to its vast economic growth.
Strategically, South Africa is the best destination country for AusMed to expand. Since South Africa is a developing economy, it presents an exciting opportunity for AusMed to set up its operations. China is at peak of its economic growth and hence it has started seeking other markets. Many firms are there in China compared to South Africa, and thus a new firm in China could be in the danger of facing stiff competition from already established firms in China. South Africa, on the other hand, does not have so many firms and thus competition to a newly established firm is not fierce as such (Chandra, Styles &Wilkinson, I.F., and 2015.p.200).
Also, government regulation plays a major role in business operations. This means that there must be regulation in business to protect such things as intellectual property rights. This is not the case in China and thus there is a lot of duplication. South Africa, on the other hand, has its state administration taking part in regulation and thus rights are legally protected. Thinking of it from this perspective, If AusMed Sets up its new plant in China, it is likely to face the problem of duplication, and thus counterfeit and substandard products are likely to circulate in the market thereby tarnishing its public image (Galea, 2016 p.56).
Unlike in China where the pharmaceutical industry is already established, the South African industry is on its growing stage in addition to being the largest in the respective continent. Therefore, it will be easy for AusMed to set up its operations in South Africa than in China whereby the industry is stable. This emanates from the fact that it is easier to enter in the market when it is in its early stages than when in developed stage. This provides a rationale as to why South Africa is a better destination for AusMed than China.
Global market entry strategy
The most suitable global market entry suitable for AusMed to South African market is foreign direct investment. A foreign direct investment is an investment that is made by a firm in a particular company into business interests located in another country. In this way, AusMed is located in Australia, where it will make business investment in South Africa. Normally, a foreign direct investment occurs when a business establishes operations in a foreign country or acquires the assets of a business, such as ownership in that foreign. That said, AusMed could use the horizontal type of foreign direct investment known as Greenfield investment. A Greenfield is a type of Foreign Direct Investment where a firm establishes its operations in a foreign country from scratch (Frost, 2017.p.67). This means that AusMed will have to purchase a land in South Africa and set up its offices, distribution hubs and living quarters. The daily administration of the business will also have to be carried out in South Africa.
Why Foreign direct investment in South Africa?
South Africa is one of the most developed countries in Africa which attracts foreign direct investment. Foreign direct investment has played a significant role in South African economic growth. There are many reasons why Foreign Direct Investment (FDI) is the most suitable market entry strategy for AusMed. First, South Africa as large free- market economy which attracts foreign direct investment in the two sectors- public and private. Secondly, South Africa is strategically positioned in the southern region of Africa and has plenty of natural resources. This means that raw materials for pharmaceuticals will be readily available and thus establishing operations in South Africa cuts the costs of transporting the products (Frost, 2017.p.33). In this perspective, a lot of resources are available in South Africa to be exploited which can only be possible with Foreign Direct Investment.
Thirdly, since African continent is at its developing stage, there is a need to invest in it. South Africa is the most strategic country to start investment in Africa given that is the one of developed countries in the continent. This means that in future, many foreign countries will invest in Africa (West, Villasenor &Schneider, 2017.p.45). Therefore, AusMed should invest as FDI in South Africa to ease its future expansion to other African countries. Having operations from South Africa, in form of already established business with offices in South Africa makes it less costly to expand to other countries in the continent.
Pharmaceutical industry is one of the most valuable and profitable industry globally since it relates directly with people’s lives. AusMed is a perfect example of a pharmaceutical industry firm which is torn in the decision whether to expand to China or South Africa. In this situation, analysis of risks and opportunities is very important. Despite the fact that China is a strategic destination because of its economic strength, it is not the perfect destination for AusMed because of reasons such as limited government regulation in business. The major issue that can make AusMed not to invest in Chinese market, for instance, is the limited protection of intellectual property rights in China. As a result of this, products from China have been regarded as contraband. South Africa thus presents a golden opportunity for AusMed on grounds that South Africa imports pharmaceuticals from other parts of world and increased government regulation.
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