Unit 5: International Business (Part A & B)
Sample Coursework for BTEC Level 3 Business Studies
Why Trade Internationally?
A Report on the International Presence of Google and Divine Chocolate
February 2021
Section 1: Introduction to Divine Chocolate and Google
Divine Chocolate is a Ghana based chocolate company. Divine chocolate is defined as a private limited company. A private limited company is a company that is owned by its shareholders. However, the shares cannot be sold publicly. 20% of Divine Chocolate is owned by Kuapa Kokoo which is a worker co-operative. A worker co-operative is an organisation that is owned by the employees who contribute to decisions through voting. In this case, the workers/owners are farmers who grow the cocoa to make the chocolate.
Google company that provides a range of internet products and services. Their first product was a search engine but they have expanded their range to include video streaming, online maps, Google Classroom, smartphones and watches. Google is a public limited company which means it is owned by its shareholders who receive a percentage of the profits and can vote in major decisions at the annual general meeting (AGM).
Divine Chocolate and Google are contrasting organisations because one sells a tangible product (chocolate) and one focuses primarily on intangible services (internet services). They originate from very different economies, USA and Ghana and have different ownership structures of public limited company and co-operative. These differences should demonstrate an interesting comparison when looking at how they operated in international markets.
Operations
Divine Chocolate Ltd is classed as an exporting business. An exporting business is one that creates a product in one country and sells it in another. In the case of Divine Chocolate Ltd, the primary sector activity (cocoa farming) and the secondary sector activity (manufacturing chocolate) take place in Ghana. Tertiary sector activity (sales) is in the UK and USA. Divine Chocolate Ltd do not have their own stores and instead sell through retailers.
Google is classed as a multinational enterprise as they have operations in many different countries. A multinational enterprise is defined as an organisation that has assets and/or operations in at least one other country than its home country. Google’s home country is the USA but they have physical offices around the world. They can also make sales to any country that can access their products online.
Markets can be generally classed as developed economies, emerging markets and less developed economies. Developed economies are those with a high level of economic activity which will be reflected in a high GDP. People in these economies may enjoy a better standard of living than other economies. Emerging markets refer to economies that are experiencing rapid economic growth but may lack some of the features of developed economies such as stable currencies and infrastructure. Less developed economies are low income countries that face a lot of barriers to developing through trade and are very vulnerable to unexpected events such as recession and extreme weather.
Divine Chocolate’s host nation, Ghana, has been classed as a less developed economy or an emerging economy with a GDP per capita of 2,202 USD in 2019 which has increased from 258 USD in 2000. Google’s host nation, USA, has been classed as a developed economy with a GDP per capita of 65,297 USD in 2019 which has increased at a relatively stable rate since 2000 when it was 36,335 USD.
Note: The Location of Google Offices. Sourced from; https://google137.weebly.com/location.html
Reasons for Operating Internationally
Reasons for Divine Chocolate Operating Internationally
Divine Chocolate has been selling their chocolate in the UK since 1997 and USA since 2008. One factor affecting this decision was the type of product. Chocolate is a popular product in the UK and USA. Divine estimates that people eat on average 11kg of chocolate per person per year in the UK and 4.4kg per person in the USA. Another factor affecting the choice of market for Divine Chocolate is the size of the markets. The population of the UK is over 68 million and the population of the USA is over 332 million.
The reasons Divine Chocolate conducts business internationally include growth, access to new marketing, increasing market share, market leadership and economies of scale. There is less demand for premium chocolate in Ghana than in the UK and the USA and they decided early on to target the mass market in these economies which led to growth. As the farmers directly benefit from the success of the chocolate sales, there is a high incentive to increase market share and achieve market leadership. As sales increase, costs are reduced through economies of scale. An example of this is marketing economies as advertising costs are spread across more products. This can lead to more profits being returned to farmers. According to their annual reports, sales were 15 million USD in 2018 increased from 8 million USD in 2014.
Reasons for Google Operating Internationally
Google is available in 219 out of 251 countries and territories in the world. One factor affecting this expansion is the type of product. Many of Google’s products are available online so can be distributed around the world without the need for physical delivery of a good. Another factor is cost. As a technology company, there are very high research and development costs that need to be recouped. By large expansion, Google can benefit from economies of scale and pay back development costs at a faster rate.
The reasons Google conducts business internationally include additional revenue streams, brand exploitation and technological dominance. Google collect their revenue mainly through advertising. The more people that use Google’s products, the more desirable their platforms are to advertisers. Brand exploitation is a benefit enjoyed by well-known brands that are recognized as organisations that produce high quality products. With this recognition and trust from customers, brands like Google can confidently invest in and launch new products to new markets. Technological dominance is a benefit enjoyed by firms who have access to sophisticated technology which makes it easier to set up in overseas markets. Google had already developed popular products and invested in technology such as servers in the USA which they could easily transfer to other markets. The required technology investment would be a large barrier to entry for new entrants to the market.
Finance Available for Businesses Operating Internationally
Overseas expansion can be very costly for a business. For example, an increase in sales leads to an increase in production which may need an expansion of facilities, equipment and stock. There may be a need for an overseas office, staff and extra payments for customs. A lot of these costs may need to be covered before the revenue from this expansion is received. Therefore it is important to explore the finance available to businesses who expand overseas.
Prepayment by the importer means that the customer of the product makes the payment before the product is shipped or produced depending on the agreement. This means that the supplier does not have to pay for the production and shipment costs in advance. This can have a positive impact on cash flow but may affect the relationship with the customer if they prefer a credit period.
Letters of credit are letters that are issued from the customer’s bank to confirm that they are able to pay an invoice and can do so on time. If the customer then cannot pay the invoice, the bank is responsible for payment. This removes the risk of an invoice not being paid which could be a concern as a business is building a relationship with a new customer.
Export credits are loans provided to overseas buyers of exporters to ensure that they can pay their invoices. This allows a business to export goods and services to overseas buyers without having negative cashflow or risking non payment of invoices. Governments offer this service to support the economic development of their country by supporting their exporting businesses.
Bank loans are amounts of money borrowed from a bank by a business. They repay the loan in smaller installments with additional interest payments. This can allow them to cover the starting costs of international expansion. This allows businesses that are new to operating internationally to start this sooner.
Support Available for Businesses Operating Internationally
When Divine Chocolate began trading in the UK, they received support from The Body Shop, Comic Relief, Christian Aid and the Department for International Development in the UK. The Department for International Development is now called Foreign, Commonwealth & Development Office helps overseas businesses set up in the UK including advice on registering and licenses. These organisations supported Divine Chocolate with the finance they needed to invest in exporting, for example Body Shop bought shares which they later donated back to the farmers. These organisations also supported Divine Chocolate with understanding the laws and regulations of exporting to the UK which would lead to them reducing the risk of facing a fine or lawsuit.
They are also supported by the Fairtrade organisation. Fairtrade works with producers, consumers and campaigners to promote fair prices and equality in the supply chain. They can help connect producers with retailers who are willing to treat them fairly. In the case of Divine Chocolate, they connected them with the co-operative supermarket in the UK. This gave them access to a large distribution channel and market which led to a rapid increase in sales and revenue.
When Google expanded internationally, they may have consulted Chambers of Commerce in the relevant economies. Chambers of Commerce are organisations that connect different businesses who may benefit from working together. Google may have needed to work with local advertisers or recruiters in new markets. They would have likely needed to also work with regional advisory organisations, for example The Department for International Trade in the UK who would have been able to advise them on intellectual property laws specific to the UK. Google operates in many different countries, each with their own specific laws and regulations so consulting advisory organisations could help them avoid inadvertently breaking local laws. This would be especially important for Google as such a global organisation as it would otherwise be challenging to fully understand the law of so many different countries.
Section 2: Globalisation
Trading Blocs
Trading blocs are groups of countries who agree to remove or reduce barriers to trade between the member countries. For example, in the EU, businesses do not have to pay import tariffs when they sell products to customers in another country within the EU.
Ghana is part of the World Trade Organisation (WTO) and the ACP-EU Partnership Agreement. The ACP-EU Partnership Agreement is an agreement between the EU and former colonized countries in African, Caribbean and Pacific countries and reduces barriers to trade and provides grants to promote education and economic growth in these countries.
The USA is part of the North American Free Trade Agreement (NAFTA). NAFTA is an agreement between The USA, Mexico and Canada to remove tariffs on the trade of certain goods such as eggs, corn and meat. The USA is also part of the World Trade Organisation.
The World Trade Organisation works with member countries to agree rules on trade, settle trade disputes and to support the needs of developing countries when embarking on international trade.
Trade blocs make it easier for businesses to trade internationally as regulation is removed and costs are reduced through removal of tariffs. There is a reduction in the level of uncertainty in trading in international markets if exporting or importing within a trade bloc which reduces risk.
Globalisation
Globalisation can be defined as the integration of the world’s economies. This means that different economies are becoming more interconnected for various reasons including through increased trade between nations. Features of globalisation include trading blocs, international mobility of labour and capital, international currencies, multinational corporations, international business communications and international payment systems.
Trade blocs are a feature of globalisation as the barriers to trade between different countries makes international trade more challenging. Trade blocs have been agreed between governments to allow for ease of trade to support the exports of the businesses that operate in their economy. As Ghana is a member of the ACP-EU Partnership Agreement, some of the barriers to trade such as tariffs and quotas have been reduced which makes it easier and cheaper for them to export their chocolate to the UK, which is a major importer of Divine Chocolate. As a USA based company, Google Headquarters may be affected by the USA membership of NAFTA. This agreement allows for skilled workers from the member nations to access working visas more quickly. This could lead to a more skilled pool of applicants for jobs at Google, increasing the quality of their workforce.
International mobility of labour and capital has been made easier with globalisation as governments lift restrictions on who is able to work within their economy. This allows businesses to benefit from skills and knowledge on their workforce that they would not have previously had access to. Globalisation has also integrated global financial markets which makes it easier to move capital (money) between different countries. This means that it is easier to spend and invest money overseas which makes international business more straightforward. Divine Chocolate is a public limited company with shareholders in the UK and in Ghana. This investment in the UK needs to be distributed to the farmers in Ghana that own 20% of the company.
Another feature of globalisation is international currencies. Each country or group of countries has their own currency. When trading internationally, a business may need to find methods to make and receive payments in different currencies. Divine Chocolate operates using the Ghanaian Cedi, the British Pound and the US Dollar. Google operates using a wide range of currencies around the world. They will be accepting payments from advertisers in different countries and paying staff and suppliers all over the world.
Multinational corporations are organisations that have operations in at least one country other than their home nation. They may have sales and manufacturing in different parts of the world. Divine Chocolate has farming and manufacturing in Ghana and sales in the UK and USA. Google has operations, sales and administration in countries across the globe.
International business communications are improving in line with globalisation as more firms need to communicate with staff in their overseas locations and with their international customers and suppliers. This may include video conferencing, shared drives and online databases. Divine Chocolate has a page on their website aimed at stockists of chocolate. They can view the catalogue and make orders directly from the website. Google has been developing products for their customers to make distance communication easier such as gmail, Google docs and Google Meet. These online communication tools are also methods used at Google for staff to communicate with overseas colleagues.
International payment systems are methods to allow customers to pay an overseas supplier. This may include international bank transfers or services such as worldpay or Paypal. At Divine Chocolate, customers are likely issued an invoice and make a bank transfer. At Google, they have created a payment product called Google Pay for individual customers. For business transactions, they offer online bank transfers or credit/debit card payments.
Barriers to International Trade
Barriers to international trade refer to anything that makes it difficult for a business to sell to customers in overseas markets.
Protectionism refers to government trade restrictions on overseas sellers importing to their country. This is to protect their local businesses from the threat of overseas competition as they may be too new or too small to be able to compete with larger international firms. Trade restrictions include tariffs and quotas.
As Ghana and the UK are part of a trade bloc, Divine Chocolate face reduced tariffs and quotas when exporting their chocolate to the UK. However as they also have a large market in the USA which they are not in a trade bloc with, they will need to pay import tariffs. This increases costs which leads to the managers having to decide whether to increase their prices to cover it, or to reduce the profits distributed to shareholders. Google use a strategy to reduce the impact of protectionist measures by locating headquarters in different countries they operate. This means that because their product is not technically crossing a border, they will not have to pay tariffs on their sales.
Exchange rate volatility refers to the changes in the value of a currency in comparison to another. This makes international trade risky and decisions on pricing and investment more challenging when converting one currency into another.
Divine Chocolate deals with 3 currencies, USD, GBP and GHS. The USD and GBP are relatively stable. The GHS has been stable in the past year but has been more volatile prior to 2020. As a result of Brexit, the GBP has also been more unstable than in the past. For the farmers, this means that the money in USD and GBP that is received from sales, is going to be worth different amounts of GHS when they receive it depending on the value of the currencies at the time it is exchanged. Google operates in countries all around the world and accepts and makes payments in many different currencies. As a result of this, the real value of their revenue and profit is going to fluctuate constantly. Google states on their finance recruitment page that forecasting is very complex and they update financial statements on a daily basis. They seek staff who can solve the problems.
Legal and regulatory systems vary in different countries. This may mean that the way a product is manufactured is fine in one country but illegal in another. For international organisations, this may mean that they need to hire local agents to support them in adhering to these differences or they may decide not to enter a market due to its challenges.
As Divine sells its chocolate in the UK and the USA, they will need to adhere to different food packaging regulations. In the USA, the Food and Drug Administration (FDA) requires all manufacturers of food to supply a lengthy list of ingredients, nutritional information etc on their labelling. As part of the EU, the UK requires food packaging to include detailed information which is not as detailed as in the USA. This means that Divine Chocolate needs to decide whether to create different packaging for the two markets which will reduce an opportunity to benefit from economies of scale in packaging production. As the UK is leaving the EU, the rules on packaging may change for Divine Chocolate in the UK. Divine Chocolate may need to consult agents or solicitors to fully understand the new requirements and may have to create new packaging for their chocolates which can increase their costs. A news article has been introduced in Australia which requires Google to pay for all news that appears in their searches. This new regulation is going to increase the costs of Google which will either reduce their profits or push them to reduce the quality of their service. Google is reluctant to make these changes and are currently threatening to withdraw from the Australian market.
Financial requirements in setting up operations, sales or exporting to another country will incur costs that may have to be paid before any revenue is earned. This may include equipment, staffing, distribution, or advertising costs.
When launching their chocolate in the UK, Divine Chocolate needed to pay for large quantities of chocolate to be produced and shipped to the UK. They would have had marketing costs to learn about the UK market and to promote them. They also set up offices in the UK which needed staff and rent payments and their website would have incurred a large web design fee. All of these costs would have needed to have been paid for before the sales were made. This can cause a liquidity issue if not managed well. When entering international markets, Google set up headquarters with highly skilled staff, researched the markets and set up large technological infrastructures such as servers. This would have been costly but as a large, established and profitable organisation, they have access to large amounts of retained profits and benefit from financial economies of scale on any borrowing.
Economic sanctions are penalties imposed by the government on businesses who want to export to that country. They may include tariffs, quotas, embargoes and rules on packaging and licensing.
As a food production company, Divine Chocolate needs to obtain licenses to sell food in the UK and the USA. This means that they have to prove they adhere to food hygiene standards. This may be a costly and time consuming process. They also need to be aware of the license renewal dates and ensure that they apply for these on time. The censorship laws on internet searches in China could be seen as an embargo. An embargo is a ban on the sale or distribution of products or services in a country imposed by a government. In this case, Google’s product of information is banned. This has led to Google limiting the products they offer in China.
Section 3: Globalisation and Google in the Past 5 1- 10 Years
One benefit of globalisation is growth. Google operates in 219 countries and territories out of the 251 recognised by the UN. This means that their products are available to a large proportion of the world. As one of Google’s main sources of revenue is from businesses advertising on their site, the increase in people using their site is going to make them more appealing to advertisers which can increase sales of advertising space and therefore revenues and profits.
Another benefit of globalisation is spreading risk. Every country that a business operates in has different levels of competition and different customer tastes and interests. If a business begins to see a fall in sales in one country but they also have sales in another country, the impact of the fall in sales in one country is spread across both markets. Google China was launched in 2006 but had to be withdrawn in 2010 as a result of disputes over censorship. If China has been Google’s only market, the whole company may have failed. However due to their presence in a range of markets, their risk was spread and the company survived.
Another benefit of globalisation is the increased access to skilled labour. Google has headquarters all around the world. This means that in every country they operate in, they can have access to the labour force and their skills. Also as a result of globalisation labour has become more mobile. This means that people are more able and more willing to relocate geographically for work. This means that Google can have more applicants for each position which increases the likelihood of applicants with the right skill set for the job and in turn can improve the quality and productivity at Google.
One drawback of globalisation is the high investment costs. Since 2016, Google has spent over $30bn USD on developing their global communication systems including data centres and sub sea cables. This is due to the increasing pressure from multinational corporations to be able to communicate large amounts of information quickly around the world due to the interconnectivity of different organisations in different countries. This is a drawback because if Google do not get a return on this investment, they are at risk of displeasing their shareholders who may choose to invest elsewhere where they feel they get better returns.
Another drawback of globalisation is a lack of understanding of foreign markets. Google dominates around 90% of the global search engine market but in China Baidu is the most popular search engine, dominating over 80% of the Chinese market. Baidu has a much better understanding of the Chinese market, specifically in terms of ranking Chinese sites more highly in their searches and promoting more sites that are written in Chinese. This means that they better meet the needs of their customers than Google have and therefore present a barrier to entry.
Another drawback of globalisation is the differences in laws and regulations. In Australia, it was recently announced that there is to be a law enforced which means Google needs to pay for every news result that they present in their searches. This conflicts with Google's business model and can lead to censorship which goes against their core values. As a result, Google is considering withdrawing from the Australian market. This could be a major risk for Google however, as a competitor may enter the market, adhere to the laws and become market leader in Australia which has a population of over 25 million.
Overall, the impact of globalisation has had a very positive effect on Google. They have expanded to many countries around the world and developed their products and infrastructure over the past 10 years to meet the needs of their customers. Some barriers to trade have meant that they cannot dominate all markets however. This includes China and potentially Australia. Google may need to adapt their business model or differentiate their products for these markets.
Research Log
Divine Chocolate Annual Report - https://www.divinechocolate.com/assets/uploads/AnnualReport18-1.pdf?mtime=20200607220305&focal=none
Divine change in ownership - https://www.divinechocolate.com/news/divine-announces-new-majority-shareholder?redirected=%E2%9C%93
Location of Google Offices - https://careers.google.com/locations/
Country classification - https://www.un.org/en/development/desa/policy/wesp/wesp_current/2014wesp_country_classification.pdf
Defining less developed economies - https://www.un.org/development/desa/dpad/least-developed-country-category.html#:~:text=About%20the%20LDC%20category,low%20levels%20of%20human%20assets.
Ghana GDP per capita - https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=GH
USA GDP per capita - https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US
Chocolate consumption in the UK - https://www.divinechocolate.com/resources/chocolate-facts-and-figures#:~:text=In%20Britain%20we%20eat%20an,about%203%20bars%20a%20week.
Chocolate consumption USA - https://www.statista.com/topics/1638/chocolate-industry/
Population of UK - https://www.worldometers.info/world-population/uk-population/
Population of USA - https://www.worldometers.info/world-population/us-population/
Details of NAFTA - https://courses.lumenlearning.com/suny-internationalbusiness/chapter/reading-nafta/#:~:text=Trade%20Agreement%20(NAFTA)-,The%20North%20American%20Free%20Trade%20Agreement%20(NAFTA)%20is%20an%20agreement,trade%20bloc%20in%20North%20America.&text=In%20terms%20of%20combined%20GDP,the%20world%20as%20of%202010.
About the WTO - https://www.wto.org/english/thewto_e/thewto_e.htm
Barriers to trade - https://opentextbc.ca/businessopenstax/chapter/barriers-to-trade/
NAFTA and labour mobility - https://www.immigration.ca/how-the-new-u-s-mexico-canada-agreement-affects-labour-mobility
Ghana currency stability - https://www.xe.com/currencycharts/?from=USD&to=GHS&view=2Y
Google Finance jobs - https://careers.google.com/teams/finance/
Google in Australia - https://www.bbc.com/news/technology-55766429
Google in China - https://www.technologyreview.com/2018/12/19/138307/how-google-took-on-china-and-lost/
Google international investment - https://www.blog.google/products/google-cloud/expanding-our-global-infrastructure-new-regions-and-subsea-cables/
Baidu and Google - https://www.websitemagazine.com/blog/baidu-vs-google-a-comparison
