MNG00723 Global Business

Risk factors in New Zealand

New Zealand is a developed country still, risk must be analyzed for making an accurate business decision. An Australian based manufacturing firm that is interested in establishing its subsidiary firm in New Zealand for which political, legal, cultural, and economic risks need to be analyzed.

Major political risk involved in New Zealand includes dependence of the country on demand from China.

The major legal risk involved is, elections are held in every three years in New Zealand. Which means new government, new rules and regulation, and new policies, this could be risky for doing business because changes regarding business policies could be quite often (Lawrence, 2015).

Major cultural risk involves in the country is, multi-culture existing in a country.  NZ European (Pakeha) societies and Maori in New Zealand are very different. Maori are tribes established which were developed from Polynesian heritage. Due to globalization, the culture of the country has broadened, and includes immigrants from South Asia, East Asia, and the Pacific islands (Singham, 2008).

The major economic risk involves, New Zealand is majorly dependent on foreign investment and especially in the manufacturing sector, foreign investment rates are very high due to which competition had increased very much. This could involve high risk for Australian based manufacturing firm, to invest in the country (Balli, 2018).

PESTLE analysis

In order to study macro environmental factors, one of the most popular concepts involves ‘PESTLE analyses.’ Among PESTLE analysis, four aspects will be considered in this report, that is political, legal, cultural and economic factors would be discussed and their pros and cons respectively, for a manufacturing firm to establish in New Zealand (Trivedi, 2016).

Political

The first and most significant risk factor to consider while making investment decision is a political environment in New Zealand. Political stability and significance of the manufacturing sector in New Zealand are to be analyzed initially. According to ‘The World Bank Data,’ for years 1996 to 2016 for New Zealand, the average value for the country in these years is 1.32 points. The minimum point was 1.07 points in 2009 and 1.53 points being maximum in 2015 (Kelsey, 2015). The graphical presentation for the same is provided below.

(Source: theglobaleconomy, 2018)

Another political indicator to consider is ‘Political rights index’ (7 points being weak while 1 point being strong). ‘The Freedom House’ gives the average value for New Zealand was 1 point from 1972 – 2016 (Roth, 2017).

(source: theglobaleconomy, 2018)

Advantages

• Political stability is consistent of the country that indicates more stable business in New Zealand for a manufacturing firm.
• Political rights index of New Zealand is strong, which means the election process is held with a good degree of freedom. In addition, civil war, oppressive regimes, warlord rule, or extreme violence does not exist in the country. For manufacturing firm to establish in New Zealand would be beneficial for the politically safe environment.
• With 99.9% business freedom and 84.6% trade freedom in New Zealand, makes entry to the market comfortable for investing firm.

Disadvantages

• Corruption perception index is not fully transparent. Moreover, the corruption level was high in 2016, which is a challenging aspect for a manufacturing firm to invest in New Zealand.
• Inequality of income was a major political issue, the focus shifted from income to wealth inequality in 2015. Unequal distribution of wealth could affect the investment decision and can be challenging. 
• Lending rate is high in New Zealand, due to which investing company have to pay more interest, and can reduce a company’s profit.
• The expensive labor force is another challenging aspect in New Zealand to consider before investing.

Legal

Legal rules and regulations are other important risk factors to be considered for effective business decision. New Zealand is a constitutional monarchy along with democracy. Principal formal statement of the country’s constitutional structure is ‘Constitutional Act 1986.’ Parliamentary elections are conducted every three years.

The first aspect to study legal environment of New Zealand is ‘Government Effectiveness’. Government effectiveness index (-2.5 to 2.5 points, indicating week to strong respectively), for the year 1996-2016, The World Bank gives 1.78 points average for New Zealand (Magalhães, 2014).

(Source: theglobaleconomy, 2018)

Rule of law performance of New Zealand is another indicator in legal factor. Eight factors are considered under rule of law index for performance measurement: absence of corruption, Fundamental rights, open government, regulatory enforcement, Order and security, criminal justice, civil justice and constraints on government powers. Rule of law index (-2.5 week to 2.5 being strongest), according to the world bank data, the average value was 1.89 points for New Zealand for period 1996-2016 (McLean, 2017).

(Source: theglobaleconomy, 2018)

In order to strengthen Asia-Pacific community, and improve investment and business environment in the region of Asia-Pacific, APEC business advisory council exists.

Two legal agreements are OECD, which includes principles of free market economy and representative democracy that encourage investors without any government intervention. Another one is FPDA, an agreement between New Zealand, Malaysia, Australia, United Kingdom, and Singapore consulting each other in external aggression event (Frankel, 2015).

Advantages

• Intellectual property treaties, including the parent corporation treaty, TRIPS agreement, Paris convention, and the Berne convention are a signatory in New Zealand. This would make manufacturers and traders register trademarks and patent inventions in New Zealand easily.
• Human rights act 1993 and the New Zealand Bill of rights act 1990 are two main law to protect human rights in New Zealand. This would promote a lawful environment for the company and its employees to work in New Zealand.

Disadvantages

• The risk is high in New Zealand because of government changes every three years with new legal rules and regulations. This would also effect in working of business in the country.
• The non-resident company’s subsidiary in New Zealand is taxed at 28% of its income worldwide.

Cultural

Doole & Lowe cultural theory, in relevance to international marketing, according to this theory, eight cultural characteristics are studied to examine the culture of the foreign country. This cultural framework involves Religion, education, technology and material culture, aesthetics, values and attitudes, social organization, law and politics, and language (Doole & Lowe, 2008).

For a manufacturing firm to expand business in New Zealand, what products and packaging to be offered to New Zealand’s residents majorly depends on this factor. The adaption of new technology and innovative products by people depends on their education level. In New Zealand, 99% of the population is literate. 6.2% of New Zealand GDP is spent on education (Zealand, 2013).

New Zealand has the majority of the Christian religion, which indicates that the import level and consumption of electronic gadgets, and foods and beverages generally increased near Christmas (Ward, 2008).   

Advantages

• Medicine and healthcare facilities are good in New Zealand, a wide network of clinics and hospitals are established. Free treatment funded from taxes is also available. Making the country comfortable to live and invest.
• For a manufacturing firm of Australia, language is not the main concern because English being one of the most used languages in the country. Moreover, the country is influenced by a western culture that is good for the Australian firm to deal with while offering any products especially fashion related.

Disadvantages

• Expensive land, this could be a major challenge for the company to invest in this country. Even the cost of basic needs and dental treatment are very high.
• There is no city life, passionless culture and uninspiring.
• Racist statements can be stated openly, this could make foreign people lives difficult in the country.

Economic

Heckscher- Ohlin theory- this theory is propounded by Eli Heckscher, and Bertil Ohlin. According to this model, it is predicted or assumed that the goods, which use locally abundant resources intensively, will be exported by a country, whereas goods use intensive use of locally scarce factors will be imported (Baldwin, 2008).

The economy in which a company is planning to invest must have a detailed study of that. New Zealand economy depends on risk factors like GDP, Foreign direct investment (FDI).

GDP, the gross domestic product is the addition of GVA (gross value added) of all producers of the economy plus any taxes from products and deducting subsidies. GDP of New Zealand until 2018, on an average, is 37.26billion currency units. Among which, 15.8 is lowest in Q2 1987 and highest of 72.57 billion in Q4 2017.

(Source: theglobaleconomy, 2018)

FDI, it is a summation of equity capital, other capital, and reinvestment of earnings. From Q2 2000 to Q1 2018 for New Zealand average value of Foreign Direct Investment, million currency units in New Zealand as per New Zealand Statistics is 509.22 million currency units. This index describes cross-border direct investment related to a resident in an economy having control over the enterprise in another economy (Bartleet, 2010).

 

(Source: theglobaleconomy, 2018)

Advantages

• Investment forecast on an average of New Zealand according to International monetary fund for period 2000 to 2022 is 23.28 percent. Among which from 2018 to 2022, the values are constantly increasing.
• According to heritage foundation data, Investment freedom index is 80 points in average from 2014 to 2018 for New Zealand. This indicates a restriction to investment activity is around 20% from the last four years.
• The well-developed infrastructure of New Zealand can be beneficial for a firm to invest in the country.
• Since Australia wants New Zealand to remove export incentives. Australian manufacturing firm to invest in New Zealand would improve economic relation with New Zealand.

Disadvantages

• For a long period of time (1996-2016), the average rate of economic growth is approx. 2 to 3 percent per annum. This is not s substantial rate for a developed country. If it reaches five, it will be considered significant (Pickford, 2018).

References

Baldwin, R., 2008. the Development and testing of Heckscher-Ohlin trade models: a Review. s.l.:MIT press.

Balli, F., 2018. New Zealand business tourism: Exploring the impact of economic policy uncertainties. Tourism Economics.

Bartleet, M., 2010. Energy consumption and economic growth in New Zealand: Results of trivariate and multivariate models.. Energy Policy, 38(7), pp. 3508-3517.

Doole, L. & Lowe, R., 2008. international marketing strategy: analysis, development and implementation. s.l.:Cengage Learning EMEA.

Frankel, S., 2015. Limits of Free Trade Agreements: The New Zealand/Australia Experience. In Intellectual Property and Free Trade Agreements in the Asia-Pacific Region. In: MPI Studies on Intellectual Property and Competition Law. s.l.:Springer, Berlin, Heidelberg, pp. 315-333.

Kelsey, J., 2015. Reclaiming the future: New Zealand and the global economy. s.l.:Bridget Williams Books.

Lawrence, J., 2015. Dealing with changing risks: a New Zealand perspective on climate change adaptation. Regional Environmental Change, 15(4), pp. 581-594.

Magalhães, P., 2014. Government effectiveness and support for democracy. European Journal of Political Research, 53(1), pp. 77-97.

McLean, J., 2017. Legislative Invalidation, Human Rights Protection and s 4 of the New Zealand Bill of Rights Act. In Bills of Rights, pp. 237-264.

Pickford, M., 2018. State highway investment in New Zealand: the decline and fall of economic efficiency. Policy Quarterly, 9(3).

Roth, P., 2017. Globalization and sovereignty: the case of human rights in New Zealand. In Sovereignty under Siege?. Routledge, pp. 65-81.

Singham, M., 2008. Multiculturalism in New Zealand–the need for a new paradigm. Aotearoa Ethnic Network Journal, 1(1), pp. 33-37.

Trivedi, M., 2016. PESTLE technique–a tool to identify external risks in construction projects. International Research Journal of Engineering and Technology (IRJET), 3(1), pp. 384-388.

Ward, C., 2008. Attitudes toward Immigrants, Immigration, and Multiculturalism in New Zealand: A Social Psychological Analysis 1. International Migration Review, 42(1), pp. 227-248.

Zealand, S., 2013. Census QuickStats about culture and identity., Wellington: Statistics New Zealand .