Question

Milky Milk is a New Zealand MNC which produces and exports milk to the China.

Due to increase in demand from developing countries, Milky milk is exploring the possibility to open a subsidiary to distribute its product in either Japan, China or India. Using the theories of

international business:

a) Explain the factors that this company should consider in choosing the country to establish the subsidiary.

b) How the agency problem may influence the decision to open a subsidiary in Japan, China or India?

this is all the information we have been given.

Answer 1

a)

The first step to approach international expansion should begin with PESTEL analysis. This also provides the various factors that should be used to consider the different alternatives. These factors are

• Political: what is the political situation in these countries?
• Economic: what will be the economic benefit of one country over the other?
• Social: what is the cultural differences and social set up in these countries? Can they impact our business?
• Technological: what is the level of technology that is required for the business and does the country have the required resources?
• Environmental: is the country environment conscious? Will our business have any environmental impact?
• Legal: is there any legal or regulation related restrictions? How will it impact the business?

b)

Agency problem refers to the conflict of interest between a principal and the agency. In this case, the subsidiary will function as an agency on behalf of Milky Milk. The key aspect of agency problem is the ethical standpoint of the agency. If the agency/subsidiary is honest and follows the instruction of headquarter then there will likely be no conflict. However, if the subsidiary begins to work for personal interest rather than the benefit of Milky Milk then there will likely be agency conflict. This is where Milky Milk needs to be careful.

They need to consider the level of corruption, uncertainty avoidance (in Hofstede’s dimensions), economic condition of the people, etc. in order to reduce the risk of agency conflict.