International business is much more complicated than domestic one and opening a US-style retail store in Venezuela involves many risks, like social, cultural, political, and legal, mainly because the economic, legal and political systems of the two countries differ a lot. (Price, Waterhouse, 2008) The following explains the various aspects of risks involved.
Social or cultural features of Venezuela
In a society, the people share the same set of norms and values and are bound with each other through common culture. However, in recent times we have witnessed that there are several societies in Venezuela each with its own culture. Cultural practices determine the skills and education level of the people in the society, which have a major impact on the practices, goals, benefits, and costs of the US retail store. Depending on the social and cultural risks involved in opening, a retail store in Venezuela the company has to develop its functioning and operations.
Most societies are divided into hierarchical categories depending on income levels, occupation, and family. There is a risk that the stratification of the society of Venezuela may affect the operations of the US retail store as it creates differences among the various races and classes creating class consciousness. This may even develop into hostility among the upper and lower working class of the store. The antagonistic relationship may develop among the laborers and managers leading to a lack of cooperation, industrial interruption, and increases costs of production. (Berlin, 2008)
Religion of Venezuela
While setting up a foreign retail store in Venezuela the religious, ethical, and social risks involved have to be considered since they are interconnected. Religion shapes the attitude of the working class towards work and religious ethics has an impact on the business costs of the store in Venezuela. However, religious risks involved are very less compared to other cultural and political risks. In addition, religion affects the economic growth of Venezuela, as it helps to sustain the various features of an individual’s behavior and leads to greater productivity. (Otero, 2008)
The education system in Venezuela
The educational risks involved in opening a retail market in Venezuela also have to be assessed since formal education supplements norms and values of society into an individual increasing their intellectual and conceptual skills. The retail store requires its employees not only to be skilled but must also respect their seniors, obey the authorities, show honesty in their work and be punctual among other things. These norms are generally embedded in an individual at a young age in their schools. Thus, the US retail store requires accessibility to a large number of educated and skilled employees since they determine the expected economic success of Venezuela. Thus, we can see that “Cultural practices can vary dramatically, as can the education and skill level of the population, and countries are at different stages of economic development.” (Hill, 2009)
Market segment related to age in Venezuela
Depending on the sex and age of the consumers, the retail store must segment its market strategies, as there is a risk that different people of different sex and age may require different products. In addition, the communication strategy, distribution channels, design, and price of the product depending on the sex and age of the consumers. Thus, age forms the main part when assessing the social and cultural risks involved in setting up the US-style retail store in Venezuela. To Maximize the sale of the retail store they first have to understand the behaviors of the consumers and then use the proper marketing mix policy. Thus, it is evident that “Markets can be segmented in numerous ways: by geography, demography (sex, age, income, race, education level, etc.), socio-cultural factors (social class, values, religion, lifestyle choices), and psychological factors (personality).” (Hill, 2009)
Race in Venezuela
While promoting the strategies of the retail store the authorities have to keep the race and ethnicity of the people in mind so that they do not develop a clash with the various races affecting their reputation. They have to promote their products according to the needs of all of the races and not leave out any group. Venezuela has several ethnic nationalities and there is a risk that conflicting ideology that may result in conflicts affecting the business of the retail store. This also affects Venezuela as it may increase inflation rates and the standards of living of the people may fall. The retail store should target those audiences of mixed race and origins as in Venezuela these people form the majority of the population. (Otero, 2008)
Population of Venezuela
One of the risks of opening a US-style retail store in Venezuela could be that a part of the population directly involved with the store may get an average income of more than the average local population. This would be widening the gap between the rich and the poor even more. Setting up a foreign store fosters globalization in Venezuela, which may result in corruption, totalitarian government, and unjust economic policies failing to improve the condition of its people economically. Without a proper change in the government, the country’s population growth may worsen. The Venezuelan government will also have numerous debts leaving it with very little to invest in public development projects, like power, education, transportation, and healthcare. However, as the income levels of the people working in the store will increase so will their standard of living helping the nation develop. (Price, Waterhouse, 2008)
Political or legal condition in Venezuela
Political risks involved in doing business in a foreign like Venezuela include social unrest and anti-business trends. There are many risks and possibilities that by opening a US-style retail store in Venezuela the storeowners may be faced with political forces that may cause drastic changes to the business environment of Venezuela thus, adversely affecting the goals and profit margins of the retail store itself. If Venezuela experiences social unrest then there is also a high risk of demonstrations and strikes among the people, which may even lead to violent conflicts and terrorism.
The US retail sore may also face risks that take place when the legal system of Venezuela is unable to provide proper precautions in case there are violations in the contract or for protecting the intellectual property laws. If Venezuela has weak legal policies then it will be very easy for the local firms to break its contracts with the retail store or even steal their intellectual property. The trading partners of the retail store may expropriate the property laws creating real dangers for the store.
Thus it is quite clear that “a well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement.” If a proper legal system is absent then the property rights will not be enforced and then if the government cannot enforce a proper system “the incentive to engage in economic activity can be reduced substantially by private and public entities”. (Hill, 2009)
Political stability in Venezuela
Although the risks and costs involved in setting up a US retail store in an economically underdeveloped and politically unstable nation like Venezuela are more than an economically developed and politically stable nation. The latent long-term profits and benefits that the retail store is likely to earn are dependent on the present state of economic development of Venezuela and more on its political stability. If the country is politically stable then its Benefit–Cost–Risk trade-off will be favorable for the retail store. In addition, there will not be any remarkable upsurges in the private sector debt and inflation rates of the country. Thus, the retail store has the risk of having to function in less favorable conditions. (Berlin, 2008)
Trade barriers in Venezuela
Trade barriers in Venezuela can constrain the abilities of the retail store to disseminate it various productive activities. Tariff barriers increases the overall cost of exporting goods and products into Venezuela by the retail store. This puts the retail store at the risk of facing disadvantageous competition from the local stores of Venezuela. The store then has to find production facilities in the country, which suits it economically to compete with the indigenous stores. Trade barriers and quotas may also limit the store’s capability of serving Venezuela from outside the country, i.e. from the USA. These risks may force the retail store to invest more in production activities thus, raising its overall costs such that the capital can only be earned back after the production activities are distributed in optimal locations. (Price, Waterhouse, 2008)
Intellectual property laws in Venezuela
Intellectual property is that property that is produced by intellectual activities, like chemical formulae for new medicines, computer software, or music record. The US-style retail market will have to establish its ownership of the intellectual property through trademarks, copyrights, and patents. Trademark is the officially registered name by which the storeowners and manufacturers can differentiate and choose their products. Copyright is the exclusive right of the store owners to manage their work according to their demands. Patent grants them exclusive legal rights for owning their retail store in Venezuela.
Protection of intellectual property has become very important in modern times since weak enforcement of these laws encourages piracy. Thus, the retail store should lobby their government for signings international agreements so that their intellectual property rights are guaranteed and protected. However, the intellectual property laws in US are different from Venezuela so the retail storeowners should understand the risks and regulations involved in the laws of the new country. Violation of these property laws can cause the store millions of dollars as there may be a risk of the local entrepreneurs stealing their ideas. “International businesses have some possible responses to violations of their intellectual property. Partly as a result of such actions, international laws are being strengthened.” (Hill, 2009)
Green laws in Venezuela
Opening a retail store in Venezuela will be advantageous for the store since Venezuela does not have strict environmental regulations and fail to implement the ones they do thus, decreasing their cost of manufacturing. This may cause an increase in the pollution levels of Venezuela. This is because with the growth of the economy and income levels in Venezuela, their pollution levels will also rise but high standards of living will also demand better environmental laws. Thus, there is also a possibility that with increased income rates the environmental laws may be made more rigorous. However, if pollution increases water contamination and other pollutants, like lead and carbon dioxide, will increase causing global warming. The only way all these problems can be solved is if Venezuela adopts strict environmental laws and fosters its development by setting up the US style retail department store. Thus, we can see why “Adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace.” (Hill, 2009)
Neighbors of Venezuela
The risk that the Venezuelan government might face by lowering its tariff and trade barriers is that its neighboring nations may not be willing to follow them. For example, if Venezuela lowers their trade barriers it does not know whether its neighboring countries will do the same or not. Thus, they might take advantage of Venezuela’s low trade barriers and enter into their market causing a lack of trust among all. It is justified that “While many governments have recognized the value of these arguments, they have been unwilling to unilaterally lower their trade barriers for fear that other nations might not follow suit.” (Hill, 2009)
Conclusion of risk analysis study in Venezuela
From the above, we can see that many factors and risks need to be addressed before opening a US-style retail store in Venezuela since they profoundly affect the processing, managing, production, promotion, workforce, and consumers of the stores and on the larger front the economy of Venezuela. (Berlin, 2008)
Berlin, Margalit; 2008; Lack of fit between business community and corporate culture: The case of a multinational company in Venezuela; The International Executive; 37, 2, 181-194; Universidad Simón Bolívar
Hill, CWL; 2009; International Business: Competing in the Global Marketplace; Seventh Edition; Back Matter Organization; The McGraw-Hill Companies
Otero, Isabella & Rigoberto Bastidas; 2008; Venezuela; Thunderbird International Business Review; 44, 2, 237-251; Center for Strategic Management, Instituto de Estudios Superiores de Administración (IESA), Caracas, Venezuela
Price, Waterhouse; 2008; Doing Business in Venezuela; Price, Waterhouse & Co, Price Waterhouse (Firm); Price, Waterhouse; University of California