Generation of Preferential Trade and Investment

Discuss about the Generation of Preferential Trade and Investment.

Introduction

The original Trans pacific Partnership agreement was between Brunei, Chile, New Zealand and Singapore which was signed in the year 2005. The aim of the trade agreement was to reduce all the tariff and nontariff components of international business in order to establish smoother and cooperative growing economies. However, as an expansionary process, this trade agreement included some other countries as well keeping the overall objectives of the agreement the same. The new Trans Pacific Partnership is a trade agreement between a number of countries which was signed in 4^th February 2016. Initially, this trade agreement included countries such as Australia, Canada, Chile, Japan, Brunei, Singapore, New Zealand, Vietnam, Peru, Mexico and the United States of America. However, trade agreement did not act in force due to the withdrawal of signature from the USA. Nevertheless, the remaining countries which were a part of TPP developed a new trade agreement among themselves known as Comprehensive and Progressive Agreement for Trans Pacific Partnership in May 2017. The propositions of this latest trade agreement are almost similar to the original trade agreement that was formed in the year 2005. The commentators have stated that the main objective was to reduce the dependencies of the Pacific countries on the economy of China.

 The aim of this study is to discuss the opportunities and the challenges provided by the TPP compared to the economy of any other country. The paper considers the economy of USA as an independent economy which was also a part of TPP. The study chooses the business of KFC which is present both in the USA and Australia, which is a part of TPP currently. In this paper, the challenges and the opportunities faced by KFC in Australia is discussed compared to that of the economy of the USA.

The overview of the chosen organisation

KFC is a fast food chain company spread across 123 countries of the world having more than 20000 outlets. In terms of business generated, this company is the second largest in the world just after McDonald's. This fast food chain is owned by the Yum Brands which also owns Pizza Hut as well. KFC is one of the first companies which had adopted franchise model in order to expand in the international market. According to the data provided on the website of the company, its current revenue 23 billion USD. The company started from a roadside shop in Kentucky and then expanded to become what the company is now. One of the biggest achievements of the company is that it demolished the dominance of the hamburger as the prime type of junk food. Followed by the operation of KFC the chicken fries, the main product of the company become popular among the customers of the market. Another feature of the company is that the products are different based on the different tastes and the preferences of the local customers. The changes in the food preferences and healthy choices have led to a little reduction in the business of the company; however, the reduction has not created much trouble for the management as of now.

The opportunities provided by TPP

The latest TPP contains a lot of propositions among which many of them provide positive benefits to the local and international businesses. One of the features of the TPP was to ensure proper human rights. Elliott et al. (2016) stated that, the draft of the trade agreement emphasised a lot on the human rights aspect of global business and trade. Therefore, compared to that in the USA, the units in Australia managed to have a better image among the customers of the market. One of the most important advantages of the TPP is that it strengthens the intellectual property rights of the businesses and the individuals. As per the requirement of the trade agreement, the signatories require enforcing strict criminal rules and regulations against the violation intellectual property rights. Kapczynski (2015) commented that, this is beneficial from the perspective local and the foreign businesses which heavily depends on the innovation and new product development. KFC is known as a top innovator in the fast food chain industry. Since the inception of the company, it has introduced a number of new products in the market. While in the case of the USA, the intellectual property is much looser than in the case of the TPP.

Therefore, the KFC has faced challenges in the USA while introducing new products in the market. Fooks and Gilmore (2014) stated that the loose intellectual property rights allow the smaller companies of the market to imitate the products of the big companies without any copyright. This not only reduces the profitability of the innovators of the market but it brings harm to the reputation of the producers as well. In addition to that the enforcement of intellectual property rights also encourages the sellers to increase the number of products in the market. One of the objectives of the TPP to enforce strict intellectual property right is to increase the number of products in the shared market in order to increase the economic transaction. Muntaner and Mahabir (2017) highlighted that, increase in the number of products is directly related to the economic transaction. This is highly discouraged by loosely defined intellectual property rights where the sellers have no incentives to introduce new products in the market as other players will be imitating nullifying the contribution of the company.  Therefore KFC has hugely benefited due to the presence of the strict intellectual property rights in case of Australia which comes under the TPP agreement region. It is also important to note that the attraction of fund in order to expand the business is also influenced by the intellectual property rights of any region. The investors are more likely to invest in a business where their intellectual property is secured. Solís and Katada (2015) pointed out that, intellectual property increases the value of the business and hence investors find it preferable to invest in the business. This is also supported by the fact that the KFC Company in the US attracts less amount of fund compared to that in Australia.

Furthermore, another opportunity provided by the countries in TPP is the Investor- State Arbitration (ISA). This is a mechanism for the dispute settlement between the state and the foreign investors. According to the proposition of the trade agreement, any foreign investor investing in the member nation can bring charges against the government in case of breach from the side of the government. This also has its impacts on the businesses operating in the member nations as well (Lawrence and Moran, 2016). KFC as an international company also benefits from the arbitration between the investor and the government as well. The main objective of the arbitration is to protect the interest of the foreign investors of the market. Hence, for any business, it is easier to attract more funds as the investors receive extra protection. This, in the case of the USA is absent. Thow et al. (2015) highlighted that, investors security is much less in case of USA compared to that member country in TPP. Consequently, KFC has also gained benefits from the proposition of the TPP agreement as well. As discussed above the availability of funds for the KFC Australia units were higher compared to that of the USA units. One of the major problems that foreign investors face in the international market is the lack of security and the discrimination from the side of the host government. This not only discourages the foreign investors but also curbs the potential expansion of the global and the local companies. Apart from that, the proposition also refrains from taking over the properties of the foreign investors without proper justification.

In addition to that, TPP also ensures that the member countries enact the labour interest protection laws so that they are not exploited by the company. Collective bargaining and the formation of unions were compelled by the proposition of TPP. Therefore, the organisations working in the member nation of TPP had motivated employees. Zhang et al. (2017) stated that, the motivation of the employees is directly related to the productivity of the organisations. In the case of KFC as well, the labour productivity as compared to that of USA was more. This has also reflected in the financial performance of the company in the two different countries. The units in Australia in general also remain successful to provide better customer services to the customers of the market compared to the units in the USA. Gleeson et al. (2015) highlighted that, the propositions of TPP is such that the organisations automatically fall in line with the legal requirements of organisational operation in terms of labour protection. From the perspective of the labours as well, KFC Australia is a better employer than KFC USA. The difference between the countries is not the effort of the business leaders in the two countries rather the propositions of the trade agreement they are in, which are very much compelling. Thus, the opportunities are immense for a business operating under the TPP agreement as it provides all the prerequisites of a smooth and transparent business. There is no additional effort that needs to be put in by the management of the organisations under TPP to be legally and ethically correct in the market (Fergusson et al. 2015). This not only clears the operation of the company from humanitarian grounds and corporate responsibilities of the organisation, but it also improves the financial performance of the origination given the increased labour production under the TPP agreement.

Challenges of operating under TPP

Along with the discussed opportunities that the proposition of the agreement provides to the organisations there are a number of challenges as well which is faced by the organisations operating in TPP member countries. First and the foremost risk that is associated with the TPP and other types of the free trade agreement is the currency manipulation from the member countries. The currency manipulation is legitimate to some extent as per the proposition of the free trade agreement. However, an increased degree of currency manipulation can lead to unstable exchange rates which can harm the overall objective of the trade agreement. This change in the exchange rate or the currency rates creates a problem for the organisation in terms of navigation. According to Elliott et al. (2016), in these types of cases, it becomes necessary for the government to monitor the changes in the currency rates. This calls for extra cost from the side of the organisation leading to increases in the price of the products. This also justifies the differences in the price of the products in Australia and the USA. Furthermore, the TPP also contains few of the economic volatility which in turn makes it tougher for the management of the organisations to track the currency and the exchange rates. This is also the reason the leadership at Australia prefers to invest more money in the predictive analysis compared to that of the USA. KFC faces direct problems due to the volatility in the Australian market. After paying the money to the resource owners as per the current currency rates, any kinds of fall in the value of currency reduces the margin of the company. In many instances, the organisation also leads to loss if proper forecasting and analysis are not in place.

Another problem faced by the organisation is the changing requirements of business in line with the propositions of the free trade agreement. Devadason (2014) highlighted that the structure and the legal requirements of business under TPP are quite different from that of other international business platforms. Therefore, from the perspective of business, the changing external environment provides serious challenges to the management of the businesses.  Furthermore, the accounting processes are also different from that of the accounting process followed in the USA. Therefore, the foreign organisations such as the KFC often face problems amending the accounting procedures. Fooks and Gilmore (2014) highlighted that changes in the accounting procedure are troublesome from the perspective of the organisations as the whole department requires changes. Given the fact that accounting strategy is the key for the maximisation of the profit of the company, the changes in the accounting standards create a burden for the organisation. In addition to that, the changes in the tax structure also influence the system that the organisation follows. TPP enacts a different tax structure followed by a different accounting method which is followed by other international organizations of the world.

Another risk for the organisations operating in Australia under TPP is the political risks. It is notable that the most of the member organisations of TPP are politically moderately stable. Hence the political turbulence is inevitable and can hamper the operation of the organisation at any point in time. Compared to that of Australia, the political stability is much stable in the USA providing the units in this area a lot of stability. The countries such as Singapore, Brunei are emerging markets which provides a lot of expansion opportunities to the foreign organisations. However, along with that the challenges that are offered by these markets are equally same. Lakatos et al. (2016) highlighted that, proper management of the macro economical affairs is therefore important from the perspective of the management of the company. The member nations and their macroeconomic affairs hugely influence the business operation in other member organisations. Organisations like KFC often get influenced by the changes in the policies of the other member nations and hence the business operation of KFC in Australia becomes problematic. Apart from that, being under TPP KFC Australian units also faces problems regarding the supply chain processes as well. Most of the supply chain activities for these kinds of the fast food chain are informal and unorganised. The case is also similar to the KFC USA units as well. However, the strict labour laws and child labour rules under the TPP does not allow the organisations to have informal supply chain processes. Therefore the cost of acquiring raw materials goes up increasing the operating cost of the company in Australia. O’Neill (2016) stated that under the TPP agreement the organisations in Australia cannot use illegal or informal supply chains systems to procure raw materials for their food products. Although, this process reduces the hidden human right violations of the workers, from the perspective of the businesses this becomes challenging.

Furthermore, the organisations working in Australia or any other member nations of TPP have to make sure they incorporate the environmental values while undertaking decisions for the company. This compels the mismanagement to put in a lot of effort increasing the operating cost of the company. Environmental conservation agenda is a part of the proposition of TPP and hence all the organisations are bound to meet the requirements. Rodriguez and Phelps (2015) stated that, under this requirement, the organisations also require to incur more cost for the arrangements of the corporate social responsibilities. In addition to that, the foreign organisations also have to alter their production processes while operating in one of the member nations of TPP. Thus, while the KFC Company follows a standard production in the USA, they have to change and modify the production processes a little in order to be fit to operate Australia. Through the modification, the company also compromised with the production in the case of Australia as well. Petri and Plummer (2016) stated that, this also created the differences in the products of the company between Australia and the USA. Lastly, another risk that is associated operating under the TPP is the lack of flexibility to the organisations. The TPP comes with different rules and laws which the organisations needs to abide by. Therefore, any kinds of changes in the technology or practice in the international market become problematic to implement in case of TPP. O’Neill (2016) has commented that the organisations under the TPP losses the competitiveness due to this and this is therefore a great risk from the perspective of global businesses.

Conclusion

Therefore the paper discusses the opportunities and the challenges faced by the organisation operating in a nation which is a part of TPP. The study considers the case of KFC which is present in both Australia and the USA. The USA after withdrawing its name from the signatories of TPP did not follow the rules and the regulations of the free trade agreement. While on the other hand Australia is a member of TPP free trade agreement and enacts the rules and the regulations in the country. As per the study, the rules and the regulations while on one hand provides opportunities to the global organisation to expand, it also comes with challenges that can hamper the operation of the organisation. The study shows that, with the increased economic transaction under the TPP, its proposition also includes an extra measure to protect the intellectual properties of the organisations along with the individuals. In addition to that, the propositions of the free trade agreement also compel the organisations of the member countries to maintain and keep the rights of the labours as well. While the intellectual property right allows the organisation to innovate more and attract a huge amount of capital it also restricts informal supply chain increasing the cost of operation of the company compared to that of the USA.

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