12.4 Impact of Economic Development on the Cost of International Trade

As noted in Chapter 10 and Chapter 11, the political, economic, and legal system of a country has an impact on whether the country is an attractive site for international trade. In this chapter, we have discussed that countries with democratic political systems, market economies, and strong legal institutions are likely to have higher economic growth, which makes them more suitable for business.

However, when deciding on doing business in less developed countries, organizations must thoroughly analyze the long-term benefits and costs associated with a given market.

We will use McDonald’s in Russia as an example to understand the costs associated with doing business in less developed countries.

McDonald’s opened its first restaurant in Russia in 1990. By March of 2022, when McDonald’s had suspended its operations due to the invasion of Ukraine, it had 853 locations all over Russia, including one in Eastern Siberia (Rainey, 2023). It was a costly venture to enter the Russian market in the beginning. Based on an analysis done by Kristy Ironside, factors that contributed to the costs were as follows:

• Political factors – due to government bureaucracy and red flags, entering the market and registering the business was complicated and time-consuming. It took at least a year to register a joint venture simply.
• Infrastructure – the lack of a commercial real estate market made it challenging to find a location. McDonald’s headquarters had to operate out of a hotel, occupying an entire floor. To build their first restaurant, McDonald’s had to tear down half of a building and reconstruct it.
• Related and supporting industries – restaurant supplies such as cups and plates had to be imported from other countries. McDonald’s also had to build its own production facility of 100,000 sq. feet where they prepared all their products.
• Human resources – labour shortage was not an issue in Russia, in fact after running one ad in a newspaper, McDonald’s received over 30,000 applications, however they did not have training in the management area. McDonald’s had to send some applicants to Chicago for management training programs (Ironside, n.d.).

Before selling a single burger, McDonald’s incurred over $50 million in costs for the opening of their first restaurant in Russia. However, from day one of its opening, McDonald’s was a success in Russia when they served over 30,000 meals, 6 times more than initially expected.

When organizations recognize the potential of a developing country, they may reap greater benefits than those firms that forgo the opportunity.

A framework developed by Michael Porter, “the diamond model,” can be used to identify factors contributing to the success of an organization in any given market (see Chapter 9.2 Export Ready Organizations).

References

Ironside, K. (n.d.). McDonald’s on Pushkin Square: From joint venture to foreign subsidiary and from communism to capitalism, 1990-1999 [PDF]. Becker Friedman Institute for Economics. https://bfi.uchicago.edu/wp-content/uploads/2021/12/McDonalds-on-Pushkin-Square_Ironside.pdf

Rainey, C. (2023, January 23). How McDonald’s won big in Russia and then lost it all. Financial Review. https://www.afr.com/world/europe/how-mcdonald-s-won-big-in-russia-and-then-lost-it-all-20230116-p5ccuz