The first and foremost reason is that western multinationals would like to expand their sales and acquire newer markets so that they can record impressive growth rates. Considering the fact that the developing countries are peopled with consumers who have aspirations to western lifestyles, it is, but natural that the western companies would like to target this need and hence, expand into these markets. Moreover, with declining sales in one region, the western companies hope to recoup the losses by expanding into other markets. Further, the attractive rates of return in the emerging markets are another reason as well. Acquire ResourcesThis is one of the most important reasons for companies to expand internationally. Because the developing and emerging countries have large deposits of minerals, metals and land for agricultural production, the western multinationals eye these markets in order to get access to the resources. This is the reason why many international businesses operate in Africa and South Asia where the humungous deposits of minerals and metals are attractive for the profits that these multinationals can make. Many emerging markets and developing countries do not have the expertise or the resources needed to tap their reserves of these minerals and metals. Hence, they welcome the multinationals with open arms as it gives them royalties and other payments to grow their economies. As can be seen from the expansion of Vedanta and the South Korean steel company (POSCO) into India, the eagerness to tap the resources is one of the most important reasons for expansion. Minimize RiskOften, businesses expand internationally to offset the risk of stagnating growth in their home country as well as in other countries where they are operating. For instance, ever since the Western countries saw their growth rates slip to below 3% (in cases recording negative growth i.e. depression), the Western multinationals have made a beeline to the emerging markets that are growing in excess of 5%. Since firms exist to make profits and grow their bottom lines, it is but natural for them to expand internationally into countries that have better growth rates than their home country. Further, by operating in a basket of countries as opposed to a few, they are able to manage political, economic, and societal risks better. We had discussed the characteristics of these risks in earlier articles. Because they vary from country to country, it makes sense to spread risk across countries and diversify the portfolio rather than placing all eggs in one basket. Closing ThoughtsThough this article has concentrated on western companies alone, it is the fact that many Chinese companies are aggressively expanding into African and Asian markets. In the same way in which Japanese companies conquered Western markets with superior quality, low cost, and exemplary customer service, the Chinese companies hope to target the emerging and developed markets with the same vigor and passion that has made China the factory of the world. These themes would be explored in detail in subsequent articles and this article has given the bare bones reasons why businesses expand internationally. Related ArticlesView All Articles
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There are various reasons as to why firms would want to expand their company internationally. In this post, we will go over the reasons discussed in class, and we will also analyze other possible motivations for firms to expand their company abroad. A firm may desire to expand internationally because market opportunities exist abroad. These opportunities include demand for a firm's product in foreign markets, trends changing to favor the product in foreign markets, or the absence of competition abroad which would give the firm the first mover advantage. More specifically, these market opportunities can be broken down and explained with examples from existing companies :·A firm's desire to grow by expanding from small or saturated domestic markets to international markets Example: Sony selling consumer electronics in international markets. Sony was founded in Tokyo in 1946. One of its founders, Akio Morita, decided that Sony should not be restricted to Japan and viewed the whole world as a potential marketplace. The company now has major international markets on almost every continent and has expanded to many countries. Sony started out solely as an electronics company but expanded to include motion pictures, music entertainment and financial services, among others. ·Unsolicited orders received from abroad Example: Abercrombie & Fitch found that many customers were ordering online and by catalog from abroad. In 2007, the company took this as a signal to expand its stores, both Abercrombie & Fitch and its sister store Hollister overseas. The company first started in the US and then continued to expand across Europe and Asia. By 2013, the retailer opened stores in the Middle East and Australia. ·Higher profitability of the international market Example: Ever heard of Cheng Loong Corp? You probably haven’t, but if you have an iPhone, iPod or Apple Mac, you’ve bought their products! Cheng Loong Corp are based in Taiwan, and they manufacture Apple product packaging. Although they have been producing similar packaging since 1959, they now find that the international market is the most profitable. ·Obtain prestige in the domestic market Example: Beiersdorf expanded its brand Nivea internationally to create appeal in the domestic market. Its ads had testimonials from customers of different ethnicities to give the sense of an international brand. Many consumers desire international products because they believe it makes them feel more sophisticated and cosmopolitan, so Beiersdorf used this to its advantage. 2. Risk diversification ·Compensate a strong seasonality in the local market ·As a reaction to the actions of a competitor 3. Economies of scale
So far, we have reviewed what was seen in class. However, we also found another way to classify motivations for expanding abroad: Proactive vs. Reactive. Proactive means to act in advance, to anticipate something happening, and plan for the situation. Companies who are proactive in international business are, in most cases, better positioned than companies that simply react. The three reasons we gave above (market opportunities, risk diversification, and economies of scale were all examples of proactive motivations for a company to internationalize. Here are some additional proactive reasons:
2. Sales Expansion:
Unfortunately, firms cannot predict every event that will occur in the future. Thus, sometimes when a company decides to expand internationally it is a reactive action to an event. The following are examples of reactive reasons for expanding abroad. 1. Market Opportunities - The company is responding to demand it discovers abroad
4. Governmental Reasons
5. Economic & Political Changes
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