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 Resources
This 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 Risk
Often, 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 Thoughts
Though 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 Articles
View All Articles
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
(Please check your downloads folder shortly for your download)
If you have a problem obtaining your download, click here to go back to the article page.
Or contact our support team who will be happy to help.
Please supply the following details:
Request ID: 76b17313180c5a55
IP: 168.138.15.255
UTC time: 2022-11-16T16:02:11.062Z
|
|
|
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.
1. Market Opportunities
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
Another reason to go global is the willingness to diversify the risk of the company. Thus, firms are likely to avoid "putting all of their eggs in one basket". By doing that, companies become more immune to changing trends in consumption for each of the markets, and they are also less affected by external factors affecting consumer behavior and purchasing of their products, such as climate.
·Compensate a strong seasonality in the local market
Example: IDE Technologies is a company that provides the service of "snowmaking" to ski resorts around the world. They operate in countries in both hemispheres (e.g. Switzerland and South Africa) in order to maintain a consistent revenue. When it is Summer in one part of the world and they are not able to operate, they focus on the part of the world where it is Winter and their business can thrive.
·As a reaction to the actions of a competitor
Example: H&M will open its first stores in India this year after Zara expanded to India in 2010 where it now has 13 stores. In 2 out of the 3 years since Zara has opened in India, it has gained profits. This was a signal for H&M that it could also be successful in India's market. Its aim is to take Zara's spot as the world's number one apparel retailer.
3. Economies of scale
Another reason why firms may want to globalize their company is to achieve economies of scale. Economies of scale are advantageous because it allows a firm to economize the transport and distribution network. Additionally, they can allow firms to produce their products cheaper in some countries because of factors such as component costs, flexibility, supplier availability, wages and different legislations.
| ·To increase competitiveness against global companies of the industry | |
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.
Question yourself: is it better for your firm to be ready for changes, or to anticipate to them?
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:
|
1. Profit Seeking: |
2. Sales Expansion:
- Customers are global and there’s a strong potential in expanding your business abroad rather than to concentrate on the domestic market.
- It is also a response to the seasonality of a domestic market.
- It depends on the life cycle of the product: if a product enters its last cycle in one country, it is essential for the firm to look for new markets to re-engage the whole process abroad.
- Expansion abroad is also a strategic decision in order to find new markets or prospects. It depends on the segments and niche of the company; a firm which is specialized (targets a niche, prestigious products etc.) has strong incentives to exploit several markets because of a small consumer segment.
| 3. Uniqueness and Exclusivity
|
| 4. Resource Seeking |
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
- Some foreign markets form as part of emerging economies and therefore represent a strong potential. Some market opportunities may appear (i.e. new tastes, new consumption habits/occasions, new segments) and must be exploited.
- International markets may also have higher profitability than the domestic ones. Foreign markets can also be exploited because there is a similarity in tastes, habits or consumption occasions.
|
2. Overproduction, Declining Domestic Sales, or Excess Capacity |
| 3. Competitive strike
|
4. Governmental Reasons
- Governments can also give incentives to domestic companies to internationalize. The government can, for example, assist exports by offering financial helps.
- Another reason is because trade barriers have decreased or disappeared in a foreign country and gives opportunities to go abroad.
5. Economic & Political Changes
- Costs of production at home increase, forcing the company to find a cheaper place to produce.
- Tariff or non-tariff barriers: if an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs.
- "Buy-Local" policies: exporting companies may find that "buy-local" policies may restrict their exports - which may cause the exporter to set up a local alliance or relationship.
- Environmental regulations or changes in work/safety regulations may cause the company to go overseas to a less restrictive location.
Conclusion: managers should always be aware of what is going on with their business to take decisions, try to forecast the future or be ready to react to changes, and potentially.. go abroad!