International Business and World Markets - Essay Example

EC5002 International Business and World Markets: Essay Introduction Internationalization of business cannot be regarded as embodying a “one fits all” approach. Firms go international to expand sales, acquire resources, and minimize risks. The drivers and recent economic trends include increased demand for specialized goods, globalization of markets, and globalization of technology, rapid technological advancement, international transportation systems, openness of economic policies among a significant number of countries, and enhanced supply of necessary resources for internationalization. In their pursuit of international expansion, companies must overcome barriers such as language differences, currency differences, cultural differences, legal and administrative differences, and skill levels differences. International business is the process of integration and interaction among people and advancing of connectivity and interdependence of businesses and markets. Many small and growing companies have unearthed lucrative new markets abroad and are receptive to franchising, joint ventures or technology transfer, and licensing (Czinkota 2008, p.229). Globalization Drivers Several factors (internal and external) can be outlined as driving the development of a global marketplace. The factors can be outlined as: market, environmental, cost, and competitive factors. Parallels within demand conditions across a number of countries facilitate the establishment of single global strategies. For instance, markets such as Europe, America, and the Far East manifest consumer groups that share matching educational backgrounds, lifestyles, income levels, aspiration, and utilization of leisure time. Cost Factors The avoidance of cost inefficiencies and duplication of efforts shape two of the most prominent globalization drivers. In most cases, a single-country population are merely not sufficient for a business to attain meaningful economies of scale Environmental Factors There are diverse factors that affect firms operating within the international scene. These factors can be delineated as incorporating political, economical, technological, and sociocultural factors. The selection of international market involves the interplay of both organizational and environmental factors. Environmental factors may entail opportunistic approaches, local market complexities, and domestic competitive pressures (Czinkota 2008, p.230). Environmental factors such as technological advances allow businesses to leapfrog over phases of economic development. Competitive Factors Global strategies are frequently necessary to safeguard competitors from attaining undue advantage in both domestic and overseas market. In the event that a competitor manufactures on a global scale and thus attains global economies of scale, this may undercut prices in the home market. Discussion The principal factors that prompt both small and medium sized forms to make their moves into overseas markets can be categorized as proactive motivations, or factors that explain why companies go global and reactive motivations that elaborate on why the firms have to do so. Expansion within a “demand-driven” paradigm demands a more intricate, active, and ongoing overseas commitment compared to “supply-driven” initiatives that highlight the optimization of supply chains (Anne 2007, p.184). The eclectic theory was an intellectual response to the rising role of international production and the multinational corporation within the world economy. There are three factors that outline the international activities of multinational enterprises: ownership advantages, location advantages, and internalisation advantages (Rugman 2010, p.1). Multinationals usually develop competitive advantages at home and then transfer the advantages to certain countries via foreign direct investments, which allow the multinational enterprises to internalize the advantages (Rugman 2010, p.2). Most companies have conventionally viewed foreign markets as a means to lower costs via the capability to avail low-cost labour and maximize the efficiency of supply chains. This mainly encompasses developing close relationships with one or two suppliers and developing a manufacturing facility. Incentives and government support are mainly far less significant compared to knowledge, relationships, and familiarity with the local business environment and community. The prominent trigger for internationalization can be outlined as securing critical supplies and market-seeking behaviour. This motivation is mainly strong among companies that bear some intrinsic advantage, characteristically related to their technology or brand recognition that awarded the companies a competitive advantage in offshore markets. The initial motivations may be opportunistic frequently flowing from unsolicited export order; however, most companies ultimately realize that additional sales translate to exploitation of economies of scale and scope (Anne 2007, p.185). The market seeking motive was a prominent motive for some European multinationals, whose limited home markets were inadequate to support the volume-intensive manufacturing processes that was gaining prominence through diverse industries from food and tobacco to automobiles. Another conventional and significant trigger of internationalization is the desire to access low-cost factors of production, especially markets that manifest limited tariff barriers (Anne 2007, p.185). Labour represents a significant cost and countries that manifest high labour costs render their products to be at a competitive disadvantage comparative to imports. The outlined motives make up the conventional driving force for overseas expansion of multinational enterprises. The ways in which the motives interact is well captured in the product cycle theory. Product life cycle theory that was developed in the 1960s avails an effective frame of reference for explaining and predicting patterns of international trade, as well as multinational companies. This approach can be conceived as the theory that unifies the development of multinational companies by highlighting that trade flows are connected to the international trade (Sharan 2006, p.16). The significance of this theory is impacted by the technological innovations and market expansion. This theory stipulates that the foundation for an internationalization process is characteristically an innovation that an entity creates in the home country. In the initial phase of exploiting the development, the company builds production facilities within the home market based on the fact this is where the core customer base is located, and the urge to sustain close linkages between research and production within this phase of the development cycle (Sharan 2006, p.17). In the initial stage, some demand may be generated within other developed countries where consumer needs and market developments are equivalent to those of the home market. These requirements are satisfied with home production, which generates exports for the home country. As the products become well established and production processes become standardized, the entity enters a new phase. The demand may have become quite sizeable with export sales becoming a critical part of the revenues from the new business. Moreover, competitors may begin to spotlight the rising demand for the new product as a possible opportunity to launch operations in the markets served by exports. The innovating company characteristically sets up production facilities within the importing countries so as to prevent or counteract such competition. This transforms the entity from an exported into a true multinational enterprise (MNE). Emerging Motivations The first sets of forces encompass scale economies and expanding R&D investments. The second factor that is critical to company’s international strategy although, not originally a motivating trigger, details the company’s global scanning and learning capability. A company may be drawn to secure supplies of raw materials is highly likely to spotlight alternative, low-cost production sources around the world. Companies tempted abroad by market opportunities are frequently exposed to fresh technologies or market needs that stimulate innovative product development (Luo 1999, p.7). The third, driver for internationalization entail competitive positioning that reflects market attractiveness or cost-effective choices. Companies expand internationally to expand markets and enhance sales, which translates to more profits. This also means that businesses have an opportunity to contribute to causes that businesses subscribe. Business also expands internationally to control expenses as every business desire to have low expenses. In searching outside their borders, companies can be able to find more economical solutions to manufacturing and production challenges they may manifest (Luo 1999, p.8). The other motivation for expanding is diversification in order to protect their investments and their markets. Demand drivers for International Business and World Markets In the case of proactive motivations, profits are the core proactive motivation. In order to enhance profits, companies may either pursue to enhance sales volume by selling into new markets or minimize costs by producing overseas. The proactive motivations for international business include international markets; profit advantage; unique products; technological advantage; tax benefit; resources access and cost savings; exclusive information; and, economies of scale (Ajami 2006, p.4). Technological advantage is a considerable stimulus that may make a firm to choose to operate beyond the host country’s national borders. This flows from the assumption that the products are not in demand and are not available from competitors. The company is also expected to consider the length of the period of which the unique product advantage will last. The speedy pace of advancement of technology, the creativity of competitors, and the absence of sufficient international patent protection contribute to the shortening of product life spans within the foreign markets (Ajami 2006, p.5). Special knowledge on foreign market customers or market situations may also act as another proactive stimulus. This driver is essentially short-term since competitors speedily catch up with information advantage. Tax benefits also drive overseas sales whereby in cases where government avails preferential tax treatment to stimulate exports, firms are able to compete by availing low prices within foreign markets. The firms are also able to accumulate enhanced profits (Ajami 2006, p.4). Economies of scale detail another motivation for a firm’s preference to operate beyond the host country’s national. International operations may enable a firm to enhance output and thus rise more speedily within the learning curve. Enhanced production for international markets can aid the firm to minimize the costs of production for domestic sales and render the firm to be equally competitive at home. Supply led Drivers The reactive motivations for international business include regulations and restrictions; customer demand; competitive pressures; saturated domestic markets; and, declining domestic sales. Reactive motivations impact on firms to seek out fresh markets owing to changes or pressures within the domestic economy. One of the supply-led forces that may drive a firm to seek out fresh markets entails competitive pressures (Luo 1999, p.7). An entity may fear losing domestic market share to the competing firms that might have benefited from economies of scale derived from international business activities. Similarly, the firm may fear losing foreign markets permanently by simply missing the boat at a moment when competitors expand overseas. Overproduction is another supply-led motivation for launching operations beyond the domestic market. Amid downturns within the domestic, business cycle, foreign markets can avail an ideal outlet for excess inventories. One of the mistakes that firms operating within the internal market commit is withdrawing from foreign markets the moment that the domestic market bounces back. This may ultimately prove to be detrimental as the international clients may not be interested in transitory or sporadic business relationships (Cherunilam 2010, p.456). Declining domestic sales (whether in terms of sales volume or market share) are a key motivator to seeking international market. For instance, a product at the end of the domestic life cycle may pursue fresh markets overseas such as high-tech products that have been outmoded by the latest innovation (Anne 2007, p.185). Furthermore, excess capacity is a significant motivator for seeking out international markets whereby, in case that the company’s resources such as equipments are not fully utilized, firms may perceive expansion abroad as an ideal way to attain broader distribution of fixed costs. Similarly, in the event that all fixed costs are allocated to domestic production, the entity can penetrate foreign market with a pricing module that highlights mainly variable costs. However, in the long-term, such pricing may yield changes of dumping. The reactive motivations of saturated domestic market also yield similar outcomes to that of declining domestic sales. Firms can utilize the international market to lengthen the life of their products and the organization, as well (Cherunilam 2010, p.456). Proximity to clients and critical infrastructure such as ports may also be a reactive motivation for entry into international markets, whereby firms located near a border may sell their products into the neighbouring country devoid of even conceiving itself as international. Conclusion The international business environment is diverse from domestic business since the environment varies when a firm crosses international borders. Usually, a firm understands the domestic environment but may be less accustomed to the environment in other countries. The motivations for companies to expand their operations internationally reflect systematic patterns, although occasionally the motives may be wholly idiosyncratic. In broad terms, factors responsible for companies going global include to build brand image, respond to competition, too small home market, access to scarce resources, sales growth, to diversify initiatives to spread the product, and diversify sources of sales and supply. In initiating international expansion programs, firms should give significant consideration to the following factors: language barriers, marketing barriers, access to raw materials, and legal barriers. References List Ajami, R. A. (2006). International business: theory and practice, New York, M.E. Sharpe. pp.4-5. Anne, M. D. (2007). The internationalization of retailing: Factors influencing the choice of franchising as a market entry strategy, International Journal of Service Industry Management 18 (2), pp.184 – 205 Cherunilam, F. (2010). International business: text and cases. New Delhi, PHI Learning Private Limited. pp.456. Czinkota, M. (2008). Fundamentals of international business, Gillingham, Wessex Press. pp.229-230. Luo, Y. (1999). Entry and cooperative strategies in international business expansion, Westport, Quorum. p.7-8. Rugman, A. M. (2010). Reconciling internationalization theory and the eclectic paradigm, Multinational Business Review 18 (2), pp.1-12. Sharan, V. (2006). International business Concept, environment and strategy, Delhi, Pearson Education. pp.16-17. Read More