Globalization: Characteristics of Global Firms - Term Paper Example

Global Business Introduction Technology has changed the face of modern business. It has given firms an opportunity to grow in a global market rather than a geographically limited market. The whole business culture has been reformed due to the advancements in the telecommunication industry and in the manufacturing processes and techniques. All this has allowed new business start ups to excel at a great pace. Because of the technological advancements new firms now try to reap lucrative returns by going international as soon as they start their business. These internationalized firms develop their products and services keeping in mind the global market and not just their domestic segment. This trend is getting more and more famous and research on these ‘born global’ firms is also increasing. The research article by Fan & Phan is also an extension to the previous research work done on the nature and the characteristics of the ‘born global’ firms. Born global firms are defined as business entities which chose to go international soon after their inception (Rasmussen & Madsen, 2002). The article wishes to explain the economic factors behind the decision of the firms to go international at such an early stage. The article also explains the effect socio cultural factors on the decision of the born global firms. These factors can a play a major role in firm’s production in local and international markets. The article has tried to explain that born global firms are not alien and their decisions are also influenced by common economic and cultural factors. These firms are not very different from ordinary firms in this regard. They rely on the same factors that normal firms use for decision making. Critique Born global firms have always been treated as businesses different from the conventional firms. Their nature of doing business is considered very different from the normal firms. Previous research done on the subject has assumed that this difference is significant. This article argues that there are not many differences between born global and conventional firms, and the decision making of born global firms is based on common factors like economic and socio cultural factors. First it is important to understand the reason of a firm’s decision to go international. The article provides many reasons for a firm to operate in a global market rather than a selected market. These reasons can be economical, social and cultural or they can be related to the target market, the overall capacity (Ganitsky, J. 1989) and the nature of the product or service. All these factors play a role in a firm’s decision to internationalize at an early stage of their business. The economical factors play a key role in a firm’s decision to go international. The basic aim of any firm is to maximize its profits. Firms are not interested in operating at a global level if they are reaping great benefits in the local or domestic markets. Firms only try to seek international markets if they think that the local markets are not sufficient for them or the profits in the local or domestic market are very low as compared to the profits they can get in international markets (Coval & Moskowitz, 2001). This clearly depicts that ‘born global’ firms do not have a business model entirely different from ordinary firms. Born global firms are also dictated by profits and they are also interested in long term growth. The article mentions that sometimes the local markets of the firms are not very developed or they may not have an appetite for the product or service the company is producing. The nature of the product or service may be such that the local market might not be enough for the firm. This forces the firm to look for foreign markets. Many firms decide at a very early stage to go international because of the small local market. Take Google or Microsoft for that matter. If these two companies were based in a country other than United States wouldn’t they have had gone international? They would have of course. It was because of their complex and diverse local markets that they did not internationalize at an early stage. United States was a very good market for operating systems and search engines. This was the reason why Microsoft and Google took sometime before selling to a global market (BSR, 2010). Local markets, as mentioned in the article, are sometimes just not enough for firms to operate profitability. Some products and services are so complex that significant budget is required for their creation and wide scale markets are necessary for such products or services (Grinblatt & Keloharju, 2001). Firms need to cover their cost and that is why they target an international market. Some small and medium enterprises today follow the trend of internationalization. They try to go international soon after their inception. These small firms try to maximize profits by selling their products to different markets. Their decision to go international is also influenced by the potential markets and the small local markets. The trend is becoming famous now a day because of the ease with which firms can start global ventures. There are many opportunities for the firms to go international by outsourcing, exporting or directly selling their products or services in the international markets. This has played a huge role in increasing the number of born global firms. The role of technology cannot be ignored. It has allowed small firms to operate at an international level with great ease. Firms can easily find partners in global markets or can export their products in order to expand their business at an international level. All this can be done fairly easy by using fast modes of transportation and communicating with potential customer through internet. The role of internet is great in providing new firms opportunity to cater to international markets. Firms can use internet to sell their product all over the world and can also use this medium for marketing. Internet has made communicating even more important in this age of information. A customer sitting in Europe has now access to cheap products produced in Asian markets. This technology allows new businesses to sell their products globally and transportation companies easily make the product available to the customers. Internet companies like Amazon and EBay have grown substantially in recent years by using internet as their main field of operation (Borsheim & Solberg, 2004). They are not only helping other small business but are also making a fortune for themselves. Internet companies are born global firms because they cater to international markets since their launch. Smaller internet firms are daily setting up and the abnormal profits associated with it are attracting firms towards this. It is important to understand that internet firms are special category of born global firms. They cannot be compared with manufacturing or retailing firms. But important lesson we can learn from these firms is that technology can be used to the best of our advantage. Firms can start using this technology to help them go international easily and swiftly. The decision of firms when to go international is also very important and is dependent on many factors. The timing is one of the factors discussed in the article. Timing is critical for born global firms. Some firms go international immediately and some firms try to gain experience and then start their operations in other markets. The timing to go international is dependent on the firm’s production capacity and the number of competitors in the local markets. A firm must decide whether it should go international immediately after inception or it should start its operations globally only after it has achieved a minimum level of experience in the local market. Research has shown that the level of exposure of managers and business owners before starting a new business play an important role in the decision of going international quickly or nor (Busenitz & Barney, 1997). Experience plays a key role because without proper management skills and previous knowledge running a successful business in any market, local or foreign, is impossible. Article also tells us that if managers have prior experience in that particular industry then they can definitely afford to internationalize at an early stage. But if this is not the case then the firm should wait for a while before proper they gain proper knowledge of the industry they wish to operate in a foreign market. A firm’s production capacity also plays a major role in its timing of internationalization. Born global firms decide when they will operate internationally only after accessing their production capacity. The more the production capacity of the firm the sooner it will try to operate in foreign markets (Rennie, 1993). But this is always not the case. There are many other factors that play a role besides the production capacity. Although the relationship between production capacity and decision to internationalize is fairly simple, a firm will have to have a good production capacity to cater to many markets at one time. But here size of the local market also plays a role. The local market, if vast and developed, allows a firm with high production capacity to operate profitably, according to the article. A firm will not decide to go international if its domestic market has a capability to digest what a firm can produce. The decision about the timing of internationalization is therefore dependent upon the local market and the production capacity of a firm. A firm’s production capacity is also important in deciding the extent of internationalization. Many firms decide to devote relatively small production capacity to the foreign markets and concentrate more on local markets but this is not always the case. Again market size of local markets and international markets play a part in this decision. All these things are inter related and firms need to consider many things before deciding about going international. Take the example of Vellus Products. They manufacture pet grooming products and are a born global firm. They had a very good local market (United States) but still they decided to go international soon after their inception (Cultice, C. 1997). This was because they were not a well-known brand in United States and in order to gain profitable returns they started to sell their products worldwide (Cavusgil & Knight, 2009). This shows that many factors are involved in firm’s timing of going international. Competitors cannot be ignored as well. They play a huge role in firm’s decision to internationalize or to stay in local markets. If the local industry in which the firm operates is cluttered with competitors, firms may choose to tap international markets in order to get lucrative returns (Madsen & Servais, 1997). Competitors play a huge role in a firm’s decision of production allocation as discussed in the article. A firm can allocate great amount of production capacity to international markets if the local market is filled with competitors. Or a firm can choose to allocate more production capacity to the local markets if the foreign market is filled with competitors. The process of internationalization is greatly affected by the competitors because a born global firm is a new entrant in the market, according to the article. It has to deal with the existing firms in the industry so the influence of competitors on the business model of a born global firm cannot be undermined. Born global firms have an opportunity to excel faster than conventional firms that focus on domestic market. But alongside this opportunity there is a significant risk involved in going international. Global markets have many competitors and because of this a born global firm risks potential profits when deciding to operate in an international market (Longenecker, J. et. al, 2009). The problem that born global firms face with competitors is that they have to deal with local and international competition at once and this is one of the downside of going global. But competitors mainly affect the timing of firms to go international. If foreign markets have a large number of competitors then firm tries to focus on its local market and delays its process of internationalization. But if the local markets have greater number of competitors then firms decide to go international soon after their inception. The decision about the timing of internationalization is centered upon the competitors, market size of local and foreign markets, production capacity and product or service. Apart from all these things, cultural factors also play a role in the process of internationalization as born global firms have to take into account cultural factors of the foreign markets. Born global firms need to have a level of familiarity when dealing with foreign customers. Cultural difference is a big problem for born global firms. They have to think from all perspectives when designing their product or service. Any mistake or misunderstanding can cost born global firms potential customers so cultural element is very important. A firm’s cost of doing business may also be different in different cultural settings (Schwartz, 1999). The difference in legal system, banking system and different bureaucratic system, according to the article, is also a hurdle for born global firms. If a firm is operating in a different culture then all these differences will have to be sought out and significant costs will have to be allocated for this purpose. Currency difference between the two countries severely affects the profits of born global firms (Lanvin, et.al 2003). Firms are exposed to exchange rate risk when they operate in more than one country. This can significantly reduce or increase cost. Climatic conditions also play a role in the operations of a born global firm. A product like garments are seasonal and their demand can be affected by weathers. Vellus products for example will always keep climatic conditions in mind. The demand of their dog shampoos will affect with seasons. This shows how climate or season affects sales of born global firms in foreign countries. Political risks are also valid and they exist when a firm wishes to operate in more than one country. A firm will have to face dual nature of political stability and this may affect sales and profits. Laws regarding the environment and other regulations can also play a role in the performance of a born global firm. Less severe regulations regarding environment can play a huge role in determining manufacturing costs. Culture also affects the firm’s decision to allocate production to local and international markets. Firms try to do more business and allocate more resources to markets that are culturally close to them (Kogut & Singh, 1988). This helps the firms in better understanding the business environment of the foreign country. The cultural factor plays an important role because any business cannot ignore the human element in it. Human beings are social animals and cultural factor influence their decision making. This is why companies choose to operate in countries that are culturally close to them. Important knowledge about the people and the environment can help companies in making similar policies. Culture is also important in the marketing of a product. One marketing plan can work in one country and can sell out business in another country. This is another reason why culture is important for a born global firm. Conclusion The article under discussion gives important practical information regarding the business operations of a born global firm. The article highlights many important business aspects of internationalization. A firm’s decision to go international is influenced by many important factors like production capacity, competitors, size and development of local and foreign market and cultural similarity to foreign markets. Production capacity is very important for born global firms. They have to decide about the allocation of production capacity between local or foreign markets. This decision is dependent on many factors, according to the article, like market size of local and foreign markets. Sometimes local markets are enough for firms so they allocate small production capacity to foreign markets and even then operate profitably. Market size also plays a huge role in the timing of internationalization. The article also says that if local markets are developed then a firm will try to reap profits from domestic markets and then in future will try to tap international markets. If this is not the case then firms will decide to go international immediately after its inception. Competitors also play a huge role in a firm’s decision to internationalize. The greater the number of domestic competitors the more likely the firm will go global. 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