How and Why Do Businesses Internationalize - Case Study Example

Why Firms Internationalise Introduction In today’s global business environment, organisations are moving their business across borders to operate internationally and even globally. In almost all countries around the world, the importance of local or international transactional corporations is increasing. On the same note, these corporations account for a large part of the global trade of goods and services. On the other hand, a focus on domestic business alone no longer serves the interests of businesses with an intention to expand. As such, businesses are exploring the advantages that expansion across borders can offer. Further, the global business environment is competitive and as a strategy, businesses internationalise as a way of looking for new markets for their products. There are also firms that produce in large quantities and internationalisation offers an opportunity to generate more profits from a large sales volume (Johanson & Vahlne, 1990). Globalisation further has an influence on the internationalisation of businesses in that firms prefer moving closer to their customers. In addition, the high cost of production, for instance locally, pushes businesses to look for destinations where they can take advantage of low production costs. The favourable business environment also plays a role in terms of driving businesses to internationalise. For instance, liberalisation of markets in different countries around the world or government regulations that favours foreign businesses attracts firms to other countries (Johanson & Vahlne, 1990). This paper examines how and why do businesses internationalise How do businesses internationalise Firms internationalise by embracing exportation of goods and services to other destinations across the world. Most firms start by focusing on their domestic market, but due to expansion, exportation becomes an option for companies to increase the sales of their products. Internationalisation through exportation has been made easier because of the liberalisation of the market in different regions around the world. As such, an environment for fair competition is created where foreign firms also have the opportunity to expand their businesses across borders (Cateora & Ghauri, 2000). Further, firms internationalise through franchising where firms (franchiser) grants other businesses (franchisee) in the different region across the world to use their trade name. As a business strategy, franchising helps businesses to expand to other regions other than the local market. Through franchising, a firm can benefit in terms of financial gains from the payment of franchise fee or royalties (Anderson, 1993). The aim of firms in a competitive global business environment is to generate profits. In addition internationalisation of firms through franchising ensures that a business generate sufficient capital to ensure that the business sustains its operations in a competitive marketplace for good and services. Internationalisation through franchising also ensures that a firm exploits reduced operating, advertising and distribution costs, for instance. In addition, firms embrace franchising in the international market because it enhances their purchasing power because of economies of scale (Fletcher et al., 2013). On the other hand, firms prefer a focus on centralised operations. As such, internationalisation through franchising enables firms to have a small central organisation instead of developing and owning firms in different locations around the world. Through franchising, firms engage the services ofthe franchisee which makes the expansion in the global market easier and cost effective. Firms also internationalise through franchising as a way of spreading risks. Through franchising, a firm in the global market can increase its business to different locations by capitalising on other people’s investment (Gaur & Delios, 2015). In this sense, a firm will have the opportunity to expand fast, adapt to market needs and gain competitive advantage. Internationalisation through franchising also allows firms in the global market to have a workforce that they can manage depending on their expenditure capability. An example of a firm that has internationalised through franchising is, McDonalds (Grogaard et al., 2013). Firms also internationalise through a multinational approach where, firms engage in production and selling in a foreign country. Through this approach, firms adapt to the local markets and compete with other local and foreign firms in the same market. Producing and selling in a foreign country is often influenced by a number of factors that include availability of resources such as human capital, raw materials and ready market for finished products. As a result, firms tend to shift their production from home country to the host country with the aim of taking advantage of the ease of producing goods and services (Cavusgil & Knight, 2015). On the other hand, internationalisation through a global approach is driven by the need to focus on mass-marketing of goods and services. Firms engaging in mass production have to look for the market in other destinations and this requires expansion across borders to enjoy economies of scale resulting from the mass production of goods and services (Khavul et al. 2010). On another note, firms also internationalise through strategic alliances or joint venture. This is necessary for a globalised marketplace where competition is stiff. In essence, strategic alliance or joint venture provides firms with a competitive advantage over other firms in the same market. Through strategic alliances or joint ventures, firms can improve efficiency in their operations, sufficient capital is pumped into the business and productivity increases (Jensen & Petersen, 2014). The global business environment provides numerous challenges for firms that contemplate expansion into the international market. This is because some firms have inadequate resources to compete with larger firms in the market that enjoy economies of scale. On this note, strategic alliance or joint venture allows businesses to adapt to a competitive global business environment. An example of strategic alliance and joint venture in the global market include that of FAW and Toyota (Alon etal. 2013). Why do business internationalise Firms internationalise in order to increase their sale due to opportunities available in other markets other than the domestic markets. In order to expand, it is important for firms to increase their sales to meet the market demands in other destinations. For instance, when China opened up its local market for foreign firms, this provided companies with an opportunity to explore a new market and capitalise on the huge demands for goods and services as a way of increasing sales. In addition, when a firm is achieving success in the domestic market, expanding internationally will help to increase overall revenue (Gonenc & de Haan, 2014). In a globalised business environment, it is advantageous for firms to explore new markets especially when dealing with unique products and services not available in the new market being explored. Firms also internationalise in order to improve their profits. While business in the domestic market generates profits, expanding to the international market allows firms to exploit opportunities provided by a high demand for goods and services globally (Welch & Paavilainen-Mantymaki, 2014). Expansion into the international market also provides firms with both short term and long term security. On the same note, expanding business across borders allows firms to minimise vulnerability of their businesses that can be caused for instance by the economic meltdown in the home country. In addition, the saturation of firms dealing in the same product in the domestic market poses risks to businesses due to the high supply of goods and services and a low demand. In order to avoid making losses due to the stiff competition in the domestic market, exploiting opportunities in the international market allows firms to spread risks and remain relevant in a competitive business environment (Brouthers et al. 2009). Firms also internationalise to control their expenses accruing from labour and production cost. In this regard, firms tend to look for destinations where they can take advantage of affordable labour and low production cost. For instance, most companies in the West have moved their production plants to the Far East due to the availability of cheap labour. Where the labour is cheap, firms can produce goods and services and sell to customers at an affordable price without compromising quality (De Clercq & Lianxi, 2014). However, where the cost of labour is high, firms have no option but to transfer such cost to the customers. However, high prices for products impact negatively on a firm’s product since customers are left with no option but to shift to substitute goods that are cheaper. On the other hand, the cost of production is a major factor in driving firms to move to other regions where they can access raw materials at a cheaper cost compared to the same raw materials from other places thus incurring additional expenses such as transport cost (Al-Aali & Teece, 2014). High production cost has contributed to the collapse of many firms and moving closer to the source of raw material is a strategy aimed at ensuring that a firm can control its expenses and generates more profits for the end product. Moving closer to customers is another reason why firms expand to the international market. This is a strategy that ensures a firm can access prospective customers for their products easier and gain competitive advantage in the globalised business environment (Altomonte et al. 2013). Customers often prefer the proximity of goods and service for ease of accessibility rather than going through a tedious process in terms of purchasing a product from overseas, for instance. Purchasing a product from abroad will take a longer period to reach the customer and eventually due to frustration, a customer might consider looking for other alternatives in the market (He & Cui, 2012). Diversification is another reason why firms expand to the international market. For instance, a firm may want to diversify its product line to other markets other than the domestic market. In essence, diversification allows firms to have a foothold in different markets across the world to reduce dependency on one market. In addition, diversifying to other markets allows firms to safeguard their investments to avoid losses that can arise, for example, through recession in the home country (Kyvik et al. 2013). On another note, firms embrace the international market due to its purchasing power compared to the domestic market. The global marketplace provides potential for firms to attract more customers to their products compared to a focus only on the domestic market. There are various destinations around the world that are untapped and this provides established firms with an opportunity to introduce their products to the prospective customers. The value of a foreign currency is also an influencing factor for firms to embrace the international market. This is because the value of the currency in the home country can impact either positively or negatively on a firm’s profits (He & Cui, 2012). As such, firms tend to move abroad to take advantage of the low value of the currency in the host country. The low value allows such firms to spend less and increase their production compared to the home country where the value of currency is high and this means firms have to spend more in the delivery of goods and services and this minimises their profitability in the long run (He & Cui, 2012). An enabling environment in terms of government regulations also attracts firms to the international market. Where the trade regulations are flexible in one country and the local market is liberal, more foreign firms are attracted to such a country. This is because firms can operate freely without constant interruptions due to numerous regulations for conducting business in the home country, for instance (Evers, 2011). On the other hand, political stability also drives foreign firms to other countries. This is because political stability is a driving force for economic development. On the same note, an improvement in the economy means more spending by consumers. As such, foreign firms can exploit the opportunity provided by economic growth in the host country. For example, more foreign firms have moved to emerging economies such as India and Brazil where there is a rise in the middle-class population who spend more money on goods and services as a way of improving their living standard (Fletcher et al. 2013). Further, firms also move to the international market due to the uniqueness of resources required to produce goods and services. Consequently, such firms have to look for locations where they can access such unique resources to remain relevant in the marketplace. For example, firms dealing with oil production have no option, but to shift their base to regions where oil is found. It is challenging to establish oil business in a location where there is no oil. This is the reason why multinational companies dealing with oil production are concentrated in locations where oil deposits are found around the world. This allows for easy accessibility, production and quick delivery of finished products to the intended customer (Fletcher et al. 2013). Unique resources also include skills and knowledge, and a firm can be dealing with a product where the specialised skills needed lack in the home country. As a result, firms move abroad to locations where they can take advantage of the availability of specialised skills they need to produce their goods and services. In addition, the need for strengthening R&D capabilities also contributes to the internationalisation of firms. In a constantly changing business environment, innovation is necessary to ensure that a firm remains competitive. As such, expansion to the international market provides firms with an opportunity to be more innovative in terms of producing unique products that resonate with customer’s needs (Azar & Drogendijk, 2014). The desire of firms in a competitive business environment is to establish a differentiation strategy. As such, expanding to the international market allows firms to take advantage of exceptional skills of the people they employee in different locations around the world to improve their R&D capabilities. Firms also internationalise as a way of countering competition in the domestic market. This occurs through acquiring or joining forces with a similar firm abroad to expand production capabilities and penetrate the global marketplace dominated by large organisations. Small organisations are often affected business-wise due to lack of economies of scale enjoyed by large organisations. As such, expanding to the international market by looking for partners to work together ensures that small firms survive in a competitive global marketplace (Azar & Drogendijk, 2014). Patent races also contribute to firms embracing the international markets because competing firms want to be the first to discover an invention. This allows a firm to secure a patent to protect their invention and thus giving them control of the market for a new invention. An example of patent races is evident in the biotechnology field where global pharmaceutical invest heavily in research to come up with inventions that will generate more profits in the marketplace due to securing a patent for the same invention. As a result of advancement in technology, local firms are embracing the international market by exploiting business outsourcing. This ensures that local firms can minimise expenses that would have been incurred locally in terms of employing personnel (Abdelzaher, 2012). In addition, business outsourcing to other regions enhances flexibility and quick delivery of services compared to doing it locally where a paperwork process; for instance, can cause delays (Abdelzaher, 2012). Conclusion Most markets in the global arena are still in their infancy and this offers and opportunity for established firms to exploit such markets. In addition, availability of resources is a significant factor that drives firms to internationalise. This is because when a firm is closer to the source of production, it will be easier in terms of minimising production cost and selling the end product at an affordable price. In addition, the domestic market sometimes is rigid and denies firms an opportunity to expand. As a result, internationalisation provides firms with an opportunity to expand through strategic alliances or joint venture. In essence, expanding to the international market that has a significant purchasing provides firms with an opportunity to maintain a competitive edge and to enjoy economies of scale. References Abdelzaher, D.M., 2012.The impact of professional service firms’ expansion challenges on Internationalisation processes and performance. Service Industries Journal, 32(10), 1721-1738. Al-Aali, A., &Teece, D.J. 2014.International entrepreneurship and the theory of the (long-lived) International firm: a capabilities perspective. Entrepreneurships: Theory & Practice, 38(1), 95-116. Alon, I., Yeheskel, O., Lerner, M., & Zhang, W. 2013.Internationalisation of Chinese entrepreneurial firms. Thunderbird International Business Review, 55(5), 495-512. Altomonte, C., Aquilante, Tommaso, Bekes, G., & Ottaviano, G., 2013. Internationalisation and innovation of firms: evidence and policy. I.P Economic Policy, 28(76), 663-700. Anderson, O., 1993. An internationalisation process of firms: a critical analysis. Journal of International Business Studies, 23(2), 209-231. Azar, G., &Drogendijk, R. 2014.Psychic distance, innovation, and firm performance. Management International Review, 54(5), 581-613. Brouthers, L.E., Nakos, G., Hadkimorcou, J., &Brouthers, K.D. 2009. Key factors for successful export performance for small firms. Journal of International Marketing, 17(3), 21-38. Cateora, P., &Ghauri, P. 2000. International Marketing, European Edition. Berkshire: McGraw- Hill. Cavusgil, S.T., & Knight, G., 2015.The born global firm: an entrepreneurial and capabilities perspective on early and rapid internationalisation. Journal of International Business Studies, 46(1), 3-16. De Clercq, D., &Lianxi, Z. 2014. Entrepreneurial strategic posture and performance in foreign markets: the critical role of international learning effort. Journal of International Market, 22(2), 47-67. Evers, N., 2011.Why do new ventures Internationalise? a review of the literature of factors that influence new venture internationalisation. Irish Journal of Management, 30(2), 17-46. Fletcher, M., Harris, S., Richey, J., & Robert, G. 2013.Internationalisation knowledge: what, why, where, and when? Journal of International Marketing, 21(3), 47-71. Gaur, A., & Delios, A., 2015.International diversification of emerging market firms: the role of ownership structure and group affiliation. Management International Review, 55(2), 235-253. Gonenc, H., & de Haan, D.J. 2014.Firm internationalisation and capital structure in developing countries: the role of financial development. Emerging Markets Finance & Trade, 50(2), 169-189. Grogaard, B., Gioia, C., & Benito, G.R., 2013. An empirical investigation of the role of industry factors in the internationalisation patterns of firms. International Studies of Management & Organisation, 43(1), 81-100. Jensen, P.D., & Petersen, B. 2014.Value creation logics and internationalisation of service firms. International Marketing Review, 31(6), 557-575. Johanson, J. & Vahlne, J., 1990. The mechanism of internationalisation. International Marketing Review, 7(4), 11-24. .He, X., & Cui, L. 2012.Can strong home country institutions foster the internationalisation of MNEs?Multinational Business Review, 20(4), 352-375. Khavul, S., Benson, G.S., Datta, D., 2010. Is internationalisation associated with investments in HRM?a study of entrepreneurial firms in emerging markets. Human Resource Management, 49(4), 693-713. Kyvik, O. Saris, W., Bonet, E., & Felicio, J., 2013. The internationalisation of small firms: the relationship between the global mindset and firms internationalisation behavior. Journal of International Entrepreneurships, 11(2), 172-195. Welch, C., & Paavilainen-Mantymaki, E., 2014.Putting process (back) in: research on the Internationalisation process of the firm.International Journal of Management Reviews, 16(1), 2-23. Read More