Expanding Internationally within National Companies - Literature review Example

KEY CONSIDERATIONS THAT MAJOR NATIONAL COMPANIES TAKE INTO ACCOUNT WHEN EXPANDING INTERNATIONALLY By (Name) Presented to (Name of Professor) (Name of Institution, City, Sate) (Date) Global business activity is among the principal features of the modern-day global economy. The growth in middle-income segments and consumer markets has propelled companies to focus on global expansion in search for development opportunities. Market indicators portray that the inclination toward grand global expansion will continue at a swift speed. The speed signifies the strong need by organizations to be on the frontline in marketing, and the essentiality to capitalize on novel market developments. In a study by The Institute of Chartered Accountants (2010), 38 percent of the 520 senior executives said that they derived more than half of their returns from overseas operations. In spite of the size of their global footprint, the study identified the top drivers for international business expansion as profitability, innovation capabilities, access to materials and human resources, and growth opportunities. Organizations venture abroad for a myriad of reasons, which range from firm-specific factors to international environment factors. Firm-specific factors are motivated by a company’s mission and vision, overall purpose and aims, and the detailed objectives to achieve the aims. While these form the primary motives, the international environment and the conditions within the specific nations significantly influence the achievement of the company’s objectives and aims. Knowledge seeking is a chief cause for businesses to expand internationally. Corporations venture into foreign economies to gain novel experience and info and to track developments in overseas industries that are characterized by rapid technical breakthroughs and developments, such as Japanese technology industries. Additionally, global expansion enables businesses to maintain their domestic customers. Following customers overseas guarantees clients an ongoing product flow, thus avoiding losing customers to local suppliers that may be domestic competitors with global operations. Moreover, internalization enables firms to exploit economic market imperfections by reducing risks via international diversification. Internationalization grants firms the capability to get around currency controls and reduce taxes, which may increase cash flows and reduce cost of funds. Tassiopoulos (2008; p. 91) accentuates that there is no single ideal vehicle for international expansion. Therefore, every business chooses a structure that is perfect in determining its eventual success. The best structure varies according to the features of the target market, the resources available to the franchisor, and the nature of the franchise business. While resources and control are perhaps the most critical factors in choosing an expansion structure, other major considerations comprise of the variations between local and target markets, size and possible growth of the target market, noteworthy financial issues within the target market, local legal barriers, target market’s business culture, level of environmental and political risk, challenges in establishing and maintaining distribution networks, and available human resource. Franchisors must choose the structure in response to prior research and planning if they have to create value for their organizations’ development. The following issue focuses on the key considerations that major national companies ought to take into account when devising and executing their strategies to expand internationally. During global expansion, the planning phase is the initial and most vital. It depicts the significance of channeling efforts to ensure that resources and efforts are employed in conception of successful operations. It ensures that resources are not wasted in evaluating less significant investment regions. During this stage, the business must examine issues pertaining to market research, changing demographics, and plainly defined strategies. Strategy Every market has its gradations due to cultural, market, governmental, and economic conditions. It is critical to develop a strategy that compels local success while being integrated with corporate strategy. Corporations must define and test their global business development strategies clearly basing technology, sound business, and market research. The key aspects here are determining the implications of global expansion for an existing business, drafting a clear illustration of the anticipated outcomes, defining the stakeholders, and considering the extent of pressure that universal expansion may mete out on domestic operations in respect to management time, resources, and finance. Besides, the businesses should delineate their techniques of entering the global market, such as through partnership, joint venture or acquisition. For example, Cemex, a cement company based in Mexico, is among the top three cement-manufacturing companies in the world. In 2001, Cemex acquired Southdown Cement Company and consolidated the company’s operations. Besides, on top of making acquisitions in Asia, Cemex has significant assets in south and North Europe and America (Twarowska & Kakol, 2013). The different strategies that businesses can follow in their international expansion activities depend on the extent to which an organization is willing to adjust to the demands of the local market (Schaffmeister, 2015; p. 252). Besides, the degree to which a company should blend international with local elements depends on a vigilant assessment of the business’ target markets. Eventually, the decision bases on finding an effective balance between flexibility and efficiency. Standardization of the business and global integration are vital in maximizing efficiency and achieving economies of scale. Focusing on localization and adjustment is a means of heightening responsiveness to local circumstances and of maximizing sales and market shares. The way of balancing the strategy between responsiveness and efficiency depends on the specific pressures emanating from both sides. If the corporation is subject to pressures for international integration and it has incredibly short innovation cycles, it could adopt a global strategy. On the contrast, if the company depends on high efficiency and economies of scale, but is also obligated to let in some local adaptation pressures, a transnational strategy might work best for it. Alternatively, if a corporation operates within a commerce marked by feeble global integration forces, it could adopt a home replication approach. Ultimately, multidomestic strategy could work best if the need for standardization and scale is not overwhelming, but there is need for heed to localization pressures. Global Trends Companies that are planning to expand globally ought to be aware of the new-fangled and burgeoning global trends, such as demographic changes, emerging markets, and technology advancement. Global population growth has been a famous phenomenon since the inception of the earth. The UN predicts that populations will rise by 72 percent in 2050 (ERM Initiative Faculty & Cox, 2014). The present infrastructure and economies will not be able to keep up with the growth. Therefore, businesses should look into the trend to position themselves globally for the growth opportunity. Contrary, if the population does not grow rapidly, the market becomes saturated. In such situations, firms must consider expanding their businesses internationally. An example is IKEA, a furniture industry that was launched in the 1940s in a small rural community in Sweden (Twarowska & Kakol, 2013). In the 1960s, the Swedish market became saturated and IKEA opted to expand its business to Europe and Scandinavian countries. By 2002, IKEA had attained position 44 out of the leading 100 companies. The demographic changes arising from the growth have been, and will always affect business profitability and practices. The shift affects the labor force, thus compelling businesses to search for new talent. In nations such as India and China, population growth runs along with increasing affluence, thus leading to an increase in the middle class consumer base. The features of the population include educational level, residence type, family status, and purchasing power. Correspondingly, demographic trends like education profile and age of the populace indicate growth in the consumer base and economic vitality. Demographics aid a business in learning the consumer characteristics, which in turn help business owners to determine what services and products to produce. Similarly, prospect demographics shifts determine the necessary adjustments that businesses should employ to their strategies. An analysis of demographic traits enables entrepreneurs to verify if their businesses are viable within given regions. Demographics work along with psychographics, which focuses on the lifestyles and attitudes of potential consumers. Whilst demographics revolve around external data and statistics, psychographics focuses on internal behavioral information. Foreign Domestic Investment (FDI) The flow if FDI in a nation is a considerable indicator of the location’s economic viability. FDI is an imperative vehicle for the transmission of capital and technology, contributing relatively to more growth as compared to domestic investment (Borensztein, Gregorio & Lee, 1998; Loungani & Razin, 2001). However, higher productivity of FDI takes place only when the host state has a minimum entry stock of human capital. Hence, FDI drives economic growth solely when a sufficient absorptive capacity of highly developed technologies is available within the host economy. Economists establish that FDI plays a significant role in global expansion of businesses because it favors flow of wealth across state borders while allowing capital to seek the utmost rates of return. As Feldstein (2000) notes, unrestricted flow of capital offers several advantages. To begin with, global capital flows lessen the investment risks by allowing investors to diversify their investment and lending. Besides, the international amalgamation of capital markets contributes to the broadening of optimal practices in legal traditions, accounting rules, and corporate governance. Furthermore, the international movement of capital tends to limit the capacity of states to practice bad policies. In addition to these pros, Feldstein (2000), Borensztein, Gregorio & Lee (1998), and Razin & Sadka (1999) note that FDI aids in the transmission of technology, predominantly in form of novel diverse capital inputs, which are unattainable via financial investments. Likewise, FDI promotes competition within the domestic market, enhances employee training and development of human capital, and raises revenues from corporate tax in the host economy. Therefore, FDI contributes to growth and investment in the host nations. Conversely, a high share of FDI denotes weakness in the economy. The share of FDI inflows is usually higher in more risky nations, with risk being manifested in the countries’ government debt credit ratings. Hausmann and Fernandez-Arias (2000) have also found that the share of FDI is higher in economies with lower quality of institutions. They establish that, as compared to other genres of capital flow, FDI is likely to occur in nations with inefficient or missing markets. Within such environments, foreign investors prefer direct operations as opposed to relying on local suppliers, legal arrangements, or financial markets. The implication of this perception is that businesses seeking to expand internationally ponder over getting more FDI or developing plausible enforcement mechanisms. Organizational Culture Research depicts that organizational behavior is a significant factor in a corporation’s internalization decision (Harrison, 2011; Friedman, 2005; Krugman, 1996). For instance, Harrison (2011; p. 19) has found that while large retailers are likely to enter foreign markets through acquisition, smaller retailers have a tendency of employing less risky strategies like franchising. The core facet of organizational behavior that influences a corporation’s approach to expanding internationally is organizational culture. A firm’s internal culture assumes diverse modes. Whilst hierarchical culture bases on procedures and rules, a clan culture bases on tradition and loyalty, a market culture is oriented towards business achievement and competition, and an adhocracy culture revolves around innovativeness and entrepreneurship. Movement of Labor International emigration tends to distribute populations to new regions. Immigration implies transfer of labor as it pushes up investment rates, employment and income rates on the host country, thus stimulating growth. Movement of labor is thus a key consideration that major companies should take into account when expanding globally. The businesses must be in a position to assess the nature of movement, i.e. whether the workers are unskilled or skilled. In the present business arena, the principal demand is for semi-skilled and skilled experienced workers. The sequence has echoed in many countries owing to the rise in developments. The major economic benefit of assessing movement of labor is to know the regions where capital inflows, increased skills, education, and experience are concentrated. ENVIRONMENT ANALYSIS While globalization poses plentiful possible risks in the global business setting, a majority of the risks are country-specific. Before embarking on business in a foreign nation, it is therefore prudent to conduct an analysis of the atmosphere in the host country. Country analysis may assume varied forms and a broad array of organizations, including international institutions (UN, WEF, and OECD), banks, business and political consultants, and government departments provide such information. Certainly, comprehensive market research is essential before launching a service or product in a foreign market because it aids in understanding a nation’s cultural, economic, and political atmosphere. The key categories of country analysis revolve around the general environment and risk factors, and they include: Background Information To appreciate the environment within which a nation’s economic, social, and political institutions lay, an understanding of its geography, demography, culture, and history is indispensable. For instance, when comparing Czech Republic and Russia, there are diversities in their geographical sizes, climatic locations, military, economic and political significance, and ethnic compositions. Likewise, the countries have historical distinctions. While both nations experienced communism, it was for a longer period in Russia than in Czech Republic. Before communism, Czech Republic was an industrialized country while Russia had an agricultural economy. These different histories, among others, help in understanding where the country’s political and economic stake stands. Economic Situation It is intricate to understand a nation’s business environment devoid of assessing its current political systems and institutions, macroeconomic indicators, economic policies, and other info on its economy. The data on economy may encompass statistics on inflation, consumer expenditure, external trade, GDP per capita, annual growth rate, GDP, unemployment, financial system, and competitive environment. Because this info is constantly changing, it is essential to keep it updated and to study its trend to get an idea of how an economy is changing over time. Of most importance in the economic situation is the cost competitiveness of firms engaged in importing or exporting. The key indicator here is the exchange rate of a country. Exchange rates are quite unpredictable owing to the variations in political and economic conditions of a country. Besides, a country’s GNP, inflation rates, and interest rates have a propensity of affecting exchange rates. The changes in exchange rates pose major implications on the investments value and export prices between nations. High exchange rates in the local country make imports cheaper and reduce the competitiveness of exports, thus lessening the cost of investing overseas. Low exchange rates pose opposite effects while importing inflation into a country. For example, a rise in the exchange rate between the US Dollar and the Euro will make Euro-region imports from the United States cheaper and Euro-region exports to the United States more expensive. Following the unpredictability of the exchange rates amid the universe’s major currencies, import and export prices vary considerably over short periods. It is often alleged that a declining exchange rate cures the economy by making the exports more competitive in price. However, the benefits are likely to be temporary if there are underlying problems in inflation, productivity, and product quality in the host country. Political Situation When planning to expand globally, attention to political risk is a key focus. It does not merely encompass political instability, but also the implications of government policies and regulations and issues pertaining to corruption. Harrison (2011; p. 21) uses Ian Bremmer’s J Curve, which is a framework that summarizes concept of political risk. The framework represents the connection between openness and stability in a nation (Bremmer, 2007). Countries that rank higher on the graph tend to be more politically stable, and thus more open for businesses. Political stability includes such factors like a government that maintains order, secure and safe domestic environment, a well-functioning economy, and a political system that bases on rule of law. On the other hand, openness is affiliated to democracy and individual freedoms within a nation, freedom to travel overseas, trade and invest, and the degree to which a nation partakes in recognized global institutions. Openness and political stability play a major role in the business setting. Political stability establishes an orderly business milieu while openness grants businesses the freedom to undertake their tasks. Nevertheless, if political stability lacks openness, it enhances business ineffectiveness thus increasing business risks and augments the inflexibility of the regulatory environment. Cultural Assessment Cultural assessment requires an examination into a nation’s cultural elements such as social structure, religion, attitudes, and language. Cultural aspects may hinder business practices within a given region. For instance, language presents intricacies when venturing into foreign regions because it may cause misunderstandings and inadvertently offences. Although it may appear simple to translate the characteristics of a given service or product using a domestic language, marketing the service or product may present unanticipated complexities if the idea is not translated well. The host country’s subtle gestures, humor, jargon or puns may differ from those of the domestic country, and thus they must be fine-tuned accordingly. Similarly, failure to appreciate diversities in belief systems, cultural practices, religions or diversities in attitudes, relationships, and social statuses may create cultural drawbacks while doing business in an alien setting. Hence, cultural differences amid nations pose as factors that heighten the risk of operating overseas and they may dissuade international entry or diminish the likelihood of business success. Legal and Regulatory Requirements Any company endeavoring at conducting business overseas must consider the implications of the host country’s regulations and legal requirements. The foreign state may pose diverse reactions to foreign expansion or investment. The host economy’s expropriation history, currency limitations, and government restrictions may be critical factors in finding out whether the investment on market penetration will produce the anticipated benefits. It is incumbent on corporations and individuals that vend, transfer or ship services and goods to determine the restrictions or controls governing the transactions outside their domestic nations. Most nations require compliance with export controls whereby businesses must know the products involved, end users, destination countries, and customer identity. In addition, firms must be aware and adhere to prohibitions against conducting businesses within certain designated units within the host country. Likewise, the company ought to research and abide by custom laws, liability laws, tax laws, corporate laws, and import restrictions. It also needs to examine domestic legislation for matters arising under immigration law, distributor or producer liability provisions, tax laws, immigration laws, labor laws, and agency laws. Ultimately, in their global expansion endeavors, business entities must keep reviewing the legal and regulatory requirements because governments frequently update and maintain the regulations to enhance effectiveness in global businesses. Conclusion Every year, thousands of growing and entrepreneurial corporations consider global expansion as a growth and marketing strategy. Diversification and burgeoning opportunities draw businesses into the global arena. In addition, the fall of numerous barriers to global trade has compelled many firms to pursue internationals strategies to attain a competitive advantage. Nonetheless, global opportunities pose numerous challenges for which businesses must develop apt strategies. Potential risks associated with penetrating a foreign nation vary greatly. Political risks may consist of changes in the law or government policy, terrorism, wars, corruption, and civil unrest. Economic changes vary from financial instability, risk of non-payment to exchange rate exposure. Natural disasters, human error, and cultural mistakes are among other probable risks that may affect the business environment. Therefore, firms must consider the rationale for adopting appropriate strategies, entry techniques, and organizational structures that will make them competitive in the international market. In the development of a tactical plan to launch a global business program, companies must consider the potential adjustments they might require to enhance their overseas expansion. They must conduct a scrupulous investigation of the organization’s readiness to expand globally as well as a meticulous knowledge of the host economies. 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