Firms Going International - Case Study Example

Firms Going International Introduction Internationalisation of companies has increased the integration of world economies and it is evident from thetransmission of global financial crisis which emerged from the developed economies and stretched worldwide. In an attempt to participate in free trade and competition and to expand, the companies go international. The increasing international operations of large corporations and the increasing number of strategic alliances of firms are actually showing the keenness of companies to go international. The internationalisation of companies has become an important area of discussion because of its impact on the company and the home and host countries. In this report, I will discuss the advantages and disadvantages of the firms going international on companies and the host economies. This report will be actually useful for the readers to understand in what ways the foreign companies appear to be beneficial for the host countries and in which areas their activities should be controlled to avoid their disadvantages. Potential Advantages and Potential Disadvantages of Firm(S) Wishing to become International Advantages The motives of a company to go international can be the important determinants of the advantages and disadvantages of internationalisation. The basic reasons because of which a company is motivated to carry out foreign direct investment may include resource seeking, marketing seeking, efficiency seeking and strategic asset seeking (Andidas, 2006). Sometimes the impact of internationalisation depends on the nature of business. In a study to investigate the difference between the performance of service firms and manufacturers operating at international level, it was found that internationalisation have positive effects on service firms as compared to manufacturing companies. The companies go global to increase their revenues and profitability. When the market becomes saturated sometimes, it becomes imperative for the related businesses to go international. When the businesses operating in the United States reached the capacity of several economic segments, then it becomes imperative for them to develop new territories and franchise partners for example, McDonalds, KFC and Baskin-Robbins have appeared as stronger international brands than they do domestically. The strength of the U.S. multinational parent companies is directly tied to their success in America and abroad and to achieve a stronger position, many U.S. companies have to expand their operations international (Slaughter, 2010). In the recent years, various companies have extended their businesses to developing companies such as India. Hindustan Lever and ITC have been successfully operating for many years, and the company like Samsung, LG Electronics, and Hutchison Whampoa are earning more than $1 billion annually from Indian market (Rediff, 2006). The international expansion gives worldwide recognition to the parent company and its brand name is internationally recognised. The international expansion gives an opportunity to the parent company to explore more opportunities and market segments in a foreign market. Moreover, the firm may also get access to cheap labour and cheap abundant of resources. For example, Lafarge invested in China in the cement industry because of the high GDP growth and cheap labour in China. Today, Lafarge in China is one of the top ten cement manufacturers (Lafarge, 2010). Disadvantages The increasing number of companies operating internationally shows that the world is opening up for these companies. Although they bring various benefits to parent company however, there are various disadvantages of these firms. Actually these firms after going global face various challenges to which they are unfamiliar. The major obstacle that can affect the entire organisation is the culture of the host country. For example, in the beginning the parent company may face language problems, and pricing issues. In short, the host countries may have different ways of doing business, therefore, the parent company may not realise this fact in the beginning. IKEA is operating in various countries and its leaders and managers have been efficient to transmit the core values and beliefs of the company to the employees in foreign companies however, despite the unique global culture of the organisation, it has not been successful in dealing with its complex notion of culture in the foreign countries (Mauelshagen & Martens, 2007). The parent may company also find it harder to recruit the talented and skilled people. Sometimes, companies may explore various unexploited market segments in an economy; however, they may face great challenges in finding the skilled labour. When the foreign companies start their operations in China, the major problem they face in attracting the skilled labour is the shortage of talent. McKinsey Company has reported that on an average less than ten percent of the candidates applying in foreign companies in China are suitable for technical positions such as engineers, doctors etc (Wu, 2008). When a company wishes to go international, it exposes to the external environment of the host economy and faces political and economical risks. If the company is not prepare to face the political challenges then it may incur huge losses. In 1959, the American owned companies faced loss of hundreds of millions of dollars, when after Fidel Castro’s government took control over Cuba (Investopedia, n.d.). The organisational structure of the company becomes very complex when it goes international. Most of the times, the parent firm loses control and interventions over the operations of foreign companies. Therefore, in most of the cases, the foreign subsidiaries of the parent company operate independently. When a company operates at international level, then company may face differences in legal concerns which may create conflict between the parent company and its foreign subsidiary. Most of the companies planning to go international wish to start their operations in China. A report shows that the firms operation in China faces various operating challenges because China’s environment is considered as the worse than two thirds of the 59 economies selected in the report survey (EIU, 2004). Actually, most of the small firms starting their operations in China lack international and country specific experience however, the larger firms come up with at least some experience and strategies. Therefore, the experience of a firm going international may vary depending on various other factors such as its size and learning curve. When a company goes international and it does not consider the local needs of the people and the consumer patterns in the host economies, their brand name is affected wrongly, which direct affects their home country operations. Therefore, standardisation and differentiation creates an issue for the company. The shift in the demographics of a company means that the parent company has to explore unique ways to engage workers because the benefits of previous company may not fit in the foreign culture therefore, recognising the changes becomes very important for the parent company (Overman, 2006). GM US when expanded its operations to Europe to develop GM Europe, it was actually seeking to increase its target market and revenues. However, the impact of global financial crisis on GM and bankruptcy of GM Europe, affected the whole organization both financially and strategically. Potential Advantages and Potential Disadvantages of Countries wishing to accept these companies Advantages The major benefit which the host country achieves by accepting these companies is the foreign direct investment. Foreign direct investment increases the total capital and facilities in an economy thereby, increasing the level of economic activity, productivity and growth. The investment in any form is beneficial for the host country whether it is in the form of Greenfield enterprise or the takeover of a foreign company on the domestic enterprise of the host country. The host countries also face promotion of trade because of the foreign companies. The reason is that a significant portion of total trade of an economy comprises of the trade between multinational companies and their branches. The host countries which accept the foreign companies dealing in high technology products relatively face higher promotion of trade. In this way, the integration of the host country with world economy increases, thereby, assisting it to explore more opportunities. These companies strengthen the domestic competition especially in the emerging and developing economies for example, the telecommunication sector of New Zealand, before deregulation, had a monopoly market structure. The foreign companies bring technological expertise in the host country, which is very important for the economic growth of the country. Since only the large companies can afford innovative and new technology therefore, most of the foreign companies who have the capability to go international are the sources of technological expertise. Moreover, local companies can imitate the practices of foreign companies, thereby increasing their productivity level. The foreign companies create employment opportunities in the host countries. In Europe, foreign companies employ one individual in every five in manufacturing and in the United States; foreign owned companies employ one worker in every seven (Venables, 2005). Furthermore, during 1977 to 1997, when the employment of U.S. owned companies declined, then most of the reduction was offset by the increased output of foreign firms operating in the U.S (Davis, n.d.). Foreign owned companies that wish to operate at global level are more productive than national firms of a host economy. The productivity of foreign owned companies is usually larger than their branches in home countries as well. The table shows the average size and labour productivity of foreign affiliates and the manufacturing companies in France, Germany, Japan, UK and United States (Venables, 2005). The table shows that for each economy, the number of employees, turnover per firm and value added per firm are greater for foreign affiliates as compared to all other firms in the economy. Source: Venables (Multinational Firms in World Economy) Disadvantages Host countries which accept the foreign owned companies face various disadvantages. It is interesting to note that various disadvantages of these companies to host countries are closely linked to the benefits. The major disadvantage is that multinational companies do not consider the traditions, values and norms of the host countries, therefore, they are considered as a major threat to the culture of the host country. Although host countries encourage the activities of these companies in their national boundaries because of the expectations of employment creation, however, these companies do not offer extensive employment opportunities. Since most of the foreign companies use capital intensive production facilities therefore, fewer jobs are created by these companies. Sometimes these companies offer short term benefits to the host countries such as they start their operations to gain tax or grant advantages, however, once such benefits run out, they may wind up their operations. The foreign companies may exploit corrupt or less strong government of the host state to achieve maximum benefits. It happens more frequently in the case of developing economies. Although the international companies enhance the competition in the markets of host countries however, they may pose a major threat to local industries. Because of their higher productivity, investments and output, they may get advantage over the local or national firms. The foreign companies exploit the resources of the host economies. One of the motives of these companies to global is to access cheap and abundant of resources. For example, Nestle the world’s largest food and beverages company planned to build a water bottling plant on 1 million square foot in McCloud and the company was given the contract of 100 years to pump 1600 acre feet of spring water annually without any public consent and environment impact analysis (MedIndia, 2007). It clearly shows the power of foreign companies and their intentions to exploit host country’s resources. The foreign companies may also cause more damages to the natural environment of the host countries. In various host countries, the environment regulatory authorities are not that much strict therefore, the foreign companies may get benefit of it. The tax revenues created by foreign companies are far less than the revenues they earn from the host country. Most of the multinational companies have introduced a limit on the taxes they are willing to pay for example, through a survey it was found that one of the companies was willing to pay tax equal to a reasonable income amount and the other was willing to pay amount equalized at $25,000 (Smith, n.d.). Conclusion Based on the above discussion, it can be concluded that a foreign subsidiary may offer various benefits to the parent company such as increased revenues, profitability, strength, market share and recognition however, a lack of experience and environment analysis may expose the whole company to various major threats. Moreover, the host companies attracting these companies enjoy the developments, technological expertise, foreign direct investments and employment opportunities however; they should not lose their focus towards the regulation and monitoring of these countries. Bibliography Andidas Website. (2006) Why do companies go global – building or acquiring facilities outside their home country? Discuss this question with particular reference to Tesco’s international strategy. [Online] Available from: http://www.andidas.com/academic/lse_coursework/MN498%20-%20Tesco%20Internationalisation_by_andidas.pdf [Accessed 15 May 2010]. Contractor, J. F. (2007) Nature of the relationship between international expansion and performance: The case of emerging market firms. 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