Different writers on International Business (IB) have discussed the issue of internationalisation under different headings, viz., and entry mode, mode of entry or simply internationalisation.
The reasons, for the firms going international, can be briefed as under:
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1. To Increase Returns:
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The very basic reason for expansion of any business, including going global, is to increase the returns through higher margins or lower costs. International business makes it possible due to differences in labour, capital costs, natural resources, or taxation between home and the host country.
Many of the US IT companies came to India to have their call centers to serve their US clients to take advantage of the skilled labour availability. At times domestic firms go international due to legal restrictions in the domestic market for future growth.
2. Competition Worldwide:
Competition always expands market. Firms facing domestic competition often decide to go international in search of green pastures. Dell, a computer company in the US, invested in Europe, Africa, Latin America, and elsewhere due to strong domestic market competition.
Many firms decide to go international to defend their domestic markets from international competitors by entering their competitor’s home markets to put them on a back foot. Kodak of the US decided to enter Japanese market when the Fuji of Japan entered the US market.
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Holcim’s investments in Mexico led Cemex (Mexico) to make heavy investment in Spain in 1992, where Holcim already had made significant investments. If a price war erupted in Mexico, another might well erupt in Spain. As it turned out, no price wars erupted.
Weak sales in the US have compelled Coca-Cola to focus on the billion people worldwide expected to join middle class by 2020. Growth has stalled in the developed world, not only in US but in Europe and Japan too. Multinationals everywhere are turning to developing markets to make up the difference. In the West, incomes are stagnant. During the global downturn, India, China, and Brazil outpaced global markets and for the most part shrugged off recession.
Some firms decide to go overseas since their competitors have decided to do so. If the firms do not follow them, it may become difficult for them to enter afterwards. Coca Cola and PepsiCo often follow each other.
The competitors operating gradually do have advantage domestically due to lower cost and market power being abroad. Sometimes, due to imposition of trade barriers by an importing state, the exporters from abroad decide to build manufacturing plants in the importing nation. Toyota, Honda, and Nissan had to do so in the light of voluntary restrictions of exports of Japanese automobiles in 1980. Then these companies were treated as local companies in the US.
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At times overseas markets may be the source of new products and ideas (Just-in-time: Japan). How long can a country survive ignoring rest of the world that do things better than we do? Reality is that there are other parts of the world that do things better than we do. We would not be able to take advantage of what others do better and to compete with others that do look internationally.
3. Strategic Reasoning:
There may be one or many strategic reasons to go international or global. Firms having distinctive resources or capabilities developed at home may deploy them abroad. Most of the top Indian pharmaceutical companies have gone international to take advantage of making generic supplies. Some firms may go international to capitalize on first- mover advantage in an international market before a major competitor reaches.
This may result into achieving the competitive leadership in marketing. Some firms go international to have the advantage of “downstream” or “upstream” integration. India’s Oil & Natural Gas Commission’s (ONGC) aggressive participation in oil and gas exploration projects abroad is a case of downstream integration. Some firms move internationally since their clients move abroad. US meat supplier OSI Industries followed McDonald’s.
Japanese tyre making company-Bridgestone followed Honda, Nissan, and Toyota to the US market. A company may decide to go international as it is unable to maximize its goals and objectives while operating in a closed economy context. At times two firms of different nations may go in for strategic alliance to seek less restrictive foreign operating environments. Smith line of US and Beecham of UK merged as the merged company was an insider in both Europe and America.
4. To Seize Market Opportunities:
A company decides to develop internationally as it is unable to maximize its goals and objectives while operating in domestic market alone. Firms in the mature markets enter developing countries through trade or investment to seize marketing opportunities therein. Major automobile and telecom companies of the world entered China and India to seize opportunities as more and more disposable funds are available with their citizens due to high economic growth therein.
Some firms enter such markets to take advantage of product life cycle. Due to maturing of the product at home, such markets with an earlier stage of its life cycle provide them “new life”. Additionally, new markets also provide opportunity to put to use surplus profit, and underutilised man, machine, and technology. Once a few companies seize the market opportunities abroad, others also follow the suit.
Finding new sources for growth is one reason, the Western companies are vigorously investing in emerging markets, but it is not the only reason. Emerging market economies are beginning to produce their own powerful multinationals – Haier in china and Tata in India are just two examples. By entering emerging markets western multinationals are playing both offense and defence.
They know they must be on the ground there, investing there for the long term, physically close enough to learn ways of market that differ from those they are accustomed to. According to Vijay Govindrajan, the biggest threat for US multinationals is not existing competitors, but from the emerging market competitors.
5. Liberalisation Initiative:
The nations worldwide have initiated economic reforms and are extending an open arm invitation to multinational companies to invest in their territories or to export goods/services there from. To seek investment, technology and knowhow, states provide different incentives: tax-holidays, subsidies, cheap loans in local currency and use of property. The liberalisation of trade and investment rules has created a “world of opportunities” for the international entrepreneur.
6. Emergence of Multinational Enterprises (Mnes):
Emergence of MNEs is not a new phenomenon. However, their power and capabilities have increased tremendously in the recent past. A few facts about them are indicators of the same:
i. The world’s largest 1000 industrial firms (most of which are MNEs) contribute 80% of global output.
ii. Approximately 40 to 50% of world trade is conducted between MNEs and their affiliates.
iii. The top 10 largest industrial MNEs each has turnover greater than the tax revenues of Australia.
Due to ‘superpower’ the MNEs have the capability to relocate operations from high-cost to low-cost countries, and create, deploy, and upgrade resources in pursuit of sustained competitive advantage. Relocation is used to lower cost (labor and transport costs), to remain closer to components and raw materials suppliers, and to overcome the threats by the existing host country government.
It is important to note that MNEs here do not mean only large firms based in developed nations, but also from emerging economies such as South Korea, Taiwan, Singapore, Malaysia, China and India, and the small and mid-size international enterprises. Growing power of MNEs is encouraging other domestic business players to go global. MNEs are the beneficiaries of, as well as the reason for the growing international business.
7. Spread of risk:
The management of international business is the management of risk. International business is usually riskier to domestic business due to variations in environments among the nations. These variations bring in uncertainty, “unpredictability of environmental or organisational conditions” affecting the performance of a firm.
Along with uncertainty comes risk, i.e., “unpredictability of operational and financial outcomes”. The uncertainties are not only threats but opportunities too, to spread the commercial risk. Going international assists the firms to spread the commercial risk across several countries. A sudden collapse in market demand in some countries may be offset by expansion elsewhere. Similar is the case with supplies. Cemex could weather the Mexico’s currency crisis of the mid-1990s, because it had globalised.
The huge cost of new product development may be another reason to go international. Increasing total sales by going international would not only reduce research and development (R&D) costs per unit but also will make other economies of scale possible. A US pharmaceutical manufacturer’s experience is that out of every 5000 substances examined, only one is likely to prove safe and effective.
In such circumstances going international is the answer to recover the cost as early as possible by putting less of burden per unit. Apart from this, the enormous cost incurred for new product development have made companies to look across their borders for low cost outsourcing to bring down the cost and risk, if any.
None of the firms would like to use its home market or dominant markets for test-marketing (clinical trials in case of pharmaceuticals), because who would like to see its major markets getting affected for any mistakes or bad publicity during such tests or trials. The firms normally opt for a foreign location which is less important than the home market or dominant overseas markets.
8. Experience Curve:
Getting involved into international business can facilitate ‘experience curve effect’. It helps in realizing greater cost economies and efficiency increases attained in consequence of a business acquiring experience in a particular kind of activity or project. To exploit the experience curve an expanded global market is necessary. Here the benefits accrue not from the economies of scale but from the experience.
It has been seen that for some kinds of products production costs decline considerably every time the output doubles. The relationship has been observed in aircraft industry (where each time accumulated output of airframes was doubled, unit costs declined by 80% of their previous level.) and semi-conductor chip industry.
In case of airframes the cost of second airframe would be 80% of first one, for the fourth airframe 80% of the second airframe, and for the eighth airframe 80% of the fourth airframe (it would be roughly 50% of the first airframe). To generate production experience the new products are often under-priced so as to lower future production costs.
While Intel has advantage of experience curve in high-priced proprietary chips like Pentium IV, the Asian firms such as NEC and Samsung dominate the production of low-cost, standardised semi-conductor chips. Experience curves are so significant that they determine the global competition within an industry.
9. Development of Institutions to support and facilitate International Business:
Development of international institutions such as the World Trade Organisation (WTO) (facilitator of international trade), the World Bank and the International Monetary Fund (IMF) (facilitators of international monetary and financial system), and many UN bodies represent the institutional foundations of international governance and regulation of international business.
While the above institutions facilitate multilateral cooperation, the regional accords such as the European Union, North American Free Trade Agreement (NAFTA), South Asian Free Trade Agreement (SAFTA) and many more preferential trade agreements have been useful in relaxing trade and investment barriers among their members. Fewer restrictions enable firms to seize advantage of international opportunities.
10. Technological Changes:
Elimination of distance barriers is leading business to become more global because of improvements in technology – especially transportation becoming quicker, communication becoming simpler and both becoming cheaper compared to first half of the twentieth century. These developments have made international business more feasible and profitable.
The development of micro-processor has led to explosive growth of high-power and low-cost computing helping people to acquire more and more information and process it faster. Micro-processor has also revolutionalised telecommunication technologies. Internet and World Wide Web make communication faster and cheaper.
Vast information and fast communication have made it possible to manage business in and from any corner of world facilitating expansion into international markets. Not only the transaction cost has gone down, the demand for new products and services has also gone up. Increase in demand means more international transactions.
Emergence of e-commerce has eliminated the need of physical presence in the markets and electronic transfer the time-gap in payments. Hence the fear-to remain only local – is no more a real problem.
Information revolution has played a key role in the evolution of international business. Everyone wants the best and most modern products. Since consumers travel a lot, businesses must bring products and services to them in every market and that too instantly.
11. Other Reasons:
Of the other reasons driving firms to go international two important reasons are social and cultural convergence, and global peace. Due to increasing degree of global interaction through internet frequent flying, media and other channels the world is moving towards social and cultural convergence. It has led to demand for standardised products and services, making consumers to demand the same everywhere.
Global peace, instead of war, has provided space to trade and investment globally. “We live in a world that is constantly in bitter conflict, but on a global basis we are at peace”.
Today, even the firms who want to do only domestic business have to go ‘international’ to keep themselves abreast of international developments. Laxity means danger to their survival. Interdependence among nation-states of the world is both the cause and effect of growing international business. No business can be purely domestic. The realities of modern business make all business international. A political, economic or natural happening in one part vibrates the whole world.