Companies decide to go global and enter international markets for a variety of reasons, and these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. However, companies often follow a standard market entry and development strategy. The most common is sometimes referred to as the “increasing commitment” method of market development, in which market entry is done via an independent local partner. As business and confidence grows, a switch to a directly controlled subsidiary is often enacted. This internationalization approach results from a desire to build a business in the country-market as quickly as possible and by an initial desire to minimize risk coupled with the need to learn about the country and market from a low base of knowledge.
International markets evolve rapidly and very often companies struggle to keep up in terms of their strategy. It is therefore reasonable to deduce that many companies’ international operations will consist of a collage of country market operations that pursue different objectives at any one time. This, in turn, suggests that most companies would adopt different entry modes for different markets. More commonly, however, is for companies to evolve a template that is followed in almost all markets. This usually starts with market entry via an indirect distribution channel, usually a local independent distributor or agent.
The factors leading to the wide acceptability of international business are:
- Globalization of economics: The policy of liberalization was adopted which led to the globalization of various economics including the former communist countries and socialist pattern of the society. The globalization of economics has been instrumental in the growth of international business.
- Rapid technological advancement: Many firms have emerged up with innovated products or with improved process technology. With the demand for such products and technology being price-inelastic, these firms have moved abroad in order to reap large profits. The development of information technology has bought different countries closer and has encouraged firms to move abroad with the minimum of difficulties.
- Establishment of WTO: In today’s highly competitive globalized business environment, WTO is indispensable enables a country to attain the status of MFN clause which is required for scaling the international competitiveness and it implies that any concession given to any nation becomes available to all the member countries.
- Increase in Competition: With increasing competition, firms have preferred not only to source raw material and intermediate goods from the least-cost country but also to set up their units in different countries, which minimizes the cost of operation and reduces financial risk. The growing concept of cost minimization and risk reduction, with a view to surviving in a competitive environment, has led to rapid growth of the internationalization process.
- Higher growth rate of GDP in developing countries: Higher growth rate of GDP of China, India, South Korea, Singapore, Malaysia, Thailand, Brazil and Mexico and other developing countries has also been one of the significant factors for changing scenario of international business.
- Increase in business alliance In degree and variety: During last 15 years international business alliances, joint ventures, mergers, amalgamations and takeovers have occurred in the world by the companies of different countries. This has further led to widening of international business.
- Increase in educational and career orientation opportunities: These factors resulted in enhancement of opportunities for higher value addition in developing countries. The developing countries started attracting multinational companies to establish their businesses in their countries.
Why Companies Engage in International Business?
There are several drivers of international business. The driving forces that motivate companies to go global can be classified into pull forces and push forces. The pull forces are proactive which pull the business to foreign markets. The push forces on the other hand are reactive forces which promote the companies to go international.
Pull/ Proactive Forces- Attractiveness of the Foreign Markets:
- Profit advantage due to increase in volume: For companies, mostly in the developed countries, which have been operating below their capacities, the developing markets offer immense opportunities to increase their sales and profits.
- Low wage/ cheap labour attraction: Many multinational companies (MNCs) are locating their subsidiaries in low wage and low cost countries to take advantage of low cost production.
- Taking advantage of growth opportunities: MNCs are getting increasingly interested in a number of developing countries as the income and population are rapidly rising in these countries. Foreign markets, in both developed country and developing country, provide enormous growth opportunities for the developing country firms too.
- Growth of regional trading blocs: Regional trading blocs are adding to the pace of globalization. WTO, EU, NAFTA, MERCOSUR and FTAA are major alliances among the countries. Trading blocs seek to promote international business by removing trade and investment barriers. Integration among countries results in efficient allocation of resources throughout the trading area, promoting growth of some business and decline of others, development of new technologies and products, and elimination of old.
- Declining trade and investment barriers: Declining trade and investment barriers have vastly contributed to globalization. The free trade regime, business across the globe has grown considerably. Goods, services, capital and technology are moving across the nations significantly.
Push/ Reactive Forces- Compulsion of the Domestic Market:
- Saturation of domestic demand: The market for a number of products tends to saturate or decline in the advanced countries. This often happens when the market potential has been almost fully tapped. For example, the fall in the birth rate implies contraction of market for several baby products. Businesses undertake international operations in order to expand sales, acquire resources from foreign countries, or diversify their activities to discover the lucrative opportunities in other countries.
- Scale economies and technological revolution: Economies of scale are reductions in unit production costs resulting from large-scale operations. The technological advances have increased the size of the optimum scale of operation substantially in many industries making it necessary to- have foreign market, in addition to the domestic market, to take advantage of scale economies.
- Technological revolution: Revolution is a right word which can best describe the pace at which technology has changed in the recent past and is continuing to change. Significant developments are being witnessed in communication, transportation and information processing, including the emergence of the internet and the World Wide Web.
- Domestic recession: Domestic recession often provokes companies to explore foreign markets. One of the factors which prompted the Hindustan Machine Ltd. (HMT) to take up exports very seriously was the recession in the home market in the late 1960s.
- Competition as driving force: Competition may become a driving force behind internationalization. There might be intense competition in the home market but little in certain foreign countries. A protected market does not normally motivate companies to seek business outside the home market.
- Government policies and regulations: Government policies and regulations may also motivate internationalization. There are both positive and negative factors which could cause internationalization. Many governments offer a number of incentives and other positive support to domestic companies to export and to invest in foreign investment.
- Improving image of the companies: International business has certain spin-offs too. It may help the company to improve its domestic business; international business helps to improve the image of the company. There may be the ‘white skin’ advantage associated with exporting- when domestic consumers get to know that the company is selling a significant portion of the production abroad, they will be more inclined to buy from such a company.
- Strategic vision: The systematic and growing internationalisation of many companies is essentially a part of their business policy or dtrategic management. The stimulus for internationalisation comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.
Importance of International Business
- High living standards: Comparative cost theory indicates that the countries which have the advantage of raw materials, human resources, natural resources and climatic conditions in producing particular goods can produce the products at low cost and also of high quality.
- Increased Socio-Economic Welfare: International business enhances consumption level, and economic welfare of the people of the trading countries. For example, the people of China are now enjoying a variety of products of various countries than before as China has been actively involved in international business like Coca-Cola, McDonald’s range of products, electronic products of Japan and coffee from Brazil.
- Wider Market: International business widens the market and increase the market size. Therefore, the companies need not depend on the demand for the product in a single country or customer’s tastes and preferences of a single country.
- Reduced effect of Business Cycles: The stages of business cycles vary from country to country. Therefore, MNCs shift from the country, experiencing a recession to the country experiencing ‘boom’ conditions. Thus, international business firms can escape from the recessionary conditions.
- Reduced risks: Both commercial and political risks are reduced for the companies engaged in international business due to spread in different countries.
- Large scale economies: Multinational companies due to wider and larger markets produce larger quantities, which provide the benefit of large-scale economies like reduced cost of production, availability of expertise, quality, etc.
- Potential untapped markets: International business provides the chance of exploring and exploiting the potential markets which are untapped so far. These markets provide the opportunity of selling the product at a higher price than in domestic markets.
- Provides the opportunity for and challenge to domestic business: International business firms provide the opportunities to the domestic companies. These opportunities include technology, management expertise, market intelligence, product developments, etc.
- Division of labor and specialization: International business leads to division of labor and specialization. Brazil specializes in coffee, Kenya in tea, Japan in automobiles and electronics. India in textiles garments, etc.
- Economic growth of the World: Specialization, division of labor, enhancement of productivity, posing challenges, development to meet them, innovations and creations to meet the competition lead to overall economic growth of the world nations.
- Optimum and proper utilisation of World Resources: International business provides for the flow of raw materials, natural resources and human resources from the countries where they are in excess supply to those countries which are in short supply or need most.
- Cultural Transformation: International business benefits are not purely economical or commercial; they are even social and cultural. It does not mean that the good cultural factors and values of the East are acquired by the West and vice versa. Thus, there is a close cultural transformation and integration.
- Knitting the World into a Closely Interactive Traditional Village: International business ultimately knits the global economies, societies and countries into a closely interactive and traditional village where one is for all and all are for one.