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BUSINESS

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Business 2

International Business

Introduction

There a couple of reasons why organizations or firms opt to take their business activities

into the global arena. However, the paramount reasons for any firm going global are to maximize

its customer base, identify new market opportunities and generally expand its business

activities

. A firm can attract to go international due to the presence of new, convenient,

amicable and business-friendly opportunities existing in the foreign market. On the other hand, a

firm can also be compelled or rather forced to shift to foreign market due to the presence of

unfriendly, intolerable and harsh business environment existing in the domestic market. The

objective of this paper is to, explicate some of the motivating factors which make businesses go

internationalize their operations. It will also focus on a few examples of existing firms that have

taken their business operations to foreign markets and reasons behind their action.

Motivating factors

• Cheap labor in foreign markets

Sometimes it is about going for any opportunity that will help in cutting cost, and one of

them is the availability of cheap labor. One of the primary objectives of any firm is to reduce

production cost and maximize profit. One factor that vehemently contributes to high production

cost is labor. In regard to this, firms tend to identify environments where they can pay their

employees low in exchange for efficient and quality labor. One example of a country with

Antràs, P. and R Yeaple, S., 2013. Multinational firms and the structure of international trade

(No. w18775). National Bureau of Economic Research.

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adequate cheap labor in China. China has now become a global business hub hosting a number

of global giant business enterprises. China has more than enough cheap labor which is efficient

and effective. This is the chief reason which made Philips a global company to have their

business units and factories taken to China. The company has now set up more than 20 factories

in China some of which are singly owned by the company and others owned jointly. The

company originally operated in its home country Netherlands. The company encountered a very

stiff economic downfall during the year 1895 under the leadership of Gerald Philips, the founder

of the company.

The main contributor of its economic unsustainability and low profit margin was found

to be the high cost of labor in Netherlands. According to the principles of production

management, reducing cost of labor is one strategy that aids an organization to improve in its

performance. Philips took an initiative of making its products available in the international

market, its first market being the Republic of China. The company’s largest part of its profit was

now coming from products sold in China. That was followed by establishment of Philips

factories and business units in China and later India. The company now operates in almost all

continents and having also diversified its products, its performance is undisputable. The main

objective of Philips is making China its global supply point with more than 20% of its products

manufactured and supplied from China. The company enjoys cheap and affordable labor and that

has greatly contributed to lowering of production cost and maximizing on profit. Apple has

recently also set up some of its production units in China. It is all about opportunity for cheap

labor in a foreign market which is not present in the domestic market (Forsgren 2017).

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Domestic market restrictions

Restrictions in the domestic market have prompted some firms to relocate their business

operations to international markets

. One example of a domestic restriction is market saturation

for durable goods like TVs, phones, electrical appliances among others. There is a sense in which

some products become so much over saturated in the domestic market until their demand and

value start o decline. This is what companies like Samsung and LG faced in their domestic

market before going global. Both companies were founded in South Korea and their primary

products are electronic devices including Tvs, phones and computers. There was a lot of

accumulation of Samsung and LG products in South Korea which also posed some stiff

competition between the two giant companies. In the attempt to try and find a new avenue for

their products, Samsung and LG went into international market starting from Asian nations and

Europe. The companies switched their focus to foreign nations including India and China where

there was an adequate untapped market for their products. Samsung and LG now have very

performing business units in India and China and their products have gained demand and value

in these foreign nations. Actually, Samsung phones have gained a remarkable reputation in

China one may think that the company is China owned.

Profitability

Brush, C., 2012. International entrepreneurship: The effect of firm age on motives for

internationalization (Vol. 5). Routledge.

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Business statistics stipulate that firms make more profit in foreign nations than in the

domestic market

. This has been acutely proven true by Crocs Inc. footwear manufacturer which

reported $165 million profit earned from its foreign market. This is just an example among other

many firms who have immensely earned from their foreign markets. Business firms are always

focused on opportunities which will provide an avenue to boost their profit margin, and one

option is going global. The reason behind this is because when a company starts operating in

foreign nations, its products are presumed as new products and value and demand automatically

shoots up and revenue increases. Samsung makes a lot of money from its business units in Asian

nations like India and China that in its home country South Korea. Its products have earned

immense reputation and value in the United States, across Europe and Africa. It is a strong

multinational firm.

• Competition

Stiff competition in the domestic market may force a firm to internationalize its business

operations. Organizations face financial, technological and market challenges either from fellow

domestic firms or from foreign companies (Forsgren 2017). One example is Nirma, an Indian

detergent company. Nirma was originally operating amicably in the domestic market and its

products had high demand in the whole of India. It was India’s leading detergent company. This

was way back before trade Liberalization that took place in 1991 which made India open for

investment by other foreign companies. Multinational companies including Unilever, Henkel,

and Colgate flooded India and that when Nirma among other Indian firms started losing value.

Czinkota, M.R. and Ronkainen, I.A., 2013. International marketing. Cengage Learning.

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Its products faced a lot of competition from these foreign giants. The Indian firms then had to

apply a countermeasure by taking their business operations into other foreign nations.

Competition is a discouraging factor that has greatly contributed to the internationalization of

many firms. Majority of firms today are multinationals because of competition, and most of them

perform very well in foreign markets than their home markets (Taylor & Jack 2013).

Government Policies

Government policies also encourage internationalization. If a government does not offer

supportive incentives to domestic firms then those firms will definitely invest in other foreign

nations where government entities encourage and support investment

. A good example is the

Birla group of companies situated in India which mainly deals with textile and chemical

products. The Indian government did not encourage fiber plants at that time and this became a

big blow to Birla Company. The company then transferred its operations to Thailand where it set

up fiber plants. According to Assnoff Marketing theory, a business thrives very well where the

legal frameworks provide a conducive environment for the operation of the same company.

Birla Company originally experienced a very poor performance due to lack of market for its

textile products since India itself did not permit its operation. In 1955 a few years after the

Second World War, the company started ferrying its products to Thailand. By that time Thailand

did not oppose fiber plants from being set up. The company then went ahead and established its

fiber factories in Thailand. The company has now diversified its products into agrochemicals,

cement, and mining among others. It has more than 120,000 employees in its global business

Deresky, H., 2017. International management: Managing across borders and cultures. Pearson

Education India.

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units. Thailand government happen to offer incentives and encourage foreign companies to

invest in their country and this happened to be a motivating factor to Birla Company.

Government forms the basis for the growth of any firm. Nations whose governments

encourage and support investment have the most number of multinational companies. China is an

example of them, hosting the highest number of biggest multinational companies in the world.

Some of these companies are from other countries but operating from China. When government

policies do not offer an amicable environment for businesses to operate then there is a high

tendency that those businesses will be relocated to other business enabling countries, and that is

how firms become multinational (Taylor & Jack 2013).

• The Internet

The Internet is one factor that has enabled firms to operate in every part of the world

easily. The Internet has come at a time when taking business operations in the global arena is a

challenge. It is now evident that organizations or rather firms can operate, and sell their

commodities all over the world without physically having to set up branches (Mura

&Gašparíková 2014). Coca-Cola Company is the best example. Coca-Cola is one of the best and

leading multinational beverage firm located in the United States. The company’s products are

felt in every corner of the earth through the internet. The company was originally set up to

operate in the United States but there was a need to expand its market base for its products to

gain entry into the global market. The company’s first strategy was to incorporate global

celebrities in their products advertisements. The internet advertisements are done at a global

scale. The company uses the internet mostly in doing products advertisements all over the world.

Everyone is able to learn about the company’s products and services via the internet. Other

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organizations that have taken advantage of the internet is the eBay and Amazon. These

companies are multinational not because they have set up offices or buildings in every country

but because they are able to operate and distribute their products all over the world via the

internet.

The Internet has created a wonderful avenue for domestic firms to go international. Majority of

multinational companies do not actually have manufacturing units in other nations but their

products are distributed and sold globally.

• Spreading of risk

Another driving factor for internationalization is risk diversification (Killing 2012).

Companies will opt to operate in several foreign markets than only in their home country

. This

is because operating as a multinational firm reduces the risk of severe suffering either from

economy downscale or political instability in either home country or a particular foreign nation.

There is a sense in which firms prefer doing business in a number of nations if possible all over

the world since the risk is always minimal as compared to when operating in one nation which

can be struck by political instability of economy downscale which will definitely affect 100% of

the firm operations. Multinational firms like Unilever and Coca-Cola do not really suffer a lot

when some of their business is affected in one country. Taking Unilever for instance, the

company started in Britain majoring in production of Home care products including detergents.

In 1945 Unilever’s business operations in Britain started to decline due to political and economic

struggles that struck United Kingdom especially during the World War II. Owing to the fact that

Dunning, J.H., 2012. International Production and the Multinational Enterprise (RLE

International Business). Routledge.

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the company’s major operations were only based in United Kingdom, effects of political

instability and economic downfall affected it wholly. The company then shifted and started a

branch in the United States, then China and India. This was in essence to reduce the risk

involved in operating in one nation or rather domestic market.

How firms Internationalize

There are a number of ways in which firms become multinational. However, there are

some factors that are considered including the purchasing power in the foreign nation, economic

stability, legal regulations, and demography among other considerations. When a firm is satisfied

with the market environment in another country then it starts setting up its operations gradually.

The following are some of the means in which firms use to gain entry into the international

market.

• Exporting

In this mode, firms start by conducting indirect exporting of their products to other nations

through a series of intermediaries. The firm’s products reach the target market has gone through

a number of intermediate units. This happens at a certain level when the firm now starts doing

direct exports. In this stage, the firm’s products have gained value and demand in the foreign

market. The risks in the first instance are high but the firm enjoys high returns. This is how

Chevron and Exxon Mobil companies gained entry into global market and until today they have

become leading export companies in the United States (Jormanainen & Koveshnikov 2012).

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Franchising

This is where two firms come to an agreement where one firm permits the other one make

use of its brand name, advertisement techniques and marketing strategies to sell its products in a

foreign market. For instance, the Gargash Enterprises entered into an agreement with Mercedes-

Benz family Daimler AG to distribute and sell its vehicles in the United Arab Emirates. In this

case, Mercedes-Benz vehicles gained entry into countries like Dubai through an agreement with

Gargash Company.

Joint Ventures

This is where two firms usually located in different countries agree to share and operate as

a corporation and share profits and losses. There are a number of factors to be considered prior to

entering into a joint venture such as contract length, ownership among others. Marks & Spencer

which is a British based company operates as a corporation with Reliance Retail Ltd an Indian

based company. Most firms prefer operating in joint ventures because of low risk and high

profits.

Conclusion

Internalization of business operations is what major firms are looking for. A lot of factors

some of which are been explicated above have led to firms going global. Some including Apple,

Exxon Mobil among others have become global giants in revenue collection because of

international operations. However, firms need to understand that there is a risk in the first

instance of venturing into global operations. A lot of factors have to be considered before taking

business operations into foreign nations. Internalization is very much recommendable to able and

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robust firms who feel competent enough to explore the world and establish new markets for their

products.

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References

Antràs, P. and R Yeaple, S., 2013. Multinational firms and the structure of international trade

(No. w18775). National Bureau of Economic Research.

Brush, C., 2012. International entrepreneurship: The effect of firm age on motives for

internationalization (Vol. 5). Routledge.

Czinkota, M.R. and Ronkainen, I.A., 2013. International marketing. Cengage Learning.

Deresky, H., 2017. International management: Managing across borders and cultures. Pearson

Education India.

Dunning, J.H., 2012. International Production and the Multinational Enterprise (RLE

International Business). Routledge.

Forsgren, M., 2017. Theories of the multinational firm: A multidimensional creature in the

global economy. Edward Elgar Publishing.

Jormanainen, I. and Koveshnikov, A., 2012. International activities of emerging market firms.

Management International Review, 52(5), pp.691-725.

Killing, P., 2012. Strategies for joint venture success (RLE international business) (Vol. 22).

Routledge.

Mura, L. and Gašparíková, V., 2014. Penetration of small and medium sized food companies on

foreign markets. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis,

58(3), pp.157-164.

Taylor, M. and Jack, R., 2013. Understanding the pace, scale and pattern of firm

internationalization: An extension of the ‘born global ‘concept. International Small

Business Journal, 31(6), pp.701-721.

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