Internationalisation describes designing a product in a way that it may be readily consumed across multiple countries.
This process is used by companies looking to expand their global footprint beyond their own domestic market understanding consumers abroad may have different tastes or habits.
Driving forces
Trade agreements
Tariffs, quotas
Improvements in transport
Improvements in communications technology
Why pursue internationalisation?
Avoid risk of operating in one market
Take advantage of economies of scale and experience curve effects
Boost profitability
Price advantages
Cost advantages
Protect domestic market
Increasing market share and Growth
Key customer service
Developing market expertise
Making competitive move
Taking advantage of government incentives
Factors influencing the attractiveness of international markets
Size and growth of target customer base
Ease of entry to an international market
Extent to which product will need to be adapted
Existing competitive structure in the target market
Economic conditions in the target economy
Need for local expertise or partners
Consistency with corporate objectives
Other external environment factors (eg, legal)
Types of Protectionism
Tariffs
A tariff a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply.
Quotas
Quotas are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period.
Export subsidies
A subsidy is a payment to encourage domestic production by lowering their costs. Well known subsidies include Common Agriculture Policy in the EU.
Domestic subsidies
Domestic subsidies involve government help (state aid) for domestic businesses facing financial problems .
Entering International Markets
Exporting direct to international customers
Selling via international agents and distributors
Opening an operation overseas
Joint venture or takeover
Exporting
Benefits
Uses existing systems
Online promotion makes this cost-effective
Can choose which orders to accept
Direct customer relationship established
Entire profit margin remains with the business
Can choose basis of payment
Drawbacks
Potentially bureaucratic
No direct physical contact with customer
Risk of non-payment
Customer service processes may need to be extended
Distributors
Benefits
Agent of distributor should have specialist market knowledge
Fewer transaction to handle
Can be cost effective
Drawbacks
Loss of profit margin
Unlikely to be an exclusive arrangement
Harder to manage customer service quality
Agent/distributor keeps customer relationship
Foreign Direct Investment
Benefits
Local contact with customers and suppliers
Quickly gain detailed insights into market needs
Direct control over quality and customer service
Avoids tariffs
Drawbacks
Significant cost and investment of management time
Need to understand and comply with local legal and tax issues
Higher risk
Overseas Takeovers and Joint Ventures
Benefits
Speed and potentially transformational
Popular way of entering emerging markets
Reduced risk - shared with joint venture partner
Buying into existing expertise and market presence
JVs may be a requirement in some markets
Drawbacks
Higher risk, particularly if the wrong JV partner or takeover target is selected
Significant cost and investment of management time
Need to understand and comply with local legal and tax issues
Costly to withdraw if the strategy goes wrong
Multinational Companies
A multinational company (MNC) is a business that has operations in more than one country. Note that a business does not become an MNC simply because it sells its goods and services overseas. The key to being an MNC is the business has operations in two or more countries.
Key reasons for rapid growth of MNCs
Global brands seeking to drive revenue and profit growth in emerging economies (in particularly seeking rising demand from increasingly affluent consumers)
The search for economies of scale, to reduce unit costs by concentrating production in a few key international locations
The perceived need to supplement relatively weak demand in existing, developed economies
The need to operate in many countries to avoid protectionism
Increased takeover activity that has built businesses with widespread international operations
Potential benefits of MNCs to countries in which they operate
MNCs provide significant employment and training to the labour force in the host country
Transfer of skills and expertise, helping to develop the quality of the host labour force
MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment
Competition from MNCs acts as an incentive to domestic firms in the host country to improve their competitiveness, perhaps by raising quality and/or efficiency
MNCs extend consumer business choice in the host country
Profitable MNCs are a source of significant tax revenues for the host economies
Potential Drawbacks of MNC activity in the countries in which they operate
Domestic businesses may not be able to compete with MNCs
MNCs may not feel that they need to meet the host country expectations for acting ethically
MNCs may be accused of imposing their culture on the host country, perhaps at the expense of local culture
Profits earned by MNCs may be remitted back to the MNCs base country rather than reinvested in the host economy
MNCs may make use of transfer pricing and other tax avoidance measures to significantly reduce the profits on which they pay tax to the government in the host country.