Reasons for which big firms engage in Foreign Market
Companies engage in international for an array of reasons, but the objective is typically company growth or expansion. Regardless of whether a company hires international employees or searches for new markets abroad, an international strategy can help diversify and boost a business. The following are the reasons why firms go global.
1. Boost sales and improve profits
The first and foremost reason is that in order to record majestic growth rates, firms like to expand their sales and acquire newer markets. It is ample clear that companies are reliant on the buyers’ interest in the product and services and their willingness and capacity to buy them. Over years, the number of consumers is increasing with their standard of living also rising, which has prompted to increased purchasing power and demands in a particular country. At the point when this is contrasted with the buyers and demand of the whole world it opens up an energizing universe of opportunities which designate higher sales and ultimately higher profits
According to the article of Richard P Biggs in 2013, if a business is prevailing in the U.S., developing globally will probably enhance generally speaking income. Roughly 96% of the total populace lives outside of the U.S. and 90% of the total populace does not communicate in English – this proposes clients are worldwide and that if an organization looks past the shores of the residential market, it has some genuine upside potential. Assume the organization has a unique product or technological preferred standpoint not accessible to global contenders then this advantage should result in significant business achievement abroad. For instance, if one runs a software firm and includes a French and German dialect adaptation, he is expanding his aggregate market by about 200 million. U.S. firms like Nike and IBM keep up activities in the Netherlands since it offers direct access to 170 million European customers inside roughly 300 miles. In addition, with declining sales in a single area, organizations would like to recoup the losses by venturing into different markets.
2. Comparative Advantage Theory
Another primary reason is the theory of comparative advantage. When a country has specialisation in some products, other products may not be produced, so trade between countries is fundamental. Comparative advantages permit ?rms to enter foreign markets. Besides, production ef?ciency is increased by specialisation of countries.
Some countries, such as Japan and the United States, have a technology advantage, while other countries, such as Jamaica, Mexico, and South Korea, have an advantage in the cost of basic labour. Since these advantages cannot be effortlessly transported, countries tend to utilize their advantages to pursue in the production of goods that can be delivered with relative ef?ciency. This clarifies why countries such as Japan and the United States are huge makers of computer segments, while countries such as Jamaica and Mexico are huge makers of farming and handmade items.
Numerous businesses grow comprehensively to enhance their benefits and diversify their assets, an activity that can secure a company’s primary concern against unexpected events. For instance, companies with global operations can balance negative development in one market by contriving effectively in another. Companies additionally can exploit international markets to present unique products and services, which can help keep up a positive income stream.
Coca-Cola is a case of a company that diversifies through worldwide operations. The last quarter, the company revealed increased sales in China, India and South Korea, which benefited Coca-Cola worldwide. Recently, Coca-Cola purchased Mexican sparkling water brand Topo Chico with an end goal to grow a more globally alluring and assorted portfolio. As indicated by Forbes, as the sales of its carbonated soft drinks drop, Coca Cola is taking a shot at the necessary diversification of its beverage portfolio. Hence venture into the RTD tea and coffee market can drive productivity for the company in the long haul.
4. Economies of Scale
Growing universally will empower a company to deliver more units. The more units one produce, the lower the cost per unit. For the economies of scale to be accomplished, the company needs to sell through more customers that is growing to more countries. For instance, Walmart is the largest US provider of groceries, and the biggest US general retailer. They can buy in such colossal mass, and force suppliers to acknowledge such low rate, so they can sell at low prices to clients.
5. Gain Resources
Manufacturers and distributors look for outside capital, technology, data and information that they can adopt at home to diminish costs. Sometimes to gain something which is not promptly accessible at home nation, companies opt to work abroad in order to improve the cost and product quality. Additionally, it is conceivable that setting up the business in another country is less expensive than transporting the crude material from other country to home country.
The developing and emerging countries is known to possess extensive stores of minerals, metals and land for agricultural production, hence multinationals target these markets in order to gain admittance to the resources. This is the motivation behind why many international businesses operate in Africa and South Asia. Many emerging markets and developing countries do not have the mastery or the resources required to tap their reserves of these minerals and metals. Therefore, they welcome the multinationals with open arms as it gives them sovereignties and different payments to develop their economies. As can be seen from the development of Vedanta and the South Korean steel company (POSCO) into India, the enthusiasm to tap the resources is a standout amongst the most vital purposes behind expansion.
6. Competitive Strike
Market entry can incite not by the positive characteristics of the country recognised in a market appraisal venture, yet as a response to a competitor’s moves. A typical scenario is market entry as a follower move, where a company penetrates the market because a major competitor has done so. This is clearly determined by the conviction that the competitor would earn a significant advantage if it was permitted to serve alone in that market. Another frequent situation is “offense as defense,” whereby a company enters the home market of a contender—as a rule in striking back for an earlier entry into its own domestic market. For this situation, the objective is to force the competitor to allot increased resources to a strengthened level of rivalry.
According to Ainsley Harris’s article in 2015, Dunkin’ Donuts and Starbucks coexisted peacefully during Starbucks’s early development, with the Boston-based Dunkin’ focused on its baked goods and the Seattle-based Starbucks showing Americans how to say “macchiato.” But in 2003, detecting a chance, Dunkin’ introduced a line of lattes and cappuccinos, while proceeding to underscore its working-class bona fides.
Some other prominent examples are Coca Cola v. Pepsi, Marvel Comics v. DC Comics, McDonald v. Burger King and Nike v. Reebok.
7. First-mover Advantage
The first-mover advantage means getting into a market and gaining all the benefits of being first. For instance, a business will rapidly pick up footing in a new market by being first. Another benefit is the business gets early adopters on board easier since there is no one else competing for their attention.
A prime example of a successful first mover is Coca-Cola, invented in 1896 by John S. Pemberton. When Caleb Bradham invented Pepsi-Cola thirteen years later, Coke was already selling a million gallons per year. For over a hundred years, Pepsi has been trying to play catch-up in the cola beverage market, but first mover Coca-Cola continues to dominate the market. Other noteworthy examples include:
• Ebay – the first online auction service
• Kleenex – the first facial tissues
• Amazon – the first major online bookstore
Under certain circumstances, not solely for financial reasons that a company might undertake a global market entry, but rather to learn. For example, the consumer products division of Koc, the Turkish conglomerate, entered Germany, viewed as the world’s leading business sector for dishwashers, fridges, coolers, and washing machines in terms of consumer sophistication and product specification. In doing so, it perceived that its unknown brand would battle to increase much market share in this fiercely competitive market. Notwithstanding, Koc took the view that, as an aspiring global organisation, it would undoubtedly benefit from partaking in the world’s hardest market and that its own product design and marketing would improve and enable it to perform better far and wide.
9. Talent accessibility
Another cause of going global is the opportunity to approach to new talent pools. Much of the time, companies are provided with unique advantages in terms of increased productivity, advanced language skills and diverse educational backgrounds by international labour. For example, when Netflix extended to Amsterdam, the company appreciate the city for permitting Netflix to procure multilingual and internationally minded employees who can expertly “comprehend consumers and societies in the majority territories across Europe.” In addition, international talent may likewise develop innovation output inside a company.
10. Risk Minimisation
Often, companies explore foreign markets to minimize fluctuations in sales and profits emerging of business cycle which occur differently in various countries. For example, there would be slump in one nation where the sales are growing gradually while on other hand there would be a developing country where due to its enlarging markets, there is high demand for its products. Further, by engaging in a basket of countries rather than a couple, firms can oversee political, economic, and societal risks better. There is swings of risks from nation to nation, henceforth it bodes well to spread risk crosswise over nations and diversify the portfolio as opposed to setting all investments tied up on one place.
11. Promote Image
International business can likewise build a company’s perceived image and its prestige as a brand, as worldwide operations can help boost name brand recognition to support future business scenarios, such as contract arrangements, new marketing campaigns or even additional expansion.
12. Government Motivation
It is usual for governments to “incentivise” their country’s companies to trade. This frequently leads to many companies entering markets they would otherwise not have tackled. The U.S. government offers an abundance of assistance when a company agrees to begin exporting.
13. Tax Havens
In consonance with AJ Agrawal’s article in 2017, tax havens are believed to be a gold dig for significant international companies. It is a possibility for companies to spare a large portion of their profits for themselves, yet this can just occur by expanding internationally. According to a 2016 report by Citizens for Tax Justice, 367 organisations in the Fortune 500 operate subsidiaries in tax-haven nations around the world. Singapore is one of the best tax havens in the world. It circumvents its “reasonable” corporate tax rates through tax incentives, absence of withholding taxes and what gives off an impression of being substantial profit shifting. As indicated by the Oxfam report, Mauritius has a low corporate tax rate and no withholding tax. It also does not perform in international taxation anti-abuse and transparency initiatives, making it an appealing tax haven.
14. Lower cost of production
Sometimes it is simply a question of cost. It is less expensive to do business abroad because one can lessen production costs and pay employees less in more affordable countries. Hence, companies go worldwide to discover alternative wellsprings of labour. Labour in developing countries is considerably cheaper when compared to developed countries. Labour cost directly impacts on the cost of production which influences the bottom line of the companies. Some companies look to international countries for lower-cost manufacturing, technology help and other services in order to maintain an upper hand. This is one of the reasons why Apple outsources the greater part of its iPhone production to Asia and the State Bank of Mauritius (SBM) redistributes its IT services to India.
15. The Gig Economy
Another reason why businesses go worldwide is due to the gig economy. Nowadays, numerous companies are employing groups of employees they will never meet face to face. The freelance economy enables firms to complete projects without the requirement of employees being physically present in the same room. The same job is done at a cheaper cost than employing a full-time employee. Some examples are
• Uber – Online transportation network company
• UrbanSitter – Online babysitter company
• TaskRabbit – An on-demand freelance site
16. Small Home Market
One of the small home markets is Finland where it accommodates a population of approximately 5.5 million. It has encountered great accomplishment with recreations like Clash of Clans and Angry Birds while its success has been down to their global reach.
17. Easy access
One straightforward explanation behind a firm to engage in foreign market is due to easy accessibility. The Internet has opened the entryway for companies to trade all over the world. Previously it was too exorbitant to do this. However, now firms do not even need to have a physical presence in a country in order to conduct a business. It very well can be an international company from the solace of its home country. Moreover, a company can undoubtedly deal manage a global empire without visiting the places it is actually doing business in. Solid Wi-Fi connections and software options like Skype help to remain connected consistently. Costly business travel is a relic of days gone by.
18. Cultural homogenization
O’Connor defines the cultural homogenization as “the process by which local cultures are transformed or absorbed by a dominant outside culture”. The term is usually used with regards of Western culture ruling and destroying other cultures. The USA would have the most effect on the rest of the developed nations, on grounds like the media outlets as well as sports and news. However, now even the non-American culture has an influence worldwide such as world music and the promotion of non-American television (Latin American telenovelas, Japanese anime, Indian Bollywood), religion (Islam, Buddhism), food, and clothing. Consequently, firms attempt to focus on the way of life which clients are embracing. For example, for many people coffee is more than a drink; it is part of the way of life. This is why Starbucks has pick out on that market and expanded universally. Another noteworthy precedent is the worldwide influence of McDonalds’.
19. Short-Term Security
A business might be less exposed against periodic changes and downturns in another economy and marketplace.