International Business: Expand Your Reach, Seize Global Opportunities

International business encompasses the exchange of goods, services, and investments across national borders. Companies can participate in international business through various channels. For instance, a company may sell its products in foreign markets while manufacturing domestically. Alternatively, a company might establish production facilities abroad through subsidiaries, gaining greater control over its international operations.

Many businesses begin by focusing on their domestic market. As they mature and reach a saturation point, international expansion becomes a strategic option for continued growth. There are several compelling reasons why companies might choose to enter the global marketplace, including market expansion. International business allows companies to tap into a much larger customer base than their domestic market alone, which presents significant opportunities for revenue growth in new territories.

We will delve deeper into the various strategies for entering the international market, the rise of multinational corporations, and the impact of international business on both companies and the global economy.

The rise of globalization

Globalization refers to the growing interdependence of economies, cultures, and societies around the world. This interconnectedness opens opportunities and challenges for businesses.

For example, companies easily access international markets, which are much larger than the domestic market. However, companies may have to deal with cultural differences and local tastes. Regulation changes and political instability could also expose their businesses to risks.

Characteristics of Globalisation

Globalization is characterized by the following:

• Surging international trade: The exchange of goods and services across borders is rapidly increasing, creating a more integrated global marketplace.
• Enhanced capital mobility: Financial resources flow more freely between countries, enabling investments and fostering international business activities.
• Booming international travel: The rise in affordable travel options has led to a significant increase in international travel, further connecting cultures and economies. This is an example of globalization, where increased mobility fosters cross-cultural exchange and economic interdependence.
• Real-time global communication: Advancements in technology have facilitated instant communication and information sharing worldwide, impacting everything from business operations to cultural exchange.
• Intertwined cultures: Globalization fosters a growing exchange of cultural influences, with ideas, trends, and customs spreading more readily across borders. However, it doesn’t necessarily lead to complete homogenization, as local identities and traditions often persist.
• Globalized workforce: The movement of labor across borders is becoming more prevalent. This allows companies to access a wider talent pool and can contribute to knowledge transfer between different regions.
• Trade blocs and agreements: Countries are forming trade agreements and alliances to facilitate international commerce by reducing trade barriers and promoting economic cooperation.

Fast-expanding international trade

Globalization is characterized by a surge in international trade, where goods and services flow freely between countries at an ever-increasing pace. This integration fosters a more open market environment, often referred to as a free market. Several factors contribute to this growth:

• Free market policies: Governments are increasingly promoting free markets by eliminating trade barriers like tariffs and quotas, which allows for the smoother movement of goods.
• Regional cooperation: Countries are forming regional economic blocs and trade agreements to facilitate trade and economic integration within specific areas.
• Logistics revolution: Advances in transportation and technology have significantly reduced the cost and complexity of moving goods internationally.
• Information age: The rise of information technology allows for instant communication and collaboration across borders, connecting producers and consumers globally.

Increased capital flow

Capital flows are increasingly flowing between countries, both portfolio and direct investments. Portfolio investors pursue higher returns by investing in foreign capital markets, seeking to diversify their holdings and potentially benefit from stronger economic growth in other regions.

Meanwhile, multinational companies expand their investment and target key countries by acquiring existing companies or setting up production facilities. This allows them to gain a foothold in new markets, cater to local preferences, and potentially reduce production costs. The increased flow of capital also fosters economic development in recipient countries as it provides access to funding for infrastructure projects and business ventures.

Reasons for going global

There are several compelling reasons why companies might choose to expand their reach beyond their domestic market and become global businesses:

• Market expansion: Reaching new customers and generating additional revenue by selling products and services in international markets, often with greater growth potential than saturated domestic markets.
• Cost optimization: Securing raw materials or labor at lower costs by operating near those resources in other countries. This can lead to increased efficiency and economies of scale through larger production volumes.
• Trade barrier bypass: By establishing subsidiaries or acquiring foreign companies, companies can circumvent trade barriers like tariffs and quotas imposed on imported goods, effectively going global and gaining a stronger foothold in new markets. This strategy allows them to produce and sell products directly within the target country, avoiding the additional costs and delays associated with imports.
• Risk diversification: Spreading operations across different countries mitigates risks associated with economic downturns or political instability in any single market. Companies can target some countries for production and others for sales.
• Tax advantages: Taking advantage of variations in tax laws between countries can lead to significant cost savings.

Benefits of globalization for businesses

Globalization and international markets contribute to various aspects and provide benefits for businesses, including:

• Increased revenue potential: Globalization opens doors to a wider customer base across the globe, expanding revenue opportunities significantly.
• Easier market access: Reduced trade barriers and capital controls make it easier for companies to enter foreign markets and establish themselves.
• Enhanced competitiveness: Exposure to global competition drives innovation and adoption of technological advancements, leading to more competitive products and services.
• Economies of scale: Larger production volumes to meet global demand allow companies to achieve greater economies of scale, reducing per-unit costs.
• External growth opportunities: The vast size of the international market offers more opportunities for external growth through acquisitions or strategic partnerships.
• Diverse funding sources: Companies can tap into a wider pool of capital by issuing stocks or bonds in international markets, especially those in developed countries.

Challenges of globalization for businesses

Globalization poses risks for businesses, including:

• Intensified competition: Globalization exposes companies to increased competition from foreign companies entering their domestic market.
• Domestic market threat: Inefficient domestic companies may struggle to compete with foreign entrants, potentially leading to business closures.
• Demanding customers: A globalized market means customers have more options and can easily switch to better alternatives offered by foreign competitors.
• Political and social resistance: Public or government opposition in foreign countries may arise if foreign companies are perceived as harming local interests or displacing jobs.
• Eroding profit margins: Increased competition due to foreign companies entering a market can lead to lower prices and potentially reduced profitability.

Strategies to enter the international market

There are several ways to develop an international business, including:

• Exporting
• Franchising
• Licensing
• Strategic partnerships and alliances
• Joint ventures
• Direct investment

Exporting

Companies produce output in the domestic market and sell it abroad. This strategy is relatively fast and low-risk. However, companies are vulnerable to changes in trade policy by governments in destination countries.

There are two ways to export:

• Direct export
• Indirect export

Under direct export, companies sell goods directly to foreign customers. The advantages are:

• Companies have full control over sales and distribution
• Companies do not need to incur commissions to pay intermediaries, saving costs
• Companies can collect feedback directly from customers

However, indirect exporting presents challenges or limitations such as:

• Businesses lack knowledge of overseas customers and markets
• Jobs and tasks add up, and businesses have to be busy arranging transportation and storage facilities
• Companies may have to hire additional employees to deal with foreign buyers

Indirect export involves intermediaries in international trade, such as agents or trading companies. This method offers several advantages, such as:

• Opportunities for successful selling are higher, leveraging agent knowledge
• Agents manage processes ranging from transportation and administrative procedures
• Companies do not need to add new workers to handle exports

Relying on the indirect export method has some limitations, such as:

• Costs increase because companies have to pay commissions to agents.
• Agents may not be fully committed because they also have to service other companies.
• Companies miss opportunities to get closer to customers.

Franchising

Franchising sells franchise rights to parties abroad with royalties or fees as compensation. Franchisees have the right to use trademarks, logos, recipes, and promotional materials.

This entry strategy is relatively fast, low cost, and low risk. However, the company lacks control, and third parties may become competitors in the future.

• Pros: Fast, low-cost entry with minimal upfront investment. Franchisees handle most operations, freeing up franchisors’ resources. Revenue comes from royalties and fees. Spreads risk by having multiple franchisees in different countries.
• Cons: Limited control over franchisee operations, potentially impacting brand reputation. Successful franchisees may become future competitors. Requires ongoing support for franchisees in areas like training and promotion.

Licensing

Licensing is another way to enter international markets by leasing intellectual property rights to other parties. It involves contractual agreements to distribute products or services in exchange for a fee.

Different from franchising, licensing applies to registered trademarks. Meanwhile, the franchise agreement relates to all brands and business operations.

• Pros: Generates revenue from intellectual property without the need for direct investment or operational involvement. Allows companies to avoid trade barriers. Licensees are often familiar with local markets, increasing chances of success.
• Cons: Loss of control over marketing and quality standards of licensed products. Contracts can be terminated, and licensee actions can damage the company’s reputation.

Strategic partnership and alliance

Partnerships involve cooperating with other parties—such as established companies in the target country—for specific projects and mutual benefits. They reduce risk by sharing costs, knowledge, and resources with partners.

• Pros: Reduces risk and costs by leveraging complementary skills and resources of established partners in the target country. Allows for focused collaboration on specific projects with shared benefits.
• Cons: Partnerships can be temporary, limiting long-term strategic advantages. Communication barriers and cultural differences can hinder collaboration and lead to project failure.

Joint venture

A joint venture may sound similar to a strategic alliance. However, the two are slightly different. Joint ventures involve partners forming a new separate entity but not with a strategic alliance. They share ownership, returns and risks, and governance of the entity.

• Pros: Shared ownership, risks, and profits with partners in a newly formed entity, allowing for greater control than strategic alliances. Partners contribute skills and resources for success. Trade barriers become irrelevant.
• Cons: Balancing the interests of multiple partners can be challenging, leading to disagreements. A dominant partner may limit initial company control. Partners may not have strong incentives for efficiency.

Direct investment

Direct investment involves companies investing in assets or buying shareholdings in companies located in the destination country. Compared to the above methods, direct investment is the riskiest because the company has to be more deeply involved to control or operate the business in a foreign country.

Direct investment can be:

• Greenfield investment
• Merger and acquisition

Greenfield investment requires companies to set up subsidiaries or production facilities overseas. As a result, this growth strategy is slow to achieve an established market position. Here are its pros and cons:

• Pros: Avoids trade barriers by producing and selling directly in the target country. Potential for government support. Flexibility in managing the organization and developing a market strategy. Closer to customers through local production.
• Cons: Setting up a new subsidiary is expensive and complex. Requires understanding of local regulations and business practices. Slower to establish a market position compared to acquisitions. Vulnerable to changes in the business environment.

The acquisition involves a company taking over a target company in the destination country. To achieve higher economies of scale and a strong market position instantly, the company may acquire two target companies and combine them into one entity (merger).

Mergers and acquisitions are relatively quick ways to establish an established position, but they have their own pros and cons.

• Pros: Faster market entry by acquiring existing companies. Doesn’t reduce market profitability by adding new supply. Minimizes potential competitor retaliation. Reduces the risk of starting a business from scratch.
• Cons: High costs and risks associated with mergers and acquisitions. Potential opposition from the target company’s management. Cultural clashes and management style differences can lead to synergy failure. High scrutiny by regulators due to antitrust laws.

The Impact of Multinational Corporations

Multinational companies operate in more than one country. They control or manage production and distribution facilities in several countries. They usually have a head office in their home country to coordinate and manage their global activities.

Multinational companies are slightly different from transnational corporations. Transnational companies usually do not consider a country as their home.

Transnational companies combine multinational and global strategies. They compete through product standardization worldwide but remain open to adaptation through adjustments to local conditions. In other words, they pursue low-cost and differentiation strategies through the various subsidiaries under their control. In addition, they also encourage synergy through skills transfer between subsidiaries.

Operating as a multinational corporation offers several advantages, including:

• More profits through increased revenue and reduced costs
• Increased revenue by targeting global markets
• Higher economies of scale by producing more output
• Lowering costs through increasing economies of scale and operating in countries with low-cost inputs
• Diversify risk by selling and spreading business activities in different countries
• Diversity to promote innovation by recruiting talent worldwide

But, multinational companies also have to face some risks, such as:

• Unstable politics in the destination country, resulting in policy changes
• Opposition from the government or people in the destination country because multinational companies are considered unfriendly to local interests
• The contagious effect, where disturbances in one country spread to businesses in other countries
• Negative impact due to changes in economic conditions and socio-demographics

Impacts on destination countries

Multinational corporations (MNCs) are major players in the global economy, wielding significant influence not just in their home countries but also in the nations where they operate abroad. These impacts can be multifaceted, encompassing both positive and negative consequences.

Positive impacts:

• Economic engine: MNCs can act as engines of economic growth by investing in infrastructure projects like transportation networks or power grids. This not only improves the overall business environment but also creates jobs in the construction and maintenance sectors. Additionally, MNCs often establish production facilities in their host countries, leading to increased output and a boost to the local economy.
• Knowledge transfer: The arrival of MNCs can bring new technologies and skills to the workforce in destination countries. Through training programs and technology transfer initiatives, MNCs can contribute to a more skilled and competitive labor market. This fosters innovation and creates a more attractive environment for further investment.
• Competition and innovation: The presence of MNCs can stimulate competition in local markets. This pushes domestic companies to improve their product quality, efficiency, and innovation to keep pace. Consumers ultimately benefit from a wider range of choices, potentially lower prices, and products that cater more to local preferences. This dynamic interplay between global and local forces exemplifies the concept of glocalization, where multinational corporations adapt their offerings to specific markets while still maintaining a standardized brand identity.

Negative Impacts:

• Environmental footprint: The pursuit of short-term profits can sometimes lead MNCs to prioritize cost-cutting measures over environmental sustainability. This can result in pollution through lax waste management practices or unsustainable resource extraction.
• Labor practices: Concerns persist regarding unfair labor practices in some MNC operations. These can include low wages, unsafe working conditions, or a lack of worker protections.
• Unequal playing field: Local businesses, especially small and medium-sized enterprises (SMEs), may struggle to compete with the vast resources and economies of scale that MNCs possess. This can stifle local entrepreneurship and limit diversity in the marketplace.
• Profit repatriation: Profits generated by MNC subsidiaries may be transferred back to the company’s home country, limiting local investment and tax revenue in the host nation. This can hinder the development of critical infrastructure and social programs in destination countries.