What’s it: Going global is the company’s effort to expand its business reach throughout the world. It not only talks about the customer base but also the production facilities, decision making, management, and revenue.
The company expands its business to international markets for several reasons, including:
- Potential revenue– Expanding markets throughout the world provides an excellent opportunity to obtain higher revenue. The global market size is more significant than the domestic market because of the more substantial number of potential customers.
- Profitability margins – Companies can access lower input costs. It reduces production costs and increases profitability margins.
- Market diversification – Depending on the product sales on the domestic market could lead to a fail. By expanding overseas, companies can still generate sales in other countries when the local market is mature.
- Raw materials – Companies can secure raw material supply chains by operating in other countries. Also, by operating near sources of raw materials, it reduces production and logistics costs.
- Technology and human capital – One of the goals of expanding into foreign markets is to encourage innovation. Companies must remain competitive and be one step ahead in technology. They can also recruit the best talent from various countries to increase productivity and promote innovation.
- Business efficiency – With a broader market, companies benefit from more significant economies of scale.
The level of business participation in the global economy usually goes through stages:
What is a domestic business
The company’s operations are limited to the domestic market. Local or national markets are the main target of the company. Likewise, raw materials and labor usually rely on local supplies, though not always.
What is an international business
The company started to enter the international market by exporting its products to various countries. Some shipping reasons are:
- The production capacity exceeds domestic demand.
- To increase and diversify revenue.
- The growth of the domestic market is beginning to saturate
Experience in marketing products internationally is a valuable capital for the next stage of expansion.
What is a multinational business
At this stage, the company operates production facilities abroad. They built factories in various countries.
The company has a centralized structure, with the head office in the country of origin. The head office makes decisions about what products are produced and developed. They create special offers for markets in each country.
What is a global business
Global companies invest and are present in many countries. They market a consistent product image and the same brand for various countries, emphasizing volume, cost management, and efficiency. The head office is responsible for global strategy.
What is a transnational business
Transnational business is far more complex. Companies invest in foreign operations and delegate decision making, R&D, and marketing for each foreign subsidiary. They have an efficient and integrated global strategy while maintaining responsiveness to local and regional markets.
How companies do business internationally
Doing international business is not always through foreign direct investments, but it can be done in various ways. Including:
- Cooperate with independent agents
- Licensing or franchising
- Establishing a branch office
- Strategic alliance
- Foreign direct investment
The company can work with independent agents to export. The agents act as a sales representative and help the company to sell products in the target country. They collect payments and ensure customer satisfaction.
Independent agents often represent several companies at the same time. They usually do not specialize in one product or market.
Licensing or franshising
The company gives exclusive rights to other parties abroad to offers products to its brand name. As compensation, the company receives payment fees for licensing. Also, the company gets royalties, which are usually calculated as a percentage of sales.
The company established several branch offices abroad. Branch offices are usually responsible for product marketing and market research. Under this structure, the company has more control over the managers at the branch office.
The company works with other companies in other countries to develop products or establish new businesses. This collaboration can be mutually beneficial because it combines technological and monetary resources to exploit market opportunities.
Foreign direct investment
In this case, the company established a business abroad by buying an existing company or building a new production facility. This is the riskiest compared to the previous options.
Usually, companies do this to take advantage of lower wages and special investment privileges (such as tax exemptions) in other countries.
What are the obstacles companies should consider
Not all businesses have successfully expanded into the international market. Opportunities and challenges in the global market are more complex. Success depends on the way the company handles various obstacles inherent in international business, including:
- Socio-cultural barriers – Companies must understand the socio-cultural conditions in the destination country. The diversity of habits, customs, values , and culture makes consumers’ tastes and preferences also vary. That requires a more complex approach than doing business in the domestic market.
- Economic differences – Economic systems and governance affect international business operations. Take the extreme example of the command economic system. Under this system, the government does not allow the foreign private sector to control business.
- Legal and political barriers. A host country’s government can influence international business activities in various ways. They sometimes set specific requirements before allowing foreign companies to operate. Or, they limit foreign ownership in particular industries. The imposition of quotas, tariffs, local content requirements is other barriers.