International Business Expansion
The ease of setting up an international business has dramatically increased irrespective of existing barriers. Essentially, the globalization phenomenon has expanded the geographical boundaries of business operations subsequently expanding the market for goods and services. Surugui and Sugugui (2015) note that through globalization, international business facilitates international trade as the process of business transactions across country borders. International trade allows companies to negotiate the sale of merchandise to external markets through multiple means (Costa & Figueira, 2017). This paper explores the drivers of international expansion as well as the risks involved in international business expansion. Increasingly, businesses can access foreign markets using licensing, indirect sales, wholly-owned subsidiaries, and direct sales.
Drivers of International Expansion
Limited Home Market
Multinational corporations are expanding internationally to increase their market share while small companies expand for business survival. Fundamentally, companies expand into the international market place when the size of the home market is limited. Ideally, the small size of the population in a country coupled with low purchasing power may account for small local markets for produced goods and services (Cateora & Graham, 2002). Businesses exist to make profits. Accordingly, is the local market cannot generate high returns on investment, its logical for businesses to explore foreign markets for higher profits rates and survival (Zekiri, 2016). Thus, new markets outside a business’s traditional markets may present a good opportunity for expansion once the local market’s capacity to expand is limited.
Excess production also accounts for reasons why companies expand internationally. It is a normal occurrence for a normal for a company’s production capacity to outstrip the existing domestic demand for goods and services. As a company matures and increases its production capacity, it may benefit from economies of scale by increasing its sales volume in diverse foreign markets (Zekiri, 2016). For example, Toyota a Japan owned company finds is forced to sell the extra cars they produce to foreign countries as their production rates are higher than the domestic population in the country. More so, faced with excess production, companies are exploring emerging markets especially in developing countries that offer businesses with unlimited market scope (Sakarya, Eckman, & Hyllegard, 2007). Thus, companies that produce more than what the local market can absorb may find international expansion the ideal approach to finding customers for excess production.
Demographics affect international expansion by affecting the market size and availability of labor. In most developed countries, the production of goods and services is likely to be affected by the changing demographics. Progressively, these countries face the challenge of an aging population (Yoon, Kim, & Lee, 2014). Thus, to sustain their current level of productivity and economic growth, such countries must source for labor elsewhere. Therefore, outsourcing the workforce for manufacturing and service provision from populous countries like Vietnam and China with a low cost of labor is a significant driver to international business expansion (Arensberg, 2018). More so, countries with a high population growth rate attract foreign investments as multinational companies due to the availability of an expansive market for goods and services (Arensberg, 2018). Therefore, changing demographics may push companies to expand to nations where labor is abundant and cheaper and markets are available.
The establishment of trading blocs and other international trade agreements increases the feasibility of business expansion in the international market. Trading blocks and agreement are part of international business politics resulting from globalization. The need to overcome trade barriers, unify markets, and increase socialization has contributed to the formation of special trade groups such as NAFTA and the European Union (Ristovska & Ristovska, 2014). More so, the trading groups expand access to goods and services by creating a single market and supporting infrastructure through joint investments. More so, they create a conducive business environment through agreements on the tax regime, profit repatriation agreements, technological transfer, and movement of labor (Ristovska & Ristovska, 2014). Consequently, trading blocs and other international trade agreements facilitate international business by increasing the ease of doing business through the elimination of state bureaucracy in business set up. Thus, trading blocs are essential in reducing trade barriers and enabling the flow of foreign investments.
Risks of International Expansion
Foreign Currency Fluctuations
Foreign currency fluctuations create a unique foreign exchange risk. Basically, investors who wish to expand their businesses in the international market may be affected by losses resulting from financial transactions as currencies fluctuate. Economic principles hold that the appreciation of domestic currency against a foreign currency decreases the returns on investments once profits are converted into the domestic currency (Karakaya & Stahl, 2015). For example, if a U.K. business operates mainly in the U.S.A, a depreciation of the dollar against the pound means any profits in dollar denomination will result in lesser pounds. Thus, fluctuations in foreign exchange can easily wipe gains made by companies, consequently making international expansion a costly venture.
The international expansion increases a company’s vulnerability to political instability. International business is subject to geopolitics given the exchange of goods and services across political borders (Costa & Figueira, 2017). In this case, political changes in the foreign market may generate a risk of continued operation or profitability. Political instability is often a product of changes in political regimes through constitutional and non-constitutional means as well as modifications in government policies (Jalloh, Djatmika & Putra, 2017). Subsequently, political changes may affect issues such as the existing tax regime, which may create trade barriers. More so, political instability may result in violent conflicts thus slowing growth and leading to losses. Hence, political instability may make a market risky and unfavorable for expansion.
Cost of Doing Business
The cost of doing business in a given country may act as a barrier to market entry for a foreign company. Essentially, the cost of doing business is often affected by non-tariff barriers such as state bureaucracy, inflation, access to credit, exchange rates and tariff barriers like taxation (Sakarya et al. 2007). Accordingly, expanding a business into a foreign market may require a huge investment to overcome such barriers. Furthermore, changes in policies and laws in the markets, poor infrastructure, and other factors may push the cost of doing business very high, and make international operations unprofitable (Carpenter, 2013). For example, the existence of different rules and custom duties across countries may limit export trade. Thus, a company may be forced to compare the prices offered by export agents around the world to make expansion decisions. Therefore, in the absence of trade facilitation, the cost of doing business limits international expansion.
Local Culture and Practices
The success of business expansion in the international market is subject to cultural considerations. Basically, cultural consideration involves an assessment of business products as well as practices (Ocansey, 2017). Importantly, a business seeking to expand into a particular foreign market must ensure the product and services it offers resonates with the values and beliefs of the local population (Sakarya et al. 2007). For example, a bank expanding in an Islamic must comply with Islamic banking laws to add gain entry to the local community. More so, it is important to understand how to conduct business in a local market. In this case, a business must gain cultural competency by demonstrating sensitivity to cultural differences. Foreign companies must study and understand the foreign culture to ensure their products and practices resonates with the local culture.
Methods of Integrating a Business in an International Market
International businesses can integrate into foreign markets as wholly-owned subsidiaries. Wach (2014) observes this method falls under foreign direct investments where a business establishes a company subsidiary to operate in a foreign market. Thus, the method is complex since it requires the trading company to fully own the business operations and control the brand in a foreign market. Emerging benefits of operating a wholly-owned subsidiary include full control, opportunity to study the foreign market, and ease in terminating operations in case of market complications (Zekiri, 2016). Conversely, subsidiaries face foreign market limitations of income repatriation, huge initial investment, and enhanced vulnerability to market dynamics (Zekiri, 2016). Essentially, wholly-owned subsidiaries expose a company to the benefits and risks of physical operations.
Ultimately, licensing offers foreign companies the opportunity to access international markets. Essentially, this method allows a company located in a different country to obtain a contractual agreement with a business operating in a target foreign market. Durmaz and Tasdemir (2014) enumerate entry methods for licensed businesses to include loyalty payments, patented processes, and use of technical or brand features of the license owner. The typical example of licensing includes brand franchising that is deployed by Coca-Cola the multinational beverage bottling company (Zekiri, 2016). Wach (2014) notes the advantages of licensing include marketing opportunities at the international level, ease in operations, and limited involvement in the production and distribution of products. The risks attached to licensing include the demands of a complex contract negotiation process and the risk of partners becoming competitors once they develop competency. Thus, licensing as a foreign market integration strategy requires the commitment to investigate both market and partner conditions for informed investments.
One of the most common methods of accessing overseas market is through indirect sales. Durmaz and Tasdemir (2014) note through indirect sales, businesses utilize a domestic subsidiary like a trading company, an export house or an export purchase agent to sell goods and services. Ideally, indirect sales require a company to conduct periodic visits for sales or conduct sales through telephone or electronic platforms. For example, a company may utilize its website to facilitate online transactions and shipping processes. The pros of indirect sales include low entry and labor costs, opportunity to study the foreign market before investment, and ability to leverage existing sales strategies (Wach, 2014). Durmaz and Tasdemir (2014) highlight major challenges of indirect sales to include isolation from customers due to lack of physical presence and exploitation from domestic intermediaries. Thus, indirect sales offer an opportunity to access overseas markets cost-effective manner.
Businesses can also access international markets through direct exports. Wach (2014) defines direct export as the sale of products through intermediaries like overseas agents and distributors operating in a target market. Therefore, the sales agents will either connect the international business to customers or sell the products to get commissions. The advantages of direct exports include the cost advantage of not setting up physically and the transfer of risks associated with sales in the target market (Zekiri, 2016). However, direct exports prevent the company from learning foreign market dynamics, it reduces profit margins and increases the risk of brand compromise by sales agents (Zekiri, 2016). Therefore, there is a need to develop export plans and strategies to create shared expectations and alleviate possible eventualities.
In summation, business expansion into a foreign market is a complex but rewarding venture. Progressively, businesses are seeking new markets for goods and services to overcome the challenges of the limited local market, excess production, and changing demographics. It emerges that trading blocs offer businesses the opportunity to overcome trade barriers associated with international trade. Ultimately, foreign market entry depends on the capability of a company to understand and plan for foreign currency fluctuations, cultural differences, political instabilities, and existing tariff and non-tariff barriers. Significantly, companies access the benefits of indirect sales, direct exports, licensing associated with expansion at low-cost levels and market risk transfer. More so, a wholly-owned subsidiary allows companies to expand while maintaining brand control and profit margins. Progressively, a market analysis should inform decisions on international expansion.
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