Why do firms become multinational enterprises? Using examples, explain what motivates organizations to engage in international business and how they internationalize?
The reason for Companies being more and more open to global opportunities and trends is because of the growing uncertainty in the business world. The level of turbulence, sophistication and competition have grown stiffer. The businesses have grown proactive in nature with a high level of creativity and adaptive to realities of local and global phenomena. The main aim of each competitive Company in today’s global scene is to create a cost-cutting strategy and increase profits in all individual level operations and dealings. Thus, for the achievement of objectives of the business, basic values are to be maintained and also ensure that the value that customers receive is higher than the money that customers pay. This is thus on the part of the Company to plan strategies on how there should be coping of the global business challenges so that high market share is obtained. In order to be the rider of the tides in the modern windy business environment, internationalization strategy is one of most efficient ways.
There have been varied definitions of International business and at varied platforms. According to one of the definitions of the online business dictionary, International business is the system in which exchange of services and goods takes place so that individuals and organizations between borders engage in a conduct. Another definition says that it is the enactment of business operations which allows an uninterrupted flow of services and goods to end consumers from a Company so that the profit is gained from more than one country. We could also take a reference of international marketing for the same. Making a locally produced good or service available globally could be one of the possible definitions of international business.
There can nevertheless be conclusions that there are two levels through which business goals can be achieved and marketing mix correctly implemented. To put it in the simplest terms, international marketing demands Companies to make single or multiple decisions of marketing mix applicable for varied domestic boundaries. If we try to increase the complexity, the same demands the establishment of facilities of manufacturing in foreign lands and suitable marketing strategies based on manufacturing capabilities to reach the global audience at large.
There have been many types of research to come up with solid reasons as to why Companies go international. One of such researches is from the Indiana State University in the year of 2009, which provided categorical reasons for international business embarking by Companies. There are two major categories of reasons per se, which explains the international business initiatives of Companies (HubPages, 2016). They are reactive reasons and proactive reasons.
The proactive reasons as per the survey are:
For changing and rather enhancing economies of scale
For creating a larger reach to international markets
For increasing their access to resources and saving costs.
The reactive reasons as per the survey are:
Increase in global competition
Increased regulations and limitations
Increasing demands of customers at the global level
Besides these, if we need to summarize the most common and observed reasons as to why Companies go international, the following three would top the list:
Higher Revenue Generation:
It is always in the mind of local Companies to continually gather new opportunities in the form of customers and sources of revenues. In cases where the strategies of growth are utilized at the local level, the immediate next step would be seeking growth at the international level. When products of a certain Company are distributed to supplementary countries, the base of customers is increased. When the Company is able to provide convincing solutions and create a loyal customer base beyond borders, the strength and escalation of the revenue are improved multiple times.
Fight for the New Sources of Capital
The ways of increased revenue target and capital acquisition desire are parallel and closely related. There are cases when the Companies go international even if they have satisfactory levels of revenue. It is because, in most cases, the run for internationalization is more about resource competition than revenue competition. If a Company misses offering their solution to a virgin market, their competitors will do. The loss of this opportunity causes dual loss; missing a revenue stream as well as the opportunity costs of losing cash that could otherwise be used for the promotion of the Company in the global platform. There are examples of situations where a domestically strong Company has been swamped by a locally small but globally large Company. The global synergy gives it higher benefits.
Opportunities of Business Diversification:
There are a few ways in which expanding internationally gives a Company the chance to diversify its business. The first way is that there is risk spreading for the threat of slow demands across varied economies. There can be extreme cases of this; one is when a given market does not lose interest and the other is when a given market never gains interest in a given offering. Entering varied economies gives them the opportunity to improve their innovation abilities and play with product and marketing variations. Diversifying a product in different regions also keeps market interest intact in a given product.
Besides these, one other reason why Companies go international is for the recruitment of new and raw talent. Diversified talent is what modern organizations look for so that they can increase their customer base of varied backgrounds. Work teams at the global level are a growing choice of organizations.
Theories of Internationalization:
Though there are many models of international business, in this paper we explain the three theories that provide apt logical reasons and also are most commonly used.
The first theory is the eclectic paradigm of international production. The statement that this theory promotes is that there are basically three advantages which combine to give firms the final hint of expanding their operations internationally (Gross and Behrman, 2016). The first advantage is related to the ownership of the firm which lets the Company practice freely without the so-called “liability of foreignness”. This advantage is inherent in the firms through distant operations and also basically rival firms at domestic market having a better competitive positioning. The second advantage is related to location. If the location in distant land suits the strategy of the Company, they are positive on internationalization. The third reason the developers of this theory explain is the check whether internationalization can provide a firm the O-advantage that it needs. The identification of these advantages is easy to quite an extent but the explanation of the process is quite unclear. There are two main advantages to consider in this case: O-advantage and L-advantage.
The second theory is the International Product Life Cycle Model. The main assumption this theory has been that there are three stages for a product of any Company: the introduction stage, the growth stage, and the maturity stage. It is said that as the product enters into the growth stage, the producers in the native lands start exporting and exploiting newer markets. This means that the firms tend to engage only in the production of goods or services in their domestic markets in the introduction phase. When the product starts to show signs of growth, it induces the producers to export and thus indulge internationally (Mukund, 2016). The third stage that is the maturity stage is not very well explained in the case of this theory.
The theory of Transaction Cost Approach is not too revealing on the process of internationalization of firms through one of the major considerations that Companies have when expanding abroad is transaction costs. Based on the cost-benefit analysis of costs and possible profitability of that place, Companies decide on expansion.
While studying the three Companies which have gone international and understanding their dynamics, two successful global companies have been chosen and one company which failed to succeed internationally will be evaluated.
The first company which has succeeded in creating a global success history is IBM, the International Business Machines. IBM is an internationally acclaimed technology Company which is engaged in the manufacture of computer software and hardware. The Company is about a century old and the first one to provide computer services to the public sector. The success of IBM also comes from its high investments in research and development so that its artificial intelligence is very strong and thriving throughout the world.
For IBM, we can argue that all the three theories that we mentioned make sense. The Company enters Companies where it thinks it will get advantages, cheaper resources and most importantly a chance for their offerings to get better.
The success of IBM in the global scene is also due to its adaptation and adjustment ability as per local needs of technology. The competitive advantage that this Company has been able to develop is ahead of time in comparison to its global competitors who are still struggling to sustain economically. When entering a new territory, IBM did not just try to penetrate the market; it made full efforts that it would capture loyal customers too. Through a social business model; a very critical aspect to be considered when internationalizing; IBM was and has been able to increase its domestic credibility at the global platform. The productivity has been increased with cloud computing, improvements of process and analytics of business. In making itself suitable for newer markets, IBM understood the eliminations needed and the diversifications that needed to be introduced as per the needs of the market that they were entering. Innovation is their key whenever looking for a new Company and that is why their internationalization strategy is deemed to be one of the most successful. Actually, the Company follows the simple success mantra of “Think global, act Local”. With this, the Company has been able to gather a huge amount of goodwill with business and social projects in different markets that it enters.
Another successful Company that has been considered is Google. The number of services delivered by Google to its target customers i.e. the consumers and corporates alike; is varied and unlimited. Often called a search engine, Google has incorporated various technologies like Gmail, and Google Chrome. Being a virtual Company, it was bound to enter the internet which would ultimately make it global. However, the type of success that Google has obtained is not granted. The type in which Google has been able to utilize its advertisement sync and generation is quite praiseworthy. Known as the first Company who auctioned its ads, being able to innovate and gather the attention of the world to itself is the competitive advantages developed by the Company.
The reason for international business for Google would be most suitably presented by the second theory which is the International product Life Cycle. When Google first came into the market, it was concentrated only to its domestic areas. Later on, as the Company and its affiliates started to grow, the Company also grew in terms of expansion and the services that it provided to its target base.
The basis of differentiation or let us rather say competitive advantage for the Company comes in the way that it has developed its search features, other tools and also the design (Harvard Business Review, 2015). Ahead of its contemporaries, Google engages in heavy research in technology ahead of the Internet. One such example is the development of driverless cars by Google, which runs on artificial intelligence and takes the world to a whole new level (Brown, 2016). Google fiber is another global project, which not only targets a limited market in the map, it targets the globe. The diversification and popularity of its products are also the reasons why the Company has been able to do so well. Some of the global products include operating systems of Google, Chrome OS, laptops powered by Chrome. The Company also holds extensive contribution in the development of Android technology. One other reason for the success of the Company is the way the Company decided to indulge in mergers and acquisitions. Sometimes, it is essential for a Company to understand what partnerships it can indulge in to make its global presence strong.
The third Company that is taken is an example of how Companies fail in certain internationalization ventures when they do not properly weigh their options. It is the failure of Target in Canada. The presence of Target in Canada lasted for a limited time. In just two years’ time, Target decided to return back from Canada by closing down its 133 stores. Though the customers were not happy with the news, the Company was not in a happy position either, given the level of revenues.
This was a lesson for Target that there are huge challenges involved in international expansion, even when the brand is well established and successful at one part of the globe. There is high bankruptcy level among other retailers like Tesco and Best Buy in other parts of the world too; since they could not adapt to the environmental dynamism when entering a completely new area (Harvard Business Review, 2015). However, there are globally successful retailers too. And the key to their success is a competitive advantage that they have been able to create wherever they go. This differentiation may either be in the products provided or even in the experience made available to customers. Adaptation to local markets is another major prerequisite.
In conclusion, like Target, there are many Companies, which struggle to translate their success created in the land of origin to some other areas when they go for internationalization. Understanding the pace of expansion, like in this case, the number of stores, would be the correct thing to do. For this, market experience and a careful strategy would be the keys.
Anon, (2016). 1st ed. The internationalization process – theory vs. two cases.
Brown, M. (2016). Top 5 Most Successful International Businesses. [online] Marcaria.com. Available at: http://www.marcaria.com/top-5-most-successful-international-businesses.asp [Accessed 11 Jan. 2016].
Gross, R. and Behrman, J. (2016). Theory in international business. 1st ed.
Harvard Business Review, (2015). Few Companies Actually Succeed at Going Global. [online] Available at: https://hbr.org/2015/03/few-companies-actually-succeed-at-going-global [Accessed 11 Jan. 2016].
Harvard Business Review, (2015). Why Target’s Canadian Expansion Failed. [online] Available at: https://hbr.org/2015/01/why-targets-canadian-expansion-failed [Accessed 11 Jan. 2016].
HubPages, (2016). Reasons why Companies go International. [online] Available at: http://hubpages.com/business/Reasons-why-Companies-to-International [Accessed 11 Jan. 2016].
Kokemuller, N. and Kokemuller, N. (2015). Why Do Companies Go International? | eHow. [online] eHow. Available at: http://www.ehow.com/facts_5256365_do-companies-go-international.html [Accessed 11 Jan. 2016].
Mukund, S. (2016). Internationalization theories. [online] Slideshare.net. Available at: http://www.slideshare.net/febi85/internationalization-theories [Accessed 11 Jan. 2016].
Theories of international trade, foreign direct investment and ﬁrm internationalization: a critique. (2016). 1st ed.