Internalization has been of great interest to nearly every company. There is no single and universally accepted definition of internationalization but from an economics point of view, it is defined as the process where business gets more involved in the international markets. In the contemporary world, businesses begin their operations domestically but must draw up a long-term plan on how the business will be going international. Internationalization phenomenon has significantly changed the landscape for most business resulting to a very dynamic market situation with severe competition for the companies.
The reason behind going for international market varies from one company to another. However, most firms pursue internationalization because domestic market has become inadequate because of the economies of scale and multiple opportunities that are available in the foreign markets. Most successful executives will always want to try another market after any successful one.
Internationalization has been one of the strategies being used by most executives to reduce the cost of operations. Businesses with overhead costs can have the excess cost cut down in countries that have relatively deflated currencies as well as low cost of living. Most business in the United States finds it relatively cheaper operating in countries that have free trade arrangement with U.S.
One way in which internationalization help companies reduce the cost of doing is business is through reduced labor costs. Companies that are interested in going international usually look for those markets that have a low cost of leaving as that makes it cheaper hiring employees in such countries. There are those companies that consider going international when in the financial crisis. Executives of companies that are experiencing a financial crisis in the domestic market will formulate the budget and go for the foreign markets. Institutions are commonly defined as humanly made constraints the give economic, social interactions and political shape. The institution can also be looked at as a wide range of structures that widely affect contract enforcement, protection of investors, economic outcome, property rights, and even political system.
Institutions play a very crucial role in the market economy. The main aim of institutions is to ensure that there is effective functioning of the market mechanism. This sees to it that those firms that take part in the market can carry out their transactions without suffering undue loss or being exposed to risk. Some of the reason behind the popularity of internationalization among current companies include opening up of trade borders by most countries across the world, elimination of trade barriers among many others.
Companies are no longer secure staying in the domestic market and therefore most companies tend to go for internationalization to be able to spread their risks. Internationalization has become much easier due to the communication and technological advancement. Communication and technological advancement are vital in ensuring that foreign businesses are properly and timely operated without experiencing problems. Internationalization is achieved through very different ways.
There are those companies that take part through exporting their products to foreign countries and continue to strengthen their home market. Some adopt a highly aggressive approach which includes acquiring firms, coming up with alliances, embrace joint venture or just establish their subsidiary. All these entry strategies differ in regards to the risk associated with each, control, level of resource commitment and return on investment that internationalization promises.
There are many entry modes that companies can use to join foreign markets but all these modes can be categorized in two broad modes. The first mode is the non-equity mode, which comprises of export and contractual agreements. The second mode is referred to equity mode of entry, which is known to include wholly owned subsidies and joint ventures. From all the available market entry, the one that offers the lowest risk level and the lowest market control is the export and import.
The one with the highest risk level but highest market control is considered to be expected return on investment. The expected return on investment is majorly connected with a direct investment such as acquisition as well as Greenfield investments. Export and importing is the most common strategy that most firms use to pursue internationalization. Export is known as the process of selling services and goods to countries other than the domestic one. The company can directly be involved in the export or use an agent.
The other strategy that is equally popular is licensing. International licensing firms are known to give out licensee patent rights, copyrights, trademark rights, or even know-how on processes and products. Licensee does a production of licensor’s products, marketing it within the assigned territory and payment of licensor’s fee together with sales-related royalties in return. This strategy is mostly welcome by foreign public authorities as it is the way through which technology is leaked into the country.
Reasons for entering International Markets
Internationalization is more of an expansion of business from its home market into foreign markets. The decision to internationalize is one of the strategic decisions that have a fundamental effect on any firm and all its internal and external operations. It equally affects the management of the company.
In the current world, the rate at which companies operate outside their domestic market has significantly increased. Even though internationalization has become a very popular thing amongst many companies around the world, it is highly important for every company to consider their motives for going international. There are multiple reasons why companies consider going international.
The most common reason for going international is the need for pursuing potential abroad and the desire to diversify risk. Most companies consider expanding their product line in the foreign market when launching a new product. Companies like Coca-Cola had only to introduce bottled water after going to nearly every country in the world. In most cases domestic competition grows so fierce to the extent that companies consider foreign markets so attracting.
It explains why Ford which was second after General Motors in United States market became internationalized much faster compared to General Motors. Most of the Chinese firms are considering internationalization due to intense competition in china’s market. The other good reason for going to a foreign market is to avoid the risk that comes with operating in a single market.
Most firms go international with an aim of diversifying risk. With an alternative market in a foreign land can be greatly of help in offsetting negative results various uncertainties such as economic downturns or political intolerance. Starbuck’s is a good example of companies that enjoyed the advantages of going international during U.S. recession, which significantly devastated sales within the home market. Foreign market covered company loses through the overwhelming performance overseas.
Many other companies consider going international to achieve a different growth rate. Different markets have different growth rate and most companies in slow-growth countries will always consider internationalization with an aim of going to countries with faster growth rate. Companies operating in the food industry have varied growth rate from one market to another. The variations come when some countries experience maturity in say food production. Such companies will; look for countries whose markets are still at the advancing stage.
Besides major reasons that attribute to profitability, companies equally consider going international not to gain financially but to gain knowledge. There are so many firms that have entered the international market to find out what need to be changed from the existing product to make it acceptable globally. Government incentives also promote internationalization.
There are those companies that consider going overseas not for growth, not because of competition in the domestic market but because the government gives them incentives to export some of the local products. Through government incentives, most companies have managed to access markets that they would have not accessed. So many countries such as the United States provide its companies with a wealth of help to start the business of exporting products to foreign countries.