6.7 The Necessity of Global Markets
3 min read•june 25, 2024
International expansion offers companies growth opportunities, access to resources, and competitive advantages. However, it also presents challenges like and . Companies must carefully consider their reasons for expansion and choose the right market entry strategy.
There are various methods for entering foreign markets, each with pros and cons. Options range from low-risk to high-control . Companies must weigh factors like risk tolerance, resource commitment, and desired level of control when selecting an approach.
Reasons for International Expansion and Market Entry Strategies
Reasons for international expansion
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- Trade facilitation reduces trade barriers and tariffs through agreements (), harmonizes regulations and standards across countries, and simplifies customs procedures and documentation
- Growth opportunities provide access to new customer bases and markets (emerging economies), diversify revenue streams, leverage economies of scale through increased production, and extend product life cycles by introducing products to new markets
- Access to resources includes raw materials and natural resources (oil, minerals), skilled labor and talent pools (software developers in India), and advanced technologies and intellectual property
- Competitive advantages involve establishing a global brand presence (Coca-Cola), gaining first-mover advantages in emerging markets, and responding to or preempting competitors' international moves
- in domestic markets can drive companies to seek growth opportunities abroad
Methods of market entry
- Exporting can be direct by selling to customers in foreign markets or indirect using intermediaries (export management companies), offering low risk and investment with flexibility but limited control and potential trade barriers (tariffs) and transportation costs
- grants rights to foreign companies to manufacture and sell products, providing low risk, rapid market entry, and local market knowledge but with limited control, potential quality issues, and the risk of the licensee becoming a competitor
- involve partnerships with foreign companies to share resources and expertise, including joint ventures creating a new jointly-owned entity, offering shared risks and investments and access to partner's resources and networks (distribution channels) but with potential conflicts of interest, cultural differences, and loss of autonomy
- Foreign direct investment (FDI) establishes wholly-owned subsidiaries or acquires foreign companies through building new facilities or acquiring and adapting existing facilities, providing full control and access to local resources with potential for higher returns but with high risk, substantial investment, and cultural and regulatory challenges
Internationalization Approaches
Uppsala model vs Born global approach
- The describes a gradual, incremental approach to internationalization where firms initially focus on the domestic market and nearby countries with similar cultures (Canada for US firms) and progress as they gain knowledge and experience through stages: no regular export, export via agents, sales subsidiary, and production facilities, emphasizing risk reduction and learning through incremental commitments
- The approach involves rapid internationalization from or near the company's founding, proactively pursuing international opportunities as an integral part of strategy, leveraging digital technologies and networks to serve customers globally, adapting products and services to meet the needs of international markets, and emphasizing an entrepreneurial mindset, innovation, and flexibility
- Key differences include the speed of internationalization (gradual for Uppsala vs rapid for born global), geographic focus (nearby countries for Uppsala vs global markets for born global), resource commitment (incremental for Uppsala vs significant from the outset for born global), and key drivers (risk reduction and learning for Uppsala vs opportunity seeking and innovation for born global)
Global Business Environment Factors
- influences international trade patterns, with countries specializing in goods and services they can produce most efficiently
- impact the competitiveness of a company's products in foreign markets and affect the profitability of international operations
- connect businesses across borders, requiring effective management of logistics, inventory, and production processes
- , such as free trade agreements and customs unions, affects market access and business operations across countries
Key Terms to Review (22)
Born Global: Born global refers to a business model where a company is international from its inception, operating in multiple countries and targeting global markets right from the start, rather than first establishing itself in its home market and then expanding internationally over time.
Brownfield Investment: Brownfield investment refers to the practice of investing in and developing existing industrial or commercial sites that have been previously used and may require environmental remediation. These sites often have existing infrastructure, such as buildings, utilities, and transportation access, which can be leveraged to reduce the cost and time required for new development projects.
Comparative Advantage: Comparative advantage is an economic principle that explains why countries or individuals can benefit from specializing in the production of goods and services in which they have an advantage, and then trading for the goods and services in which they are at a disadvantage. This concept is fundamental to understanding the importance of international management and the necessity of global markets.
Cultural Differences: Cultural differences refer to the variations in beliefs, values, behaviors, and practices among different societies, ethnic groups, or social classes. These differences can have significant implications in various contexts, including ethics, global business, and organizational communication.
Economic Integration: Economic integration refers to the process of eliminating or reducing barriers to trade and investment between different economies, with the goal of creating a more interconnected and interdependent global market. This involves the coordination and harmonization of economic policies, regulations, and institutions across national borders.
Exchange Rates: Exchange rates refer to the value of one currency in relation to another. They determine the rate at which one currency can be exchanged for another, and are crucial in global trade and finance as they impact the relative purchasing power of different currencies.
Exporting: Exporting refers to the process of selling and shipping goods or services produced in one country to customers in another country. It is a key strategy for expanding a business's reach and accessing global markets.
Foreign Direct Investment: Foreign direct investment (FDI) refers to the investment made by an individual or company in one country into business interests located in another country. This type of investment involves establishing ownership or controlling interest in a foreign enterprise, rather than simply investing in its securities.
Global Supply Chains: Global supply chains refer to the interconnected network of organizations, resources, and activities involved in the production, distribution, and delivery of goods and services across international borders. They enable companies to source materials, manufacture products, and deliver them to customers worldwide, leveraging the benefits of globalization.
Globalization: Globalization is the process of increased interconnectedness and integration of economies, societies, and cultures across the world. It involves the expansion of international trade, investment, and the exchange of ideas, products, and services on a global scale. This term is crucial in understanding the external environment, industries, and strategies for organizations in the 21st century.
Greenfield Investment: Greenfield investment refers to the establishment of a new business operation in a foreign country, including the construction of new operational facilities from the ground up. It is a type of foreign direct investment (FDI) that involves creating a subsidiary or joint venture in a different market, as opposed to acquiring an existing business or expanding an existing operation.
Joint Venture: A joint venture is a business arrangement in which two or more parties agree to pool their resources to undertake a specific commercial project or business activity. It is a strategic partnership that allows companies to combine their expertise, assets, and market access to achieve a common goal.
Licensing: Licensing is the practice of granting legal permission or rights to another party to use a company's intellectual property, technology, or brand in exchange for payment or other consideration. It is a common strategy used by organizations to expand their global presence and access new markets.
Market Saturation: Market saturation refers to the point at which a product or service has captured the maximum share of the target market, leaving little to no room for further growth or expansion. It signifies a mature market where demand has been largely met, and new entrants or increased sales from existing players become increasingly difficult to achieve.
Multinational Corporation: A multinational corporation (MNC) is a business organization that operates in multiple countries, with headquarters in one country and subsidiaries in others. MNCs leverage global resources and markets to achieve their business objectives, often playing a significant role in the global economy.
NAFTA: NAFTA, or the North American Free Trade Agreement, is a trilateral trade agreement between the United States, Canada, and Mexico that eliminates tariffs and promotes the free flow of goods, services, and investment among the three countries. It is a landmark agreement that has significantly impacted the economic integration and trade dynamics of the North American region.
Outsourcing: Outsourcing is the practice of contracting with an external organization or individual to perform tasks, provide services, or produce goods that were previously handled internally. It allows companies to focus on their core competencies and leverage the expertise and resources of specialized providers.
Porter's Diamond Model: Porter's Diamond Model is a framework developed by Michael Porter to analyze the competitive advantage of nations in global markets. It examines the interrelated factors that contribute to a country's ability to succeed in a particular industry on an international scale.
Protectionism: Protectionism is an economic policy that restricts international trade through the use of tariffs, quotas, subsidies, or other government regulations in order to protect domestic industries and jobs from foreign competition.
Strategic Alliances: Strategic alliances are collaborative agreements between two or more organizations to achieve mutually beneficial objectives. These partnerships leverage the combined resources, capabilities, and expertise of the participating firms to enhance their competitive position and create value that they could not attain individually.
Trade Barriers: Trade barriers refer to any restrictions or impediments imposed by governments or other entities that limit or restrict the free flow of goods, services, and capital across international borders. These barriers can take various forms and are often implemented to protect domestic industries and economies from foreign competition.
Uppsala Model: The Uppsala model is a theory that describes the internationalization process of firms, particularly how they gradually increase their international involvement over time. It suggests that companies tend to start with limited international operations and then expand their international presence incrementally as they gain more knowledge and experience.