Business Internationalization: Strategies and Entry Methods

Posted on Jan 17, 2025 in Business Administration and Management (BAM)

INTERNAL Factors Driving Business Internationalization

Companies often choose to internationalize their operations for several internal reasons, including:

  • Cost Reduction Through Economies of Scale: Companies can achieve significant savings on raw materials, labor, financial resources, and taxes by leveraging lower costs in other countries. This is often referred to as relocation.
  • Access to Resources: Internationalization can be driven by attractive conditions in the destination country, such as:
    • Abundant natural resources
    • Strategic geographical location
    • Specialized labor or expertise
    • Advanced infrastructure
  • Efficient Size: In many industries, achieving a certain scale is crucial for competitiveness. Companies may expand internationally to reach a sales volume that ensures minimum efficient size.
  • Risk Diversification: Similar to a diversification strategy, companies can reduce business risk by operating in multiple geographical markets, thus avoiding overexposure to a single economic cycle.
  • Utilization of Resources and Capabilities: Companies with substantial resources and capabilities may find that a single market does not fully utilize their potential. This includes leveraging patents and specialized business knowledge.

EXTERNAL Factors Driving Business Internationalization

External factors also play a significant role in a company’s decision to go global:

  • Industry Life Cycle: As an industry matures, growth opportunities may stagnate, prompting companies to seek new markets (refer to Unit 5 for more details).
  • Low Internal Demand: Weak domestic demand coupled with untapped potential in foreign markets can be a strong incentive for internationalization.
  • Customer Accompaniment: Companies may follow their key clients as they expand internationally to continue serving them in new markets (the accompaniment effect).
  • Customer Proximity: Locating operations closer to consumers in the destination country can help companies better meet specific customer needs and adapt to varying behavioral patterns.
  • Legal Restrictions: In highly protectionist countries, establishing an international presence may be necessary to overcome legal barriers that prevent competition from outside.
  • Globalization: The increasing globalization of the world economy makes internationalization a strategic imperative for many businesses.

Internationalization Strategies: Entry Methods

1. Exports

Exporting is the simplest and most traditional method of entering foreign markets. Production remains in the home country, and products are supplied to foreign markets. Products may be adapted to meet local market requirements. Exporting is recommended when:

  • The company is relatively small and lacks the resources for foreign production.
  • The company prefers to test the market before making significant investments.
  • Moving production abroad is not advisable due to political risks, uncertainty, etc. (consider a PEST analysis).

2. Contractual Systems

  • Licenses: Agreements where a foreign licensee acquires the right to manufacture a company’s product or offer its services in their country. This is commonly used by manufacturing companies.
  • Franchises: Agreements where a franchisee acquires limited rights to use a brand and agrees to follow specific operational rules and guidelines. This is typically used by service companies.

3. Direct Investment

  • Joint Ventures: Companies operating in a foreign location that are not wholly owned by the parent company. Ownership is shared, usually with a local partner. Advantages include leveraging local market knowledge, reducing operational risks, and lowering initial investments.

Joint Venture Considerations:

  • The local partner should possess complementary skills.
  • The joint venture’s management should have significant autonomy.
  • The company should consider selling its stake if the initial conditions that justified the joint venture change (it is often a temporary strategy).
  • Subsidiaries: Creation of wholly-owned production units to serve local markets from within the host country. This provides total control over operations but is the most costly and risky alternative. It is suitable when complete operational control is a strategic priority.

Foreign Direct Investment (FDI)

  • Shareholding: This can involve majority or minority stakes, either as purely financial operations or to gain partial or complete control over management.