Globalization is here to stay. Companies choose to go international for the following simple and compelling reasons:
- To build more brand and shareholder value
- To add more revenues sources and growth markets
- To leverage existing corporate technology and supply chains
- To award more franchise owned businesses in the home country by becoming global
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Companies pursue internationalization strategies for a variety reasons. Some motives are strategic in nature, while others are reactive. An example of a reactive motive is the need to serve a key customer that has expanded broad, and on the other hand an example of a strategic or proactive motive is to tap foreign market opportunities or acquire new knowledge. Companies have a vast majority of reasons for going international such as on the reactive reasoning side there is globalization of competitors and trade barriers. On the proactive reasoning side companies go international because of economies of scale, growth opportunities, and resource access and cost savings. “There are a variety of factors that have been driving the spread of globalization across industries.
Although their impact and pace has varied according to type of industry, these have been the dominant triggers for change from local to global (or at least regional) industry structures” . Reactive comes from the word reaction. It means to receive information and then act on it. The company react by responding to demand of what it has discover in another location and as it sees its competitors going to a particular place. Globalization Of Competitors Globalization of competitors is the first example of reactive reasoning.
Many businesses are forced into international selling due to the competitive environment. While it might be terrific to stay the same size and just focus on quality, the problem is that the competitive environment creates situation where your competition continues to grow. So, if you do not grow and expand you will lose customers. Your customers will move to larger vendors that can offer lower prices. “One of the most common reactive reasons that prompt a company to go overseas is global competition.
If left unchallenged, competitors who already have overseas operations or investments may get so entrenched in foreign markets that it becomes difficult for other companies to enter at a later time” (Deresky, 2011). In addition competitors that are operating globally at a lower cost and that have market power available to them will have an advantage available domestically to them.
The second example of reactive reasoning for companies going internationally is trade barriers. “Although trade barriers have been lessened in recent ears as a result of trade agreements, which have led to increased exports, some countries restrictive trade barriers do provide another reactive reason that companies often switch from exporting to overseas manufacturing” (Deresky, 2011). If an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs.
Proactive Reasons Definition
The word proactive means to act in advance, which also mean you, are anticipating for something to happen so you can plan ahead for the situation. Companies who are proactive in international business are, in most cases better positioned than companies that simply react. Economies Of Scale Economies of scale are proactive reasons why companies are going abroad to do business. “Careful, long-term strategic planning encourages firms to go international for proactive reasons.
One pressing reason for many large firms to expand overseas is to seek economies of scale” (Deresky, 2011). An economy of scale means increasing efficiencies by producing volume. “The relationship between the availability of scale or scope economies and the globalization of industries is that in more and more industries size matters in determining competitive levels of efficiency” (Segal-Horn, 2002).
A growth opportunity is a second proactive reason why companies choose to go international to prosper.
When a company or a franchise finds it has problems expanding their business at home then they choose to seek expansion growth through the international markets. An example of this would be the McDonald’s Corporation. McDonald’s made the announcement of their plans to invest $2. 1 billion in 1,000 new locations in 2010. This would make McDonald’s have a “new life” in another country because of its declining growth in its domestic home market. “In addition new markets abroad provide a place to invest surplus profits as well as employ underutilized resources in management, technology, and machinery.
When entirely new markets open up, such as in Eastern Europe, both experienced firms and those new to international competition usually rush to take advantage of awaiting opportunities” (Deresky, 2011). A third proactive reason for companies to go global is resource access and cost savings. Many companies choose operate from overseas because they are intrigued over the resource access and cost savings. “The availability of raw materials and other resources offer both greater control over inputs and lower transportation costs.
Lower labor cost (for production, service, and technical personnel), another major consideration, and lead to lower unit costs and have proved a vital ingredient to competiveness for many companies” (Deresky, 2011). Usually just knowing the anticipation of shifting manufacturing production companies overseas will improve competitiveness at home.
In conclusions the main reason companies must go international is to be competitive. If your company does not grow then the competitors will grow and you will lose your customers. Your company has to be proactive and start exporting or importing to be more competitive in the global market.
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