Motives to Start International Expansion
After having assessed the resources available to SMEs and LSEs which are necessary in order to approach the challenges and rewards in international expansion in this post, we can take a closer look at the process followed to initiate the internationalisation process. In general terms, each company takes a series of incremental steps designed to develop an international presence.
All in all, the approach which is being followed pertains to the will of a company to look for something necessary to the creation of value or to the maintenance of its strategic advantage. If we were to list internationalisation motives we would have the following:
- Market-seeking: companies go abroad to find new customers.
- Efficiency-seeking: companies go abroad to lower the costs associated with performing economic activities.
- Resource-seeking: companies venture abroad to access resources that are not readily available at home, or that can be obtained at lower cost.
- Strategic asset-seeking: companies go abroad to obtain strategic assets (tangible or intangible) which may be critical to their long term strategy but that are not available at home.
A company can decide to internationalize by emphasizing the reward associated with a successful marketing venture (proactive motives) as well us by understanding the risks associated with not taking advantage of internationalization opportunities (reactive motives).
In this post we’ll address the following topics:
1. Proactive Motives for International Expansion
2. Reactive Motives for International Expansion
3. Change Agents
4. Risks Associated with International Expansion
1. Proactive Motives
- Profit and growth goals. This relates to the firm’s motivation towards growth, in relationship to the challenges of profiting from overseas operations.
- Managerial Urge. This relates to the manager’s commitment and motivation that reflect the desire and enthusiasm to drive internationalization forward. There are often aspects that relate to socialization and lifestyle. If a manager had prior experience in exporting companies, this may provide additional drive towards internationalization.
- Technology competence/unique product. Unique products can provide a sustainable competitive advantage in international operations, however, many companies consider their product unique even though it may not be such.
- Foreign Market Opportunities\Market Information. As foreign market entry is costly, risky and requires circumstances which do not present themselves too frequently. In order to take advantage of these opportunities however companies need to acquire information and insights which are not easy to access. This is why sometimes opportunities derive from random events, as in the case of managers discovering market opportunities during a holiday or vacation.
- Economies of Scale. Increasing outputs allows approaching the experience learning curve at a faster pace. BCG demonstrated that in fact by doubling production output an organization can reduce the production cost of about 30%.
- Tax Benefits. These are less and less present, as anti-dumping laws punish foreign producers for selling products at low prices, as a form of protection for local producers.
Let’s now see what types of reactive motives can lead companies to approach international market growth.
2. Reactive Motives
- Competitive Pressures. A company may see that competitors are either reducing the domestic market share, pushing the company to seek foreign markets, or alternatively see that other companies are gaining a first-mover-advantage when entering foreign markets. A popular example of this phenomena is Coca-Cola entering foreign markets before Pepsi, and so as to push the latter to follow suit.
- Domestic Market, Small and Saturated. Certain companies may be quick to realize that the domestic market is too small to support economies of scale. In certain cases companies may realize that they are entering the final stages of the product-life-cycle and may decide that instead of reviving the product with additional communication investments they may be the opportunity to prolong the PLC by entering foreign markets.
- Overproduction/excess capacity. If the sales volumes are below expectations, firms may find themselves stuck with unsold goods, which they may export abroad with price cuts and promotional activities, waiting for the domestic market to return to previous levels. This approach in pricing is usually called ‘penetration pricing strategy’ but is not sustainable in the long term as it might foster parallel importing.
- Unsolicited Foreign Orders. This can happen just because of the chance of promotional diffusion.
- Extended Sales of seasonal Products. Seasonality in demand conditions may be different in the domestic market from other international markets. This may lead to a yearly export cycle resulting in more stable demand.
- Proximity to international customers. For instance, German firms may be working with Austrian clients for close proximity or short psychological distance.
3. Change Agents
Usually, companies do not address a costly and time-consuming endeavor because of only one factor. On the contrary, there may be one or more change agents pushing the organization towards foreign opportunities.
- Perceptive Management. Managers who gain early awareness of developing opportunities in overseas markets.
- Internal Events. Any type of in-company event capable of initializing a foreign endeavor. This could be due to an employee, finding an opportunity or the development of a by-product suitable for foreign sales, like the food processing firms who developed low-cost protein substances suitable to fight malnourishment in Africa.
- Inward\Outward Internationalisation. Sometimes a company imports products from foreign markets before initiating the export of those products to foreign markets.
- Market Demand. A company enters a foreign market when the market is ready for it.
- Network Partners. Network relations may assist companies in accessing the type of knowledge necessary to start the internationalization process.
- Competing Firms. Knowing that a competitor considers expansion in a foreign market a valuable option, may trigger a copycat attitude.
- Trade Association. Associations and partnerships may allow companies to consider ‘joining the bandwagon’ when new potential markets are assessed and deemed valuable locations for market expansion.
- Financing. Financial incentives and opportunities may assist in overcoming the issues connected with risk\reward balance when developing an entry strategy.
Even if there may be a wide variety of elements pushing companies towards internationalization goals, there is still a wide variety of factors hindering internationalization. Among these the most common we can list comprises.
- Insufficient finances
- Insufficient market knowledge
- Lack of foreign market connections
- Lack of export commitment
- Lack of capital to finance expansion into foreign markets
- Lack of productive capacity to dedicate to foreign markets
- Lack of foreign channels of distribution
Moreover, there are a variety of risks which depend on the general market environment, commercial risks and political risks.
4. Risks Associated with International Expansion
General Market Risks
- Comparative Market Distance, each expansion creates additional costs.
- Adaptation to Foreign Markets, the product, and services that companies produce abroad are often the same at home, but exporting always foresees higher expenses.
- Competition from other firms in other foreign markets.
- Adapting products and services to new local conditions.
- Difficulties in finding the right distributor in the foreign market.
- Differences in product specifications in foreign markets.
- The complexity of shipping services to overseas buyers.
- Exchange rate fluctuations, when contracts are made in a foreign currency.
- Failure to get customers to pay due to contract dispute, bankruptcy, refusal to accept the product or fraud.
- Delays and\or damage in the export shipment and distribution process.
- Difficulties in obtaining export financing.
This is by far the category that provides the highest amount of potential issues\limitations. The list below is simply a list of some of the most frequent ones.
- Foreign government restrictions.
- Lack of government assistance in overcoming export barriers
- The high value of a domestic currency relative to those in export markets.
- High foreign tariffs on imported products.
- Confusing import\export procedures.
- Civil strife, revolution, and wars.
How can one balance these issues? Essentially in three ways.
- Avoiding exporting to high-risk markets.
- Diversify overseas markets and ensure that the firm is not over-dependent on a single country.
- Insure risk whenever possible.
- Structure of the export business so that the buyer bears most of the risk.
These risks may be present before the internationalization process is started, or alternatively they can present themselves after investments have been made. It is still possible however to approach a de-internationalization strategy.
De-internationalisation is a process determined by internal and external factors whereby the international company shifts towards a configuration with a lower international presence. This can be then further implemented via Figure 2.5 showing typologies of withdrawal in response to shifting market conditions.
As discussed in this post there are a variety of reasons that push companies to seek international expansion, being able to identify which main reasons are inducing your company to grow abroad is a useful insight to develop a fitting marketing strategy.
Sources for Further Study
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