6.7 The Necessity of Global Markets

International expansion offers companies growth opportunities, access to resources, and competitive advantages. However, it also presents challenges like trade barriers and cultural differences. 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 exporting to high-control foreign direct investment. 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 (NAFTA), 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
• Market saturation 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
• Licensing 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
• Strategic alliances 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 greenfield investment building new facilities or brownfield investment 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 Uppsala model 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 born global 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

• Comparative advantage influences international trade patterns, with countries specializing in goods and services they can produce most efficiently
• Exchange rates impact the competitiveness of a company's products in foreign markets and affect the profitability of international operations
• Global supply chains connect businesses across borders, requiring effective management of logistics, inventory, and production processes
• Economic integration, such as free trade agreements and customs unions, affects market access and business operations across countries