Q13: What are the advantages and disadvantages of having international operations?

Explain.

There are several advantages and disadvantages of international operation.

The advantages are:

Foreign operations can absorb excess capacity, reduce unit costs, and spread economic
risks over a wider number of markets. For example in facsimile industry, the company can
reduce the production cost for fax machine for about 30%-40% with each doubling of volume.
And also for IKEA company, they can reduce cost by involved customer in the value chain,
where customer needs to carried home the furniture and assembled it himself.
Foreign operations can allow firms to establish low-cost production facilities in locations
close to raw materials and/or cheap labor. This means that company can reduce cost of
transportation to transport raw materials to the company and because of the location in the sub-
urban or village, company can hire local people with small salary. For example, many electronics
firm established company in China because the raw materials there are cheaper than other place
and also they hire local people to work with low salary.
Competitors in foreign markets may not exist, or competition may be less intense than in
domestic markets. With this opportunity, company can become a monopoly in the market and
can sell product at the higher price and also they can become the leading in the market far from
their competitor.
Foreign operations may result in reduced tariffs, lower taxes, and favorable political
treatment in other countries. Tariffs are usually associated with protectionism, a government's
economic policy of controlling trade between nations to support the interests of its own citizens
and for economic reasons, tariffs are usually imposed on imported goods.
Joint ventures can enable firms to learn the technology, culture, and business practices of
other people and to make contacts with potential customers, suppliers, creditors, and distributors
in foreign countries. Joint venture is a situation where two or more companies agree to develop a
new company by contribute equity such as assets, intelligence, and cash. By doing so, the
company will joint venture with the local company in order to attract new and local customer and
slowly they can introduced their product easily.
 Many foreign governments and countries offer varied incentives to encourage foreign
investment in specific locations. This will be a good opportunity for foreign company to enter the
local market because they have the support from the local government. The compote of
incentives offered is both fiscal or non-fiscal such as income tax holidays, wage-based
deductions from taxable income and/or infrastructure, exemption from duties or grant of tax
credits from certain importation, easement from wharf dues and export taxes, employment of
foreign nationals, and other varied site-specific incentives.
Economies of scale can be achieved from operation in global rather than solely domestic
markets. Larger-scale production and better efficiencies allow higher sales volumes and lower-
price offerings. Economies of scale refers to the cost advantages that a business obtains due to
expansion and also a long run concept and refer to reductions in unit cost as the size of a facility
and the usage levels of other inputs increase. Scale of economic also provided competitive
advantages to the organization such as the efficiency in operations where scale economics make
scale in each activity. In flexibility, scale of economics make balancing scale with strategic and
operational risks and in innovation and learning, it will make organizations experienced the cost
reduction in production and also small cost in research and development in order to make
innovation.

And the disadvantages are:

Firms confront different and often little-understood social, cultural, demographic,

environmental, political, governmental, legal, technological, economic, and competitive forces
when internationally doing business. These forces can make communication difficult between
the parent firm and subsidiaries.
Weaknesses of competitors in foreign lands are often overestimated, and strengths are
often underestimated. Keeping informed about the number and nature of competitors is more
difficult when internationally doing business. This is because company cannot gain enough
information about the competitors because competitors came from other countries and limited
access to the company’s profile.
 Language, culture, and value systems differ among countries, and this can create barriers
to communication and problems managing people. The company first must understand the
language, culture, and value system in the target countries and then try to adopt the difference
into the company’s operation system so that problems will not occur. For example, if the
company want to perform operations in the Thailand, first they must learn local Thailand
language and understand how their people doing work.
Gaining an understanding of regional organizations such as the European Economic
Community, the Latin American Free Trade Area, the Intenational Bank for Reconstruction and
Development, and the International Finance Corporation is difficult but is often required in
internationally doing business. Company needs to know about the function of these organizations
because every regional hane its own rule and policies to follow and failing to follow the rules
will result the company cannot operates in that region. And also, by understanding these
organizations will help company to doing business smoothly for example, if the company cannot
provide enough capital to do operations, organization like International Finance Corporation will
help by giving loan to boost company to do international business.
Dealing with two or more monetary systems can complicate international business
operations. This is because when company wants to do international operations, they have to deal
about finance with international finance organizations or the country’s local financial institutions
and they cannot use local financial institution. This will result company now have an agreement
with two financial institutions and company needs to be more careful so that they will not
disobey the rules. For example, if company like Sony Corporations wanted to do business in
Malaysia, they also have to deal with Bank Negara Malaysia (BNM). If Sony Corporations
cannot agree with the agreement provided by BNM, then they cannot perform business here.
The availability, depth, and reliability of economic and marketing information in
different countries vary extensively, as do industrial structures, business practices, and the
number and nature of regional organizations. This is because every country not have the same
economic situation, and this will reflect the decision whether to enter the company or not.
Company needs to understand the economic situation of target market very well