Why should companies expand internationally?

A truly multinational company is one which has a globalized supply chain spread
across different parts of the world. While a global supply chain has its own
vulnerabilities, which are usually beyond the control of the company (for example: the
Tsunami in Japan), there are many reasons why a company would want to enter into
international markets.

The primary reasons that companies opt to expand into foreign markets are to:

 1. Explore markets with better profitability

This is an obvious reason for a lot of local companies to enter into an international
market. An international market could have a higher purchasing power and, therefore,
the same products can earn better profits in that market. This is obviously minus the
initial go-to-market cost of breaking into that international market.

2. Achieve economies of scale with a larger customer base

Some goods and commodities provide the company with great economies of scale
opportunities. The effects of economies of scale can be magnified when a larger base
of customers come into the business. This is pretty relevant to tech-based companies
who can be easily classified as 'born-global' companies. This companies can offer
their technology products to a new customer, any where in the world, at no additional
costs. Hence, making more money on the buck.

3. Reduce over dependence on any one market

Each business should be diversified across products and also across the market
segments that it targets. This protects the business from uncertainties. This is another
reason why a company should expand internationally. Usually, your job as a marketer
would be the stabilize your product portfolio as well as customer portfolio to make
your business robust against seasonality and these uncertainties.

4. Take global competitors head-on on their home turf

This is another why a company would want to go international. When you as a local
company have successfully challenged a foreign company in the local market, you get
the confidence to challenge the company in other similar markets as well.

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5. Service customers who are abroad
There could be tech companies who already serve customers around the world despite
being centred at only their home country. When the company has enough number of
big-ticket customers in some part of the world, they can think about setting up an
office there and further expand their customer base. This is done better when the
company serves the international market with personalized and culturally relevant
market.

What are the Different Modes of Entry into

International Business?
Some of the modes of entry into international business you can opt for include direct
export, licensing, international agents and distributors, joint ventures, strategic
alliance, and foreign direct investment. 

Each of these entry strategies for international markets are different in terms of the
costs involved, level of risk, level of ease of execution, and the level of reward. I have
arranged these 5 modes of entry into international business on a graph which
suggests what are the trade-offs in each of these entry strategies for international
markets.

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MODE OF ENTRY INTO INTERNATIONAL BUSINESS
Mode of entry may be defined as the institutional mechanism by which a firm makes it
products or services available to the consumers in the international market. The following are
the various mode of entry into international business:

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EXPORTING
Exporting is the easiest mode of entry into international business. Therefore, most firms
begin their international expansion using this model of entry. Exporting is the sale of
products and services in foreign countries that are sourced from the home country. The
exports are of two types:

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Direct Exports: These include the sale of goods from the firm to the seller overseas directly.
In this firm experience first hand information about the market. There is no intermediary
involved.
Indirect Exports: In this, the exporter hires the expertise of someone else to facilitate the
exchange. The intermediary charges the fee for its services. There are several types of
intermediaries:

 Manufacturers’ export agents: who sell the company’s product overseas

 Manufacturers’ representatives: who sell the products of a number of exporting
firms in overseas markets
 Export commission agents: who act as buyers for overseas markets
 Export merchants: who buy and sell on their own for a variety of markets.

ADVANTAGES OF EXPORTING

 It involves very little risk and low allocation of resources for the exporter.
 It increases sales and reduce inventories.
 Exporting also provides an easy way to identify market potential
 It establishes recognition of a name brand.
 If the enterprise proves unprofitable, the company can simply stop the practice with
no diminution of operations in other spheres and no long-term losses of capital
investments.

DISADVANTAGES OF EXPORTING

 Exporting can be more expensive because of the costs of fees, commissions, export
duties, taxes, and transportation.
 Exporting could lead to less-than-optimal market penetration because of inappropriate
packaging or promotion.
 Exported goods could also be lacking features appropriate to specific overseas
markets.
 Additional market share could be lost if local competition copies the products or
services offered by the exporter.
 The exporting firm also could face restrictions against its products from the host
country.

LICENSING
In this mode of entry, the manufacturer of the home country leases the right of intellectual
properties, i.e., technology, copyrights, brand name, etc., to a manufacturer of a foreign
country.

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The license is granted for a predetermined fee. The manufacturer that leases is known as
the licensor and the manufacturer of the country that gets the license is known as
the licensee.

In Licensing agreement and franchise, an overseas-based business will pay you a royalty or
commission to use your brand name, manufacturing process, products, trademarks and other
intellectual properties.
In essence, the licensee is buying the assets of another firm in the form of know-how or
R&D. The licensor can grant these rights exclusively to one licensee or nonexclusively to
several licensees.

ADVANTAGES OF LICENSING

 Low investment of licensor.

 Low financial risk of licensor.
 Licensor can investigate the foreign market.
 Licensee’s investment in R&D is low.
 Licensee does not bear the risk of product failure.
 Any international location can be chosen to enjoy the advantages.
 No obligations of ownership, managerial decisions, investment etc.

DISADVANTAGES OF LICENSING

 It limits future profit opportunities associated with the property by tying up its rights
for an extended period of time.
 By licensing these rights to another, the firm loses control over the quality of its
products and processes, the use or misuse of the assets, and even the protection of its
corporate reputation.
 Both parties have to manage product quality and promotion
 One party’s dishonesty can affect the other.
 Chances of misunderstanding.
 Chances of trade secrets leakage of the licensor.

FRANCHISING
In this mode, an independent firm called the franchisee does the business using the name of
another company called the franchisor.

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Franchising is mode in which the franchisee is granted permission to use a name, process,
method, or trademark. And also, the franchisor firm assists the franchisee with the operations
of the franchise or supplies raw materials, or both.

The franchisor generally also has a larger degree of control over the quality of the product.
Payment under franchising agreements is that the franchisee pays an initial fee and a
proportion of its sales or revenues to the franchising firm.

EXAMPLES: The prime examples of U.S. franchising companies are service industries and
restaurants, particularly fast-food concerns, soft-drink bottlers, and home and auto
maintenance companies i.e., McDonald’s, KFC, Holiday Inn, Hilton etc.

ADVANTAGES OF FRANCHISING

 Low investment.
 Low risk.
 Franchisor understands market culture, customs and environment of the host country.
 Franchisor learns more from the experience of the franchisees.
 Franchisee gets the R&D and brand name with low cost.
 Franchisee has no risk of product failure.

DISADVANTAGES OF FRANCHISING

 Franchising can be complicated at times.

 Difficult to control.
 Reduced market opportunities for both franchisee and franchisor.
 Responsibilities of managing product quality and product promotion for both.
 Leakage of trade secrets.