However, successful international expansion also means more revenue, diversified revenue streams, a dramatic increase in global brand awareness, and exposure to international business technology and methods. Product diversification similarly insulates you from the risks of declining interest in a particular item. While you’ll want to meet your new client’s demands, you need to understand related host-country legal requirements before committing. But you need to make sure you’re complying with local worker-classification and permanent establishment laws, or risk fines and reputational damage in the future. Many MNCs use a combination of methods to increase international business. While opening a center overseas does have its challenges, especially during the initial phases, it is relatively straightforward. Sometimes, a product isn't a bad product, but a bad fit for the market where it was originally launched. Expanding might be the right thing to do. (Cont’d) Imperfect Markets Theory The markets for the various resources used in production are “imperfect.” e.g., cost for labour and other resources are low in Asian countries Product Cycle Theory As a firm matures, it may recognize additional opportunities outside its home country. If you don't enter a ripe market with your solution, competitors do. A company employs a highly valued foreign national and home-country immigration rules force that employee to relocate back to his or her native country. Simply, they offer a means by which to attempt to understand a complex world. factors or ‘conditions’ to explain the ‘why’, ‘where’ and ‘how’ of the internationalisation of production: Ownership factors, Location factors and Internalization factors (OLI). There is one overarching goal that all international businesses share: increased profit. The classical theory of international trade is popularly known as the Theory of Comparative Costs or Advantage. As international relations has grown in complexity, the family of theories that IR offers has grown in number. This superb video from CNBC explores why Starbucks failed to establish a leadership position in the $6bn Australian coffee shop market.. This can be a good strategy, though it can come with significant risks if the company doesn’t comply with local immigration, permanent establishment, employer-classification and other obligations. Further, a lower cost of acquiring customers may be another compelling reason to expand internationally. Just because you think your product or service will thrive in a new country doesn't mean it actually will.Diego Caicedo, co-founder and CEO of OmniBnk, which operates in multiple Latin American countries, said scaling across borders is complicated and expensive regardless of a company's size, and the process c… This is why foreign automotive companies moved some operations to the United States. Aug 23, 2013 By Matt Gossett. This can b… The allure of penetrating new markets overseas is hard to avoid for companies looking to boost revenue. A business analysing the options suggest by the Ansoff Matrix might well be tempted to focus on the bottom-left quadrant (market development) and try to enter international markets as part of a growth strategy.Selling into international markets is increasingly attractive for UK businesses. Employees who speak different languages and understand different cultures enhance connections with a broader customer base. Generally speaking, however, the rewards of growing an international footprint are realized over time. It also explains why a competitor brand - Gloria Jeans - has succeeded where Starbucks failed. Closely connected to the goal of improved profit margins is the desire to increase sales. […] The race to expand internationally is often about gaining a presence in foreign markets. New Trade Theory 8. They app He holds a Master of Business Administration from Iowa State University. The new client may want your existing, experienced employees on site, or require permanent, local employees to support them in the host country. The bottom line is that if you want to expand into a new market you have to perform due diligence, 3 Blunders Businesses Make When Going International (And How to Avoid Them), After Brexit Vote, HR Leaders Must Focus on Practical Considerations, Analysing work stoppages for European employers. International business expansion (or internationalization) is the process of taking a domestic, or local company, and expanding it to the international market. Theory of Comparative Advantage 5. This can help you save on taxes. Operating in international markets also gives businesses access to a larger and more diversified talent pool. Improving profit margins is one of the most common reasons for entering international markets. There are many other factors to consider, including employee benefits and managing stock options across multiple countries with different guidelines and regulations. Kokemuller has additional professional experience in marketing, retail and small business. Further, a lower cost of acquiring customers may be another compelling reason to expand internationally. Diversifying your brand's offerings and its customer base are two popular reasons for international business expansion. In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. The company doesn’t want to lose this employee’s institutional knowledge and wants to continue the employment relationship while the employee lives abroad. This will allow it to reach a wider audience and diversify its operations. As a company expands, it begins to find itself involved in marketing programs that may not have been part of the original business plan. They range across different industries and business models, and each has had a unique set of requirements. To identify the overview of international petroleum industry, it include all companies that are involved in the oil and gas production chain as shown in Fig 4.1 (PetroStrategies Inc, 2010), from the owners of the resources to operators, drillers, equipment manufactures, facility constructors, service providers and engineering companies. Again: If you’re planning on hiring locals or sending expats to support that new client, make sure you understand the costs and timelines involved when hiring or sending workers abroad. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. Companies new to global expansion often overlook the “hidden costs” of both mandatory and supplementary employee benefits, such as paid vacation, retirement or car allowances that may not be applicable in your home country but can bring significant additional overhead. Keep in mind, however, that employees providing client services are typically viewed by tax authorities as directly tied to revenue generation, so you will likely have fewer opportunities to minimize your legal footprint than in the above scenario. Nonetheless, subcultures also exist between countries and … In addition to mobile devices, the company is planning to sell electric folding bikes, self-balancing scooters, fitness bands and other products. Using a theory to critique an issue, as this chapter did with the United Nations, is to understand the reason why these theories exist. But while every successful company will employ its own particular strategy, the underlying mode of operation—the character and trajectory of all successful companies—is fundamentally the same.Companies achieve competitive advantage through acts of innovation. The UK electorate has spoken, and after a transition period Britain will leave the European Union. Production Cycle Theory of Vernon Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in … A company may want to reduce costs by relocating closer to a supplier or benefit from lower production costs by expanding operations to another country. Signing a big deal with a highly valued client abroad is an exhilarating experience for a new company. Moreover, global expansion is a great way of leveraging expertise in overseas production processes. The first-mover advantage is basically getting into a market and gaining all the benefits of being first. The transaction cost theory supposes that companies try to minimize both the costs of exchanging resources with the environment, and the bureaucratic costs of exchanges within the company. The economist John Dunning has identified four primary reasons for corporate foreign investments (Global Capitalism, FDI and Competitiveness, 2002): Having an international brand that is well reputed will invite top talent to the company. What is interesting about market imperfections theory is that it is an international trade theory. Culture refers to the learned norms that members of a specific population or society are confronted to from an early age, characterised by common values, attitudes, beliefs and behaviours. Keeping up with these obligations and options can take a toll, particularly on small teams in high-growth organizations. Going abroad simply because the domestic market has little or no growth is a bad reason, according to Aneel Karnani, a professor of corporate strategy and international business at the University of Michigan. It is a way to broaden your horizons. That said, I’ve found that regardless of company size or profile, an organization generally decides to expand its international footprint for one or more of the four following reasons: Those new to international expansion should keep in mind that the associated costs and risks may seem to significantly outweigh the potential short-term benefits, especially if the company’s home revenues are substantial. It is the main factor that differentiates groups of people coming from different geographical regions or social backgrounds and links these groups within national or regional borders. With expert guidance, determining the optimal legal entity to establish will likely be easy, though it may be more time-consuming and costly than you’d anticipated. We commonly see two examples: Companies in either of these situations may first consider paying the employee as a contractor in the new country, and so avoid the costs of establishing a legal entity and of withholding and remitting income taxes to local authorities. A company may want to reduce costs by relocating closer to a supplier or benefit from lower production costs by expanding operations to another country. If you do decide to hire or keep the worker as an employee in the new country, you’ll not only have to establish a locally compliant payroll, you’ll have to comply with all local labor laws. companies that have achieved international leadership employ strategies that differ from each other in every respect. The process of Internationalization can be also described as “the process of increasing involvement in international operations”(Welch and Luostarinen, 1988,p.36). Companies expand into international markets for a variety of reasons, such as increasing brand awareness and reducing costs. The allure of penetrating new markets overseas is hard to avoid for companies looking to boost revenue. For instance, you�ll able to quickly gain traction in a new market by being first. in spite of the many motives of companies to internationalize and the advantages which they can achieved, there are many barriers that the company must overcome for successful internationalization. Business Standard: Xiaomi Seeks to Expand beyond Smartphones in India, CNBC: It Is Time for Us to Develop Our International Market, The Business Journal: 5 Benefits of International Expansion. In some cases, a strong domestic company gets overrun by a lesser player that succeeds globally and grows big through global synergy. In general, companies go international because they want to grow or expand operations. In the first part of a series on taking your small business international, I’d like to discuss why it might make sense to expand your business to a foreign country. Companies or businesses that operate on a global scale can expand their market by offering their products to international consumers. Theory of Absolute Advantage 4. Expanding globally gives your company an opportunity to move to greater heights with regards to profitability. Academia.edu is a platform for academics to share research papers. In addition, you can connect with suppliers in international markets and take advantage of raw materials and resources unavailable in domestic markets. Navigating different cultures and instilling company values across borders are difficult tasks. It is important to clarify precisely what is meant by such wording because the strategic implications are completely different.The business resources needed to sell internationally might typically include a sales team, brochures of products in various languages and an office team to handle sales orders b… Factor Endowment Theory 6. Sometimes, a government will incentivize companies to enter their country's market in an effort to build their economies. But while the desire for a lower per-employee cost is compelling, establishing any office abroad comes with its own costs, including those associated with compliance and the administrative burdens associated with managing operations and affiliates from a home-country HQ. At Vistra I work with many companies looking to expand internationally. After reading this essay you will learn about: 1. To better understand the overall situation, let’s take a look at each item in turn. And as with all the other scenarios, you’ll need to consider not only all your various tax obligations — such as those related to corporate tax, indirect tax, payroll and social tax — but your employer obligations under local law, including those related to any applicable collective bargaining agreements. No matter what your scenario when expanding internationally, due diligence well in advance will be rewarded. That way you will actually be operating as an international company in the US, rather than a domestic company. Theories of International Business (2) Why are firms motivated to expand their business internationally? Politicians on both sides of the channel must now not only start to develop new policies, they must also set a reasonable tone amidst Brexit-related passions. Furthermore, responsibility for managing rapid growth is rarely evenly distributed within an organization, and certain teams such as HR, finance and legal may be understaffed and overwhelmed by the administrative burdens associated with international expansion. Theories of FDI may be classified under the following headings: 1. 1. But while flying home, it often dawns on the CFO that the client may demand “boots on the ground” in a brand new country. Breaking the Glass Ceiling It might also not make much sense to focus on expansion for certain companies. You should know that de-registering, or winding down a presence in another country can be as expensive and time-consuming as establishing operations. For example, Xiaomi, one of the most popular smartphone manufacturers in China, seeks to expand in India over the next few years. Distributing your products in additional countries increases your customer base. The US is the only nation that offers a double taxation system. 10. International markets can open up … Finally, in this scenario the commitment to the host country generally extends only as long as the employee is working for the company. For immigration or personal reasons, the new hire must remain in his or her home country. When growth strategies are used up on the national level, the next path is often to seek out international growth. Going international is a strategy that is influenced by a variety of factors and is typically implemented over time. UK and EU business leaders must similarly manage change in their respective organizations during this uncertain period. Why Expand Your Business Internationally? This is one of the most important reasons for companies to expand internationally. One of the first questions you must answer is whether your business is actually suited to succeed in international markets. Introduction to Theories of International Trade 2. Let’s take a look at each of these reasons, and some things all businesses should consider before expanding under those circumstances. Theory of Mercantilism of International Trade 3. However, while employment laws vary by country, the labor laws of most jurisdictions greatly favor the worker over the employer. There are several reasons why companies … International investments refer to investments by entities of a nation in nations other than their own.Foreign investments involve export of capital. Launching that product again in a different market, toward people with a different culture and a different budget can mean an entirely different, much more positive reception for that product. Still, while the benefits can be great, most companies proceed with caution. Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. 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