Compare and contrast the means by which a company can internationalise its operations


Research Paper (undergraduate), 2011

26 Pages, Grade: 85%


Excerpt

Introduction

In terms of management philosophies, companies can be categorized as ethnocentric (home- market oriented), polycentric (oriented toward individual foreign markets), regioncentric or geocentric (oriented toward larger areas, even the global market place) (Czinkota, 1999, pp. 395). Nevertheless, the world economy is more and more characterised by an increased internationalisation in which companies see a chance to improve their long-term competitiveness, to increase their profitability as well as to balance the economic cycle of the home market by diversify the risk internationally. In addition, there are non-economic motives such as to obtain power and influence as well as to gain prestige. However, to internationalise successfully companies must create a strategy of internationalisation. Part of this strategy is for instance the choice of the target market and the timing of entering a market. In addition, a strategy can be created based on the control aspect, the capital employed as well as how much risk is involved in internationalising the operations. Referring to this, there are several modes a company can choose to internationalise its operation, which can be divided into equity and non-equity modes. In general, non-equity modes such as franchising, exporting, etc. are less expensive and risky than equity modes. For companies with little international experience, non-equity modes provide a good start to begin their operations internationally. Equity modes such as Foreign Direct Investments provide the most control of the business and as the name already indicates there is a substantial equity participation involved. However, when creating an international strategy companies must consider risk aspects that can be categorised into political, economic, and legal risks. In addition, as companies operate internationally the more they deal with the diversity of languages as well as cultural differences which a company must give attention to.

This paper will identify the main reasons for and against internationalisation as well as present different types of entry modes. At the end, the internationalisation of Wal-Mart will be analysed mainly focusing on Wal-Mart entering Germany.

Reasons for internationalisation

There are several reasons for internationalisation, which can be divided into pull factors and push factors. Pull factors are forces of attraction which pull companies to foreign markets. Push factors force companies to internationalise their operations because of the saturation of the home market for instance (Cherunilam, 2004, pp. 9). According to Dunning a multinational companies (regioncentric or geocentric) has relative to a non-multinational companies three principal advantages, location, internationalisation and ownership (Peng, 2008, pp. 171).

Location

Foreign countries can be attractive for companies if they provide location-specific advantages. Lower costs of labour, land prices, tax rates provide such advantages (Please see appendix for low tax countries). In addition, companies who depend on natural resources are also seeking for resources in order to produce their products. Oil companies, for instance, must enter countries such as Russia, Venezuela or countries in the Middle East to assure their oil supply. Furthermore, multinational companies (MNCs) enter foreign markets that have a strong demand for their products.

Internationalisation

Besides location-specific advantages, there are more advantages for companies that operate globally. MNCs can achieve economic of scale. "Economic of scale in production mean that production at a larger scale (more output) can be achieved at a lower cost (i.e., with production at a larger scale (more output) can be achieved at a lower cost (i.e., with economies or internationalizing its business meaning the company produces more products and this lead to lower per-unit production cost. In addition, MNCs also can buy its resources in bulk, which lead to lower prices as well. The present of MNCs in different countries also allows them to effective bear the risk of cyclic economic declines (Ajami, 2006, pp. 12). MNCs can diversify their risk, which in particular means that they can subsidize their losses in country X with the profits in country Y. Furthermore, MNCs go international because the products or services they provide in their home countries might have a good reputation in terms of quality, performance, etc. and will be successful in foreign markets. If MNCs have entered a foreign market successfully, they increase their reputation globally and this can lead to a better brand image. A good brand name, such as BMW, allows MNC to charge premium prices for their products that lead to an overall better performance (Ajami, 2006, pp. 13). In relation to this, the home market is most often saturated. Especially developing countries have potentially higher growths rates, which are attractive to MNC (Pangarkar & Yuan, 2009, pp. 47). Moreover, due to their size, MNCs also require a lot of capital for their operations. The advantage of operating internationally is that they have access to different financial markets and choose the best deal. The managerial experience and expertise also increases of MNC. Mangers can share their expertise and technical expertise, which they have acquired in different countries with each other. This guarantees that managers are constantly up to date with the latest developments of their business. Furthermore, in case MNCs want to improve its technology to improve for instance production efficiency, it is sometimes less expensive to acquire a well technological equipped company of a foreign country instead of making large investments. Therefore, the access of technology in foreign countries can be seen as an advantage of MNCs.

Ownership

Finally yet importantly, a MNC who owns facilities in foreign countries is better able to coordinate their business. FedEx, for instance, has distribution centres all over the world which allows them coordinating and delivering their packages on time. Please see appendix to see information on the first/late mover advantage as well as to find out how to minimize risks.

Reasons against internationalisation

As you can see there are many reasons for companies to go international, but there are also disadvantages a company must take into consideration. Since MNCs are operating across international borders, they deal with currencies of other countries and are more vulnerable to fluctuations in exchanging rates. However, currency swaps and forward contracts can minimize the risk of exchange rate fluctuations. Furthermore, MNCs are subject to many regulations, which vary from country to country. Regulations are often changed and can have an adverse impact on a MNC business.Trade barriers such as tariffs might increase the company's expenses or even restrict the access to a foreign country. MNCs are also exposed to political risks. This political risk increases in countries whose governments are unstable and tends to change frequently (Ajami, 2006, pp. 15). Moreover, the diversity of languages as well as cultural differences could also create a communication problem among customers, employees of MNCs and its suppliers.

Modes of entry

For companies there are different modes of entry a foreign country. You can divided them into non-equity modes such as licensing, franchising, indirect and direct export and equity modes such as wholly owned subsidiaries and joint ventures (Peng, 2008, pp. 168). They all vary in the degree of control.

Non-equity modes

Indirect/direct export

The simplest and easiest way to enter a foreign market is most likely through exports. Companies can choose whether the export directly their products to the customers or they export their products through an intermediary such as a manufacturer´s export agent, export commission agent, etc. Usually companies use domestic capacity to produce their products and send them by air, rail, ship, or truck to the foreign market. The advantage of exporting is that it is less risky than other modes. Problems arising in the foreign market are not subject to the exporting company. The risk is limited to the value of the shipment (Campell & Craig, 2005, pp. 325). Moreover, the fact that little set-up cost is required for exporting means that FRPSDQLHV FDQ ³DWWDFN VHYHUDO IRUHLJQ PDUNHWV ZLWKLQ D OLPLWHG EXGJHW´ &DPSHOO &UDLJ 2005, pp. 325). In addition, exporting is a good way to increase the recognition of the brand name internationally. Furthermore, profits compared to a joint venture do not have to be shared. Companies also can achieve economic of scales due to the increased domestic production. However, a major disadvantage of exporting is that exporting companies have a lack of foreign market knowledge. Products in the home country might not be satisfying the needs of the foreign market. In addition, the high costs of transportation, commission, fees, and taxes reduce the profits of exporting companies.

Licensing

Another non-equity mode is licensing. According to Ajami (2006) "through licensing, a company (licensor) grants a foreign entity (licensee) some type of intangible rights, which could be the rights to a process, a patent, a program, a trademark, a Copyright, or expertise". The licensor as well as the licensee profit from the agreement. The licensor has low capital risk and receives a percentage of the licensee's profits. Similar to exporting it can increase the recognition of the brand name internationally. Furthermore, for companies who do not have the resources to achieve full commercial exploitation of their intellectual property by themselves licensing can be a very attractive way to develop the company´s business internationally (Dratler, 2006, pp. 19). For instance, a small laboratory that develops medicine successfully might not have the opportunity to manufacture the medicine in a large scale. The laboratory can give the right to produce its medicine to a large manufacture. Nevertheless, a disadvantage is that a licensor does not have the tight control over manufacturing, strategy, marketing, etc. of the licensee. In addition, there is a risk of sharing the expertise with a foreign company. A competitive advantage in form of intangible assets can under circumstances be lost. Foreign companies might copy the intangible assets and this decreases the competitive advantage of the licensor.

Franchising

A similar form to licensing is franchising. Besides granting the franchisee, the permission to use a name, process, method, or trademark, the franchisor also might help to operate thebusiness or even supply the raw materials (Ajami, 2006, pp. 25). Furthermore, according to Wall (2010) you can distinguish between "first-generation franchising" and "second-generation franchising." In the first-generation franchising, the franchisor does not interfere much with the franchisee's operations. In a second-generation franchising, the franchisor has much more control on the daily's operations of the franchisee. The main advantages for a franchisor are increased profits as well as the expansion of the brand name awareness internationally. The greatest disadvantage is that it is difficult for a franchisor to control and consequently assure the quality of the products in the foreign market. In addition, adjustment due to the requirements of the foreign market could be difficult to do. For instance, a restaurant chain that is entering the Middle East through franchising and provides a lot of pork in its menu must adjust their products to the requirements of Middle East customers otherwise the restaurant will fail. Moreover, similar to licencing the profits must be shared between franchisor and franchisee.

[...]

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Details

Title
Compare and contrast the means by which a company can internationalise its operations
College
University of Sunderland
Course
International Business Environment (PGBM04)
Grade
85%
Author
Year
2011
Pages
26
Catalog Number
V173491
ISBN (eBook)
9783640937899
ISBN (Book)
9783640937837
File size
760 KB
Language
English
Keywords
PGBM04 University of Sunderland, International Business Environment, internationalisation, Modes of entry, Foreign direct investment, Wal Mart
Quote paper
Alexander Berger (Author), 2011, Compare and contrast the means by which a company can internationalise its operations, Munich, GRIN Verlag, https://www.grin.com/document/173491

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