IGNOU : M.COM : IBO 2 : UNIT 1 : Q - 4. Why do firms go international? Explain with the help of examples from Indian context.

 

Ans. REASON FOR ENTERING INTERNATIONAL

There are several reasons for a business firm to go international. Important reasons for going international are described below:

1) Domestic market constraints

2) Government policies and regulations

3) Growth of overseas markets

4) Increased productivity

5) Relative profitability

6) Diversification to reduce business risk

7) Control inflation and price rise

8) Counter competition

9) Strategic vision

Let us now study each of them in details.

Domestic Market Constraints : Domestic demand constraints drive many companies to expand the market beyond the national boundaries. The following are the main constraints in the domestic market:

·         If the size of the domestic market is very small, companies look forward to foreign markets to achieve the economies of scale. For example, many Japanese companies in electronics and automobile sectors go global because the size of the domestic (Japan) market is small. Similarly, since most European nations are relatively small in size, without foreign markets, European firms would not have sufficient economies of scale to allow them to be competitive with US firms.

·         Due to recession in the domestic market, companies may not be able to utilize the full production capacity. Sometimes there is excess production capacity in the country where companies are not able to utilize the full production capacity, and unable to sell in the domestic market whatever produced.

·         The market for a number of producers tend to saturate or decline in the advanced countries. This often happens when the market potential has been almost fully tapped, and when the population in some of the advanced economies would saturate or decline. Such demographic trends have very adverse effects on certain lines of business.

·         Another type of domestic market constraint arises from the scale economies, The technological advances have increased the size of the optimum scale of operation 'substantially in many industries making it necessary to have foreign market, in addition to the domestic market, to take advantage of the scale economies. It is the thrust given to exports that enabled certain countries like South Korea to set up economic size plants. In the absence of foreign markets, domestic market constraints come in the way of benefitting from the economies of scale in some industries.

Government Policies and Regulations : Government policies and regulations also ' motivate the firms to internationalize. Government may impose certain restrictions on further growth and capacity expansion of some firms with the domestic market in order to achieve certain social objectives. But there may not be any such restrictions on making investments overseas or the restrictions may he relaxed even in the domestic market, provided the additional capacity envisaged by the company is utilized for exports. III such a situation, a firm may contemplate export operations, because it offers a way to achieve corporate growth which may otherwise not be possible. US producers of asbestos products found the domestic market legally closed to them. Since some overseas markets had more lenient consumer protection laws, US firms continued to produce asbestos for overseas markets. Here US banned the sale of the product domestically, but production in the country is allowed. Take a contrasting example, where the product consumption is allowed in the domestic market, but production is no1 permitted. Production of caustic soda and soda ash are banned in many developed countries as it was considered environmentally hazardous, but the use of these products is not banned. At the same time, developing countries like India have not imposed such ban on production. As a result, companies in the developing countries like India found attractive markets in developed countries.

Growth of Overseas Markets : The enormous growth potential of many foreign markets is a very strong attraction for companies to enter into foreign markets. In a number of developing countries, both the population and income are growing fast. It may be noted that several developing countries, the newly industrializing countries and the Peoples' Republic of China in particular, have been growing much faster than the developed countries. Growth rate of 1ndia has also been good and the liberalization seems to have accelerated the growth. Even if the market for several goods in these countries is .not very substantial at present, many companies 'are eager to establish a foothold there considering their future potential.

Increased Productivity : Increased productivity is necessary for the ultimate survival of a firm. This itself may lead a company to increase production and then seek export markets. Moreover, h these days of technological developments, bigger companies have spend a lot on research and development. To meet the cost of research and development, larger markets become necessary and exports become unavoidable.

Relative Profitability : One of the most important objectives of internationalization is the profit advantage. International business could be more profitable than the domestic. The price realized in export markets may be relatively higher than that realized in the, home market. This is so, for example, in the case of readymade garments and jewellery. Many other cases, export incentives provided by the Government may make exporting relatively more profitable than selling in the domestic market. Even when international business is less profitable than the domestic, it could increase the total profit. This is possible because by exporting you can utilize the idle production capacity. Thus by optimum utilization of production capacity, the overall profitability of domestic business call be improved.

Diversification to Reduce Business Risks : A diversified export business may help in mitigating sharp fluctuations in the overall activity of a firm. When ii firm is selling in a number of markets, the downward fluctuation in sales in one market which may be the domestic market may be fully or partially counterbalanced by a rise in the sales in other markets. Demand for most products is affected by such cyclical factors as recession and such seasonal factors as climate. The unfortunate consequence of these variables is sales fluctuations, which can frequently be substantial enough to cause losses. One way to overcome this risk is to consider foreign markets as a solution for variable demand, Such markets even out fluctuations by providing outlets for excess production capacity. For example, the US economy slowed down in 2001 while Chinese and Indian economies are doing well. If a business firm is operating in these three countries, the decline in sales in the US may be more than compensated by the increase in sales in China and India.

Control Inflation and Price Rise : On several occasions, Governments permit imports to increase Ule supply and control prices, thus control the inflationary pressures on the economy. Whenever domestic prices increase, normally imports are allowed to increase the supply and control the prices, When imported products are available at lower price, domestic producers also reduce their prices. Without imports, there is no pressure on domestic producers to reduce their prices, The lack of imported product alternatives forces consumers to pay more, resulting in inflation and excessive profits for local firms. . This development usually acts as a prelude to workers' demand for higher wages, further exaggerating the problem of inflation.

Counter competition : Many companies also take an offensive international competitive strategy by way, of counter-competition. The strategy of counter-competition is to penetrate the home market of the potential foreign competitor so as to diminish its competitive strength and to protect the domestic market share from foreign penetration. Effective counter-competition has a destabilizing impact on the foreign company's cash flows, product related competitiveness and decision making about integration, Direct market penetration can drain vital cash flows from the foreign company's domestic operations.

Strategic Vision : The systematic and growing internationalization of many companies is essentially part of their business policy or strategic management. The stimulus for internationalization come from the urge to grow, the need to become more competitive, the need to diversify and to get strategic advantages of internationalization. Many companies in India, like several pharmaceutical firms, have realized that a major part of their future growth will be in the foreign markets. There are a number of corporations which are truly global. Planning of manufacturing facilities, logistical systems, financial flows and marketing policies in such corporations is done considering the entire world as its single market. In short, it is a borderless world.