Question

Summarize the internationalization process of accounting! What are the advantages and disadvantages of this process? Discuss from the business aspect.

Answer 1

As barriers to globalization continue to fade, as the continuous relationship of individuals, companies and nations through globalization has caused firms to move out of their domestic market to the international one to gain sustainable competitive advantage, businesses should realize that competing globally is not an option, but an economic imperative. It happens particularly in professional service market, as today service industries constitute more than two thirds of the most developed nations’ economic activities. The rapid globalization of service business in the last decades has prompted an increasing number of firms to develop strategies to enter and expand into markets outside their home countries; accounting companies are no exception. European services markets have become much more integrated for companies; services and structures offered by accountants and auditors to their clients inevitably need to reflect that as well.

Accounting services today are recognized as one of the most internationalized of the services. Multinational companies with activities and subsidiaries established abroad need accountants and auditors present or represent in several jurisdictions in the world and able to provide them with an international accounting services. In international competition conditions, accounting companies are forced to create sustainable competitive advantages in order to become or remain successful. To gain competitive advantage in a global marketplace firms have to engage in interorganizational networks with different partners. Interorganizational networks become highly prevalent as organizations are motivated to collaborate with business partners to achieve their goals and objectives.

Large international accounting & audit organizations such as PricewaterhouseCoopers, Deloitte, Ernst & Young, KPMG are not just multinational organizations but multinational networks. In international literature and economics these companies are called Big Four, being the biggest and the most profitable accounting services providers.

When assessing the applicability of any internationalization model to the accounting services market it is necessary first to define the composition of that market. The accounting services market can be seen as consisting of two sub-markets, auditing services and other services. Other services range from basic accounting services such as book-keeping, tax return preparation and tax planning to more general management consultancy activities, financial planning, etc

Accountants and accounting are essential elements of the infrastructure of any enterprise. Information about a firm’s financial accounts is vital for managers, shareholders, and creditors. It is a key input for lenders’ and investors’ decisions as to whether, when, and how to provide finance to enterprises. Accounting is thus an important part of the business sector of any modern economy.

The growth of multinational enterprises generally and of multinational accounting firms in particular has focused attention on issues related to internationalization process of accounting services. This attention, in turn, is part of a rising tide of interest in trade in a wide range of services.

The expertise and prestige of the largest accounting firms have also allowed them to acquire overseas clients that have no roots in the accounting firms’ home countries and to affiliate with local accounting firms, forming networks and partnerships under a common brand name.

Factors which influence internationalisation process often differ between companies. Not all factors are equally important to all companies. It depends on the industry. These factors may play an essential role when company chooses a foreign market entry mode. Existing models and theories do not mean that one of them perfectly suits to the certain industry or business activity, such as accounting services. This is because over the years the world has experienced major technological, political, economical, social changes contributing to a more homogeny world.

Thus the main problem is to to clarify to what extent the internationalization process of accounting services follows the patterns suggested in the literature and how the effectiveness of internationalisation of accounting services can be improved.

Business internationalization motives and barriers

The decision to expand across national borders is one of the most important strategic decisions in the growth and development of the company. There are several different purposes which push enterprise to go abroad. It depends on the enterprise which reason is more relative to it goals, etc. However, doing business abroad is more complex and risky than domestic business and there is a high possibility of failure, thus, a firm should correctly evaluate its drivers of international expansion.

First, a main set of motives for the company to go abroad is centered on the ambition to improve its competitiveness based on market size and costs. With a focus on economies of scale enterprises can be motivated to internationalize in order to gain access to markets or sub-suppliers. These drivers are closely linked to returns maximization and costs minimization. Another group of motives is more related to company’s strategic development and gives access to international competencies and resources, international business relationships and foreign capital.

Advantage

• Profit advantage. Company may feel that going abroad can give greater opportunity for increasing profits than staying in the domestic market.

• Products. Domestic market can appear to be too small for operations. And another reason could be launching new product to the market which was not available in the foreign market yet.

• Exclusive information. Company may have access to information or new useful technology as an input to strengthening the competitiveness of the firm.

• Tax benefits. The foreign country may appear more or similarly tax beneficial as domestic one.

• Economies of scale. Larger volumes through operations with abroad can provide economies of scale.

• Prestige. This is very common in case of small and fast growing company. It gives a company a sense of importance and respect, it increases its image due to challenge of doing business abroad.

• Companies are driven by reactive motivations usually when sales problems occur in domestic market due to economic recession, market saturation, decrease of domestic sales, etc.

Disadvantage

• Competitive pressures

• Overproduction

• Declining domestic sales

• Saturated domestic market

• Excess capacity

• Relationships

Domestic business is far different from international business. There are problems and barriers, costs and risks that companies face with regard to internationalization. This is because global marketing environment is much more complicated and risky than domestic one. The major external elements that affect a firm when going abroad include economic, political, social, cultural, technological, financial and competitive environments. Language and cultural barriers are among the most obvious ones. Differences in religious beliefs, societal norms and business negotiations styles all have an impact on business when dealing with foreign counterparts.

Laws and regulations also constitute a significant barrier for internationalization. Shifting borders and instability of some foreign governments can pose a threat to the security of the business abroad. Foreign exchange rate instability and the issue of intellectual property protection need to be considered as well. In the countries, where legal and economic systems are not as developed as in some countries, there is a risk of not being paid for your goods or services. Losses from exchange rate fluctuations and bad debt written off can present serious financial problems to the enterprises selling abroad. What is more, the span of control in international business is wider and this brings problems related to supervision of international business. In order to narrow the span of control, most firms operate through distributors or establish own subsidiaries abroad.

The barriers and challenges related to internationalization can be summarized as follows:

• High costs of internationalization process or lack of capital;

• Lack of strategy decisions in the initial phase and lack of ability to implement strategy;

• Lack of international experience.

Taking into consideration the barriers and risks explained above, it is more advisable for

enterprises to examine their capabilities carefully before the international expansion.