Question

Why might firms choose to internationalize instead of operating domestically? (a) Identify and explain three major motivations for expanding overseas. (b) What are the drawbacks of this strategy? Identify and explain three major drawbacks for expanding overseas

Answer 1

The three major motivations to move overseas

(i) Opportunities to sell to overseas customers. It happens when the company sees potential unmet demand in certain countries, which promising prospects, and opportunities to be exploited. It can give them first mover advantage if there is no prominent competitors, and can prove to be beneficial.

(ii) Acheivement of economies of scale through cheaper resources. The companies might move overseas to take advantage of abundant resource availability, cheap labour or other favourable conditions which give them an edge over others owing to higher margins.They can acheive economies of scale by producing at a cheaper place and exporting its products worldwide.

(iii) Distributing resources as a protective meaasures against the risks specific to a particular market. Global operations make the company more resilient against economic, social, plitical and environmental changes and ensure business continuity.

Drawbacks of moving out.

(i) The company and its resources must have a high cross cultural competence to be successful in an alien culture. Many organisations which do very well back home, fail overseas because they are not able to cope up with cultural differences.

(ii) They do it on expense of loosening their grip on their local operations because of a part of their resources dedicate themselves overseas. It can affect their domestic position and in case of failure on both fronts, their propsects might be severely affected.

(iii) Companies are unaware of many market specific conditions and facts that are vital to know while doing business. It can be ethical considerations, involvement of local government in businesses, political scenario, social structure and many other facors, where local players have advantage over it and this facor might affect the prospects negatively.