Assessing Internationalisation

Reasons for targeting, operating and trading in an international market:

• Avoiding the risk of operating in a single market
• Taking advantage of economies of scale and the experience curve
• Boosting profitability
• Competing against international firms in order to safeguard domestic markets
• Increasing market share and achieving business growth
• Better serving key customers located abroad
• Developing market knowledge and expertise
• Making a competitive move
• Taking advantage of government incentinves

• The size of a potential market and its expected growth
• The accessibility of the international market
• Compatibility or alignment of the market
• Availability of financial and other resources
• The competitive environment
• The external environment (PESTLE factors)

Off-shoring: where companies outsource or subcontract business activities overseas, largely because labour and other production costs are much cheaper there; also known as outsourcing off-shore

• Many businesses decide to produce more, and more of their resources are abroad (generally, costs are cheaper)
• Lack of investment in manufacturing in the UK
• Availability of low-paid, unskilled workers
• Multinational companies may already have capacity and capability abroad and may prefer to improve their efficiency by utilising that rather than producing in the UK
• Can be far easier to establish manufacturing operations abroad
• Off-shoring production facilities can allow business leaders to focus on what they do best
• Take advantage of free-trade areas

• Additional business risks associated with the transition period, political instability, and natural disasters, which can disrupt business continuity
• Increased additional costs, including managing the transition abroad, ongoing management and supervision costs, transport, delivery and insurance costs
• off-shoring to developing countries affect a company's image and its reputation for CSR
• Currency fluctuations can affect profit margins
• Difficulties in controlling the quality of goods or services provided
• Communication, including language differences, particularly for highly technical products
• Logistics, including transportation, delays in deliveries, the responsiveness of suppliers and their ability to get products to market quickly enough

Re-shoring: the reverse of off-shoring; the transfer of business operations back to the country of origin; also known as on-shoring

• Shifting customer preferences
• Desire to respond more quickly to consumer preferences - create a competitive advantage
• Reduction in the wage gap in emerging economies
• Fluctuating exchange rates
• Difficulties in dealing with changing international transport costs, import duties, potential transport disruptions and supply chain risks
• Desire to improve cash flow by reducing levels of inventory that need to be held
• Desire to improve the quality of products and components
• Desire to reduce the production-to-market lead time so that companies are able to react more effectively to emand
• A desire for a solid legal framework and a predictable regulatory system

Exporting: Goods or services produced in one country are sold in another

Advantages:

• reduces risk and little investment is required
• Speeds up entry to international markets
• Makes use of existing facilities and therefore increases economies of scale

Disadvantages:

• May face import tariffs and other trade barriers
• Incurs transport costs
• Limits access to local information about the international market, particularly in the case of indirect exporting

Licensing: a business arrangement whereby one company gives another company permission to manufacture its goods, offer its services, and use its technology, brand or expertise for a specified fee or royalty 

Advantages:

• reduces risk and little investment is required
• Speeds up entry to international markets
• Avoids import tariffs and other trade barriers
• Makes use of existing facilities and therefore increases economies of scale

Disadvantages:

• lack of control over marketing products
• Licensee may become a competitor

Alliances: agreements between two or more companies to combine their strengths and expertise in order to undertake a mutually beneficial project - in this context, involving entry to an international market; alliances can include strategic alliances and joint ventures

Advantages:

• combines the resources and strengths of two or more companies
• potential for learning and benefiting from each other
• Less investment required than going it alone

Disadvantages:

• Can be difficult to manage
• Less control than going it alone
• A greater risk than exporting and licensing
• Partner in the alliance may become a competitor

Direct Investment: the taking of a controlling ownership in a company in one country by a company based in another country; this can be via organic growth or the takeover of a foreign business; sometimes known as Foreign Direct Investment (FDI)

Advantages:

• greater knowledge of local markets
• opportunities to make better use of specialist skills
• retain the knowledge of products and markets within the company

Disadvantages:

• A higher level of risk than the other methods
• requires huge resources and long0term commitment
• requires well-thought-out strategy for managing local plants and resources, including overcoming cultural barriers

Multinational: a business that operates in several countries but is managed from one (home) country; this term is often abbreviated to MNC