Reasons for trading internationally
- to expand market share as harder to do so just in the UK, as market will not just rapidly expand in the UK, more developing countries to expand in.
market share is the percentage of total sales of one particular product that comes from an individual business
- once a market has reached the point of saturation in developed countries, so slow growth. meanwhile the growth of the markets in emerging economies is spectacular & will continue to grow, so multinationals have moved their to expand their market
market saturation occurs when it becomes impossible to expand sales further in that particular market. if the product is durable good e.g a washing machine, it may still be possible to sell replacement machines
Market penetration refers to the process of expanding market share so as to reach a larger number of customers
What are the limits in the domestic markets?
e.g mobile market is exceptionally dynamic, but on a more modest level, similar conditions apply to many businesses. competition from other producers can create a tough trading environment. governments in developed countries want to encourage compeitition.
in the UK, the OFT works to prevent individual businesses from acquiring too much market power. competition policy keeps prices down for consumers and it gives businesses an incentive to produce efficiently. so businesses finds that they cannot easily expand their market share in their domestic markets.
for some businesses, the constraint is coming from competing imports. businesses can react vigorously, cutting costs & increasing productivity or improving product design. But ultimately if the foreign competitor has a significant market share, the domestic producer may face real difficulty in expanding. exporting may be the only way to achieve higher sales.
a relatively small domestic market may provide insufficient sales revenue to make expensive innovations worth the cost of research & development. global reach is important here because the prospect of sales in foreign markets greatly increases the expected future income stream from any proposed innovation. of course there are risks.
innovation may mean either a new product development or an improvement in the design of an existing product. both of these are product innovations. alternatively, process innovation means cutting costs by finding a better method of producing.
some products are constantly being superseded by technical changes and innovations. this always happens with machines & electrical goods - cars, comps. Supplies have to keep abreast of new technologies, patent their own discoveries & innovate as fast as they can, just to stay in business. an international market increases the incentives to keep on researching potential innovations and reduces the risks. sales may drop off in 1 market but are less likely to diminish in all markets at once. competing companies will be innovating too, & maintaining competitiveness means keeping up & is possible surpassing the achievements of rival businesses.
Tesco provides a good example: one pound in every nine spend by consumers in the UK is spent at Tesco stores. that gives the company an amazing level of market penetration. sure enough, Tesco has had trouble with competition authorities, which have dictated rules about where and when Tesco has too many outlets for customers to have a real choice. these rules limit Tesco's capacity to open new stores. So now there are over a 100 Tesco stores in Japan and in Thailand and outlets all over Eastern Europe, especially Poland. Tesco also has a strong presence in many other countries. Its venture into the USA has not been a success, but never mind, the company is now truly multinational and risks in any one country can be against successes in others
Extending the product life cycle
v.often, businesses have to work hard just to keep the market share they have. staying competitive in a stable market is 1 thing, but supposing the product has passed through the growth & maturity phases of the product life cycle & is going to decline, what next?
the length of the product life cycle varies hugely from 1 product to another. technical change is always going to be important in bringing a product to the end of its life but changes in fashions & tastes also can bring about a v.rapid decline in sales.
extending the product life cycle can work. improvements & subtle changes in the product may help it to keep its market. but if tastes/ fashions are involved, the decline phase of the product life cycle may be surprisingly swift. new markets may provide sales growth that would be impossible to achieve in the domestic market through minor changes
the product life cycle refers to the phases which many products go through between their first introduction to the market & the eventual decline in sales that may lead to production ceasing. these phases include: development, introduction to the market, growth, maturity (during which sales are fairly constant) and decline.
e.g accountancy, insurance, tourism. service exports are sure to remain important in the UK0 they made up 40% of the total in 2007
the search for new markets has different features for each product and location. the underlying reasons for it will always have roots in the desire to expand the business, make more profit & spread the risks associated with growth. bigger businesses can take some risks without threatening their futures. new market mean sales growth & profits that will fund further expansion. the entrepreneur may sleep a little easier & gain satisfaction from an expanding marketplace.
product or market conditions that may prompt a bus
the world changes rapidly. much more of what we produce and consume is either exported/ imported. a significant reason is that it has become easier to trade internationall.
in the past, many countries have tried to restrict trade, because govs feared that foreign competition might reduce demand for their own domestic products. so they put tariffs (import duties) & other restrictions on trade, so as to make imports dearer & discourage people from buying them. then govs began to realise that other countries' trade restrictions discouraging sales of their own exports.
over a long period, trade negotiations between govs led to these restrictions being much reduced. some countries banded together in trade blocs like the EU. world-wide, long & detailed trade negotiations led to much easier trading conditions. this gave businesses everywhere a chance to develop their products for international markets & expand output, this process is known as trade liberalisation.
Tariffs are taxes on imported goods. they make the price higher & sales will generally be lower.
Trade liberalisation refers to the process of reducing barriers to trade so that economies can move gradually closer to free trade, which would mean that there are no trade barriers at all.
trade blocs are groups of countries where barriers to trade are reduced/ eliminated between member states e.g EU
There are many reasons why a business might want to start trading internationally. these include both factors that 'push' businesses out of domestic markets & factors that 'pull' them towards international ones. often it is a combination of both. most businesses want to expand & increase profitability. moving international markets is often the best way to do this.
push & pull
- saturated domestic market
- fierce comp in domestic market
- comp from imports
- the product is in the mature/ decline stage of product life cycle
- potential for increased sales & profits
- economies of scale
- risk spreading
- global sourcing
- increasing trade liberalisation
- expanding trade blocs
for many businesses the 1st stimulus to start marketing abroad comes when it becomes steadily more difficult to increase sales in the domestic market. there will be few new customers left to target with their products/ services. sales will come either from existing customers replacing old/ worn out products or by attracting customers away from a rival's product. this situation is called market saturation
market saturation occurs when it becomes impossible to expand sales further in that particular market. if the product is a durable good, e.g. a washing machine, it may still be possible to sell replacement machines
Fierce competition from both local & foreign frims
competition can be fearsome, coming from both domestic suppliers & imports.
- in a saturated market, businesses compete vigorously to increase sales at the expense of rivals. comp may be based on price/ non-price factors
- competing businesses will be watching each other all the time, looking for ways to differentiate their products & get a larger market share. innovative product design, reliability, reputation and clever marketing will be constantly stiffening the competition. providing value for money will be a key factor.
- this can be an expensive process as it may require constant innovation and/or intensive marketing to increase market share
- imported products will often be able to compete on price. foreign suppliers may have lower labour costs (e.g clothes) for some products, this will give them a potentially strong competitive advantage.
- international markets can be a welcome addition to the domestic market, as they contain many potential new customers; the scope for expansion & increased profits can be enormous.
Product life cycle
The product life cycle helps to explain how businesses might respond to market saturation.
(draw the diagram)
- a saturated market is one that is in the maturity stage of the cycle. sales eventually reach a plateau and cannot be increased significantly
- the usual solution for a business in this situation is to develop an extension strategy to prolong the maturity stage by bringing out a new/ improved version
- the next stage is decline, when no matter what the business does, sales & profits begin to fall
- moving into new international markets & exporting can be seen as an extension strategy
- equally, in a foreign market, the product can be placed earlier in the cycle, perhaps into the introductions or growth stages
an extension strategy is aimed at extending the life of a product either by making small changes in it, finding new uses for it, or finding new markets
Pull factors- emerging economies
Potential for increased sales & profits
access to new markets in emerging economies creates huge potential for increased sales & profits and major growth opportunities for many businesses. the profit motive is often paramount, especially for large businesses, i.e. those public companies that are answerable to a significant body of shareholders. there is a strong attraction to expanding into new markets to satisfy this motive
emerging economies are characterised by rapid economic growth. they have seen big increases in manufacturing output & standards of living are rising. some would still be described as poor countries (e.g India) but others (e.g Mexico) are well on the way to becoming developed countries with modern economies. the group includes many smaller countries like Chile & Thailand.
Economies of scale
- trading internationally will usually mean that size of the business will increase
- this means a greater chance of achieving economies of scale (a reduction in average cost brought about by increasing the scale of production)
- increasing economies of scale can lead to a competitive advantage: lower costs may make lower prices possible & open up mass markets.
- sometimes economies of scale are so significant that the most efficient level of output is greater than the level of demand for the product in any but the largest economies
- diversified markets reduce risk: if sales fall in 1 market, they may still rise/ remain stable in another. this is an economy of scale which can be achieved by selling a range of products/ a single product in a range of diff markets. trading internationally gives a business greater stability: a problem/ downturn in 1 country can be compensated by growth in another.
- the wider risk is spread, the safer the business
- global sourcing is a term used to describe the practise of finding good & services from the global market.
- it may mean just buying cheaper sources abroad, or setting up production facilities abroad to take advantage of lowers costs of production. this is called offshoring
- these savings include low cost labour (which may be skilled/ unskilled), low cost raw materials & other economic factors such as tax breaks & low tariffs on trade
- offshoring applies to services as well as to manufactures
offshoring means locating production in a foreign country, the objective is to exploit cost savings, most often lower wage rates
Increasing trade liberalisation
it becomes easier to trade when trade barriers are dismantled, and more firms are attracted to doing businesses internationally. there have been several factors contributing to this on-going process.
- in the period just after the end of WW2 there was a general feeling of the need to bind nations together to prevent further catastrophe. many people believed that we could set up international institutions that would encourage international co-operation & reduce aggression
- in the late 40's, the IMF and the World Bank were set up
- permanent arrangements were made to facilitate trade negotiation- at first via GATT, which later turned into the WTO
- discussions began that would ultimately lead to the formation of the EU
the international monetary fund (imf), co-ordinates the international monetary system. it tries to keep the system stable, and provide adequate finance for world trade to continue without interruption
the world bank lends to developing countries in order to fund projects which will help them to raise incomes & make their economies more efficient
the WTO , world trade organisation, started as GATT, the general agreement on Tarrifs & trade. it supervises arrangements & trade negotiations & helps to resolve disputes between govs.
- these bodies have all contributed to the increase in international trade, trade negotiations take a v.long time to reach agreement. but, over many decades, trade barriers have been dramatically reduced by participating govs as more and more countries joined the WTO. 153 countries already members. china joined in 2001. russia cleared all the hurdles needed to join formally in 2011
do not confuse trade liberalisation with free trade. trade liberalisation is an on-going process that may or may not have free trade as ultimate aim
Free trade areas
Expanding trade blocs
a trade bloc can be a free trade area a loose alliance of countries that want free trade between themselves. or it can be a tightly integrated common market. this will have harmonised business regulations so that there is a 'level playing field' with all businesses competing on equal terms
- the creation & growth of trade blocs has made it much easier to access member countries' markets without hindrance
- they encourage specialisation & open up new markets
- the best known free trade area is NAFTA (north american free trade area)
- the bets known common market is EU (the european union)
- other trade blocs include ASEAN ( the association of south east asian nations) and MERCOSUR (southern common market, including argentina, brazil, & some neighbours)
free trade areas are groups of countries that trade completely freely with each other, with no trade barriers, but each member country retains independent trade policies in relation to the rest of the world
common markets have completely free trade internally & a single unified trade policy covering all member countries' trade with the rest of the world. but besides free movement of goods & services, there is also free movement of people & capital. individuals in all member countries can work in any other member country. businesses based within the common market can invest in any member country
trade blocs all encourage & increase trade amongst the member states; this is called trade creation. after the UK joined the EU, its exports to other members increased greatly. trade blocs also create trade diversion. this is because member countries may end up trading more with each other & less with the outside world, this can be a barrier to true worldwide free trade
trade creation occurs when there is an increase in the total amount of goods & services traded because of reduced trade restrictions within a trading bloc.
trade diversion occurs when a trading bloc reduces imports from non-member countries, enabling businesses within member countries to increase sales inside the trading bloc
benefits & constraints of trading within a trading
- access to other markets without exports being penalised
- manufacturers can import from bloc members without tariffs
- possibility of economies of scale
- spreading risk
- a trading bloc creates a larger market which attracts foreign direct investment (FDI) from outside
- greater comp within trade bloc can increase efficiency within firms
- no protection for domestic industries from other bloc member's exports
- increased comp for domestic producers
- a common external tariff in a common market can increase costs of raw materials/ supplies from outside
- reaching agreement with member states can be difficult & time-consuming
- new rules & regulations may not suit all businesses
why interational trade is increasing
Reduction of trade barriers
the past 60 years or so have seen an exceptional growth in international trade. exports grew on average by 6% annually
The WTO (world trade organisation- formed 1995)
- the WTO is the successor of the GATT (general agreement on tariffs & trade)
- its stated aim is to oversee and regulate the international trading environment
- it has over 150 members, accounting for over 97% of world trade. around 30 others are negotiating membership
- the main objective is to help trade flow smoothly, promote free trade & encourage economic growth by reducing trade barriers
- it does this by acting as a forum for trade negotiations, administering trade agreements & trying to resolve trade disputes
- it also helps developing nations with technical matters & training programmers.
What does it not do
- it is not a global policeman
- it cannot 'force' countries to co-operate
The WTO has its critics
- WTO has been accused of favouring the richer countries at the expense of developing ones
- some doubt that free trade & liberalisation are the best solutions for developing nations
Foreign direct investment
- as trade barriers are reduces, the flow of FDI increases as business set up factories or other kinds of production or distribution facilities in other countries
- much FDI flows from one developed country to another but increasingly FDI is flowing into developing countries
- it may be associated with off shoring of productions in countries with lower input costs, or it may be directed towards productions for foreign markets
FDI occurs when businesses or govs invest in other countries. they may build factories or offices, develop mines or create their own marketing & distribution systems. there is a good deal of FDI between UK and USA but increasingly, emerging economies are both receiving and extending their own FDI
developed countries include most of Europe, usa, canada, australia. all have high incomes. through capital investment, they have acquired sophisticated production facilities. some countries that were until recently placed in the developing county category are now considered developed e.g singapore & s.korea
developing countries have relatively low standards of living, compared to developed. they may have small manufacturing sectors & the majority of the population engaged in agriculture. they have limited infrastructure & levels of investment are often low. many of the worst off have been damaged by war
Breakdown of old political orders
- collapse of the Soviet Empire & communist role in Eastern Europe in 1989 opened these areas up to international business
- Russia itself has become of the BRICs and has a huge reserves of minerals and energy supplies
- china has moved a long way away from its previous hard-line communist & isolationist stance. both Chinese people & foreigners can set up their own business in CHina, provided they have the approval of the Communist Party. chinese suppliers actively seek customers for their exports
BRIC stands for Brazil, Russia, India & China. these are the world's 4 largest fast-growing economies. the term is sometime use to refer to all fast-growing economies. S.Africa thinks of itself has the 5th BRICS. emerging economies
Improvements in communication & transport links with countries
- as it gets easier & cheaper to communicate with other countries & to travel to the, so the amount of trade increases
- revolutions in transport systems, in particular containerisation have reduced transport costs. air freight has become cheap enough to be used for high value-low bulk products
- cheap air travel & telecoms have made international communication with markets and suppliers easy & cheap. forging international relationships is often almost as easy as with local ones
Responding to the opportunites
there are various ways of expanding markets, depending on the nature of the product & the relevant markets:
- many countries that used to be seen as developing countries are now emerging economies, including BRIC. all of them have a growing middle class, some of whom are becoming v.rich and keen to buy luxury products. they will appreciate branded goods identical to those sold in exporting country. simply by setting up distribution systems in big Chinese cities, Burberry has increased sales dramatically
- in all emerging economies & all developing countries there are large no. of poorer people whose incomes are growing slowly. they are creating new markets but not necessarily for the v.same products that sell in the developed world
- the key factor in creating new markets is to understand the needs of potential buyers. just exporting existing products with little/ no awareness of local needs may fail to open up a potential mass market
- backward innovation deliberately simplifies existing products to develop lower cost version. this is a strategy that responds to local needs & requirements & can achieve a mass market by appealing to customers with low/ middle incomes
- businesses that are facing saturated markets can expand rapidly by using this to create completely new markets
backward innovation involves developing low cost products that will appeal to people with relatively low incomes. frequently they will have just the most basic functions of sophisticated manufactured products, & may be similar to the early versions of products that are now sold with many more features in developed economies
Selling product innovations in multiple markets
- it makes sense to sell product innovations in a variety of different markets in order to maximise sales & profits
- innovation can be an expensive process; selling in more markets helps to recoup the investment more quickly
average costs are reduced as the fixed costs of innovation are spread over greater output