Global Business - Answers to Economics Class Research Questions

Why do companies choose to enter foreign markets?

There are a number of reasons companies choose to enter foreign markets. One way to conceptualize these reasons is to divide them into proactive versus reactive reasons. A company which has advantages due to its product or technology, relative to competitors already in a market, may choose to enter a foreign market for proactive reasons. Companies which are able to gather information regarding competitors, customers, distribution and other important factors within the foreign market prior to their opening business in the new area are likely to achieve better results.

Another proactive reason a company may wish to enter a foreign market is due to tax breaks offered by the local government to exporters (Blythe & Zimmerman, 2005, 105). However, companies should be cautious about using this as a motivation due to the temporary nature of such incentives. An example of this is provided by the United States, Foreign Sales Corporation provision, which gave tax breaks to companies located in the United States, who were exporting products to foreign markets. These tax breaks provided benefits, which were in conflict with World Trade Organization (WTO) agreements. The WTO made a request to the United States Congress that these tax laws be amended. Congress complied with the request and many companies within the United States withdrew from the affected export markets.

Companies which are located in relatively small countries, and doing well, may wish to enter foreign markets as a proactive means of expansion. This is especially true for companies which are located in countries which are less developed and have a lower average socioeconomic level. For these companies, the customers in foreign countries may be better able to afford their products.

There are a variety of reactive reasons the company may wish to enter a foreign market. Competitive pressures in the company's home country can be one reason for expanding to other countries where the same level of competition does not exist. A frequent mistake in this type of situation is for a company to enter the new market too quickly. This situation causes the company to be unprepared for many of the difficulties, they are likely to encounter.

Declining domestic sales, overproduction, and excess capacity can also be reactive reasons for a company to expand to foreign markets. These companies often think of the foreign market as an alternative which can compensate for declining domestic sales. If the foreign market is being used in these types of situations, the effect of expanding into the foreign market will be short-lived. When domestic business improves these companies will often decrease, or even cease, their foreign market business. This can often result in poor public relations in the foreign market.

Another reactive reason for companies to enter a foreign market is close geographic proximity. For example, there are many companies in Canada which export to the United States and vice versa.

How do companies enter foreign markets?

There are several effective strategies a company can use for entering a foreign market. Each of the strategies involves a different level of investment and risk. The strategies from the lowest level of investment to the highest are: exporting, foreign licensing, joint ventures with foreign companies, direct investing, and multinational expansion.

The least expensive and quickest way for a company to enter a foreign market is by exporting its products (Kishel & Kishel, 2005, 230). A business often chooses this strategy after it begins receiving requests for its products from foreign buyers or distributors. The company may also discover a product overseas which is very similar to its own and extremely popular. This method of expanding into a foreign market has the advantage of being the least expensive, simplest to enact, and least risky. The only losses which are likely to be incurred are of the goods being exported and the time involved in establishing the distribution relationships.

Another method a company can use to expand foreign markets is by forming a joint venture with someone who is already doing business in the country (Blythe & Zimmerman, 2005, 231). The foreign partner can help the expanding business in establishing and running their overseas operations. This strategy reduces the amount of capital investments required by the expanding business and takes advantage of the knowledge which the foreign partner already has regarding doing business in the country. This is the strategy which has been used by large companies such as Disney and McDonald's. However, there are also a number of small businesses who use this strategy successfully. The success of this strategy often relies on choosing the appropriate foreign partner.

Another strategy a company can use to expand into a foreign market is direct investment. This strategy can be used when a company cannot find a foreign business which appears to be an appropriate partner. In this situation, the company retains complete control of the business by setting up in a foreign country. This allows the company to run the business in whatever way they see fit. However, this also involves the greatest risk because the entire cost of a complete business must be handled by the expanding company.

The most aggressive strategy for expanding into new markets is the multinational expansion. With this strategy, the company sets up its own business in a foreign country and then becomes part of the foreign market by establishing a series of business relationships in the new country and with other countries. This allows the business to expand into ever more countries.

What are the major advantages and disadvantages to entering a foreign market?

In order for the expanding business to be able to operate in the new country it must have resources, which can offset its disadvantages. Many times these advantages are in the form of superior skills, knowledge and technical expertise. A company expanding into a foreign market also requires superior marketing skills relative to be indigenous competition. The expanding company may also use an economy of scale to enhance its research and development beyond what the competition is capable of. Another advantage which can be used by an expanding company is a better supply or value chain than the domestic businesses. It is critical that the expanding business have the organizational capabilities for managing business in the new country (Luo, 1999).

A company can gain advantages by moving into a new foreign market before its competitors. The company moving into a new foreign market where there is not yet any competition has the advantage of being able to gain a new market, new distribution channel, new segmentation, and create buyer switching costs. The company is also able to position their product in the new market, establish brand loyalty, create and use technological advantages, establish leadership, and establish supply chains, which lead to production and service delivery advantages.

There are also disadvantages for a company moving into the new market before its competitors. A completely new market offers both operational and contextual uncertainties. Unknown cost can arise from startup, switching to new suppliers and distributors, searching for customers and appropriate employees, and obtaining the licensing required. Another disadvantage is that competitors can move into the market and take advantage of the already established business produced by the company. These new companies do not have to invest the capital for process innovation and product development. They can copy the business practices of the company which first moves into the market.

Why would a company decide not to enter a foreign market?

When a company is considering moving into a foreign market the advantages and disadvantages must be weighed carefully. If the disadvantages outweigh the advantages of the foreign market, then the company should not enter the new area. All the advantages and disadvantages which were previously mentioned need to be considered carefully. The entry decision by the company must be based upon a careful cost-benefit analysis. The company must have a realistic strategy which involves careful planning for the timing of entering the market. Other factors which have to be considered are marketing, production, capital necessary, available technology, organizational resources, market demand, industry structure, customer needs and the new country's industrial policy. The level of competition from indigenous businesses, as well as foreign competitors, must also be considered (Luo, 1999, 185). If the timing is not right for market entry, or there are too many competitors already present, the market should be avoided.

The stability of the country containing the foreign market must also be considered. Many emerging economies are located in countries with unstable national economies and markets structures. Government policies may shift as the governments themselves quickly change. This type of rapid change can often create an environment which is not conducive to business. This type of market should be avoided.

An example of the type of problem a company can encounter when moving into a new market is provided by Beijing Jeep. Soon after Beijing Jeep moved into China in the early 1990s, it ran into a multitude of problems such as foreign exchange shortages and product quality issues. The Chinese government intervened with Beijing Jeep when it was close to bankruptcy. Jeep's global competitors watched and were unwilling to enter the market. After Jeep became established in China a second wave of foreign automobile manufacturers entered China such as Mercedes-Benz and General Motors. By the end of 1995 Chrysler (Jeep) sold approximately 60,000 cars each year. Volkswagen also entered the Chinese market and was selling approximately 400,000 cars each year (Luo, 1999, 190). However, both Mercedes-Benz and General Motors were experiencing a multitude of problems and had not yet produced a single car. The fact that even these large companies have trouble in a new country can be seen as evidence of the difficulty in moving into a foreign market.

There are many countries, which recognize the difficulty foreign businesses have when establishing themselves within a new country. Many of these countries also desire the economic stimulus provided by these foreign businesses. In order to assist new companies coming into their area, some countries will deregulate industries in order to facilitate an easier transition of new companies. Often times this deregulation creates enough added opportunities for the company moving into a new area to be successful. An example of this type deregulation can be seen in the push to remove the certificate of need program established by the Health Planning Act of the United States (Luo, 1999, 193). This certificate of need program limits competition entering the United States from foreign countries. If a country has regulations, which will sufficiently impede business, and the government is unlikely to deregulate, then companies may wish to avoid entering this market.

A company would not want to enter a foreign market if the disadvantages of the new market outweighed advantages. An extensive cost-benefit analysis must be done, which includes a variety of business factors. If this analysis yields more costs than benefits, the new market should not be entered. A country which is economically unstable, or has a rapidly changing political system, should also be avoided.

Which types of business are more likely to be successful in foreign markets?

Frequently, the best way to determine what type of business will be most successful in foreign markets is to look at the success of already existing companies. The 10 most successful companies in the world are Royal Dutch Shell, Exxon Mobil, Wal-Mart, British Petroleum, Chevron, Total, Conoco Phillips, ING group, Sinopec, and Toyota. All of these companies do business in multiple foreign countries. Royal Dutch Shell, Exxon Mobil, British Petroleum, Chevron, Total, Conoco Phillips and Sinopec are oil production companies. Wal-Mart is a discount supermarket which sells everything from groceries to automobile supplies and services. ING group focuses on financial services for a variety of commercial applications. Toyota makes automobiles and other vehicles. One thing all of these companies have in common is that they provide necessities. Oil and its byproducts are used for energy production and transportation of all types. Wal-Mart sells groceries, clothing and other items, which are necessities of everyday life. ING provides financing and monetary services for a variety of necessities.

The fastest growing industries in the world are food production, energy, petroleum refining, diversified financials, metals, engineering and construction, mining and crude oil production, utilities, and beverages (Global 500, 2009). Like the most successful companies in foreign markets, the fastest growing companies are involved in providing necessities. The number one fastest growing industry, food production, also provides the most basic of necessities.

Companies which are considering entering foreign markets are more likely to be successful if they provide some sort of necessity. It does not have to be a necessity which is desired worldwide. A necessity which is needed in a foreign market is all that is required. For example, an Iceland-based manufacturer which specializes in clothing for extremely cold temperatures is likely to do well by expanding their operations to Alaska.

SUMMARY AND CONCLUSION

Companies enter foreign markets for a variety of reasons. Some of these reasons are proactive and may consist of a company having advantages in technology or being eligible for tax incentives. Companies from small countries may wish to expand their customer base in larger or more affluent countries. Competitive pressures in the company's home country may encourage it to offer products in foreign countries as well.

Companies can enter foreign markets with a variety of strategies. The strategy involving the least expense and risk is to export products to the foreign market. Other strategies involve forming a joint venture with a business in the other country, direct investment, and multinational expansion.

There are both advantages and disadvantages for a company entering a foreign market. A company may have superior technical expertise and knowledge relative to the companies in the foreign market. Moving quickly into a foreign market before competition can provide numerous advantages and disadvantages. Quick movement into a market provides unparalleled opportunities for establishing a customer base. However, there are a variety of operational and contextual uncertainties in a foreign country which can create problems for the expanding business.

A careful cost-benefit analysis should be done by a company before entering a foreign market. If the benefits do not outweigh the costs, the new market should not be entered.

Companies which are most likely to be successful in foreign markets are those which provide necessities. These do not need to be global necessities, but rather necessities within the market.

Entering a foreign market can provide a great many benefits for a company. However, this should be done after a careful cost-benefit analysis of the new area. Careful consideration should be given to all factors which may affect the business. A company can be more confident that they will be successful if their product is a necessity in the new market.

References

Blythe, J., & Zimmerman, A. S. (2005). Business-to-business marketing management: a global perspective. London: Thomson learning.

Global 500, 2009, Annual ranking of the world's biggest companies from Fortune Magazine. Fortune.

Kishel, G. F., & Kishel, P. G. (2005). How to start, run, and stay in business: The nuts-and-old guide to turning your business dream into a reality. (4th Ed.). Hoboken, New Jersey: Wiley.

Luo, Y. (1999). Entry and cooperative strategies in international business expansion. Westport, Connecticut: Quorum Books.