Firm Internationalisation Process - Assignment Example

Firm Internationalization Firm Internationalization Success is every company’s objective, but once the company achieves this objective, it opts to succeed. In this context, the companies find the desire to go global. Going global is seeking an international market, where the company can sell its products worldwide. In most cases, the company has achieved internal growth and is now seeking external growth. Once a company is in such a state, and has successfully found its way to the global market, the firm has achieved internationalization. There are purposes why companies go global, while some may find drive in profitability (Aulakh, 2007), others for investment purposes, to developing economies of scale in sourcing and many others. Internationalization is a multifaceted process. Before a firm can engage in going global, a firm must grow from within. In this context, the firm must be dominant in the home country. When a company has a competitive advantage, it suggests that it has strategies, which it can apply in the global market to survive. The firm is likely to face substantial challenges before it can achieve growth. Once the firm overcomes financial, managerial issues, and gain shareholder’s confidence, then, it can go global (Buckley et al., 2007). Owing to the intention of growing in the external market, the firm can utilize mergers, takeovers, or joint ventures. On the other hand, internationalization involves entering foreign markets. The firms may employ many strategies to enter the foreign markets. This may include licensing, exporting and foreign direct investment (FDIs). Licensing involves giving another company production rights to use the licensed material. The organisation given such rights (licensee) will have paid the other organisation giving the license (licensor) some payment. Exporting is another strategy that companies employ to enter foreign markets. Exporting involves selling of goods produced in the home market of the company to other markets in the world. On the other hand, FDIs involves the intention to obtain a long-term interest in a business, which operates in a different economy (Rugman, 1975). Market Entering Strategies Licensing Companies can seek to serve goods or services through licensing. Licensing is the easiest way to enter international markets, and companies prefer this strategy owing to the minimal risk and low investment. Producing in the target market will help the company overcome trade barriers, such as potential cultural distance. This is possible because people in the target market can view the company as an outsider (Rugman and Verbeke, 2004). Licensing allows the contracted partner to produce its products, trade secrets, technology and patents; however, the firm will pay a fee to the licensor. This shows that licensing qualifies as a contract between two parties and involves a fixed arrangement. Advantages Licensing as a new entry strategy does not require high investments. In addition, licensing minimizes potential risks in the global market. In addition, for companies that seek to enter the international market with haste, licensing is the strategy to adopt. Owing to the many trade barriers, licensing is effective because the company can bypass the trade barriers. Disadvantages Conversely, licensing can be ineffective, especially because of the restrictions on geographical areas, or validation time of the right to use the licensor’s knowledge. The licensor must provide their knowledge, which may lead to a potential lack of control on use of assets. There is also potential competition, in the case, where the licensed partner can use the knowledge at their advantage, but FDI eliminates such risks (Rugman, 1975). In so doing, the partner can offer competition to the licensor. Exporting In exporting, the company will sell the computer in the European Market. Exporting stands out as the widely applied entry strategy to foreign markets. Exporting needs minimal investment, which removes potential financial risks. On the other hand, exporting, especially in the European market will not always enjoy free trade (Buckley et al., 2007). Therefore, the company will pay taxes, tariffs, and transportation fee. In this case, however, exporting can be proper, especially due to the lack of risks, and the company will face minimized investment. Besides, the European market is attractive for the product, owing to the affordability of the PC. It is the 21st century, and every person wants to own a computer. The invention of the PC, which can perform similar functions to the other known computer, at half the price, will bring substantial revenue. A firm can either use indirect exporting, or direct exporting. Indirect exporting involves using export management companies, domestic distributors, and piggyback. Advantages For new companies in the global market, exporting does not require international experience because companies will not need extra resources or networks. When using elements in indirect exporting, the company can focus on business locally because international issues will not come in the way. In addition, the company will not incur extra costs in hiring and training new staff, and the distributor covers costs as such. Disadvantages On the other hand, such a strategy has its bad sides. In this context, the new product will require substantial focus to evaluate its performance in the European market. Indirect exporting gives the third party substantial influence on the product and the company will not coordinate or oversee its performance. The company can overcome the disadvantages of indirect exporting by using direct exporting. Direct exporting involves the use of an intermediary in the local market and links the business activities in the global market. Foreign Direct Investment In the context of foreign direct investment (FDIs), companies acquire a local company or build a foreign company from scratch. It refers to a wholly owned affiliate, and this means a 100% control of the company’s assets in a foreign country. The company that shows interest in owning an affiliate may start from the ground by developing a new company, or acquire a distributor that has a network aware of the company’s line of products. In comparison to exporting, FDI poses substantial risks. This entry strategy requires most devotion and effort, especially when the company opts to start another foreign firm from scratch (Rugman, 1975). Advantages For companies that want to protect their technology expertise, FDI is the strategy to adopt. In addition, when a company owns a subsidiary in a foreign country, it provides an opportunity to learn a lot concerning the market. This, one hand, will allow the firm to apply specialized skills, and on another hand, it gives the company an opportunity to be viewed as an insider. Disadvantages Owning subsidiaries in foreign countries requires substantial resources, and devotion, which the firm can perceive as wastage of time. This may make it difficult for the company to manage local resources, and the foreign subsidiary. When compared to other entry strategies, such as exporting and licensing, FDI poses substantial risks, primarily because of the high investments required (Kumar and Chadha, 2009). Course of Action The choice on the choice of entry in foreign market needs evaluation of the entry strategies. This will help the company manage the potential results from the entry mode. This is due to varying degrees of risks, finance and human resources (Kumar and Chadha, 2009). The political state of the country, the legal framework, sales potential and cultural distance also needs consideration. In this context, the invented PC has the potential to generate substantial sales, which will help the firm obtain extra revenues in the European market. The Indian firm is a global company, which makes it well suited in the international market. Therefore, the firm has well-established network of distributors, and suppliers, strategic alliances with other global companies, and has effective management, which can manage across borders (Bartlett and Ghoshal, 1989). In the case of exporting, I feel it is non-strategic for the company. This is because the strategy works well for small companies that seek to reach a large global audience. Notably, the strategy has low investment and minimal risks. In addition, owing to its application in new firms, it is possible that firms employ indirect exporting. This makes the company ineffective in monitoring the sales potential, and overall performance of the new product. On the other hand, licensing is not applicable for this company. Similar to exporting, the entry strategy has low investment and minimal risks. However, in this case, the PC is a technology, which has sales potential in the European market. This means that the company will need full control of its technology, and control the overall business in the global market. Licensing does not provide for this because the licensed company acquires legal rights to control the product. In addition, a licensed company can take advantage of the technology, and instead, compete with the licensor. Owing to the evidence provide by theory, I recommend the creation of wholly owned subsidiary in Europe. The 21st century is characterized by advancing technology, and the personal computer, which can perform similar functions with a common PC, is attractive. In addition, the PC is half the price when compared to the other PC. Creation of a subsidiary in Europe will give the company full control of its technological expertise, which is important because the product is new in the market. This expansion strategy will help the firm minimize transportation costs, and overcome trade barriers, which characterize the European markets (Rugman, 1975). Bibliography Aulakh, P. S. (2007). Special issue on emerging multinationals from developing economies: motivations, paths and performance. Journal of International Management, 13 (3), 235-402. Bartlett, C. & Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. Cambridge, MA: Harvard Business School Press. Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38(4): 499-518. Kumar, N., & Chadha, A. (2009). India’s outward foreign direct investments in steel industry in a Chinese comparative perspective. Industrial and Corporate Change, 18 (2): 249–267. Rugman, A.M. (1975). Motives for foreign investment: The market imperfections and risk diversification hypotheses. Journal of World Trade Law, 9(5): 567-573. Rugman, A.M. & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1):3-18. Read More