Internationalization (‘I18N’) though having no single or universally accepted definition has been of great interest to nearly every company. From an economics point of view, it is defined as the process where business gets more involved in the international markets.
'Internationalization' - An Introduction
By SHAN R
Welcome to Protelo’s blog on ‘Internationalization’. Please feel free to add your valuable comments, views or any other vital information about Internationalization at the end of this page in the comments section. Thanks in advance for reading through.
What is Internationalization ?
Internationalization has been one of the strategies being used by most executives to reduce the cost of operations. Businesses with overhead costs can have the excess cost cut down in countries that have relatively deflated currencies as well as low cost of living. Most business in the United States finds it relatively cheaper operating in countries that have free trade arrangement with U.S. One way in which internationalization help companies reduce the cost of doing is business is through reduced labor costs. Companies that are interested in going international usually look for those markets that have a low cost of living as that makes it cheaper hiring employees in such countries. There are also companies that consider going international when in a local financial crisis. Executives of companies that are experiencing a financial crisis in the domestic market will formulate the budget and go for the foreign markets.
In the contemporary world, businesses begin their operations domestically but must draw up a long-term plan on how the business will be going international. Internationalization phenomenon has significantly changed the landscape for most business resulting to a very dynamic market situation with severe competition for the companies. The reason behind going for international market varies from one company to another. However, most firms pursue internationalization because domestic market has become inadequate because of the economies of scale and multiple opportunities that are available in the foreign markets. Most successful executives will always want to try another market after any successful one.
Role of financial institutions in economic development
Institutions play a very crucial role in the market economy. The main aim of institutions is to ensure that there is effective functioning of the market mechanism. This sees to it that those firms that take part in the market can carry out their transactions without suffering undue loss or being exposed to risk. Some of the reason behind the popularity of internationalization among current companies include opening up of trade borders by most countries across the world, elimination of trade barriers among many others. Companies are no longer secure staying in the domestic market and therefore most companies tend to go for internationalization to be able to spread their risks. Internationalization has become much easier due to the communication and technological advancement. Communication and technological advancement are vital in ensuring that foreign businesses are properly and timely operated without experiencing problems. Internationalization is achieved through very different ways. There are those companies that take part through exporting their products to foreign countries and continue to strengthen their home market. Some adopt a highly aggressive approach which includes acquiring firms, coming up with alliances, embrace joint venture or just establish their subsidiary. All these entry strategies differ in regards to the risk associated with each, control, level of resource commitment and return on investment that internationalization promises.
Entry modes for Internationalization
There are many entry modes that companies can use to join foreign markets but all these modes can be categorized in two broad modes. The first mode is the non-equity mode, which comprises of export and contractual agreements. The second mode is referred to equity mode of entry, which is known to include wholly owned subsidies and joint ventures. From all the available market entry, the one that offers the lowest risk level and the lowest market control is the export and import . The one with the highest risk level but highest market control is considered to be expected return on investment. The expected return on investment is majorly connected with a direct investment such as acquisition as well as Greenfield investments. Export and importing is the most common strategy that most firms use to pursue internationalization. Export is known as the process of selling services and goods to countries other than the domestic one. The company can directly be involved in the export or use an agent.
The next strategy that is equally popular is licensing. International licensing firms are known to give out licensee patent rights, copyrights, trademark rights, or even know-how on processes and products. Licensee does a production of licensor’s products, marketing it within the assigned territory and payment of licensor’s fee together with sales-related royalties in return. This strategy is mostly welcome by foreign public authorities as it is the way through which technology is leaked into the country.
Another strategy which is more like licensing is franchising. The only difference between licensing and franchising is the fact that franchising is more directly involved in development as well as control of the activities that take place in the market. The strategy is defined as the system where semi-independent business owners, commonly known as franchisees, pay a small fee and royalties to their parent company, referred to as (franchiser). This is done because of the right offered of being identified with the trademark. With the trademark, a firm is allowed to sell products and services besides being able to use the business format and system. This mode of entry offers numerous rights and resources. It has both advantages and disadvantages that companies intended to pursue internationalization need to analyze first. There is the other strategy that companies use to enter foreign markets and that is joint ventures. Unlike licensing strategy, the foreign joint venture has equity position as well as management of the business in the international firm. What takes place in the joint venture is the formation of a partnership between home country and the host company, which always results in the development of the third firm. In most cases international firm gets much better control over operations as well as access to the local market knowledge, which is not possible with companies that have gone for licensing strategy. Strategic alliance mode of entry is more of cooperative agreements that are done by different firms. Most of the companies that consider strategic alliance as the best mode of entry are companies that deal in Technology innovation. The primary objective of the strategic alliance is to exchange technology.
Finally, there is the direct investment. This is an arrangement that involves 100 percent ownership. This can be achieved through the direct acquisition of the host market. It can also be realized through owning facilities, and this is known as Greenfield investment.