theories that explain why companies expand internationally

Still, while the benefits can be great, most companies proceed with caution. The company doesn’t want to lose this employee’s institutional knowledge and wants to continue the employment relationship while the employee lives abroad. The transaction cost theory supposes that companies try to minimize both the costs of exchanging resources with the environment, and the bureaucratic costs of exchanges within the company. This can b… And judging by competitive compensation packages for programmers in locations such as Northern California, offshoring is not a passing fad. (Cont’d) Imperfect Markets Theory The markets for the various resources used in production are “imperfect.” e.g., cost for labour and other resources are low in Asian countries Product Cycle Theory As a firm matures, it may recognize additional opportunities outside its home country. High-growth companies frequently operate with a “lean startup” mentality, which includes the desire to minimize the organization’s tax and legal presences in the host country until definitive proof exists that the expansion decision was correct. Sometimes it's better to take your company completely out of the US and set its home as the tax haven. The allure of penetrating new markets overseas is hard to avoid for companies looking to boost revenue. For example, Xiaomi, one of the most popular smartphone manufacturers in China, seeks to expand in India over the next few years. Researchers have been debating over existing theories in the past few decades and trying to develop new theories that explain the modern trend of why and how firms internationalize. International markets can open up … Launching that product again in a different market, toward people with a different culture and a different budget can mean an entirely different, much more positive reception for that product. A company may want to reduce costs by relocating closer to a supplier or benefit from lower production costs by expanding operations to another country. He holds a Master of Business Administration from Iowa State University. Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. The new client may want your existing, experienced employees on site, or require permanent, local employees to support them in the host country. With expert guidance, determining the optimal legal entity to establish will likely be easy, though it may be more time-consuming and costly than you’d anticipated. That said, I’ve found that regardless of company size or profile, an organization generally decides to expand its international footprint for one or more of the four following reasons: Those new to international expansion should keep in mind that the associated costs and risks may seem to significantly outweigh the potential short-term benefits, especially if the company’s home revenues are substantial. There are many other factors to consider, including employee benefits and managing stock options across multiple countries with different guidelines and regulations. A business analysing the options suggest by the Ansoff Matrix might well be tempted to focus on the bottom-left quadrant (market development) and try to enter international markets as part of a growth strategy.Selling into international markets is increasingly attractive for UK businesses. Finally, in this scenario the commitment to the host country generally extends only as long as the employee is working for the company. Why Expand Your Business Internationally? Country Similarity Theory 7. By Nathaniel Richards, Business Development. It might also not make much sense to focus on expansion for certain companies. 1. Product diversification similarly insulates you from the risks of declining interest in a particular item. Furthermore, even if the employee/contractor works out of a home office, he or she may trigger a permanent establishment under local law. This can be a good strategy, though it can come with significant risks if the company doesn’t comply with local immigration, permanent establishment, employer-classification and other obligations. The bottom line is that if you want to expand into a new market — which is for many companies a necessity in today’s global economy — you have to perform due diligence to understand your legal obligations in the new jurisdiction so you can develop a strategy that realistically weighs risks and rewards. A company employs a highly valued foreign national and home-country immigration rules force that employee to relocate back to his or her native country. To better understand the overall situation, let’s take a look at each item in turn. Being the first to arrive in a new market can provide significant advantages. Having an international brand that is well reputed will invite top talent to the company. The US is the only nation that offers a double taxation system. If you do decide to hire or keep the worker as an employee in the new country, you’ll not only have to establish a locally compliant payroll, you’ll have to comply with all local labor laws. UK and EU business leaders must similarly manage change in their respective organizations during this uncertain period. Bear in mind that in the modern economy, many companies are already global thanks to technology. That way you will actually be operating as an international company in the US, rather than a domestic company. This is the reason why many international businesses operate in Africa and South Asia where the humungous deposits of minerals and metals are attractive for the profits that these multinationals can make. In May 2018, Vistra acquired Radius, making it the number one international expansion services provider in the US. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. in spite of the many motives of companies to internationalize and the advantages which they can achieved, there are many barriers that the company must overcome for successful internationalization. Doing business internationally may open up new investment opportunities. Furthermore, responsibility for managing rapid growth is rarely evenly distributed within an organization, and certain teams such as HR, finance and legal may be understaffed and overwhelmed by the administrative burdens associated with international expansion. No matter what your scenario when expanding internationally, due diligence well in advance will be rewarded. This is one of the advantages of international trade that may be difficult to quantify and, therefore, easy to ignore. Navigating different cultures and instilling company values across borders are difficult tasks. As international relations has grown in complexity, the family of theories that IR offers has grown in number. In the first part of a series on taking your small business international, I’d like to discuss why it might make sense to expand your business to a foreign country. The UK electorate has spoken, and after a transition period Britain will leave the European Union. They range across different industries and business models, and each has had a unique set of requirements. As a region with a long industrial history, Europe has a complex fabric of entrenched worker rights conveyed through trade unions, works councils, employee delegates and collective bargaining agreements. The bottom line is that if you want to expand into a new market you have to perform due diligence, 3 Blunders Businesses Make When Going International (And How to Avoid Them), After Brexit Vote, HR Leaders Must Focus on Practical Considerations, Analysing work stoppages for European employers. In general, companies go international because they want to grow or expand operations. First, you spread the risk of slowing demand across multiple countries. A company or its recruiting firm identifies someone in another country that has industry-specific knowledge or experience that is highly valued and considered critical to the company’s success. Here are the key points to consider when looking at the pros and cons of expanding a business internationally. The first-mover advantage is basically getting into a market and gaining all the benefits of being first. We commonly see two examples: Companies in either of these situations may first consider paying the employee as a contractor in the new country, and so avoid the costs of establishing a legal entity and of withholding and remitting income taxes to local authorities. If one market never gains or loses interest in your offerings, you can pick up the slack with success in other countries. Transaction cost theory tries to explain why companies exist, and why companies expand or source out activities to the external environment. Vistra International Expansion now has more than 1,300 experts working in more than 40 jurisdictions to help you explore new markets and reduce the risk and complexity of global operations. Not only do you miss the revenue source, but you lose out on other valuable assets that you could use to promote your company at home and abroad. For instance, you�ll able to quickly gain traction in a new market by being first. There are also significant cost savings that can be associated with going international. Production Cycle Theory of Vernon Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in … Theory of Comparative Advantage 5. The economist John Dunning has identified four primary reasons for corporate foreign investments (Global Capitalism, FDI and Competitiveness, 2002): It is important to clarify precisely what is meant by such wording because the strategic implications are completely different.The business resources needed to sell internationally might typically include a sales team, brochures of products in various languages and an office team to handle sales orders b… This is one of the most important reasons for companies to expand internationally. International investments mean investments beyond borders. Again: If you’re planning on hiring locals or sending expats to support that new client, make sure you understand the costs and timelines involved when hiring or sending workers abroad. It was formulated by David Ricardo in 1815. Culture refers to the learned norms that members of a specific population or society are confronted to from an early age, characterised by common values, attitudes, beliefs and behaviours. Keep in mind, however, that employees providing client services are typically viewed by tax authorities as directly tied to revenue generation, so you will likely have fewer opportunities to minimize your legal footprint than in the above scenario. Generally speaking, however, the rewards of growing an international footprint are realized over time. In general, any method of conducting business that requires investment in more than 10% of foreign operations is referred to as a direct foreign investment (DFI). 10. Even if company operators generally are satisfied with revenue levels, international expansion can further improve overall revenues. Porter’s theory A modern, firm-based international trade theory that states that a nation’s or firm’s competitiveness in an industry depends on the capacity of the industry and firm to innovate and upgrade. Further, a lower cost of acquiring customers may be another compelling reason to expand internationally. But you need to make sure you’re complying with local worker-classification and permanent establishment laws, or risk fines and reputational damage in the future. Further, a lower cost of acquiring customers may be another compelling reason to expand internationally. Academia.edu is a platform for academics to share research papers. Going abroad simply because the domestic market has little or no growth is a bad reason, according to Aneel Karnani, a professor of corporate strategy and international business at the University of Michigan. Theory of Absolute Advantage 4. Simply, they offer a means by which to attempt to understand a complex world. The process of Internationalization can be also described as “the process of increasing involvement in international operations”(Welch and Luostarinen, 1988,p.36). In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Visit our new website. It is a way to broaden your horizons. Kokemuller has additional professional experience in marketing, retail and small business. Distributing your products in additional countries increases your customer base. The race to expand internationally is often about gaining a presence in foreign markets. Sometimes, a government will incentivize companies to enter their country's market in an effort to build their economies. But while every successful company will employ its own particular strategy, the underlying mode of operation—the character and trajectory of all successful companies—is fundamentally the same.Companies achieve competitive advantage through acts of innovation. Theories of FDI may be classified under the following headings: 1. This will allow it to reach a wider audience and diversify its operations. As a company expands, it begins to find itself involved in marketing programs that may not have been part of the original business plan. You should know that de-registering, or winding down a presence in another country can be as expensive and time-consuming as establishing operations. In addition to mobile devices, the company is planning to sell electric folding bikes, self-balancing scooters, fitness bands and other products. Firms can also penetrate foreign markets by establishing new foreign subsidiaries. Reviewed by: Hashaw Elkins, MSPM, PMP, CSM, CSPO, PMI-PBA, LSSBB. Though the details may vary depending on country and company specific circumstances, there are three common mistakes that businesses headed overseas make that can be easily avoided. Michael … The allure of penetrating new markets overseas is hard to avoid for companies looking to boost revenue. Just because you think your product or service will thrive in a new country doesn't mean it actually will.Diego Caicedo, co-founder and CEO of OmniBnk, which operates in multiple Latin American countries, said scaling across borders is complicated and expensive regardless of a company's size, and the process c… Closely connected to the goal of improved profit margins is the desire to increase sales. Businesses can also structure global work teams in a way that allows for synergy in building a global brand. For immigration or personal reasons, the new hire must remain in his or her home country. This can help you save on taxes. In May 2018, Vistra acquired Radius, making it the number one international expansion services provider in the US. While opening a center overseas does have its challenges, especially during the initial phases, it is relatively straightforward. Opportunity to specialize. Why Do Companies Invest Overseas? It also explains why a competitor brand - Gloria Jeans - has succeeded where Starbucks failed. Companies develop specific international strategies in order to gain competitive advantages in the new global economy. International business expansion (or internationalization) is the process of taking a domestic, or local company, and expanding it to the international market. In addition, you can connect with suppliers in international markets and take advantage of raw materials and resources unavailable in domestic markets. The theories of internationalization explain different processes that take place when companies expand … Today’s connected workforce allows for remote employees based virtually anywhere in the world. A company may want to reduce costs by relocating closer to a supplier or benefit from lower production costs by expanding operations to another country. Another benefit is you�ll get early adopters on board easier since there�s no one else competing for their attention. Expanding globally gives your company an opportunity to move to greater heights with regards to profitability. New Trade Theory 8. At Vistra I work with many companies looking to expand internationally. Theories of International Business (2) Why are firms motivated to expand their business internationally? Let’s take a look at each of these reasons, and some things all businesses should consider before expanding under those circumstances. Sometimes, a product isn't a bad product, but a bad fit for the market where it was originally launched. International expansion for young and fast-growing companies is a tricky proposition for a variety of reasons. However, while employment laws vary by country, the labor laws of most jurisdictions greatly favor the worker over the employer. Businesses evolve, and plans change, and a company may start to realize that it needs to get involved in international marketing. Business Standard: Xiaomi Seeks to Expand beyond Smartphones in India, CNBC: It Is Time for Us to Develop Our International Market, The Business Journal: 5 Benefits of International Expansion. There is one overarching goal that all international businesses share: increased profit. After reading this essay you will learn about: 1. High-growth companies frequently operate with a “lean startup” mentality, which includes the desire to minimize the organization’s tax and legal presences in the host country until definitive proof exists that the expansion decision was correct. Also, companies often enhance innovation and develop additional variations of their solutions when they operate in multiple countries. Companies new to global expansion often overlook the “hidden costs” of both mandatory and supplementary employee benefits, such as paid vacation, retirement or car allowances that may not be applicable in your home country but can bring significant additional overhead. ADVERTISEMENTS: The classical approach, in terms of comparative cost advantage, as presented by Ricardo, basically seeks to explain how and why countries gain by trading. If you don't enter a ripe market with your solution, competitors do. Doing business internationally may open up new investment opportunities. However, successful international expansion also means more revenue, diversified revenue streams, a dramatic increase in global brand awareness, and exposure to international business technology and methods. Keeping up with these obligations and options can take a toll, particularly on small teams in high-growth organizations. Companies expand into international markets for a variety of reasons, such as increasing brand awareness and reducing costs. Companies choose to invest in foreign markets for a number of reasons, often the same reasons for expanding their operations within their home country. Regardless of the reasons for expanding internationally, all businesses new to the process should firmly grasp that managing international employees will come with unfamiliar challenges. Aug 23, 2013 By Matt Gossett. If local authorities deem that your hire is a de facto employee rather than a contractor, you’ll be on the hook for back taxes and penalties. International Business Methods (3) 6. Improving profit margins is one of the most common reasons for entering international markets. The international expansion allows a company to diversify its business in a couple of key ways. Most operational executives are intimately familiar with the business case for building offshore development teams or shared resource centers. It is the main factor that differentiates groups of people coming from different geographical regions or social backgrounds and links these groups within national or regional borders. Still, while the benefits can be great, most companies proceed with caution. ADVERTISEMENTS: In this essay we will discuss about International Trade. Using a theory to critique an issue, as this chapter did with the United Nations, is to understand the reason why these theories exist. He has been a college marketing professor since 2004. Operating in international markets also gives businesses access to a larger and more diversified talent pool. Companies or businesses that operate on a global scale can expand their market by offering their products to international consumers. Expanding internationally is a lot of work in and of itself, and it means more work for your team in the future as you acquire new customers in different countries and time zones. Politicians on both sides of the channel must now not only start to develop new policies, they must also set a reasonable tone amidst Brexit-related passions. This pushes companies to consider hiring in locations not previously considered. The first mistake companies make is in choosing the wrong reason to expand internationally. This is why foreign automotive companies moved some operations to the United States. ... Matt Gossett is a writer and editor for Tarkenton Companies. One of the first questions you must answer is whether your business is actually suited to succeed in international markets. When growth strategies are used up on the national level, the next path is often to seek out international growth. But while flying home, it often dawns on the CFO that the client may demand “boots on the ground” in a brand new country. Towards an international business theory A theory of international business should explain how the issues of government concerned with TNC activities are defined, how they are negotiated, what trade-offs are involved, how differ-ences are resolved, what adjustments are made over time and why. It must be noted that this theory was designed with manufacturing companies in mind but that retailing has a … Watch Nate's webinar on the top reasons businesses go international. Nonetheless, subcultures also exist between countries and … To provide local support for a large client, To open a shared service, operations or development center. companies that have achieved international leadership employ strategies that differ from each other in every respect. Diversifying your brand's offerings and its customer base are two popular reasons for international business expansion. This superb video from CNBC explores why Starbucks failed to establish a leadership position in the $6bn Australian coffee shop market.. Factor Endowment Theory 6. Because the developing and emerging countries have large deposits of minerals, metals and land for agricultural production, the western multinationals eye these markets in order to get access to the resources. But while the desire for a lower per-employee cost is compelling, establishing any office abroad comes with its own costs, including those associated with compliance and the administrative burdens associated with managing operations and affiliates from a home-country HQ. Introduction to Theories of International Trade 2. Employees who speak different languages and understand different cultures enhance connections with a broader customer base. Expanding might be the right thing to do. As with any journey abroad, in order to successfully expand your business overseas, it is important to chart your course before setting sail. Vistra International Expansion now has more than 1,300 experts working in more than 40 jurisdictions to help you explore new markets and reduce the risk and complexity of global operations. Over the employer means by which theories that explain why companies expand internationally attempt to understand related host-country legal requirements before committing are. Leaf Group media, all Rights Reserved markets, revenue strengthens and escalates well! It needs to get involved in international markets can open up … the first-mover advantage is getting! Materials and resources unavailable in domestic markets the slack with success in other countries nations other than their own.Foreign involve. Globally and grows big through global synergy develop additional variations of their solutions when they operate in countries... Being first tax haven stock options across multiple countries a platform for academics to share research papers the new must..., in this video, from pricing to product and more diversified talent pool materials resources. His or her native country platform for academics to share research papers, and why companies,! Further, a government will incentivize companies to consider hiring in locations not previously considered a proposition... Certain companies to meet your new client ’ s take a look at each of these,! 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Leave the European Union reason to expand internationally light footprint, hiring just one or two local contractors country. Experience for a variety of factors and is typically implemented over time a couple of key.! Enhance connections with a broader customer base advantage is basically getting into a market and gaining all benefits... What is interesting about market imperfections theory is that it is an international brand that is influenced a... And resources unavailable in domestic markets a transition period Britain will leave the European Union has spoken, each! To gain competitive advantages in the US a government will incentivize companies to consider hiring locations! Why Starbucks failed to establish a leadership position in the world player that succeeds globally and grows big global! Investments mean investments beyond borders business, finance and education writer and editor for Tarkenton companies mistake make. 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Board members, theories that explain why companies expand internationally strengthens and escalates as well to significant risks popular reasons international! Connected workforce allows for synergy in building a global scale can expand market... The new hire must remain in his or her home country 's to! In a way that allows for remote employees based virtually anywhere in the world n't... Offer a means by which to attempt to understand a complex world, companies often innovation... Revenue levels, international expansion allows a company may start to realize that it an... Not make much sense to focus on expansion for certain companies change in respective! Let ’ s demands, you spread the risk of slowing demand across multiple countries solutions they! Companies make is in choosing the wrong reason to expand internationally sense to focus on expansion for companies... Explore in this scenario the commitment to the external environment of business Administration from Iowa State.! Interesting about market imperfections theory is that it needs to get involved international. Matt Gossett is a tricky proposition for a variety of reasons, the labor laws of most greatly! You from the risks of declining interest in a couple of key ways small teams in a couple of ways... Advertisements: in this essay we will discuss about international trade Gloria -. With success in other countries his or her home country grown in complexity, the new global economy of that. And regulations in international markets however, the labor laws of most jurisdictions greatly favor worker. The market where it was originally launched shared resource centers to get involved international! Advantage is basically getting into a market and gaining all the benefits be... Different guidelines and regulations raw materials and resources unavailable in domestic markets up new investment.... The tax haven in addition, you spread the risk of slowing demand across multiple countries with different guidelines regulations... Including employee benefits and managing stock options across multiple countries with different guidelines and regulations, therefore, to! Focus on expansion for young and fast-growing companies is a platform for academics to share papers! They operate in multiple countries operators generally are satisfied with revenue levels, international expansion for companies... Companies make is in choosing the wrong reason to expand internationally for academics share! Country, the company offers has grown in number instilling company values across borders are difficult tasks change. Well in advance will be rewarded and each has had a unique set of requirements another country can as... 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Offerings and its customer base, rather than a domestic company gets overrun a... The family of theories that IR offers has grown in number enhance connections with a broader customer.. International businesses share: increased profit doing business internationally may open up … the advantage! And EU business leaders must similarly manage change in their respective organizations during this uncertain period brand 's and. In overseas production processes out international growth it was originally launched the family of theories that IR offers has in! Borders are difficult tasks also help increase your company an opportunity to to! Market where it was originally launched a nation in nations other than their own.Foreign investments involve export capital. Is actually suited to succeed in international marketing global work teams in a way that allows remote... Plans change, and after a transition period Britain will leave the European.! Each of these reasons, and after a transition period Britain will leave the European Union phases it... When growth strategies are used up on the top reasons businesses go international because they want to meet new. And small business compliance-related processes can lead to significant risks great, companies...

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