Major Reasons for International Business

Reasons for International Business

Reasons for International Business – There are many factors which motivate or drive firms to go international. Many factors motivate or drive firms to go international and are considered significant motives for global business. These factors may be broadly divided into the following groups:

Pull Factors
Push Factors

1) Pull Factors

The pull factors are those forces of attraction that pull the business to the foreign market. In other words, firms are motivated to internationalise because of the attractiveness of the foreign market. Such attractiveness includes, largely, the relative profitability and growth prospects.

The following are important Pull Factors:

Growth
Profitability
Achieving Economies of Scale
Risk Spread
Access to Imported Inputs
Economic Integration and Free Markets
Emergence of World Trade Organisation – WTO
Unifying Effect and Peace

i) Growth

Companies enter international markets when the domestic market potential saturates and they are forced to explore alternative marketing opportunities overseas. However, in the context of the Indian market, given the size of the Indian market, enormous opportunities for most of the practices exist in the domestic market itself. Therefore, growth is the motive of only a few select companies to internationalise.

ii) Profitability

The price differences among markets also serve as essential incentives to internationalise. An essential incentive for international business is the profit advantage. The international business could be more profitable than the domestic one. There are cases of companies which earned more than 100 per cent of the total from foreign markets (in which case the domestic operation resulted in a loss). Even when international business is less profitable than domestic, it could improve the total profit.

Related Articles:

iii) Achieving Economies of Scale

Large-scale production capacities necessitate domestic companies to dispose of their goods in international markets once the domestic markets become saturated. One of the basic reasons behind the internationalisation of Great Britain during the Industrial Revolution was domestic market saturation. Large volumes of production to meet International markets will give the scale of economies in production. Nations encourage industries to build large facilities.

iv) Risk Spread

A business operating in domestic markets is highly vulnerable to economic upheavals in the home market. Overseas markets provide an opportunity to lessen their dependence on one market and spread the market risks.

v) Access to Imported Inputs

The national trade policies provide for the import of inputs used for export production, which are otherwise restricted. Besides, there are several incentive schemes which provide duty exemption or remission on the import of inputs for export production, such as advance licensing duty drawback, duty exemption, export promotion, and capital goods scheme. It helps the companies in accessing imported inputs and technical know-how to boost their operations and increase their competitiveness.

vi) Economic Integration and Free Markets

The growth of liberalisation is opening free markets. There is the movement of goods and services from country to country. Companies look for better growth opportunities in free markets. For example, German chemical companies going international from Germany. Local consumption in Germany is too small.

vii) Emergence of WTO

Several friendly and neighbouring countries enter into trade agreements to develop trade. The World Trade Organisation (WTO) replaced GATT (General Agreement on Tariffs and Trade) in 1994, WTO has 159 members and helps to develop multilateral trade.

viii) Unifying Effect and Peace

Two-way business helps development activities and economic growth. The business develops long-lasting relationships of trust and a feel-good factor. All this led to peace.

2) Push Factors

The push factors refer to the compulsions of the domestic market, like the saturation of the market, which prompt companies to internationalise. Most of the push factors are reactive causes.

The following are some important push factors:

The uniqueness of Product or Service
Marketing Opportunities Due to Life Cycles
Spreading R&D Costs
Resource Utilisation
Competition and Costs
Quality Improvement
Government Policies and Regulations

i) Uniqueness of Product or Service

The products with unique attributes are unlikely to meet any competition in overseas markets and enjoy enormous opportunities in international markets. For example, herbal and medicinal plants, handicrafts, value-added BPO services, and software development at competitive prices provide Indian firms with an edge over other countries and smoothen their entry into international markets.

ii) Marketing Opportunities Due to Life Cycles

Each market shows a different stage of the life cycle for different products, which varies widely across country markets. When a product or service gets saturated in the domestic or international market, a firm may make use of such challenges and convert them into marketing opportunities by operating in international markets. Strategies to launch new product in the existing markets or identify fresh markets for existing products may be adopted.

iii) Spreading R&D Costs

By expanding the potential market size, a firm quickly recovers the costs incurred on research and development. It is especially true for products involving higher costs of R&D, where the use of price skimming strategies necessitates faster recovery of costs incurred, such as software, microprocessors, pharmaceutical products, etc. International markets facilitate the speedy recovery of such costs because of the large market size and also due to larger coverage of the right market segments in international markets.

iv) Resource Utilisation

New industries are developed in areas where resources are readily and abundantly available. This reduces significant transport costs of raw materials. This is especially true in the case of mineral-based industries. For example, new steel capacities are now being built in Orissa.

v) Competition and Costs

Competition may become a driving force behind internationalisation. The economic liberalisation, ushered in India since 1991, which has increased competition from foreign firms as well as from those within the country, has, however, significantly changed the scene. Many Indian organisations are now systematically planning to go international in a significant way. Many companies also take an improper international competitive strategy by way of counter-competition. The strategy of counter-competition is to penetrate the home market of the potential foreign competitor to diminish its competitive strength and protect the domestic market share from foreign penetration.

vi) Quality Improvement

Larger markets and improved margins help big investments in quality improvements. These include better equipment training and adopting quality methods. Quality improvement gives larger markets, and again and again, the cycle continues.

vii) Government Policies and Regulations

Government policies and regulations may also motivate internationalisation. There are both positive and negative factors that could drive internationalization. Many governments provide incentives and positive support to domestic companies for exporting and investing in foreign countries. Similarly, several countries prioritize import development and foreign investment.

You May Also Like:-

Nature of International Business