Why do Firms Go International? Give an examples from Indian context.
Firms Go International due to following reasons:
Domestic Market Constraints.
Domestic market constraints motivate many companies to go international. Following are the main constraints in the domestic market:
Small Size of Domestic Market: In many cases companies go global because of the small size of domestic market which does not allow them to have economies of scale.
Recession in the Domestic Market: Recession in the domestic market often provokes companies to explore foreign markets. Recession in the domestic market does not allow the companies to utilize full production capacity. For example Hindustan Machine Tools and automobile industry in the early 1990s explored foreign markets due to recession in Indian market.
Technology: The technological advances have increased the size of the optimum scale of operation substantially in many industries making it necessary to have global market so that economies of scale may be availed.
Growth in International Markets: Many Indian companies entered the international markets in response to growth in international markets. The enormous growth potential of many foreign markets has been a very strong attraction for Indian software companies to go international. Similarly, an Indian pharmaceutical company CIPLA entered Africa with its HIV treatment drugs as there exists a vast market.
Competition: Competition may become a driving force behind international marketing. Competitors are an important factor which stimulates international marketing. Tata Motors became international in response to other automobile companies becoming international. Many companies also take an offensive international competitive strategy by way of counter competition.
Government Policies and Regulations.
Government policies and regulations attract the manufacturers to internationalize. The governments of many countries including India give a number of incentives and other positive support to domestic firms to go international. For example Indian government provides a number of concessions to the firms engaged in exports to and in manufacturing in foreign countries.
Similarly, several countries encourage imports and foreign investment. After the economic reforms launched in 1991, Indian government has given a lot of incentives to attract foreign investment. Sometimes, as was the case in India, companies may be obliged to earn foreign exchange to finance their imports and to meet certain other foreign exchange requirements like payment of royalty, dividend etc.
Further, in India, companies were allowed to enter certain industries subject to specific export obligation. Some companies move to foreign countries because of environmental laws and other laws. Government polices which limit the scope of business in the domestic market may drive companies to move to other countries.
Growth of Overseas Markets.
The enormous growth potential of many overseas markets drive many companies to expand the market globally. Economic growth of many developing countries has created market opportunities that provide a major incentive for companies to expand globally. In a number of developing countries, both the population and income are growing fast.
Growth rate of India has been good and economic reforms have accelerated the growth. Further, economic growth has reduced resistance that might otherwise have developed in response to the entry of foreign firms into domestic economies. It is convenient for a foreign company to enter a domestic economy without taking business away from local firms.
Even if the market for several goods in these countries is not very substantial at present, many companies are eager to establish a foothold there, considering their future potential.
Increased productivity is necessary for the ultimate survival of a firm. This itself may lead a company to increase production. Increase in production facilitates a company to seek export markets. The pressure for global markets is intense when new products require major investments and long periods of development time. The cost of research and development must be recovered in the global market place, as no single national market is likely to be large enough to support investments of this size.
One of the most important objectives of internationalization of business is the profit advantage. International business may be more profitable than the domestic because of export price being higher than the domestic price. International business can increase the total profit even if it is less profitable than the domestic. It could increase the total profit. In some cases, international business can help in increase the profitability of the domestic business.
One of the important motivations for international business is to reduce costs. Many international firms establish their production facilities in the countries where the manufacturing costs are cheaper.
Diversification to Reduce Business Risks.
A diversified export business may reduce sharp fluctuations in the overall activity of a firm. Decline of sales in one market may be counter balanced by a rise in the sales in other markets. Foreign markets even cut fluctuations by providing outlets for excess production capacity.
Control Inflation and Price Rise
On several occasions, governments permit imports to increase the supply and control prices, thus, control the inflationary pressures on the economy. When imported products are available at lower price, domestic producers have to reduce their prices. Thus, imports control inflation and price rise.
Counter competition is a strategy to penetrate the home market of the potential foreign competitor so as to diminish its competitive strength and to protect the domestic market share from foreign penetration.
The systematic and growing internationalization of many countries is essentially a part of their business policy or strategic management. The stimulus for internationalization comes from the urge to grow, the need to become more. competitive, the need to diversify and to gain strategic advantages of industrialization. For example, many Indian pharmaceutical firms have realized that they have very good growth prospects in the foreign markets. There are a number of corporations which are truly global. Their policies have been framed considering the entire world as its and a single market a border-less world.