Topic 7 The Export Process - Motivation to Internationalization

Introduction

Why Trade with Other Nations?

There are several reasons why countries trade with other countries.

First - no nation, not even a technological advanced one, can produce all of the products that its people want and need.

Second - even if a country did self-sufficient, other nation’s would seek to trade with that country in order to meet the needs of their own people.

Third - some nations have an abundance of natural resources and a lack of technological know-how while some nations have sophisticated technology but few natural resources.

 

Trade Relations enable Individual Nations to Produce

• what it is most capable of producing
• and to buy what it needs
• in mutually beneficial exchange relationship.

Free Trade – is the movement of goods and services among nations without political or economic trade barriers.

Export – Selling product to another country.

Import – Buying product from another country. 

Different writers have identified proactive and reactive factors within the organization internal and external environment that triggers most organization into internationalization.  

Advantages and Disadvantages of Free Trade

Advantages of Free Trade

1. The Global Market contains over 6 billion potential customers for goods and services.
2. Productivity grows when countries produce goods and services in which they have a comparative advantage.
3. Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth.
4. Free trade inspires innovation for new products and keeps firms competitively challenged.
5. Uninterrupted flow of capital gives countries access to foreign investments, which help keep interest rates low.

Disadvantages of Free Trade

1. Domestic workers (manufacturing based jobs) can lose their jobs due to increased imports or production shift to low-wage global markets.
2. Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower global markets.
3. Moving operations overseas because of intense competitive pressure often means the loss of services jobs and growing number of white collar jobs.
4. Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries. 

The Export Process -Internationalization

How Do Internationalization takes Place?

Business that has gone international uses various process in term of internationalization and these can be looked at in terms of:

• their speed of entry,

• the mode of entry used

• the pattern of entry and

• the number of countries covered.

Exporting: Exporting is the most popular, quickest and easiest way for many small companies to become international. Contrasting to other forms of foreign market entry, it involves less commitment of organizational resources, offers superior flexibility of managerial actions, and requires fewer business risks.

Reasons for Exporting

There are numerous benefits that exporting can offer to both national governments and business organizations.

Macro-national levels:-

• Enlarge domestic employment levels.

• Supports in the development of new technologies.

• Supply of foreign exchange.

• Contributes to standard of living

Micro-business levels:-

• Improves firm’s financial position.

• Develops competitive advantages.

• Enriches managerial skills.

• Better utilization of production capacity.
• Facilitates company growth.

Exporting is a crucial business activity for a nation’s economic health, as it significantly contributes to:

• Employment

• Trade balance

• Economic growth

• Standard of living

Factors Influencing Exporting

Organizations have increasingly recognizes the need to export the goods or services they produce as shifts in domestic markets and general moves towards “internationalization” have meant many domestic markets have reached the points at which supply is exceeding demand.

Organizations go “internationalization”:

• Decline in domestic growth

• Rising competition in local markets

• Decreasing international trade barrier

• Opportunity to grow

• Increase profits

• Increased competition from a dominant large competitor

• Entry of a large number of firms offering similar products or services in the domestic market.

• Government’s providing hands-on exporting assistance and trade-finance support for small and medium size businesses that choose to directly export goods and services (e.g. Export Assistance Centers –USA).

Other Forms of Internationalization

Expansion of Franchising – Today small, medium size and large franchise cover the globe, offering business opportunities in areas from exercise to hamburgers to education. (e.g. McDonalds)

Foreign Direct Investment – Increased buying of permanent property and businesses in foreign nations meaning other nations perceiving that country of being a strong economic leader.

Dumping
– Practice of selling products in a foreign country at lower prices than those charged in the producing country. Companies sometimes use this tactic to reduce surplus products in foreign markets or to gain a foothold in a new market by offering products for lower prices than competitors do.

Licensing – A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty). Licensing beneficial to a firm in several ways:-

• Gain additional revenues from a product that it normally would have generated in its home market.
• Licensing agreement typically extend into long term contracts.

Contract Manufacturing – involves a foreign company’s production of private-label goods to which a domestic company than attaches its own brand name or trademark.

International Joint Ventures – A partnership in which two or more companies’ joint to undertake a major project. Companies in such partnership tend to grow faster than their counterparts. (Often companies from different countries). Joint ventures can even be mandated by governments as a condition of doing business in their country.

Example: It is often hard to gain entry into a country like China but agreeing to a joint venture with a Chinese firm can help a company gain such entry.

Joint Ventures are developed for other business reasons as well ( expanding low share market for certain products – Campbell soup with Japanese Nakano Vinegar Co. and Malaysia’s Cheong Chan Co. to expand its soup market).

Examples of International Joint Ventures:-

Global Engine Alliance, a combination of Daimler Chrysle, Mitsubishi Motors and Hyundai Motor Company.

International Joint Venture can also bring together unique partners.

Benefits of International Joint Ventures

• Shared technology.
• Shared marketing and management expertise.
• Entry into markets where foreign markets are not allowed unless their goods are produced locally.
• Shared risks.

Knowledge - Intensive Strategies Firms

Motivation – Proactive

• Strategic thinking & Planning.

• Niche Offering.

• International search.

• Committed management

Knowledge-Intensive Firms

Patterns  – Concurrent

• Domestic and Export expansion.

• Lead Markets.

• Strong evidence of networking.

 

Pace – Rapid

• Fast internationalization.

• Many markets at once.

• New product development for global offering.

Methods of Distribution/Entry  – Flexible

Use of Agents or Distributors & Integration with clients channels, use of licensing, joint ventures, overseas production.

Subsequent Internationalization – Structured

• Evidence of a planned approach to international expansion.

• Expansion of network.

Traditional Firms

Motivation – Reactive

• Adverse domestic market conditions

• Unsolicited/enquiries orders

• Reluctant’ management

• Cost of new production processes ‘force’ export initiation.

Patterns – Incremental

• Domestic expansion first.
• ‘Psychic’ markets.
• Limited evidence of network.

Pace – Gradual

• Slow internationalization (small number of export markets).
• Single market at a time.
• Adaptation of existing offering.
  

Methods of Distribution/Entry – Conventional.

• Use of agents/distributors or wholesalers.
• Direct to customers.
  

Subsequent Internationalization – Ad hoc

• Evidence of continued reactive behavior to export opportunities.
• Unrelated new customers.

The Export Process International Strategies.

Growth Objectives and International Orientation

• A number of factors appeared to exert a significant influence on initial business strategies, growth objectives and international orientation of all firms.

1. First, ownership and management issues strongly influenced firms’ business strategies and international focus;
2. Second, product and market development strategies were closely linked;
3. Third, the introduction of new process technologies often forced firms to revise their strategic directions.

However, in terms of patterns and pace of internationalization ‘knowledge-intensive’ and ‘traditional’ firms responded differently, with the latter being less aggressive in their growth strategies and more cautious in internationalizing.

Product/Market Strategies

With respect to the components of business strategy:

Close interrelationships identified between product and market strategies in the evolution of firms, regardless of whether they had adopted a domestic or international focus.

New product development

was an essential prerequisite to internationalization.

Operations Strategies

• Impact of process innovation on international orientation.

• Acquisition of new process technology .

Business Strategy and Internationalization

• Niche’ products provided a stronger impetus to internationalize among ‘knowledge-intensive’ firms.

• International market offering for international markets.

• Management had a ‘global’ vision from the outset.

• International orientation for some firms.

New Product Development Process

• Proactive and Reactive Approach to new market development approaches.

• Product offering and New Product development process.

• International market focus.

Initial Market Selection and Entry Strategies.

The market selection and entry strategies of ‘knowledge-intensive’ firms were more likely to be influenced by relationships with clients and global industry trends, rather than by geographic or ‘psychological’ proximity of overseas markets.

There was less evidence of network relationships among ‘traditional’ firms, some of which had gravitated towards ‘psychic’ markets.

Initial Market Selection and Entry Strategies.

Exporting modes were prevalent in both groups as initial market entry strategies. In terms of country choice, internationalization ‘stage’ models focus upon ‘psychic distance’ as an important determinant of the initial market selection decision.

Initial Market Selection and Entry Strategies

However, the findings reveal that this was a determining factor in only a few cases and simply one of a series of contributory factors for several other firms.

In contrast, other factors appeared to exert a fairly strong influence on country selection decisions. First, a significant number of ‘knowledge-intensive’ firms were influenced by global industry trends and gravitated towards ‘lead’ market/s in their particular field.

The Export Process Internationalization - Channels

A channel of distribution is an organized network of agencies  which combine to link producers with users. Distribution is the physical flow of goods through channels.

A channel is useful in that:-

• it makes a product or service available in a convenient location to the customer (Place).
• It makes the product or service available when the customer wants it (Time).
• It package or reprocesses the products into form that customer can use (Form).
• It advises the public about products and its attributes (Information).

Distribution Channels in international marketing can be a basic source of competitive advantage on the one hand and a cause of problem on the other.

Small exporters have difficulties in establishing effective channels to distribute their products in the overseas markets.

Reasons For Not Internationalizing:

Not enough resources.

No contacts abroad.

Problems of red tape and documentation.

Management perceives exporting to be too risky.

Language barriers / linguistic problems.

Financing difficulties.

Difficulties in foreign markets.

Not enough information.

Lack of qualified staff.

Various kinds of trade impediments.

Initial costs too high.

No perceived demand abroad for products / services.

Cultural differences.

Difficulties in distribution.

The empirical evidence, therefore, confirms the assertion that the major reason why many firms do not export abroad is due to the fact that they focus on servicing customer needs in local domestic markets.

 

Source:

Francis Cherunilam (2009) International Business Environment; Himalaya Publishing House.

P. Subba Rao (2012) International Business 3^rd Revised Edition. Himalaya Publishing House.