Internationalisation of Firms – Motivation Factors and Internationalisation Process

In the recent years, it has been observed that international trade and investment has increased in number of sectors all over the world. The reasons behind this is that firms which operate in cross-border markets record high productivity than that recorded by firms that operate in the domestic markets only (Siedschlag & Zhang, 2015). Empirical evidences have shown that firms owned by foreign individuals prove to be more productive than the firms owned by domestic people (Ruane & UĞUR, 2005). This implies that international operation results to growth and development of organizations by generating high productivity and revenue from multinational markets. It has also been observed in research that a significant part of this productivity has become differential between the multinational and non-multinational firms (Temouri, Driffield & Higón, 2008). In this context, this can be stated that firms internationalize due a number of reasons, increasing productivity being the most significant. 

Development of Firms into Multinational Enterprises

In the recent decades, a rising trend has been observed among the small firms have been observed to get interested towards FDI. The rate of FDI has increased from 20-30% to 30-40% within a decade in the emerging economies. More significantly, the recent financial crisis that engulfed the overall business operations all over the world could not affect the rate of FDI in the emerging countries (Hansen & Rugraff, 2011). As a result, the rate of internationalisation of business in the emerging economies had exceeded that of the developed countries (UNCTD, 2008). Most of these investments and expansions in the international markets have been identified in the Chinese states and some of the Eastern European countries. 

Apart from the small firms of the Asian and European countries, a number of firms from Canada have been observed to generate high revenue and corporate reputation by signing partnership contracts with big multinational companies. This is because often small organisations find it difficult to establish trust in the foreign markets if they want to expand in the foreign markets organically (The Conference Board of Canada, 2009). On the other hand, if the firms get a gateway for entering a foreign market with the help of a large multinational company, there remains a beneficial chance of growth and development of the firm in international market (The Conference Board of Canada, 2009). The constantly growing proportion of international trade and investment in the global value chains has opened up a number of new horizons for the small domestic firms thereby contributing to the improvement of their abilities for expansion and prosperity. 

Considering the new trend of expanding business of small domestic firms to the international market, it can be stated that small companies are often able to get introduced in the foreign markets if they are provided with facilities and necessary assets in the home country as well as in at least one of the foreign countries (Nordmeyer, 2018). These provisions often help the organisations in managing the operations in an integrated manner (Nordmeyer, 2018). When a firm partner with a multinational company for expanding business in the foreign countries, it offers small enterprises with a number of advantages such as economies of scale, market growth and reduced operational costs. 

Motivation Factors towards Engagement in International Business

Small firms tend to engage into international business for a number of reason. Among these, the most common objective is expansion of business, search for new market and expansion of customer base. There are a number of motivational factors such as profitability, economies of scale and risk diversification, which lead firms towards engagement in the international market. Companies are able to ensure growth and profitability and obtain economies of scale through multinational business (Sapienza, Autio, George & Zahra, 2006; Ethier, 2014). Delta Air Lines can be set as an example which became successful in increasing profitability after it expanded its service in the foreign markets with terminals at Seattle, and business centres at Beijing, Seoul, Hong Kong, Tokyo and Shanghai (Zhang, 2017). Apart from it, companies like Procter & Gamble and Intel Corporation has set examples regarding the fact that foreign expansion leads to economies of scale in the business (Tradeline, 2005; Yao, 2017). 

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Expansion of size and scope of business in the international market helps firms in achieving economies of scale while sharing operational costs and business risks between markets. This is because economies of scale develops in a business while the unit cost of a product gets reduced as a result of increase in production volume. In international business, the risks get diversified because when a company expands to a number of countries, it gets less exposed to the economics as well as political instability within a single country (Hitt, Tihanyi, Miller & Connelly, 2006). In this context, the reference of Arla Foods, a Danish company, can be drawn which became successful in enhancing profitability by diversifying risks after expanding in the American market (Azuayi, 2016). 

In addition to the aforementioned facts, having spread throughout a vast marketplace, an organisation is able to recover most of its costs incurred for research and development. Such factors emerge since the company then operates at a large marketplace with wide coverage of the right market segments in the international industry (Penner‐Hahn & Shaver, 2005). It is for this reason that companies like Volkswagen and Samsung have developed in the field of research and development after expanding to the foreign countries (Hackett & Casey, 2014). Companies also aim at expanding business to the global market if there is lack of resources or high competition in the global market. Moreover, while operating in the global market, companies come across a number of innovative ideas, along with diverse customer and employee base (Luo & Tung, 2007). At times, these employee base are obtained at a lower cost than that of the domestic country. 

Process of Internationalization

Depending on the beneficial factors of the foreign market to which a company plans to expand, firms internationalise with the help of three main processes. These processes include export based methods (direct exporting and indirect exporting), non-equity based methods (licensing and franchising) and equity based methods (joint ventures, foreign direct investment and consortia, keiretsus and chaebols) (FTMS, 2018). Among these, the export based processes of internationalisation are the most common ones. Apart from these methods, companies internationalise on the basis of risk and reward through joint ventures and foreign manufacture (FTMS, 2018). 

Export based internationalisation can be done by indirect and direct exporting. While exporting indirectly, companies operate through intermediaries such as export house, confirming house, buying house and piggy backer, in the foreign market. This process is considered to be a cost effective and quick process. However, the overall operation is dependent on second hand information (Vrontis & Kitchen, 2005). Sakuma Exports operates as a confirming house in the process of indirect exporting (Sakuma Exports Ltd., 2018). 

In case of direct export, companies engage in direct operation with the overseas market players. This process allows the exporter to closely monitor the development and competitions of the host market while promoting interaction between the producer and the end-user of the product. This process is associated with long-term commitment such as provision of after-sales service and customer feedbacks so that repurchase can be encouraged. However, the resource cost is high for the whole process is a highly time consuming one (Vrontis & Kitchen, 2005). Organisations involved in direct exporting have to operate on  the basis of  the features of  the Export Processing Zones (EPZs) which provide the companies with incentives for the direct exporting activities such as lower or zero tax on profits and imported components, infrastructures, government subsidies, restrictive regulations and the like. These zones are extensively used by countries for the encouragement of inward FDI that target mainly towards the increase in direct exports. Companies like Infosys and Tata Consultancy Services are involved in active direct exporting (DSIJ Team, 2012). 

Conclusion

In the recent years, especially in the past decade, a trend of increased international expansion of small domestic firms have been observed all over the world. This constant growth of the proportion of international trade and investment in the global value chains has opened up a number of new horizons for the small domestic firms thereby contributing to the improvement of their abilities for expansion and prosperity. This is because partnership business with big firms provides organisations with advantages of economies of scale, market growth and reduced operational costs. Factors like scope of enhancement of growth and introduction of new and innovative products in the international market, along with broadening of the customer base while increasing the overall sales and revenue motivate firms towards international expansion. At times, availability of labour at low cost motivates companies towards foreign expansion by way of export based and equity based methods, export being more popular for it is a cost effective and quick process. Therefore, it can be inferred from the discussion that firms internationalize mainly by exporting products to foreign markets with the vision of overall profit maximisation.