Expanding globally: Pathways to international expansion
Why Look at International Expansion?
International expansion is usually considered when either:
- an international demand for the business's product or service is received by, or made known to, the business; or
- the business is actively looking for new opportunities for growth.
A business that has reached its potential in the domestic marketplace will be required to look beyond domestic boundaries to drive its growth and remain competitive. The primary aims of a business when expanding internationally will be to increase sales, acquire resources and diversify its sources of sales and resources.
Nonetheless, reasons for entering into a particular market, however, may vary. For example, an Australian wine company may decide to enter the Chinese market because of the untapped potential of a growing population with an increasingly sophisticated palate, whilst it sells its products in the UK because it is aware that many British wine drinkers are used to the flavour and taste of Australian wines.
Pathways to International Expansion
Many different pathways to international expansion exists. In its simplest form, international business occurs when a business sells its product or service to a purchaser who lives in a different country, such as, through a mail-order catalogue or by way of e-commerce.
he diagram on the right provides an illustration of different ways to expand internationally (you will need to click on the image to view). These methods or pathways may be grouped into 3 broad categories:
(a) No foreign ownership (exporting, franchising and licensing)
(b) Collaborative ventures (joint ventures, partnerships, consortiums)
(c) Sole foreign ownership (representative, service or branch office and wholly-owned subsidiary)
A number of factors will have an impact on the mode of international expansion decided upon by the business. For example, a business that has limited resources or is new to the international market will want to decide on a market penetration strategy involving the least costs and risks.
In certain jurisdictions, foreign investment rules may require the business to proceed on the basis that it has local partners or shareholders.
On the other hand, business decides that it desires more control over its offshore operations may choose to incorporate a wholly-owned subsidiary for the management of its business in a country with few limitations and service the region through that subsidiary.
Reactive and Proactive Approach
A business that adopts a reactive approach to international expansion will expand only in the following circumstances:
· response to an international demand for its product or services;
· response to the actions of domestic competitors that have expanded internationally;
· response to falling domestic sales and/or falling profits as a result of becoming less competitive;
· response to increasingly high production and/or administrative costs in its domestic marketplace.
A business that has a proactive approach to international expansion on the other hand, actively does the following:
· look for new opportunities for growth in new or emerging markets;
· look for ways to increase sales and profits by taking advantage of lower costs, incentives and tax concessions offered in the international marketplace;
· plans for penetrating new or emerging markets ahead of its domestic competitors; and
· establishes offices overseas to better service its customers.
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