Internationalization has evolved into one of the most important strategies for business expansion over the past few decades. Generally, firms decide to generalize due to many reasons. Some of the main reasons include the need to diversify their operations, take advantage of government incentives, achieve market growth, take advantage of economies of scale, avoid a saturated domestic market, or engage in a joint venture opportunity. It is imperative to note that there are various methods through which a company can adopt an internationalization strategy. These methods could either be export based, non-equity based or equity based. While export based methods of internationalization comprise of direct and indirect exporting, non-equity based comprises of licensing and franchising. On the other hand, equity based approaches comprised of foreign direct investment, joint ventures, Keiretsus, Chaebols and Cornsortia. Therefore, a retail company in a developed company may either utilize the export based, equity or non-equity based method of internationalization to expand its operations into large emerging economies in order to maximize their prospects of success while at the same time minimize the risks of failure.
As noted earlier, there are three main methods of internationalization. These methods include the non-equity based method, equity based method and export based methods. It is imperative to note that the strategy chosen by the company would reflect the amount of risk associated with the decision. Normally, a company that adopts indirect exporting as its strategy of internationalization faces the least amount of risk. However, the returns associated with this method are also very limited and little. In retrospect, a company that utilizes the foreign direct investment and foreign manufacture as its key internationalization strategy will face the highest risk but also the highest rewards and returns from the investment. For this reason, it is critical that the company carefully evaluates all the possible methods of internationalization and determine the optimal level of risk that the firm is willing to take in order to achieve a given amount of returns from their investment. Therefore, this section provides a critical analysis of the various methods of internationalization that a firm can adopt.
It is worth pointing out that export based methods are the most prominent strategy for internationalization among firms. This method can be grouped into two, that is direct and indirect exporting.
Indirect exporting occurs when a company does not involve itself in undertaking any form of international activity on the target country. Instead, it operates through intermediaries. Often, the role of the intermediaries may be played by an export house, buying house or conforming house. In this case, an export house is a company or institution that buys goods or services from firms in the domestic market and then sells them abroad on its own behalf. On the other hand, a conforming house is one which acts for foreign buyers and is paid in the form of commission to bring in buyers and sellers into a direct contact and ensures that payment is made to the exporter by the final buyer. In retrospect, a buying house functions like a conforming house. However, it plays a more active role in ensuring that the seller matches the specific needs of the clients.
Aside from the use of intermediaries, there are two other forms of indirect exporting. The first one is the use of independent export management companies. Basically, these companies take care of all the export arrangements for a number of clients and offer them purchasing, financing, shipping and negotiation services as regard to dealing with overseas orders. Today, a perfect example of such a company is Unilever. The company established Unilever export to handle its exports from countries such as the United Kingdom. As a result, it is able to reap from economies of scale gained on behalf of all the product and brands of the company.
The other form of indirect exporting is known as piggybacking. In this strategy, different companies combine their resources with the intention of accessing international markets more effectively. It could also be defined as the process through which a manufacturing firm uses the distribution network and sales force of another company to market its goods. Often, this technique is used as a means of achieving an excellent level of marketing support without substantial investment or effort on the part of the firm. In the business world, a perfect example of the implementation of this strategy was when Whirlpool agreed with Sony to supply its appliance in the Japanese market.
Overall, the key advantage of using this strategy is that it does not involve any extra costs to incur on the part of the firm in order to access the overseas market. Additionally, this method is quicker and can allow the firm to sell goods and services swiftly. Most importantly, the risks involved in this method are significantly low and minimal. Therefore, the firm has the advantage of offering its products in the international market at a low cost, fast speed and with negligible levels of risks. Regardless of the numerous advantages associated with this strategy, it has some disadvantages. First, the company that intends to internationalize will limited control over the local marketing issues. What is more, the business will have a limited contact with its customers and, therefore cannot obtain direct feedback from them for purposes of marketing or product development.
Direct exporting is also another major type of export based internationalization. In this strategy, the firm takes an active role and engages directly with the foreign markets. Therefore, the organization takes part in distributing and selling its own goods and services to the international market. As a result, the strategy requires that the firm has to make a long-term commitment to serving a particular foreign market and the must conduct local research and establish local pricing policies.
The main advantage of this method of internationalization is the fact that it allows the firm to closely observe and keep an eye on the progress and competition in the host market. In addition, this strategy helps to improve interaction between the manufacturing company and its clients in the foreign country. Most importantly, this approach permits the establishment of long term commitments and the firm can therefore provide services that can help encourage repeat clients and hence establish customer loyalty. Regardless, it has one major disadvantage. It limitation arises from the fact that it takes a long time before it can be fully established. Additionally, it is associated with a higher resource cost.
Nowadays, direct exporting strategies are implemented in countries all over the world in the form of Export Processing Zones. Basically, these are geographical areas within a nation that is designated to providing the required infrastructure and incentives to encourage inward foreign direct investment. Today, successful EPZs are found in countries such as Singapore, India, Costa Rica and China. In most cases, the success of these export processing zones depends on the incentive provided to pull more investments into the region.
Just like export based methods of internationalization, there are various forms of equity based internationalization. These methods include licensing, franchising and contractual methods.
Licensing refers to an agreement between two parties, where the licensor grants the rights to intangible property to the company that seeks to internationalize its operations. Mainly, this contract is made to cover a specific period of time. In return, the licensor receives payment for the service in terms of royalty fee from the licensee. Today in business, this strategy has been implemented by various companies. For instance, Xerox, the manufacturer and inventor of the photocopier machine established a joint venture with the accompany Fuji-Xerox. In the contract, Xeros licensed its xerographic technology to Fuji-Xerox. As a reward therefore, Xerox paid a fee equal to 5 percent of the total sales revenue to the joint-venture as a royalty fee for the service. In this case therefore, the licensor benefits by obtaining access to the foreign market with little investment or local knowledge. On the other hand, the licensee benefits from gaining access to the inventions and brands that would otherwise have been illegal to access.
Using this technique has various advantages to the business that seeks to expand its operations. It is imperative to note that both parties in the contract benefit significantly. Firstly, this method guarantees that the firm does not have to shoulder the development costs and risks associated with entering an international market. Therefore, the method is very attractive for companies that don’t have capital to expand and develop its operations in the foreign market. Secondly, licensing allows the firm to break through barriers such as investment barriers in the international market. To be specific, this method can be used when the company is willing to participate in the new country but is barred from doing so by the barriers of investing in the destination country. For instance, in the case of Xerox, the company was both willing and able to set up and take part in the Japanese market. However, the country’s regulation on setting up a wholly owned subsidiary by the destination country’s Government prohibited it from setting up, and the firm was forced to enter into a joint venture with Fuji. The other advantage associated with licensing is that it can be used when the firm has an intangible property such as technological know-how or business applications, but is not willing to develop on the idea by itself. For instance, Coca-Cola licensed its famous trademark to clothing manufacturers to allow them to incorporate the company’s designs into their clothing.
Despite the numerous advantages of this strategy, it has some disadvantages and limitations. To begin with, competing in the international market may force a business to coordinate strategies across the two markets by using the profits earned in one nation to support the competitive attacks in the foreign market. Mainly, this is because the licensee company is less likely to use its profits to support such strategic moves for the firm. Thus, the licensor may end up hurting the financial position of the parent company for a given period of time. In addition, the risk associated with licensing technological know-how and competencies to a foreign company is high. Most companies with such technologies often wish to maintain control over their knowledge. However, it can easily lose this control once the licensing agreement is signed with a foreign company. What is more, this method does not give the owner firm a tight control over the marketing, manufacturing and strategy that is needed to realize the sales in the new location. Consequently, this significantly limits the ability of the firm to realize location economies and experience by producing its products.
By and large, this method is a modified form of the licensing strategy. In this approach, the franchisor sells the intangible property to the franchise and also insists that the franchise agrees to abide by strict rules as to how it will perform the business. In this type of contract, the franchiser helps the franchisee o operate the business on an ongoing basis. The remuneration in this case is payment in the form of royalties. Just like in licensing, the royalties are often a given percentage of the franchiser’s total sales revenue from that particular product. It is imperative to note that this form of internationalization is often undertaken by companies in the service industry unlike licensing which is undertaken by manufacturing companies.
One perfect example of the franchise strategy in action in today’s business is McDonald. Today, McDonald has set up strict rules that guide how restaurants should be operated by its franchises. As a result, the company has significant control over the menu, staffing policies design and location of the restaurant, cooking methods, and other activities that occur within the restaurant. The company also coordinates the supply chain for its franchisees and offers management training to the companies. What is more, it offers financial assistance to its franchisees across the globe.
Just like the past two strategies, using this method to internationalize a company’s operations has various disadvantages. First and foremost, when accompany adopts franchising, the franchisor has limited control over the quality of the products being produced. Yet, the idea behind this concept is that the name of the franchising company conveys a message about the quality of the service or product being offered by the firm. Thus, when the franchisee is unable to meet the standards of quality, then the name of the business may be dragged into the mud. Another disadvantage of the method is that it limits the company’s ability to transfer the profits from a franchise company to support the operations of the firm’s activities in another country.
Essentially, this is where companies use foreign direct investment as a way of competing in the global market. This method has various advantages and gives the firm the greatest level of control over its operations in the foreign market. Today, there are four main equity-based methods. they include joint venture, alliances, acquisitions and Consortia, Keiretsus and Chaebols.
In this method, the company creates a new identity in which both parties to the contract play active roles in the formulation of strategy and decision making. The joint venture can either be specialized or shared value-added joint venture. It is imperative to point out that joint ventures can be useful in helping a firm secure access to a partner’s technology, proprietary process and even a protected market position. It can also help the firm by sharing and lowering the costs of high risk technology-intensive development projects. It also permits a firm to obtain economies of scale, therefore reduce costs and enhance profits The other advantage of this method is that it is politically acceptable. As a result it is a feasible mode of entry into a foreign market.
However, just like any other method, this strategy of internationalization has its disadvantages. For instance, the company is likely to lose control over its technology since it transfers the control to the other company too. In addition, this method of shared ownership may result in conflicts and battles for control between firms if their goals and objectives change overtime. What is more, it is associated with the inability to engage in global strategic coordination.
In this internationalization strategy, the firm owns 100 percent of the stocks and shares. Today, a company can set up a wholly owned subsidiary by either setting up a new operation in the foreign company (Greenfield venture) or purchasing an established company in the host country and use the firm to market its goods or services. There are various advantages associated with this type of internationalization. Firstly, the companies technological know-how remains protected and under the control of its parent country. As a result, the company’s competitive advantage is maintained. Moreover, a firm has the ability to engage in global strategic coordination. Also, this method gives a company the ability to reap from location advantages and economies of scale.
Yet, despite the numerous advantages, the method has various disadvantages. Of all the methods discussed in this paper, this strategy has the highest degree of risks. In addition, it is associated with significantly high costs as the firm must shoulder the full costs of setting up an operation in the foreign market.
Conclusion
All in all, all factors taken into consideration, internationalization is an important strategy for firms that seek to expand their operations. Therefore, a major retail organization that operates in a developed country can use either export-based, equity based and non-equity based forms of internationalization to enter large emerging markets in order to maximize their chances of success and minimize risks. It is imperative to point out that while export based approaches to internationalization are simple and involve minimal risks, there returns and revenues are significantly low. In retrospect, equity based techniques are associated with the highest degree of risks as the firm must bear all costs associated with setting up in the new country. However, this method brings about the highest returns and revenues to the firm as the company has total control over its operations. Therefore, in order to settle on the most suitable method for internationalization, the firm must gauge its objectives and reconcile them with the degree of risk that it is willing to take in order to accomplish these goals.
Arora, A., and Fosfuri, C., Exploring the internationalization rationale for international investment: Wholly owned subsidiary versus technology licensing in the worldwide chemical industry, Working Paper Business Economics Series 18, https://e-archivo.uc3m.es/bitstream/handle/10016/6430/wb998118.PDF?sequence=1 (accessed 19 May 2018).
Azuayi, R., Internationalization Process of SMEs: Strategies and Methods, Mälardalen University School of Sustainable Development of Society and Technology l, https://www.diva-portal.org/smash/get/diva2:121500/FULLTEXT01.pdf, (accessed 19 May 2018).
Azuayi, R., Internationalization Strategies for Global Companies: A Case Study of Arla Foods, Denmark, Lancaster University Management School, https://www.omicsonline.org/open-access/internationalization-strategies-for-global-companies-a-case-study-of-arlafoods-denmark-2168-9601-1000191.php?aid=80434, (accessed 19 May 2018).
Cavusgil, N., ‘Differences among exporting firms based on their degree of internationalization,’ Journal of Business Research, vol. 12, no.2, 1984, pp. 197-200.
Chapter 7: Market entry modes for international businesses, Research Gate, https://www.researchgate.net/profile/Krzysztof_Wach/publication/267040494_Market_entry_modes_for_international_businesses/links/5443e3920cf2a76a3ccd68ff/Market-entry-modes-for-international-businesses.pdf (accessed 19 May 2018).
Conconi, P., Sapir, A., and Zanardi, M., The Internationalization Process of Firms:from Exports to FDI, Lancaster University Management School, https://conconi.ulb.be/internationalization.pdf, (accessed 19 May 2018).
Floyd, C., International Franchising and Licensing, Franchise Chat, https://www.franchise-chat.com/resources/international_franchising_and_licensing.htm, (accessed 19 May 2018).
Hassan, Z., Internationalization process, FTMS, https://www.ftms.edu.my/images/Document/MOD001055%20-%20International%20Business/Zubair%20Hassan%20(2013)%20Chapter%202-Internationalisation%20process..pdf , (accessed 19 May 2018).
Onsorio, D. B., Palacios, A. A. and Ferndez, N., Methods Of Internationalisation Throughout Literatura, Research Gate, https://www.researchgate.net/publication/309741062_METHODS_OF_INTERNATIONALISATION_THROUGHOUT_LITERATURA, (accessed 19 May 2018).
Roy, E., Direct or indirect exporting: which is the best fit for your business?, Trade Ready, https://www.tradeready.ca/2017/topics/market-entry-strategies/direct-indirect-exporting-best-fit-business/, (accessed 19 May 2018).
Ziyan, L., Franchising and/or Licensing as Foreign Market Entry Strategies In the Chinese Hotel Industry, University of Wales, https://esource.dbs.ie/bitstream/handle/10788/111/ma_ziyan_ling_2007.pdf?sequence=1&isAllowed=y, (accessed 19 May 2018).
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download
