Incentives to Globalize
Before beginning work on this week’s discussion forum, please review the link Doing Discussion Questions Right, the expanded grading rubric for the forum, and any specific instructions for this week’s topic.
For this assignment, make sure you post your initial response to the Discussion Area by the due date assigned.
Question 2:
Evaluate one of the basic benefits of becoming multinational corporations. Your textbook reading this week sets out the different reasons firms cite when explaining why they cross the borders of their home country and become multinational corporations. Read the three basic benefits highlighted in the text and in Figure 8-1.
- Select one of the reasons (or benefits) and defend why it might be emerging as the most important one in firms’ decisions to internationalize in the 21st Century. In answering this question, be sure to consider the international business conditions today and look for the motivations that underlie these current trends. In your answer, be sure to contrast the less important alternatives that you did not select. It will create a more lively discussion if participants don’t all select the same reason to defend as the most important, emergent reason or benefit. This section of your post should be 1 page (500 words) in length.
The final section or paragraph (three or four sentences) of your initial post should summarize the one or two key points that you are making in your initial response.
Start reviewing and responding to the postings of your classmates as early in the week as possible. Respond to at least two of your classmates. Participate in the discussion by asking a question, providing a statement of clarification, providing a point of view with a rationale, challenging an aspect of the discussion, or indicating a relationship between two or more lines of reasoning in the discussion. Complete your participation for this assignment by by the end of the week.
Question 2:
Evaluate one of the basic benefits of becoming multinational corporations. Your textbook reading this week sets out the different reasons firms cite when explaining why they cross the borders of their home country and become multinational corporations. Read the three basic benefits highlighted in the text and in Figure 8-1.
- Select one of the reasons (or benefits) and defend why it might be emerging as the most important one in firms’ decisions to internationalize in the 21st Century. In answering this question, be sure to consider the international business conditions today and look for the motivations that underlie these current trends. In your answer, be sure to contrast the less important alternatives that you did not select. It will create a more lively discussion if participants don’t all select the same reason to defend as the most important, emergent reason or benefit. This section of your post should be 1 page (500 words) in length.
The final section or paragraph (three or four sentences) of your initial post should summarize the one or two key points that you are making in your initial response.
The book Reading
Identifying International Opportunities
An international strategy is a strategy through which the firm sells its goods or services outside its domestic market.3 In some instances, firms using an international strategy become quite diversified geographically as they compete in numerous countries or regions outside their domestic market. This is the case for Netflix in that it competes now in all but a few countries. In other cases, firms engage in less international diversification because they focus on a smaller number of markets outside their “home” market.
An international strategy is a strategy through which the firm sells its goods or services outside its domestic market.
There are incentives for firms to use an international strategy and to diversify their operations geographically, and they can gain three basic benefits when they successfully do so.4 We show international strategy’s incentives and benefits in Figure 8.2.
8-1aIncentives to Use International Strategy
Raymond Vernon expressed the classic rationale for an international strategy.5 He suggested that typically a firm discovers an innovation in its home-country market, especially in advanced economies such as those in Germany, France, Japan, Sweden, Canada, and the United States. Often demand for the product then develops in other countries, causing a firm to export products from its domestic operations to fulfil demand. Continuing increases in demand can subsequently justify a firm’s decision to establish operations outside of its domestic base, as illustrated in the Opening Case on Netflix. As Vernon noted, engaging in an international strategy has the potential to help a firm extend the life cycle of its product(s).
Gaining access to needed and potentially scarce resources is another reason that firms use an international strategy. Key supplies of raw material—especially minerals and energy—are critical to firms’ efforts in some industries to manufacture their products. Energy and mining companies have access to the raw materials, through their worldwide operations, which they in turn sell to manufacturers requiring those resources. Rio Tinto Group is a leading international mining corporation. Operating as a global organization, the firm has 55,000 employees across six continents and operating in more than 40 countries. Rio Tinto uses its capabilities of technology and innovation (see first incentive noted above), exploration, marketing, and operational processes to identify, extract, and market mineral resources throughout the world.6 In other industries where labor costs account for a significant portion of a company’s expenses, firms may choose to establish facilities in other countries to gain access to less expensive labor. Clothing and electronics manufacturers are examples of firms pursuing an international strategy for this reason.
Increased pressure to integrate operations on a global scale is another factor influencing firms to pursue an international strategy. As nations industrialize, the demand for some products and commodities appears to become more similar. This borderless demand for globally branded products may be due to growing similarities in lifestyle in developed nations. Increases in global communications also facilitate the ability of people in different countries to visualize and model lifestyles in other cultures. In an increasing number of industries, technology drives globalization because the economies of scale necessary to reduce costs to the lowest level often require an investment greater than that needed to meet domestic market demand. Moreover, in emerging markets, the increasingly rapid adoption of technologies such as the Internet and mobile applications permits greater integration of trade, capital, culture, and labor. For instance, Vietnam is experiencing a “mobile revolution.” In 2017, 28.8 million people had smartphones and access to the Internet, compared to 20.7 million in 2015. That number is projected to increase to 42.7 million people by 2022.7 In this sense, technologies are the foundation for efforts to bind together disparate markets and operations across the world. International strategy also makes it possible for firms to use technologies to organize their operations into a seamless whole.8
The potential of large demand for goods and services from people in emerging markets such as China and India is another strong incentive for firms to use an international strategy.9 This is the case for French-based Carrefour S.A. This firm is the world’s second-largest retailer (behind only Walmart) and the largest retailer in Europe. Carrefour operates five main grocery store formats—hypermarkets, supermarkets, cash & carry, hypercash stores, and convenience stores. The firm also sells products online. Carrefour operates 12,300 stores in 30 countries.10 In 2018, it announced a major strategic alliance with Tesco, a British multinational firm that operates in similar domains as Carrefour. In the alliance they plan to cooperate in several areas, especially in their supply chains. By sharing their expertise, they believe that they will be able to obtain higher quality supplies at lower costs.11
Even though India differs from Western countries in many respects, such as culture, politics, and the precepts of its economic system, it offers a huge potential market, and the government has become more supportive of foreign direct investment.12 Differences among Chinese, Indian, and Western-style economies and cultures make the successful use of an international strategy challenging. As such, firms seeking to meet customer demands in emerging markets must learn how to manage an array of political and economic risks, which we discuss later in the chapter.13
We’ve now discussed incentives that influence firms to use international strategies. Firms derive three basic benefits by successfully using international strategies:
1.increased market size
2.increased economies of scale and learning
3.development of a competitive advantage through location (e.g., access to low-cost labor, critical resources, or customers)
These benefits will be examined here in terms of both their costs (e.g., higher coordination expenses and limited access to knowledge about host country political influences)14 and their challenges.
8-1bThree Basic Benefits of International Strategy
As noted, effectively using one or more international strategies can result in three basic benefits for the firm. These benefits facilitate the firm’s effort to achieve strategic competitiveness (see Figure 8.1) when using an international strategy.
Increased Market Size
Firms can expand the size of their potential market—sometimes dramatically—by using an international strategy to establish stronger positions in markets outside their domestic market.15 As noted, access to additional consumers is a key reason Carrefour sees international markets such as China as a major source of growth.
Firms such as Netflix, Carrefour, and WH Group understand that effectively managing different consumer tastes and practices linked to cultural values or traditions in different markets is challenging. Nonetheless, they accept this challenge because of the potential to enhance the firms’ size and performance. Other firms accept the challenge of successfully implementing an international strategy largely because of limited growth opportunities in their domestic market. This appears to be at least partly the case for major competitors Coca-Cola and PepsiCo, firms that have not been able to generate significant growth in their U.S. domestic and North American markets for some time. Indeed, most of these firms’ growth is occurring in international markets. An international market’s overall size also has the potential to affect the degree of benefit a firm can accrue because of using an international strategy. In general, larger international markets offer higher potential returns and pose less risk for the firm choosing to invest in those markets. Also related is the strength of the science base of the international markets in which a firm may compete. This is important because scientific knowledge and human capital are needed to facilitate efforts to more effectively sell and/or deliver products that create value for customers.16
Economies of Scale and Learning
By expanding the number of markets in which they compete, firms may be able to enjoy economies of scale, particularly in manufacturing operations. More broadly, firms able to make continual process improvements enhance their ability to reduce costs while, hopefully, increasing the value their products create for customers.17 For example, rivals Airbus SAS and Boeing have multiple manufacturing facilities and outsource some activities to firms located throughout the world, partly for developing economies of scale as a source of being able to create value for customers.
Economies of scale are critical in a number of settings in addition to the airline manufacturing industry. For example, economies of scale are a critical component of Costco’s business model. Costco is a subscription business that sells a service to its customers. The service it provides is buying goods in large quantities at low costs (because of its economies of scale), thus allowing the firm to sell the goods to consumers at lower prices, passing on the savings provided by Costco’s purchases.18 In fact, Costco is so popular that it is experiencing some of the diseconomies of scale in that some people prefer not to shop in crowded stores. This causes Costco to continue to expand the number of its stores. Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders.19 By sharing resources and knowledge in this manner, firms can learn how to create synergy, which in turn can help each firm learn how to deliver higher quality products at a lower cost.
Operating in multiple international markets also provides firms with new learning opportunities,20 perhaps even in terms of research and development (R&D) activities. Increasing the firm’s R&D ability can contribute to its efforts to enhance innovation, which is critical to both short- and long-term success. However, research results suggest that to take advantage of international R&D investments, firms need to have a strong R&D system already in place to absorb knowledge resulting from effective R&D activities.21
Location Advantages
Locating facilities outside their domestic market can sometimes help firms reduce costs. This benefit of an international strategy accrues to the firm when its facilities in international locations provide easier access to lower cost labor, energy, and other natural resources. Other location advantages include access to critical supplies and to customers. Once positioned in an attractive location, firms must manage their facilities effectively to gain the full benefit of a location advantage.22
A firm’s costs, particularly those dealing with manufacturing and distribution, as well as the nature of international customers’ needs affect the degree of benefit it can capture through a location advantage.23 The influences of cultural and formal country institutions (e.g., laws and regulations) may also affect location advantages and disadvantages. International business transactions are easier for a firm to complete when there is a strong cultural match and similar country institutions with which the firm is involved while implementing its international strategy.24 Finally, physical distances influence a firm’s location choices as well as how it manages facilities in the chosen locations.25
In recent times, there has been pressure in some countries for firms to reduce the scale and scope of their internationalization and focus on producing goods in the domestic market. For example, the Trump administration in the United States has pressured firms to move their internationally based manufacturing operations to the United States in order to provide more jobs for U.S. citizens. As a result, some firms have begun searching for ways that they can reverse some of their internationalization efforts while doing so efficiently and serving all domestic and international markets.26
