9.8 The Necessity of Global Markets
Learning Objectives
- Discuss why a company would go international.
In this section, we explore some of the methods companies can use to go international and how they might implement them. Each method for entering international markets has its advantages and disadvantages, and it is up to the leadership team to figure out which is most suitable for its company and for the countries in which it operates.
Reasons for Internationalization
Before we get into how companies can go international, let’s look at why a company might want to expand internationally in the first place. Navigating cross-cultural environments is fraught with dangers but holds the possibility of great success.
Trade Facilitation
At a basic level, relying on a domestic market can be problematic. Because of the many factors enhancing globalization, companies of all sizes and types want to take advantage of global markets to expand and achieve sustainable competitive advantage. Global e-commerce rose almost 26% in 2020 (Abrams, 2021), and is expected to hit $5.55 trillion in 2022 (Keenan, 2022). To learn how Shopify, an e-commerce giant, takes advantage of global markets, go to Global Ecommerce Explained: Stats and Trends to Watch in 2022.
Growth Opportunities
Another critical factor that supports internationalization is that emerging markets such as China, India, Brazil, and Malaysia will continue to grow and present companies with tremendous opportunities. Research from the Boston Consulting Group suggests that such emerging markets experienced growth (as measured by GDP growth rate), surpassing more developed economies by 2.2% (Walternmann et al., 2014).
The middle class was expected to increase by 1.38 billion people in 2020, however, the pandemic reduced that number to 1.32 billion (Kochhar, 2021). That is still an enormous increase in buying power ripe for businesses to tap into as they expand internationally. Experts predict that incomes in emerging markets will continue to rise.
How to Go International 1: Exporting
Given that it is critical for companies to go global, there are various means that companies can use to do so. The most basic and cost-effective approach is exporting, whereby a company sends its product to an international market and fills the order just as it fills a domestic order. Our earlier example of Dmitrii Dvornikov (who was selling jewelry and table clocks made from Russian semiprecious stones to international customers on Russia’s eBay) is a simple example of exporting. However, companies can also become more involved in the process and have dedicated offices in other countries to tackle exports. In fact, some companies may find that exporting is so critical that they create a dedicated export department.
Because exporting is one of the easiest ways to go international, it can bring many benefits (Government of Canada, 2021).
Current research suggests that companies that export tend to be 17% more profitable than companies that don’t. Additionally, exporting provides the ability for companies to defend their markets by becoming more competitive in other markets. Furthermore, by exploring international markets, a company can acquire critical cross-cultural management skills, thereby increasing the value of the company. Consider the case of DeFeet International, a U.S. maker of socks for cyclists (International Trade Administration, n.d.).
Despite several major disasters during the company’s existence (it burned down in 2006), DeFeet has been able to survive and expand thanks to the global market. The company hired an international marketing manager to get advice on how to develop a market strategy for Europe. Because of its strong research and development, DeFeet International has been able to develop the best socks for cycling. While production still takes place in the U.S., exporting has resulted in distributors in over 35 countries.
Despite the many benefits of exporting, companies are often reluctant to do so. Much of such fear is based on some assumptions about how business is done. For instance, managers often assume that exporting can be too risky, but some argue that selling only to domestic markets is just as risky. Some companies believe that exporting is too cumbersome or that getting paid for exports is too complicated and not worth the time. However, experts believe that exporting is not as complicated and can be easily done through the right channels.
This finding suggests that exporting is a viable strategy, even for small firms. To give you more insights into these assumptions, Table 9.8.1 summarizes some of these myths and counterarguments.
| Myths | Reality |
|---|---|
| Exporting is risky. | Selling domestically is as difficult as exporting to some markets. Additionally, not all markets are necessarily risky. |
| It is difficult to get paid for exports. | Buying and selling internationally is now fairly routine. There are numerous ways to ensure reliable payment. |
| Exporting is so complicated. | Exporting requires minimal paperwork. It is now very easy to search for buyers using the internet. There are many intermediaries available to help with exports. |
| I can’t succeed because I don’t speak another language. | As mentioned in the chapter, there are many organizations offering help with translation etc. Setting up global websites can be seamless now. |
| My product won’t do well in other markets. | If you do well in the U.S., your product will probably do well in other countries. There are many services available to test the market. |
(Based on International Trade Administration, n.d.)
Solving a Disadvantage of Exporting through Licensing and Franchising
Although exporting is an easy way to go international, it has some disadvantages. Exporting does not give much control to the company in terms of how the product is presented in the international market. For instance, if the company decides to use an international intermediary to sell its product abroad, it is at the mercy of that intermediary. Additionally, exporting sometimes requires traveling and other tasks that may take managers away from domestic activities. In light of such disadvantages, companies will often resort to licensing.
Licensing is a contractual agreement whereby, in exchange for a royalty or fee, a company gives the right to another company to use a trademark, know-how, or other proprietary technology. Similar to exporting, licensing is an easy way for a company to enter an international market quickly and without the need for laying out much capital. A licensor often has some asset that it can offer to the licensee in exchange for a fee. This asset might include a valuable patent, a trademark, technological know-how, or a company name that the licensor provides to the licensee in return for a payment.
A recent study of European firms’ entry into the Vietnamese market shows that these companies relied on licensing (Simonet, 2012).
For instance, consider Haymarket Media, one of the largest publishers in the United Kingdom. Haymarket enters into simple licensing agreements with the local affiliates to provide generic content to all worldwide licensees. This content is similar in all overseas editions of its magazines. However, through this licensing arrangement, the country affiliate adds local content. In this way, Haymarket has been able to increase sales of existing content by selling it in new global markets.
International franchising takes licensing up a notch. Rather than simply license some specific aspect of the value chain, a company will license the complete business model. The business model usually includes trademarks, business organization structures, technologies and know-how, and training. Similar to licensing, the franchisor owns a trademark that the franchisee pays a royalty for. Additionally, the franchisee will usually pay for the right to use the business model of the franchisor.
Many fast food companies have relied on franchising agreements to enter the Indian market (Lakshmi et al., 2015).
As India has experienced economic growth, more people have greater amounts of disposable income. In addition, because more couples are now busy working, they rely more on upon fast food as a meal option. Companies such as McDonald’s, KFC, Domino’s Pizza, and Pizza Hut have all entered franchising agreements with local companies to sell their products. This move has proven to be very successful because the franchisors have been able to expand their markets while the franchisees have seen significant profits in the local Indian markets.
Similar to other forms of entry, licensing and franchising has benefits and disadvantages. In terms of benefits, both forms of entry provide the receiving company with an established brand or some other technological know-how that has already proved itself. The recipient of the franchise agreement doesn’t need to build a new reputation but can rely on a well-known international competitor. For the franchisor, this often provides a quick way to expand revenue from an existing business model. Additionally, while licensing and franchising are cost-effective ways to go international, the companies granting the license or franchise still retain control over their product. If things don’t work out as planned, the licensor can end the agreement. For the franchisee, an added benefit is that corporate support is provided to help the company succeed.
Disadvantages of Licensing and Franchising
Both licensing and franchising have disadvantages that can affect both the recipient of the agreement and the grantor of the agreement. For instance, a study of Indian entrepreneurs entering into franchise agreements with fast food companies in the United States reported that the master franchisor had too much control (Lakshmi et al., 2015).
Furthermore, a franchise agreement can be risky and capital intensive for the local companies. For the licensor or franchisor, the biggest disadvantage is that the company can create a new competitor. While the host country’s laws may dictate the terms of the agreement, local enforcement of these laws may not always be strong. Thus, a local company can therefore use the business model for its own purpose. Furthermore, compared to exporting, the licensor gives up additional control. Once the agreement is signed, it is possible for the licensee to sell the product at a lower price or with lower quality. This has the potential to affect the reputation of the licensor.
How to Go International 2: Strategic Alliances
Because of some of the dangers of licensing and franchising, companies can often get even more involved in global operations by engaging in strategic alliances. International strategic alliances occur when two or more companies from different countries enter into an agreement to conduct joint business activities. Strategic alliances are often the preferred means of entry in emerging markets because they make it easier to do business in the country. A strategic alliance is a way for a foreign company to bypass barriers imposed by local governments.
A prominent example of one of the most successful strategic alliances is the one entered into by Nissan and Renault in 1999 (Kumar, 2014).
In this case, both companies were facing situations in which finding an international partner made sense. Nissan had historically low profitability and needed to find a partner. In contrast, Renault had just ended a failed relationship with Volvo and also needed to expand globally. Furthermore, both companies had what the other partner needed. For instance, Nissan had a strong presence in North America, providing a much-needed boost to Renault’s global ambition. Nissan also had strong engineering abilities that would benefit Renault. In contrast, Renault had ample cash and superior design capabilities, both of which Nissan needed.
The Nissan-Renault example shows some of the benefits of strategic alliances. Strategic alliances often provide both partners with sorely needed skills or capabilities. Strategic alliances also often provide access to new markets and customers. In terms of going global, a company may not always have the necessary know-how or financial assets to enter an international market. Strategic alliances, therefore, provide the means for a company to spring into the international domain. In that context, China remains an attractive destination for many multinationals. China’s market presents tremendous potential given the increase in disposable income. A recent study sheds some light on the many aspects of entering alliances in China
Figure 9.8.2, therefore, provides you with some of the main benefits foreign companies expect to gain from strategic alliances.
Strategic alliances also enable companies to share resources to develop new technologies and make technological advances. This issue is acknowledged by the South Korean government, which encourages South Korean small and medium enterprises to enter into strategic alliances with foreign partners as a way to gain access to advanced technology as well as get management skills to expand internationally. A recent study examined data from South Korea and found that entering strategic alliances also allowed companies to enjoy higher productivity
Disadvantages of Strategic Alliances
Despite these advantages, strategic alliances are notorious for high failure rates. A major reason is that strategic alliances are very difficult to manage. Additionally, strategic alliances often present partners with the possibility of acting opportunistically. This can occur when a partner tries to access technological know-how that they were not originally privy to. Alliance partners may also decide to refuse to agree to the original terms of the strategic alliance contracts. Finally, strategic alliances inevitably involve ambiguity and uncertainty. Properly managing such ambiguity is also necessary to avoid disadvantages associated with such alliances.
Example: McDonald’s in India
McDonald’s has had significant success in India. In 1996, it opened its first restaurant. Today, it has over 380 restaurants in India. McDonald’s has been successful because it adequately examined cultural differences and found ways to address cultural challenges. As mentioned earlier, the practice of Hinduism, the dominant religion in India, results in a preference for vegetarian meals. McDonald’s, therefore, developed many vegetarian menu items while also integrating local foods. It also recognized the very diverse nature of Indian society and offers appropriate regional and local foods in different regions.
To enter the Indian market, McDonald’s entered into strategic alliances with two companies that were responsible for different parts of India (The Economist, 2017).
However, despite the success, McDonald’s is currently embroiled in a business war with one of two individuals who helped McDonald’s come to India. In 1996, McDonald’s entered into a 50-50 joint venture with Vikram Bakshi of Connaught Place Restaurants Limited. Over the subsequent decades, Bakshi was able to expand McDonald’s significantly in the east and north of India. However, in 2008, McDonald’s tried to buy back Bakshi’s share for $7 million. Bakshi used evidence from an accounting firm to argue that his share was worth $331 million. In the face of this challenge, McDonald’s had Bakshi fired as an alliance partner in 2013. Baskhi has been fighting McDonald’s in Indian courts. He sued to be reinstated and to be able to run his stores without interference from McDonald’s corporate headquarters. When McDonald’s tried to take Bakshi to the London Court of International Arbitration, he was able to get a local Indian court to agree that he was being subjected to “oppression and mismanagement.” Although another court has agreed to allow McDonald’s to sue Bakshi in London, he is now appealing in another Indian court. This experience has revealed some of the worst fear of multinationals about the dangers of strategic alliances and the need to respect the local courts.
Discussion Questions
- Why did McDonald’s choose to use strategic alliances to enter India? Why not use exporting or other means?
- Why is McDonald’s facing challenges in India? What disadvantages of strategic alliances do these challenges reflect?
- What can McDonald’s do to address Bakshi’s concerns?
- What can McDonald’s do about Bakshi’s use of local Indian courts? How can multinationals adequately prepare for such situations?*
How to Go International 3: Foreign Direct Investment
Given the difficulties associated with strategic alliances, some companies elect to be wholly vested in the host country. This final form of international entry, which we discussed at the beginning of the chapter, is a foreign direct investment (FDI), which occurs when a company invests in another country by constructing facilities and buildings in that country. FDI can also occur through mergers and acquisitions, whereby a multinational company fully acquires a company in another country. Many car companies, such as Toyota, Honda, BMW, and Nissan, have fully operational plants in the United States. For example, many of the BMW SUVs, such as the BMW X3 and X5, are fully built in the BMW plant in Spartanburg, South Carolina.
Why do some companies choose FDI as a means of international entry? For BMW, FDI allows the company to be closer to its customers and to also sell the car as an American car. Additionally, because some countries may impose tariffs on imported products or otherwise discourage imports, building a plant locally allows a company to bypass such restrictions. Furthermore, FDI can also provide access to local expertise or to cheaper costs of labor, both of which can help a company become more competitive through reduced costs.
Disadvantages of FDI
As you might expect, FDI as an entry mode is not without difficulties. While this method gives the company the most control, it is also the most capital intensive. A multinational engaged in FDI is also exposed to the political risk of a country, the degree to which political decisions can impact a business’s ability to survive in that country. For instance, throughout history, countries such as Venezuela have used governmental decrees to appropriate investment from U.S. oil companies. Finally, it is important to note that FDI also involves additional coordination risks and can drain resources from local operations. A company that engages in FDI must be able to coordinate and integrate foreign and domestic operations.
The Incremental Path to Internationalization: The Uppsala Model
The above sections also provided some insights into how some companies can start small (say, with exporting) and eventually have FDI activities in some countries. One of the most popular ways to understand this development path of internationalization is the Uppsala model, which argues that “as firms learn more about a specific market, they become more committed by investing more resources into that market” (Chetty Campbell-Hunt, 2004).
In this model, companies adopt an incremental approach to internationalizing. First, they develop a solid domestic market base. After they have a strong domestic foundation, they start exploring international markets and eventually export products to markets that they feel have close psychic distance. Psychic distance refers to the many differences that exist between countries because of language, cultural characteristics, social institutions, and business practices. Countries with close psychic distance are similar to each other in all these variables; those with greater psychic distance are less similar. As a firm continues to gain international experience, it will start exporting to countries with greater psychic distance. As the firm gains even more international experience and knowledge of international markets, it will eventually want to have production facilities in the overseas market (Chetty Campbell-Hunt, 2004).
The Uppsala model has been criticized on many fronts. Experts argue that this approach may oversimplify a very complex process. It is also criticized as being too deterministic because some companies may skip stages. The latter criticism is valid when we consider the case of born globals, companies that operate internationally from the day they are created.
The All-In Approach to Internalization: Born Globals
Born globals have been made possible because of the many factors we discussed earlier that are making the world more global: the rapid development and decreasing costs of many types of information technologies have allowed companies to go international from the day they are created. Born globals are key to most countries’ economic development and allow new entrants to reach a global marketplace in a hurry, rather than build in their home country and expand only after securing a foothold domestically. A recent report suggests that born globals were significant contributors to exports in countries such as Poland and Australia. Additionally, the Organisation for Economic Co-operation and Development (OECD), a leading international organization comprising many of the world’s leading economies, has argued that born globals were key engines that tackled the economic downturn occurring after the financial crisis of 2007. It is therefore critical for the international leadership student to understand born globals.
Consider the case of M-PESA, the world’s leading mobile-money company, created in 2007 in Kenya.
Current research suggests that born globals are unique in many ways (Choquette et al. 2017).
When compared to other start-ups, born globals tend to have higher employment and job growth rates. Born globals also serve a wider global market than domestic start-ups. Additionally, while born globals tend to experience similar internationalization patterns of smaller entrepreneurial firms, they have much more aggressive learning strategies as a result of becoming global much faster than others (Chetty Campbell-Hunt, 2004).
Given the critical importance of born globals, what are the factors that contribute to their success? Current research suggests that a number of factors, such as marketing competence, effective pricing, advertising and distribution capabilities, product quality, and so on, all contribute to the success of such companies (Danik & Kowalik, 2015).
Studies also show that prior experience of leaders in combining resources from different countries and having a global vision are also important. To give you more insights, Table 9.8.3 discusses the success factors for born globals based on several studies.
| Study Sample | Key Success Factors |
|---|---|
| 21 British firms |
|
| Companies based in U.S. and Denmark |
|
| New ventures in Irish shellfish sector |
|
| Irish low-technology International New Ventures |
|
| Polish born globals |
|
(Based on Danik & Kowalik, 2015)
Example: SAP and the American CEO of a German Multinational
SAP is a German multinational specializing in enterprise application software. The company was founded by five engineers, and the company is now the world’s leading business software maker. Through its software, SAP helps its customers streamline production processes. SAP also provides forecasting services to its customers to help them predict customer trends. It currently has over 87,000 employees in 130 countries assisting over 335,000 customers worldwide.
For the first time in its history, the company is currently headed by an American, Bill McDermott. McDermott’s training was in sales, and that provided him with significant expertise to become SAP’s current CEO. In 2010, SAP was facing declining revenue worldwide and needed a turnaround. Initially, McDermott was co-CEO with Jim Hagemann Snabe, a Danish executive who was one of the company’s cofounders. The arrangement worked well, and when Snabe retired in 2014, McDermott became CEO.
McDermott’s success came from the many changes he instituted to better adapt to cultural differences. For instance, he quickly discovered that sales were not very effective in the United States because the salespeople were more interested in focusing on the engineering aspects of SAP’s products at the expense of listening to American customers. Such experiences led to the development of more customer-focused innovation and a more empathetic approach to customer needs, things McDermott strongly believes in.
In visiting his German counterparts, McDermott also saw other potential sources of cross-cultural conflict. For instance, he saw that presentations in the United States were much more effective if the presentation quickly engaged the audience and got them excited. In contrast, a German audience preferred a more disciplined, fact-based presentation. McDermott also discovered key differences between the way U.S. companies are managed in comparison to German companies. For example, he found that while U.S. public companies are pressured by quarterly results, SAP was much more interested in 30-year cycles as opposed to 90-day stock price movements.
McDermott’s success at managing cross-cultural differences is no surprise. When he was a teenager, he purchased a distressed deli shop in Long Island. Long Island was already a melting pot of immigrants, and he learned how to deal with a diverse group of customers. When he was first hired at 27 to sell Xerox copy machines, he found that American customers do not have a long time for a sales pitch. He learned to be quick and to the point. In contrast, in Asia, he found that you had to focus on developing relationships rather than focus on the product. At the age of 29, he was asked to turn around business in Puerto Rico. There he found employee morale to be very low because of cost-cutting measures. Rather than blindly implementing American management, he listened to the local employees and implemented many measures to improve operations. For instance, he worked to improve customer service. Most importantly, he reinstated a Christmas party that had been canceled as a cost-cutting measure. This lifted morale and led to the turnaround.
McDermott has many important lessons for aspiring cross-cultural leaders. He advises that leaders be respectful of cross-cultural differences. Additionally, because SAP has one global vision, he can have all employees focus on that vision. He therefore also suggests that leaders and managers adopt a compelling vision that can be readily shared with all employees. He also believes that the customer experience is what is critical. Finally, he recommends that the savvy manager be human and empathetic and show humility.
Critical Thinking Questions
- What are some of the sources of McDermott’s excellence at managing cross-cultural differences? How did his experience managing a deli store at a young age help him develop cross-cultural management skills?
- What are some of the cross-cultural differences he discovered? Using your knowledge of culture, explain some of these differences.
- What is your assessment of his lessons for cross-cultural managers? Relate these lessons to the GLOBE findings of the effective global leader.
(Colvin, 2014; Lev-Ram, 2012 & McDermott, 2016)
Exercises
Leadership Skills Application Exercises
- Your manager is currently considering negotiations in China, and given your international leadership knowledge, you are asked for advice. How would you approach preparing to advise her? What type of information will you provide to her?
- You have a new product, and you are considering exporting the product. Visit the Government of Canada’s Step-by-Step Guide to Exporting or the American government’s export website at https://www.export.gov/article?id=Why-Companies-should-export. What are some of the key issues to take into consideration when exporting?
- You are in charge of HR in your company, and the company will soon need to send an expatriate to Japan. You will need to design a training program to better prepare your employee. What type of training program will you provide? What essential elements will the program include?
- You are considering investing in Saudi Arabia and know that the business culture there is influenced by religion. Using your knowledge of Islam, what should you expect? How can you better prepare for the investment?
- You have designed a new surfboard that presents significant advantages over current models. How can you determine whether you are ready to launch your company as a born global?
Leadership Decision Exercises
- You are the CEO of a company that produces high-end laptops for gaming. You have heard that there is interest in your product from international customers. You need to decide how to enter the international market. What issues do you take into consideration when deciding among the different means of entry? Which approach do you think would work best?
- Visit Hofstede’s cultural dimensions website at https://www.hofstede-insights.com/models/national-culture/. Pick two countries and compare them with Canada on the cultural dimensions. How would you manage cultural differences in these countries?
- Your company is interested in exploring international expansion into Africa. Visit the African Union’s website at https://au.int/en/. What are some of the countries included in the African Union? How easy will it be to approach entering these markets?
- Your company is interested in exploring investments in several sectors in Zimbabwe. Because of political instability, you are obviously very reluctant given the risks of doing business in that country. Using data from https://www.marsh.com/us/campaigns/political-risk-map-2017.html, discuss the concept of political risk. When can you decide that investing in Zimbabwe is a good idea?
- You will be sending one of your employees to several new countries for short-term assignments. You need to decide between low-rigor cross-cultural training and high-rigor cross-cultural training. Which method would work best? How would you decide between the two, and what elements would your training involve?
Key Takeaways
Within this section, you first read about the need for companies to go international and learned that some markets present strong potential while others have floundered.
Companies can go international in many ways: exporting (an entry mode where a company sends a product to an international market and fills the order like a domestic order), licensing, and franchising (a contractual agreement whereby a company is given the right to another company’s trademarks, know-how, and other intangible assets in return for a royalty or a fee), strategic alliances (where two or more companies from different countries enter into an agreement to conduct joint business activities), and foreign direct investment (which involves a company investing in another country through the construction of facilities and buildings in another country).
With each of these methods of entry, there is a trade-off between the cost of a means of entry and the amount of control a company has over its operations. For example, exporting is usually the cheapest way to go international but offers the company the least amount of control. Born globals do not have to think about how or when to go global because they are international from the day they are created.
“The Necessity of Global Markets” in Principles of Management by OpenStax is licensed under under Creative Commons Attribution 4.0 International License.
