[This is the second in a series of articles on globalization.]
Small and medium-sized businesses should consider foreign markets for many reasons. In this article, I will describe the most commonly cited reasons.
Reasons for foreign business activities – Cost reduction
For most companies, one of the primary reasons for establishing a facility or function in a foreign market is to take advantage of perceived opportunities to reduce the costs of operations and production. Labor costs can be reduced by tapping into the large pool of low-wage workers available in many countries. In addition, provided that foreign investment in land and building facilities is allowed, companies often find these resources to be much less expensive, thereby reducing capital costs. Foreign companies also often offer valuable opportunities to reduce or eliminate transactional costs through exemptions from local taxes, tariffs, and licensing and documentary fees.
Reasons for foreign business activities – Risk reduction
Global operations can effectively reduce the risks associated with business operations by diversifying a company’s market opportunities. For example, if a company sells goods used in connection with warm weather activities, such as swimsuits, it can literally follow the summer around the world to create a steady, year-long demand. In addition, companies with access to capital in several different foreign markets can take advantage of opportunities that may arise due to currency fluctuations to obtain the funds at the most cost effective rate.
Reasons for foreign business activities – Source of supplies
Companies that use raw materials as supplies often elect to pursue sources in a variety of countries. In many cases, materials that are scarce, or even non-existent, in a company’s home country will be abundant and inexpensive in a foreign market. Strategies in this area may include shipping supplies out of the foreign country or locating a manufacturing facility directly in the foreign country to further reduce the cost of the supplies. Japanese automobile manufacturers have a long history of setting up plants in oil producing countries in order to assure they have access to necessary supplies of petroleum goods that are not available in Japan.
Reasons for foreign business activities – Improved customer service and relations
Companies often establish autonomous facilities, or enter into joint ventures with local partners, in foreign countries in an effort to gain a better understanding of the demands and customs of consumers in those countries. By actually being present in the country, the company can customize its goods and services to meet local requirements and begin to build brand loyalty based on customer service. In order for this strategy to be successful, however, the company must be willing and able to hire local managers who understand their own domestic market and the specifications and functionality of all of the company’s products.
Another benefit of a local presence is the company’s ability to improve response time to changes in demand patterns in the country. As a company’s products gain acceptance in a new foreign market, customers will demand better service and support. Any failure to respond will likely lead to erosion of market share at the expense of competitors that enter the market in response to the company’s own early success in selling its products.
Reasons for foreign business activities – Access to new markets
Companies should look to foreign countries as potential new markets for their goods and services. New foreign markets can increase sales, diversify the company’s customer base, and provide protection against variations in the domestic business cycle. Foreign markets also provide good opportunities for selling older, more mature products that have become obsolete in more advanced markets. In addition, a network of global facilities allows a company to quickly divert products and supplies to regions where demand is booming.
Reasons for foreign business activities – Global learning
Education and environmental scanning is an important strategic tool for any business, regardless of the size or scope of its operations. For a company that can afford to make the investment, cross-border operations can be a powerful learning tool for enhancement of operations and product development activities. Setting up business operations in a foreign market is the best way to observe how other companies deal with the unique technological, social, cultural, and political factors that impact demand in that market. In addition, global operations can provide access to companies that have developed internationally recognized best practices in key functional areas, such as new product development, manufacturing and supply chain management.
Reasons for foreign business activities – Access to global talent
Companies that look outward and participate actively in foreign markets can gain access to valuable human resources in those markets, as well in their own country. Many less industrialized countries, such as India, have a large pool of well-educated scientists and engineers who can provide high quality services at tremendous cost savings to firms located in higher-priced markets such as the U.S. and the European Union. By recruiting and using such resources, a company, regardless of its size, may significantly reduce its own product development costs. Global operations can have other benefits in the recruitment area. For example, a company that has established one or more foreign branches or strategic relationships can attract managers with interest and experience in international business, thereby creating a pool of talent that naturally thinks globally when the company thinks about the development of new markets and resources.