A2 Reasons for Conducting Business Internationally
Growth can be achieved by increased revenue due to access to more customers in new markets. If the market is saturated in a home country, a business may struggle to compete domestically. Emerging markets offer great sales potential with less competition than home markets.
Diversification across a range of markets can spread the risk. If a product fails in one market, the sales in another can ensure the survival of the business. There may be issues in one country such as recession or high levels of competition than do not exist or are less of a threat in another.
Increased market share can be achieved as a result of the benefits achieved through operating internationally. Cost savings through economies of scale and lower production costs can be passed onto customers which makes the business more competitive. When selling in overseas markets, firms with a small market share in their domestic market may find that they can achieve a much larger market share in countries with less competition. This could lead to market leadership benefits such as price setting.
Brand extension strategies can be used to introduce new products. Once a brand is established in a market, they can launch new products under that brand name. This results in marketing economies of scale as the investment in branding can be spread across sales in global markets.
Technological dominance refers to the benefits firms in one country have over firms in another due to their access to more sophisticated technology. A firm in a more developed economy may be able to set up larger and more efficient operations than domestic rivals in a less developed overseas nation.
An international business can gain comparative advantage. This refers to the cost savings that come from accessing products and services in countries where they are at a lower cost. If a firm reduces their costs compared to competitors through international business, they can either pass these savings on to customers through lower prices or increase their profit margins.
Internal economies of scale can be achieved through increased size. For example, purchasing economies of scale can be achieved through increased orders from suppliers. Suppliers who have large international customers will be keen to offer large discounts to avoid losing them as a customer.
External economies of scale can be achieved when businesses locate in areas which are beneficial to their operations. This may include access to more skilled staff or infrastructure that supports their logistics.
Preferential tax rates or government incentives may be in place in countries where governments want to boost the economy and reduce unemployment. Governments also encourage domestic firms to export because it improves the balance of payments.
