There are several answers to the question ‘why firms go international?’ The factors which motivate or provoke firms to go international may be broadly divided into two groups, viz., the pull factors and the push factors. The pull factors, most of which are proactive reasons, are those forces of attraction which pull the business to the foreign markets. In other words, companies are motivated to internationalise because of the attractiveness of the foreign market. Such attractiveness includes broadly, the relative profitability and growth prospects. The push factors refer to the compulsions of the domestic market, like saturation of the market, which prompt companies to internationalise. Most of the push factors are reactive reasons. Important reasons for going international are described below.
Profit motive
One of the most important objectives of internationalisation of business is the profit advantage. International business
could be more profitable than the domestic. As pointed out earlier, there are cases where more than 100 per cent
of the total profit of the company is made in the foreign markets (in which case the domestic operation, obviously,
is incurring loss). Even when international business is less profitable than the domestic, it could increase the total
profit. Further, in certain cases, international business can help increase the profitability of the domestic business.
One of the important motivations for foreign investment is to reduce the cost of production (by taking advantage
of the cheap labour, for example). While in some cases, the whole manufacturing of a product may be carried out
in foreign locations, in some cases only certain stages of it are done abroad. A significant share of the merchandise
imported into the United States is manufactured by foreign branches of American companies. Several American
companies ship parts and components to overseas locations where the labour intensive assembly operations are
carried out and then the product is brought back home. The North American Free Trade Agreement comprising the
U.S., Canada and Mexico is expected to encourage large relocation of production to Mexico where the labour is
substantially cheap.
Growth opportunities
The enormous growth potential of many foreign markets is a very strong attraction for foreign companies. In a
number of developing countries, both the population and income are growing fast. It may be noted that several
developing countries, the newly industrialising countries (NICs) and the Peoples’ Republic of China in particular,
have been growing much faster than the developed countries. Growth rate of India has also been good and the
liberalisation seems to have accelerated the growth. Even if the market for several goods in these countries is not
very substantial at present, many companies are eager to establish a foothold there, considering their future potential.
Similarly, when the East European economies have been opened up, there has been a rush of MNCs to establish a
base in these markets.
Domestic market constraints
Domestic demand constraints drive many companies to expanding the market beyond the national border. The
market for a number of products tends to saturate or decline in the advanced countries. This often happens when
the market potential has been almost fully tapped. In the United States, for example, the stock of several consumer
durables like cars, TV sets etc. exceed the total number of households.
Estimates are that in the first quarter of the 21st century, while the population in some of the advanced economies
would saturate or would grow very negligibly, in some others there would be a decline. Such demographic trends
have very adverse effects on certain lines of business. For example, the fall in the birth rate implies contraction of
market for several baby products.
Another type of domestic market constraint arises from the scale economies. The technological advances have
increased the size of the optimum scale of operation substantially in many industries making it necessary to have
foreign market, in addition to the domestic market, to take advantage of the scale economies. It is the thrust given
to exports that enabled certain countries like South Korea to set up economic size plants.
Competition
Competition may become a driving force behind internationalisation. A protected market does not normally motivate
companies to seek business outside the home market. Until the liberalisations which started in July 1991, the
Indian economy was a highly protected market. Not only that the domestic producers were protected from foreign
competition but also domestic competition was restricted by several policy induced entry barriers, operated by such
measures as industrial licensing and the MRTP regulations.
Many companies also take an offensive international competitive strategy by way of counter-competition. The
strategy of counter-competition is to penetrate the home market of the potential foreign competitor so as to diminish
its competitive strength and to protect the domestic market share from foreign penetration.
“Effective counter-competition has a destabilising impact on the foreign company’s cash flows, product related
competitiveness and decision making about integration. Direct market penetration can drain vital cash flows from
the foreign company’s domestic operations. This drain can result in lost opportunities, reduced income, and limited
production, impairing the competitor’s ability to make overseas thrusts.”
Government policies and regulations
Government policies and regulations may also motivate internationalisation. There are both positive and negative
factors which could cause internationalisation. Many governments give a number of incentives and other positive
support to domestic companies to export and to invest in foreign countries. Similarly, several countries give a lot of
importance to import development and foreign investment. Sometimes, as was the case in India, companies may be
obliged to earn foreign exchange to finance their imports and to meet certain other foreign exchange requirements
like payment of royalty, dividend, etc.
Monopoly power
In some cases, international business is a corollary of the monopoly power which a firm enjoys internationally.
Monopoly power may arise from such factors as monopolisation of certain resources, patent rights, technological
advantage, product differentiation etc. Such monopoly power need not necessarily be an absolute one but even
a dominant position may facilitate internationalisation. As Czinkota and Ronkainen observe, exclusive market
information is another proactive stimulus. This includes knowledge about foreign customers, market places, or
market situations not widely shared by other firms. Such special knowledge may result from particular insights by
a firm based on international research, special contacts a firm may have or simply being in the right place at the
right time (for example, recognising a good business situation during a vacation).
Although such monopoly element may give an initial advantage, competitors could be expected to catch up soon.
Spin-off Benefits International business has certain spin-off benefits too. International business may help the company
to improve its domestic business; international business helps improve the image of the company. International
marketing may have pay-offs for the internal market too by giving the domestic market better products. Further,
the foreign exchange earnings may enable a company to import capital goods, technology etc. Another attraction of exports is the economic incentives offered by
the government.
Strategic vision
The systematic and growing internationalisation of many companies is essentially a part of their business policy
or strategic management. The stimulus for internationalisation comes from the urge to grow, the need to become
more competitive, the need to diversify and to gain strategic advantages of internationalisation. Many companies in
India, like several pharmaceutical firms, have realized that a major part of their future growth will be in the foreign
markets. There are a number of corporations which are truly global. Planning of manufacturing facilities, logistical
systems, financial flows and marketing policies in such corporations are done considering the entire world as its,
and a single, market - a borderless world.
