Entering International Markets (AQA A-Level Business): Revision Notes

Entering International Markets

Why businesses enter international markets

Internationalisation means moving into and operating within international markets. Businesses pursue this strategy to gain competitive advantages through targeting, operating in, and trading with overseas markets. There are several key growth opportunities that make international expansion attractive.

Increasing market size

When a business sells its existing products in new countries, it follows a market development strategy. The principle is simple: the bigger the market, the more units the business is likely to sell, leading to higher revenue.

For example, Tesco has nearly saturated the UK supermarket sector. By entering new countries, they can continue growing even though their domestic market has reached maturity. This strategy works particularly well for businesses that have maximised their potential in their home market but still have capacity for growth.

Extending the product life cycle

International markets allow businesses to extend the life cycle of their products. When products reach maturity or decline in their home market, they can be launched in new countries where demand still exists.

This strategy generates additional revenue from products that would otherwise be discontinued.

Reducing costs through global sourcing

Global sourcing is the practice of obtaining raw materials and components from countries offering the cheapest prices. Businesses can purchase components from overseas suppliers at competitive rates and then assemble the final product in the UK.

This approach significantly reduces production costs whilst maintaining quality standards. For instance, a UK manufacturer might source electronic components from Asia, where production costs are lower, before completing final assembly domestically.

Operating in developing countries

Setting up operations in developing countries with low wage rates can substantially reduce labour costs. This might involve relocating factories or establishing new production facilities in countries where wages are considerably lower than in the UK.

Securing revenue during economic downturns

When the UK economy enters recession, domestic demand typically falls. By exporting to a growing economy, businesses can maintain revenue streams even when their home market is struggling.

This diversification strategy reduces dependence on a single market and provides stability during economic uncertainty. If one market experiences difficulties, others may remain strong, protecting overall business performance.

Factors affecting the attractiveness of international markets

Not all international markets are equally attractive. Businesses must carefully evaluate multiple factors before deciding where to expand. These factors fall into three main categories.

Size of the market

Population considerations

Countries with large populations and developing markets, such as China and Brazil, represent attractive prospects because their markets are naturally bigger. However, businesses cannot simply look at total population numbers.

Population demographics are equally important when assessing market size. A pharmaceutical company, for example, would specifically target countries with ageing populations because older people typically require more medical products and services. The composition of the population directly affects potential demand.

Wealth factors

The wealth of a population determines its purchasing power and therefore affects the size of a business's potential market.

For example, a designer clothing company would more likely open outlets in Switzerland, where wages are generally high, rather than Bangladesh, where wages are generally low. Higher incomes mean consumers can afford premium products, making wealthy markets more attractive for luxury goods businesses.

Technology availability

The availability of technology significantly impacts market size, particularly for technology-dependent businesses. Internet streaming services like Netflix cannot enter countries where the internet isn't readily available or where connection speeds are low.

Businesses must assess whether the technological infrastructure exists to support their products or services before entering a market.

Political and economic factors

Laws and regulations

Businesses entering international markets must understand and comply with local laws. Employment laws, environmental laws, and tax laws all affect the profitability of operations.

Different countries have varying legal requirements that can significantly impact operational costs and business practices. What is legally acceptable in one country might be prohibited in another, requiring businesses to adapt their operations accordingly.

Trade controls

Governments implement political controls on trade through tariffs (taxes on imports) and quotas (limits on the quantity of imports). These measures protect domestic industries but make it more difficult and expensive for foreign businesses to enter the market.

Higher tariffs increase product prices, potentially making a business less competitive against local competitors. Quotas can limit market access entirely, preventing businesses from importing as much as they would like.

Political stability

Businesses prefer entering countries with a stable political environment. If there is political unrest in a country, a business might wait until the problem is resolved before entering.

Exchange rates

Fluctuations in exchange rates make the cost of international trade unpredictable. When currency values change, it becomes difficult for businesses to accurately forecast revenue and profits.

Cultural, ethical and environmental factors

Cultural and language similarities

Businesses find it easier to trade with countries that have similar cultures and languages to their own. Cultural alignment reduces misunderstandings and simplifies business operations.

It is more difficult to succeed in countries with language and cultural barriers. Communication becomes more challenging, consumer preferences may differ significantly, and marketing messages may not translate effectively across cultural boundaries.

Ethical considerations

Cheap labour in certain countries can be attractive for businesses seeking to reduce costs. However, businesses must be careful not to exploit workers. Worker exploitation is unethical and can lead to serious reputational damage.

Environmental impact

Businesses should consider the damage their activities might cause to the environment. Getting raw materials from abroad often requires transportation from one country to another, causing pollution.

Distributing finished products to other countries also generates pollution through shipping and air freight. Some businesses attempt to exploit the lack of environmental restrictions in certain countries to gain cheap resources, such as through deforestation. However, ethical companies choose more sustainable sources, even if they cost more.

Product restrictions

Some countries have fewer restrictions on buying and selling certain products. For weapons manufacturers, this creates opportunities to make money by selling missiles and other weapons abroad.

However, selling weapons to countries seen as a security threat is unethical and can have serious geopolitical consequences. Businesses must consider the broader implications of their international sales, not just profitability.

Methods of entering international markets

Different methods of entering international markets carry different amounts of risk. Businesses must choose the approach that best matches their resources, objectives, and risk tolerance.

Importing and exporting

Businesses can easily enter international markets by importing or exporting goods and services. This means buying from or selling to companies and consumers in other countries.

Importing from other countries provides benefits including greater variety and cheaper prices. Businesses can source products or materials not available domestically or find better prices overseas.

Exporting to other countries benefits businesses through an increased market size. More potential customers mean greater sales opportunities and revenue potential.

However, developing the infrastructure for importing or exporting can be expensive. These initial setup costs will decrease the value added unless the price of the product is increased, which might make the business less competitive.

Licensing

Businesses can allow foreign firms to produce their products under licence. This means another firm manufactures the product, but the original company's name remains on the product. This arrangement is known as licensing.

The key advantage is that the business benefits from the infrastructure that foreign firms already have in place. The company can make money without significant investment and with a low amount of risk.

The licensing company receives royalty payments without having to establish its own operations abroad. This makes licensing an attractive option for businesses wanting international expansion without substantial capital investment.

Alliances

Businesses can join forces with similar companies abroad, combining local knowledge with a product that has already proved successful in their own country. This arrangement is called an alliance.

Alliances can spread out the costs and risks and help businesses overcome trade barriers. By partnering with a local company, foreign businesses can navigate unfamiliar markets more effectively.

Direct investment

Direct investment occurs when a business takes over or merges with a business in a different country. This represents the highest level of commitment and risk.

The main benefit is that it allows the business to enter markets quickly and already have an instant share of the market. The business doesn't need to build market presence from scratch, instead acquiring an existing reputation in the new country.

Direct investment can also reduce the risk of failure because the business benefits from the knowledge and experience of the local market and culture provided by the business it joins with. Local expertise helps avoid costly mistakes that foreign businesses might make without insider understanding.

Impact on business functions

Internationalisation affects the decisions and activities of different departments within the business. Each functional area must adapt to the challenges and opportunities of operating internationally.

Human resources department

HR may start recruiting people who can speak multiple languages so they can communicate more effectively within the business and with their customers. Multilingual employees become essential for international operations.

HR might also need to help current employees relocate abroad to manage or work in overseas operations. This involves handling visa applications, relocation packages, and cultural training.

Finance department

The finance department must develop new methods for dealing with fluctuating exchange rates as goods are bought and sold in different currencies. Currency risk management becomes a crucial responsibility.

Finance teams need systems to monitor exchange rates, hedge currency risks, and accurately forecast costs and revenues when dealing in multiple currencies. This complexity increases the sophistication required of financial management.

Marketing department

Marketing may need to split into separate international and national departments as products will be priced and promoted differently depending on the country they are being marketed in.

Consumer preferences, cultural values, and competitive conditions vary between countries. Marketing strategies that work well domestically may fail abroad, requiring tailored approaches for each international market. Product positioning, advertising messages, and pricing strategies must all be adapted to local conditions.