Pros and Cons of Going International

Only available on StudyMode
  • Download(s) : 938
  • Published : June 30, 2012
Open Document
Text Preview
Pros and cons of going international

When thinking about internationalization, a lot of people instantly associate it with multinational companies. It cannot be said that they are wrong; however, internationalization is a far more complex phenomena as it does not only consist of companies setting their headquarters outside the borderlines of the countries of origin. If an entity simply decides to import or export commodities or services, their action can also be described as ‘going international’; producing effects both domestically and internationally. In recent years, the number of companies that chose to get involved in international business operations and transactions increased substantially to the point where becoming visible in the world market became very difficult. When operating internationally, a company should consider its mission (what it will seek to do and become over the years; what is the purpose of the company’s existence); its objectives (what is the company trying to accomplish according to its mission); and strategies (means to achieve its objectives).The main reasons for the increased number of companies that want to go international are the following: * Minimizing competitive risk

* Acquiring resources
* Expanding the sales
* Diversifying the sources of sales and supplies.

Minimizing competitive risks. Although companies indeed go international for maximizing the profits, in most of the cases, they do so in order to minimize the competitive risks posed by their competitors; making internationalization more of a defensive measure, that is necessary in surviving the fierce competition. The profit resulted from international operations might even help certain competitors achieve economies of scale by increasing their productivity and reducing their costs through investments in technology or in vital departments such as R&D or Marketing. In other words, the companies that go international have the upper hand whilst, the others, despite their efforts, merely cannot win the battle against their competitors and incur a loss. This fact can easily by demonstrated by using the Game Theory; illustrated through the numerical example below (Figure 1). Let us take 2 companies (players in the market) called ‘Player 1’ and ‘Player 2’ and give them utility points based on the actions undertaken; having to make a choice between getting involved only in domestic operations and going international. Although unlike the case of ‘Prisoner’s Dilemma’, companies can choose to communicate and collaborate with each other, one wrong move in the corporate arena might even result in ‘Game over’ (bankruptcy for one of the companies). Figure 1: Game theory application

Player1/Player2| Not go international| Go international| Not go international| 5, 5| 0, 15|
Go international| 15, 0| 10, 10|

According to the example above, if both players choose not to go international, they receive 5 utility units; much less than in the case of internationalization, that enables them to increase their profits drastically. If the first player continues its domestic operations without going international whilst the second player takes advantage of this opportunity, ‘Player 2’ gains 15 utility points, whereas ‘Player1’ gets nothing compared to the 15 or 10 points that it would have got if it went international. As a result, the best choice for both players is to go international (internationalization usually has the greatest probability); making the internationalization strategy strictly dominant and the ‘Go international’- ‘Go international’ outcome the only stable one. Acquiring resources. When going international, companies seek foreign capital, technologies, and information they can use at home. Their main purposes are reducing their costs and improving their product quality; differentiating themselves from competitors, potentially increasing market share and profits. The foreign earnings may also be...
tracking img