Why Do Firms Invest in Foreign Countries
Content
UNIVERSITI UTARA MALAYSIA
Why Do Firms Invest in Foreign Countries
BFMA2023 INTERNATIONAL BUSINESS
PREPARE FOR PROF DR. MOHAMAD HANAFI MOHAMAD
Why Do Firms Invest in Foreign Countries?
International business is a term used to jointly describe all commercial transactions that take place between two or more nations or across national borders. It can define as the economic system of exchanging good and services, conducted between individuals and business in multiple
countries.International business grew rapidly over the last of the twentieth century partly because of liberalization in both trade and investment. This further encouraged by the removal of many major trade rules and regulations in doing business internationally. Internationalization has been viewed as a process of increasing involvement of enterprise in international markets. Firms internationalize mostly seeks opportunities for growth especially when theirs home markets have become mature and to saturated with many competitors. There are several modes involved in international business. Some of the modes include but are not limited to exports and imports, performance of services like Turnkey Operations and Management Contracts, use of assets like licensing agreement, Royalties and franchising, the investments and other operational functions. For example would be the direct marketing companies such as Avon and Amway. To seize new market opportunities, these companies decided to enter the Chinese market in China. For the first three year it operates in the burgeoning China Market, Amway earned nearly $200 million. But the main objectives for firms to internationalize are to maximize return on investment (ROI) and to minimize cost.
Some of the reasons why a company decides to internationalize including gaining access to a larger, market gain market power and maximize production possibilities. A company could attain greater profits from foreign markets than those received locally. However population, per capita income and education level will be the main determinants for a company venturing into a new territory. The company need to growth and expansion to secure future markets or to deal with future competitors. An expansion not only helps a company to keep the same market share but also increase its share of the pie in a new market. Expanding a company doesn’t just mean grappling with the same problems on a larger scale but its mean understanding, adjusting to, and managing a whole new set of challenges in essence, a different business. Some factors of growth include rapid expansion of the technology, liberalization of government policies, privatization, development of institutions, encouraging growth, and an increase in global competition. Growth causes a variety of changes, all of which present different managerial, legal, and financial challenges. Growth mean that market share will expand, calling for new strategies for dealing with larger competitors, additional capital will required, creating new responsibilities to shareholder, investors and institutional lenders. For example Johnson & Johnson was founded in 1886 have been grown to meet the health care needs of people worldwide. They started with a small company selling medical product and first expand to Canada in 1919 and England 1924 and now have branch in worldwide. The move towards market orientation (liberalization) in many countries has been reflected in deregulatory policies by governments, including the reduction of
tariff barriers, facilitating the flows of capital and investment, and privatization of State owned enterprises. Liberalization has preceded or been forced by globalization (involving greater integration in world markets, and increased international economic interdependence). Both phenomena have been facilitated by the significant growth in world trade and foreign direct investment in recent years, and by information technology that has facilitated rapid financial transactions and changes in production and service locations around the world.(Macdonald, 1997) Internationalizations allow companies to manage their resources more efficiently and respond quickly to the changing market demands by spreading out the risks, improve utilization of idle materials, minimize competitive risks, protect investment and control production cost. Foreign direct investment is also viewed as a way of increasing the efficiency with which the world's scarce resources are used. A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. Partly this is because of the expected continued decline in the role of development assistance on which these countries have traditionally relied heavily, and the resulting search for alternative sources of foreign capital. More importantly, FDI, very little of which currently flows to the poorest countries, can be a source not just of badly needed capital, but also of new technology and intangibles such as organizational and managerial skills, and marketing networks. FDI can also provide a stimulus to competition, innovation, savings and capital formation, and through these effects, to job creation and economic growth. Along with major reforms in domestic policies and practices in the poorest countries, this is precisely what is needed to turn-
around an otherwise pessimistic outlook. One reason why companies engage in international business is to minimize risk. In particular, companies decide that it will be beneficial to go into foreign markets to minimize swings in sales and profits. This has to do with smoothing sales and profits, as a company will try to take advantage of a business cycle in another country that differs with their own. Sales will tend to increase or grow more quickly during an economic upswing and decrease or grow more slowly during a recession. It makes sense then for companies to expand to other countries with business cycles opposite that of their domestic country, in order to counteract slower sales during a recession in the domestic country. One example of this is when Nestlé experienced slower growth in Western Europe and the United States in the early twenty-first century, but this was offset by higher growth in Asia, Eastern Europe, and Latin America. Also, by purchasing the same products, services, or components from different countries, a company can avoid being affected by price swings and shortages from one particular country. Companies will also do international business to defend themselves against competitors. They might need to counter an advantage that a competitor is getting from going global. These are all ways to minimize risk and some reasons why companies will decide to conduct international business. (Phelps, 2007) To survive in a globalized world, companies need to keep their eyes on what their competitors are doing. If a company sets up an operation in a new market or market a new product abroad, other competitors would react by taking immediate action so that they will not lose the market shares. It is only natural to se Coca Cola follow Pepsi footsteps or vice versa when either
company enters an international market. Competitive environment varies from country to country based on number and strength of competitions, suppliers, customers and as well as the local regulations that permit a company to compete. One of the product categories in which global competition has been easy to track in U.S. is the automotive sale. The increasing intensity of competition in global markets is a challenge facing companies at all stages of involvement in international markets. As markets open up, and become more integrated, the pace of change accelerates, technology shrinks distances between markets and reduces the scale advantages of large firms, new sources of competition emerge, and competitive pressures mount at all levels of the organization. Also, the threat of competition from companies in countries such as India, China, Malaysia, and Brazil is on the rise, as their own domestic markets are opening up to foreign competition, stimulating greater awareness of international market opportunities and of the need to be internationally competitive. Companies that previously focused on protected domestic markets are entering into markets in other countries, creating new sources of competition, often targeted to price-sensitive market segments. Not only is competition intensifying for all firms regardless of their degree of global market involvement, but also the basis for competition is changing. Competition continues to be market-based and ultimately relies on delivering superior value to consumers. However, success in global markets depends on knowledge accumulation and deployment. (Craig & Douglas., 2009) Other reason why the firm goes international is the profit maximization. The fact is any good company could raise greater profits and improve its sales from operation internationally if they enter the market at the right time and
place. Some companies have no choice but to expand when the demand for their product services in the domestic market for growth. For example, rather than merely depending on the domestic market for growth, CIMB and Celcom have no other avenues to maximize their shareholders’ return except to expand to Indonesia, Thailand and several other countries through either acquisition or joint venture with the local company to maximization the profit. For the best example is the retail business here in Malaysia when Tesco start doing their business here. Tesco Plc, a United Kingdom based supermarket chain that has in recent decades expanded into the European, North American, and Asian markets with success. All facets of the company operation have been affected by this expansion, including business structure, corporate culture, organizational structures, and the financial status of the company. Tesco's huge growth in home country is a hard act to follow. With the domestic market increasingly saturated, some UK supermarket chains, namely Tesco, Sainsbury (who have now sold their interests in the USA) and M&S have looked to overseas markets to maintain their positions. This is a whole new ball game, bringing into play competition with large firms from other countries, such as US retailing giant Wal-Mart and French multinational Carrefour.Tesco began expanding internationally in the 1990s and now (2004) has outlets in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia, Thailand, Malaysia, South Korea and Taiwan. It has also recently bought chains in Turkey and Japan and is in the process of negotiating expansion into China
Early in 2004, Tesco reported that its international sales were up 29% to £6.7bn, with a 44% rise in profits to £306m. (TESCO, 2011)The growth has been especially marked in Asia, where the underlying group profit rose 71.8%. Tesco opened its first store in Malaysia in May 2002 with the opening of its first hypermarket in Puchong, Selangor. Tesco Malaysia currently operates 45 Tesco and Tesco Extra stores. Selangor has 12 stores, Perak seven stores, Johor six stores, Kuala Lumpur and Penang five stores each, Kedah four stores, Negeri Sembilan three stores, Melaka two stores, and Kelantan one store. Tesco has partnered with local conglomerate Sime Darby Berhad, which holds 30% of the shares. Tesco also acquired the Malaysian operation of the wholesaler Makro, which was rebranded Tesco Extra and provides products for local retailers. As of 2011, Tesco has relaunched the Tesco Extra brand in five of its stores in the Klang Valley. The new Tesco Extra brand will now offer the widest choice in the food, clothing, home and electronics ranges. A variety of complementary services such as a pharmacy, an optician and a Tesco phone shop will also be incorporated into these Tesco Extra stores.Tesco Malaysia offers a value range, its own branded range, electronic goods, the loyalty clubcard and clothing. Tesco completed with Carrefour and Giant.
Works Cited
Phelps, C. (2007, August 01). Global Id . Retrieved December 09, 2011, from Global Id: http://globalid.blogspot.com/2007/08/minimizing-risk-by-engagingin.html Craig, C. S., & Douglas., S. P. (2009, 0ct 4). RESPONDING TO THE CHALLENGES OF GLOBAL MARKETS: CHANGE, COMPLEXITY, COMPETITION AND CONSCIENCE. Retrieved December 12, 2011, from Victoria University of Wellington : www.vuw.ac.nz/~caplabtb/m302w07/CRAIG_DOUGLAS.DOC Macdonald, D. (1997, May 7). INDUSTRIAL RELATIONS AND GLOBALIZATION: CHALLENGES FOR EMPLOYERS AND THEIR ORGANIZATIONS. Retrieved December 12, 2011, from ILO: www.ilo.org/public/english/dialogue/actemp/.../dmirglob.pdf TESCO. (2011, May 1). TESCO. Retrieved December 13, 2011, from TESCO PLC: http://www.tescoplc.com/
Why Do Firms Invest in Foreign Countries
BFMA2023 INTERNATIONAL BUSINESS
PREPARE FOR PROF DR. MOHAMAD HANAFI MOHAMAD
Why Do Firms Invest in Foreign Countries?
International business is a term used to jointly describe all commercial transactions that take place between two or more nations or across national borders. It can define as the economic system of exchanging good and services, conducted between individuals and business in multiple
countries.International business grew rapidly over the last of the twentieth century partly because of liberalization in both trade and investment. This further encouraged by the removal of many major trade rules and regulations in doing business internationally. Internationalization has been viewed as a process of increasing involvement of enterprise in international markets. Firms internationalize mostly seeks opportunities for growth especially when theirs home markets have become mature and to saturated with many competitors. There are several modes involved in international business. Some of the modes include but are not limited to exports and imports, performance of services like Turnkey Operations and Management Contracts, use of assets like licensing agreement, Royalties and franchising, the investments and other operational functions. For example would be the direct marketing companies such as Avon and Amway. To seize new market opportunities, these companies decided to enter the Chinese market in China. For the first three year it operates in the burgeoning China Market, Amway earned nearly $200 million. But the main objectives for firms to internationalize are to maximize return on investment (ROI) and to minimize cost.
Some of the reasons why a company decides to internationalize including gaining access to a larger, market gain market power and maximize production possibilities. A company could attain greater profits from foreign markets than those received locally. However population, per capita income and education level will be the main determinants for a company venturing into a new territory. The company need to growth and expansion to secure future markets or to deal with future competitors. An expansion not only helps a company to keep the same market share but also increase its share of the pie in a new market. Expanding a company doesn’t just mean grappling with the same problems on a larger scale but its mean understanding, adjusting to, and managing a whole new set of challenges in essence, a different business. Some factors of growth include rapid expansion of the technology, liberalization of government policies, privatization, development of institutions, encouraging growth, and an increase in global competition. Growth causes a variety of changes, all of which present different managerial, legal, and financial challenges. Growth mean that market share will expand, calling for new strategies for dealing with larger competitors, additional capital will required, creating new responsibilities to shareholder, investors and institutional lenders. For example Johnson & Johnson was founded in 1886 have been grown to meet the health care needs of people worldwide. They started with a small company selling medical product and first expand to Canada in 1919 and England 1924 and now have branch in worldwide. The move towards market orientation (liberalization) in many countries has been reflected in deregulatory policies by governments, including the reduction of
tariff barriers, facilitating the flows of capital and investment, and privatization of State owned enterprises. Liberalization has preceded or been forced by globalization (involving greater integration in world markets, and increased international economic interdependence). Both phenomena have been facilitated by the significant growth in world trade and foreign direct investment in recent years, and by information technology that has facilitated rapid financial transactions and changes in production and service locations around the world.(Macdonald, 1997) Internationalizations allow companies to manage their resources more efficiently and respond quickly to the changing market demands by spreading out the risks, improve utilization of idle materials, minimize competitive risks, protect investment and control production cost. Foreign direct investment is also viewed as a way of increasing the efficiency with which the world's scarce resources are used. A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. Partly this is because of the expected continued decline in the role of development assistance on which these countries have traditionally relied heavily, and the resulting search for alternative sources of foreign capital. More importantly, FDI, very little of which currently flows to the poorest countries, can be a source not just of badly needed capital, but also of new technology and intangibles such as organizational and managerial skills, and marketing networks. FDI can also provide a stimulus to competition, innovation, savings and capital formation, and through these effects, to job creation and economic growth. Along with major reforms in domestic policies and practices in the poorest countries, this is precisely what is needed to turn-
around an otherwise pessimistic outlook. One reason why companies engage in international business is to minimize risk. In particular, companies decide that it will be beneficial to go into foreign markets to minimize swings in sales and profits. This has to do with smoothing sales and profits, as a company will try to take advantage of a business cycle in another country that differs with their own. Sales will tend to increase or grow more quickly during an economic upswing and decrease or grow more slowly during a recession. It makes sense then for companies to expand to other countries with business cycles opposite that of their domestic country, in order to counteract slower sales during a recession in the domestic country. One example of this is when Nestlé experienced slower growth in Western Europe and the United States in the early twenty-first century, but this was offset by higher growth in Asia, Eastern Europe, and Latin America. Also, by purchasing the same products, services, or components from different countries, a company can avoid being affected by price swings and shortages from one particular country. Companies will also do international business to defend themselves against competitors. They might need to counter an advantage that a competitor is getting from going global. These are all ways to minimize risk and some reasons why companies will decide to conduct international business. (Phelps, 2007) To survive in a globalized world, companies need to keep their eyes on what their competitors are doing. If a company sets up an operation in a new market or market a new product abroad, other competitors would react by taking immediate action so that they will not lose the market shares. It is only natural to se Coca Cola follow Pepsi footsteps or vice versa when either
company enters an international market. Competitive environment varies from country to country based on number and strength of competitions, suppliers, customers and as well as the local regulations that permit a company to compete. One of the product categories in which global competition has been easy to track in U.S. is the automotive sale. The increasing intensity of competition in global markets is a challenge facing companies at all stages of involvement in international markets. As markets open up, and become more integrated, the pace of change accelerates, technology shrinks distances between markets and reduces the scale advantages of large firms, new sources of competition emerge, and competitive pressures mount at all levels of the organization. Also, the threat of competition from companies in countries such as India, China, Malaysia, and Brazil is on the rise, as their own domestic markets are opening up to foreign competition, stimulating greater awareness of international market opportunities and of the need to be internationally competitive. Companies that previously focused on protected domestic markets are entering into markets in other countries, creating new sources of competition, often targeted to price-sensitive market segments. Not only is competition intensifying for all firms regardless of their degree of global market involvement, but also the basis for competition is changing. Competition continues to be market-based and ultimately relies on delivering superior value to consumers. However, success in global markets depends on knowledge accumulation and deployment. (Craig & Douglas., 2009) Other reason why the firm goes international is the profit maximization. The fact is any good company could raise greater profits and improve its sales from operation internationally if they enter the market at the right time and
place. Some companies have no choice but to expand when the demand for their product services in the domestic market for growth. For example, rather than merely depending on the domestic market for growth, CIMB and Celcom have no other avenues to maximize their shareholders’ return except to expand to Indonesia, Thailand and several other countries through either acquisition or joint venture with the local company to maximization the profit. For the best example is the retail business here in Malaysia when Tesco start doing their business here. Tesco Plc, a United Kingdom based supermarket chain that has in recent decades expanded into the European, North American, and Asian markets with success. All facets of the company operation have been affected by this expansion, including business structure, corporate culture, organizational structures, and the financial status of the company. Tesco's huge growth in home country is a hard act to follow. With the domestic market increasingly saturated, some UK supermarket chains, namely Tesco, Sainsbury (who have now sold their interests in the USA) and M&S have looked to overseas markets to maintain their positions. This is a whole new ball game, bringing into play competition with large firms from other countries, such as US retailing giant Wal-Mart and French multinational Carrefour.Tesco began expanding internationally in the 1990s and now (2004) has outlets in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia, Thailand, Malaysia, South Korea and Taiwan. It has also recently bought chains in Turkey and Japan and is in the process of negotiating expansion into China
Early in 2004, Tesco reported that its international sales were up 29% to £6.7bn, with a 44% rise in profits to £306m. (TESCO, 2011)The growth has been especially marked in Asia, where the underlying group profit rose 71.8%. Tesco opened its first store in Malaysia in May 2002 with the opening of its first hypermarket in Puchong, Selangor. Tesco Malaysia currently operates 45 Tesco and Tesco Extra stores. Selangor has 12 stores, Perak seven stores, Johor six stores, Kuala Lumpur and Penang five stores each, Kedah four stores, Negeri Sembilan three stores, Melaka two stores, and Kelantan one store. Tesco has partnered with local conglomerate Sime Darby Berhad, which holds 30% of the shares. Tesco also acquired the Malaysian operation of the wholesaler Makro, which was rebranded Tesco Extra and provides products for local retailers. As of 2011, Tesco has relaunched the Tesco Extra brand in five of its stores in the Klang Valley. The new Tesco Extra brand will now offer the widest choice in the food, clothing, home and electronics ranges. A variety of complementary services such as a pharmacy, an optician and a Tesco phone shop will also be incorporated into these Tesco Extra stores.Tesco Malaysia offers a value range, its own branded range, electronic goods, the loyalty clubcard and clothing. Tesco completed with Carrefour and Giant.
Works Cited
Phelps, C. (2007, August 01). Global Id . Retrieved December 09, 2011, from Global Id: http://globalid.blogspot.com/2007/08/minimizing-risk-by-engagingin.html Craig, C. S., & Douglas., S. P. (2009, 0ct 4). RESPONDING TO THE CHALLENGES OF GLOBAL MARKETS: CHANGE, COMPLEXITY, COMPETITION AND CONSCIENCE. Retrieved December 12, 2011, from Victoria University of Wellington : www.vuw.ac.nz/~caplabtb/m302w07/CRAIG_DOUGLAS.DOC Macdonald, D. (1997, May 7). INDUSTRIAL RELATIONS AND GLOBALIZATION: CHALLENGES FOR EMPLOYERS AND THEIR ORGANIZATIONS. Retrieved December 12, 2011, from ILO: www.ilo.org/public/english/dialogue/actemp/.../dmirglob.pdf TESCO. (2011, May 1). TESCO. Retrieved December 13, 2011, from TESCO PLC: http://www.tescoplc.com/
