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7.2 Advantages of going international

In Chapter 1 you were introduced to the notion of the 'global village'. The world is becoming one marketplace of inter-dependent people and any firm which concentrates solely on a single domestic market will probably fail or have a stunted growth pattern. There is thus a logical basis for businesses to expand their operations internationally, and we can list three basic reasons for firms 'going international':

  1. To increase sales and profits, MNEs can expand market outlets and exploit growth opportunities. Overseas sales can absorb extra capacity and reduce unit costs. They can also spread economic risk over a wide range of markets.
  2. To gain competitive advantages, MNEs can find low-cost production facilities close to raw materials and/or cheap labour. They can widen their channels of distribution and access new technology through joint ventures.
  3. To secure raw material resources, MNEs can engage in worldwide exploration for, and the processing, transportation and marketing of, raw materials.

There are also some disadvantages to international expansion, most of which were mentioned back in Chapter 1.

  1. MNEs face a multiplicity of political, economic, legal, social and cultural environments.
  2. There are complex interactions between a MNE and its host countries because of national sovereignties, widely disparate economic and social conditions, and other factors.
  3. Geographical distance, cultural and national differences, variations in business practices, and other differences make communication difficult between the MNE and its subsidiaries.
  4. Economic, marketing and other information required for strategic planning varies in availability, depth and reliability between countries.
  5. Differences in industrial structure and business practices make analysis of future competition difficult to undertake.
  6. Regional economic integration and the activities of institutions such as World Bank and GATT may confront the MNE.

To add further depth to this section, work through the following reading and add to the list of reasons why organisations 'go international'.

Reading 7.4

Czinkota, M. R., Ronkainen, I. A. and Moffett, M. H. 2005, International Business , 7 th edn, Thomson/South-Western, Mason , Ohio , pp. 352-357: 'Motivations to go abroad'.

The advantages and disadvantages of going international have direct relevance to five specific issues dealt with under the two headings 'Profiting from global expansion' and 'Pressures for cost reductions and local responsiveness' (Hill 2005, pp. 416 and 422). We will discuss each of these five issues in turn and will number each of the five so you can match this discussion with what Hill (2005) says in your textbook.

  1. Location economies. An MNE will want to base its value chain activities in the place where they are most effective in adding value. If possible, all value chain activities might be best located in one place. Where this is not possible, each individual activity will be located where it is most cost effective. This is beautifully illustrated by the archetypal example of General Motors' Le Mans car. It was:
    • designed in Germany
    • manufactured in Japan , Taiwan , and Singapore (each country produces specific parts)
    • assembled in Korea
    • advertised/promoted by a British agency; and
    • sold mainly in the US .

      You may also recall two further examples used in Chapter 1 of the Airbus A380 and the Ukrainian Big Mac.
  2. Experience effects. This concept as it applies to manufacturing is that unit production costs decline by some fixed percentage (commonly 20%-30%) each time the total accumulated volume of production in units doubles.

    The actual percentage varies by industry and is based on a number of variables of which the last two are not mentioned in your textbook:
    • learning effects: the amount of time it takes a person to learn a new task
    • scale economies: the reduction in unit cost achieved by producing a large volume of a product
    • product and process improvements
    • raw materials costs

      The experience curve is commonly used in estimating production costs of:
    • products never made before with present techniques and processes; and
    • current products produced by new techniques or processes
    • The strategic significance of the experience curve lies in an MNE being able to reduce the cost of creating value by moving down the experience curve as shown in Figure 7.4.

      Figure 7.4 Experience curve
    Figure 7.4 Experience curve

Activity 7.2

At the 32,000 level in Figure 7.4, the graph line is almost horizontal and doubling the quantity (to 64,000) is unlikely to lower unit cost significantly.

Why does the experience curve not continue to fall indefinitely?

You may not find the answer in a textbook because textbook authors think the answer is obvious. Rely on your commonsense and this task should take only a few seconds.

The experience curve might not hold true for a particular firm for a variety of reasons. For example, the use of computer-assisted design and manufacturing, and robot technology, means that learning times are shorter and products can be economically manufactured in small customised batches. By emphasising economies of scope over economies of scale we now have the concept of flexible manufacturing.

  1. Core competencies. These are the skills possessed by a firm which give it some competitive advantage. In short, core competence is what an organisation does well. Examples from your textbook are:
    • Toyota makes cars more competently than any of its competitors
    • McDonald's runs fast food outlets better than its competitors
    • Coca-Cola markets soft drink more effectively than its competitors
    • When a firm goes international, it has to devise the means of transferring this core competence to its overseas subsidiaries. In Toyota 's case, the problem is to find suitably skilled/educated staff to build motor vehicles competently.
  2. Pressures for cost reduction. These tend to be high for products which serve universal needs: that is, where there is no need to differentiate a product to satisfy consumer needs. This is the case with commodities such as petroleum products, steel, sugar and bulk chemicals. It is also the case with many industrial products such as televisions, video recorders and personal computers.
  3. Pressures for local responsiveness . Th ese arise from :
    • differences in consumer tastes and preferences, for example, Australians generally prefer powerful, roomy cars while British and Japanese people prefer smaller cars because of limited road and parking space
    • differences in national infrastructure and traditional practices, for example, Australia 's national electricity grid operates at 240 volts. North American electrical systems operate at 110 volts. Electrical products must be tailored to suit these differing voltages
    • differences in distribution channels: for example, Australia has a fairly efficient wholesale/retail distribution system for most products with few intermediaries. Japan has a distribution system in which business relationships are more important than cost
    • host government demands, for example, food and pharmaceuticals are generally subject to close surveillance by national governments because of specific concerns for community health and safety. However, not all governments are similarly motivated: for example Australia requires a health warning and graphic photos to be printed on cigarette packets whereas other countries have no such requirement
    • market idiosyncrasies, where international operations give scope for economies of scale and serving the global marketplace from a single location. However, despite the convergence of consumer tastes referred to earlier in this subject, there are idiosyncratic factors which cannot be ignored. For example, large fast food companies such as McDonald's and the small Great Australian Pie Company must tailor their products to meet specific markets. The pies produced by the Great Australian Pie Company for the Japanese market are smaller than those produced for the Australian domestic market and they contain different condiments to suit Japanese palates.

Now read Hill's (2005) approach to these topics.

In your text

Hill 2005, Chapter 12, pp. 415-427.

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