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Reasons for International Business Expansion

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  • 0:03 Internationalization
  • 1:10 Reasons for Expansion
  • 5:07 Lesson Summary
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Lesson Transcript
Instructor: Allison Tanner
Companies are expanding internationally more than ever before. This lesson will discuss some of the reasons that companies choose to expand internationally.

Internationalization

Desperate to know if going global, or taking her company international, is the right decision, Mia, a Fashion CEO, meets with Global Mania Consulting to determine if her company is ready to take the leap into international business expansion.

International business expansion (or internationalization) is the process of expanding a business from the domestic market into international markets across the globe. There are several reasons an organization may want to internationalize. In general, the reasons for internationalization fall into three primary categories:

  • Market seeking: Looking for markets to expand into and sell products throughout the year and opportunities to sell products in a region which would not typically have access
  • Economic: Increasing profits and saving on expenses
  • Strategic: Expanding the size of the company and working to reduce the potential risks of staying in only one market

Global Mania is helping Mia evaluate the reasons for internationalization, an important process for any company debating internationalization.

Reasons for Expansion

Global Mania helps Mia to determine why she would want to expand internationally and how internal expansion may benefit any organization considering going global. He explains that within each category of expansion there are important reasons that organizations choose to internationalize. Global Mania takes a closer look at each category to help Mia understand the benefits of internationalization.

1. Market Seeking

Market seeking opportunities include looking for areas where you can sell products all year round and methods for selling highly specialized products that would not be accessible without internationalization. Specialized or unique products include items such as coffee, which is sold through international means because the beans come from specialized locations such as Ethiopia or Ecuador.

Thus, internationalization can help a company to gain a competitive advantage. This means that they want to stay ahead of their competitors. Expanding the company internationally makes the products or services accessible to customers no matter where they may be. Further, internationalization can help companies to sell all season long. For example, some of Mia's winter clothing that would usually go on sale in the U.S. can be shipped to South Africa during the U.S. summer because it is their winter.

2. Economic Reasons

Some organizations internationalize in an effort to increase profits by taking advantage of the concept economies of scale; which is the idea that the more output an organization has, the lower the cost of manufacturing. For instance, if Mia makes 1,000 pink shirts, it will be cheaper than making 100 pink shirts. If she internationalizes, she may start making 10,000 shirts instead of 1,000, further decreasing her cost of production.

Additionally, some organizations need a variety of resources, or materials, to meet their business needs. Importing products, such as clothing materials, food items, metals, and ingredients for pharmaceuticals, can be extremely expensive. Internationalizing can help companies to diversify their resources and decrease the cost of production. In the long run, this decreases the cost of their goods or services and makes them more accessible to the customers who want to purchase them.

Further, companies may globalize to reduce the cost of discovering new products. Research and development is important for most organizations, and the economic advantage of expanding the company can help alleviate the expense of coming up with new products and services. It can reduce this cost by providing more affordable resources and reducing the cost of production.

3. Market Reasons

Other organizations are looking to grow their company through market development, which is the process of expanding into the new markets. Large organizations may have maximized the number of market shares, or control they have over their local markets. In order to continue growing, they will have to expand internationally.

Organizations also seek to strategically internationalize in order to reduce the risk of operating in only one location. If Mia always operates in one market and that market crashes, then her company is at a greater risk of failing. However, if she operates in numerous markets, one could fail, and the other market would keep her company alive.

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