Why companies engage in international business

We've alluded to reasons why companies engage in international business. Basically, they're trying to create value for their organizations. We'll now focus on some of the specific ways in which firms can create value by going global. Start by taking another look at Figure 1.1 (page 6), where you'll see three major operating objectives that under­lie the reasons for companies to engage in international business:

1. Expanding sales

2. Acquiring resources

3. Minimizing risk

Normally, these three objectives guide all decisions about whether, where, and how to engage in international business. Let's examine each of them in more detail.

Expanding sales

A company's sales depend on the desire and ability of consumers to buy its products or services. Obviously, there are more potential consumers and sales in the world than in any single country. Now, ordinarily, higher sales create value – but only if the costs of making the additional sales don't increase disproportionately. In fact, additional sales from abroad may enable a company to reduce its per-unit costs by covering its fixed costs – say, up-front research costs – over a larger number of sales. Because of lower unit costs, it can increase sales even more.

So increased sales are a major motive for a company's expansion into international markets, and in fact, many of the world's largest companies – including Volkswagen (Germany), Ericsson (Sweden), IBM (United States), Michelin (France), Nestle (Switzerland), and Sony Japan) – derive more than half their sales outside their home countries. Bear in mind, however, that international business is not the purview only of large companies. In the United States, 97% of exporters are classified as small and mid-sized companies (SMMs). Many small companies also depend on sales of components to large companies, which, in turn, install them in finished products slated for sale abroad.

Acquiring resources

Producers and distributors seek out products, services, resources, and components from foreign countries. Sometimes it's because domestic supplies are inadequate (as is the case with crude oil shipped to the United States). They're also looking for anything that will give them a competitive advantage. This may mean acquiring a resource that cuts costs; an example is Rawlings' reliance on labor in Costa Rica – a country that hardly plays baseball – to produce baseballs.

Sometimes firms gain competitive advantage by improving product quality or by differentiating their products from those of competitors; in both cases, they're potentially increasing market share and profits. Most automobile manufacturers, for example, hire one of several automobile-design companies in northern Italy to help with styling. Many companies establish foreign research-and-development (R&D) facilities to tap additional scientific resources. This is especially important for companies based in countries with low technological capabilities. Companies also learn while operating abroad. Avon, for instance, applies know-how from its Latin American marketing experi­ence to help sell to the U.S. Hispanic market

Minimizing Risk

Operating in countries with different business cycles can minimize swings in sales and profits. The key is the fact that sales decrease or grow more slowly in a country that's in a recession and increase or grow more rapidly in one that's expanding economically. During 2008, for example, General Motors' U.S. sales fell 21%, but this was partially offset by its sales growth of 30% in Russia, 10% in Brazil, and 9% in India. In addition, by obtaining supplies of products or components from different countries, com­panies may be able to soften the impact of price swings or shortages in any one country.

Finally, companies often go into international business for defensive reasons. Perhaps they want to counter competitors' advantages in foreign markets that might hurt them elsewhere. By operating in Japan, for instance, Procter & Gamble (P&G) delayed foreign expansion on the part of potential Japanese competitors by slowing their amassment of the necessary resources to expand into other international markets where P&G was active.

Similarly, British-based Natures Way Foods followed a customer, the grocery chain Tesco, into the U.S. market. In so doing, it not only expanded sales but also strengthened its relation­ship with Tesco, effectively reducing the risk that Tesco would find an alternative supplier who might then threaten Natures Way Foods' relationship with Tesco in the U.K. market.