Globalizing Corporations, the Imperative In Theory & Practice

"Global interdependence is pervasive. It is not only political and military....[but] also environmental.... Perhaps the most important aspect of interdependence however is economic." (Terpstra, 1993, Preface) Today more and more firms operate internationally and in some cases even globally. In almost all major economies of the world, the significance of domestic and/or foreign-based transnational corporations is increasing. Such corporations, directly or indirectly, account for a large part of world trade in goods and services. Attempts to theories such international developments are widespread; therefore, there is no such thing as a "universal" theory. However, the emphasis of most theories tends to be on how businesses should internationalise rather than on why they should do so. Most contributions in literature focus on strategies and structures of international firms but do not explain the reasons of internationalisation. The main aim of this article is therefore to give an outline of the reasons why companies choose to go international. Using only relevant theories and different examples from business, it shall be demonstrated that there is not only "one" motive for companies to choose international expansion but that there is a variety of causes depending on the respective internal and external environment of the different companies. In the following, under II , there will be an overview of different reasons for companies to choose international expansion; these reasons will be substantiated by different statements and theories from literature and in each case illustrated by relevant examples. Under III. finally, there will be a conclusion. The expositions of II. will be analysed and a prospect into the future of globalisation will be made.

Throughout literature, there are manifold suggestions forreasons why companies choose or should choose tointernationalise their market activities. Often the main reason for internationalisation is stated asthe need of companies to be able to stay competitive intheir respective environment. This theoretical approach isoften referred to as the "network approach". The theoryexamines the process of internationalisation by applying anetwork perspective. Internationalisation is defined asdeveloping networks of business relationships in othercountries through extension, penetration and integration.Extension refers to investments in networks that are new tothe firm, whereas penetration means developing positionsand increasing resource commitments in networks whichthe firm already is involved with. Integration can beunderstood as the co-ordination of different nationanetworks. Thus, if the relationships between firms are seenas a network, it can be argued that firms internationalisebecause other firms in their (inter) national network aredoing so. Within the industrial system, firms engaged in theproduction, distribution and use of goods and servicesdepend on each other due to specialisation. However,certain industries or types of markets are more likely to beinternationalised, given the configuration of the worldeconomy. Under the prospect of this approach, Johanson& Mattsson distinguish four types of international firms: Theearly starter, the late starter, the lonely international andthe international among others. To which of thesecategories a firm is referred to depends on both the level ofinternationalisation of the network and the level ofinternationalisation of the firm It is important for firms not to end up as a "late starter",because this would mean a severe disadvantagecompared to competitors. In my opinion, a good example ofthis type of internationalisation is the international car

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industry. As e.g. the German car manufacturer Volkswagen chooses to enter more and more international markets, many smaller suppliers are also forced to internationalise their activities because they are connected to Volkswagen through an interdependent network of relationships. If these small or medium-sized suppliers do not want to risk a loosening of these network connections (and therefore competitive disadvantages), they are determined to follow Volkswagen′s international steps. From authors point of view, a further important motive for choosing globalisation of activities is the fact that companies are increasingly faced with foreign competitors in their domestic market. In order to keep up with these competitors who often pursue a very aggressive policy to gain market share it is advisable for domestic firms to also focus on international markets. This will give them the opportunity to react more efficiently to unforeseen measures of the foreign competitor; i.e. better opportunities to exert retaliation. A very good example for this is the case of Michelin versus Goodyear. The North American subsidiary of Michelin decided to expand its share in the North American home market of Goodyear by lowering the price of its tyres. Michelin presumed that Goodyear could not match this step because of the significance of the North American sales for its activities; this presumption was indeed correct. However, because of its global activities, Goodyear was able to counter Michelin′s move not directly but indirectly by dropping the price of its tyres in "Michelin′s profit sanctuary, Europe" This, because of the oligopolistic nature of the tyre industry, caused a "nontrivial negative impact on Michelin′s main cash source", causing the firm to take back the North American price drop and virtually rendering its marketing tactic a useless and costly measure. This example clearly demonstrates how internationalisation can be helpful to repulse aggressive foreign competitors by indirect retaliation, especially in oligopolistic markets, which become more and more frequent. Another reason, or better-expressed crucial incentive, for firms to think internationally is the general change of the economic climate in the world. This makes it much more easier for companies to internationalise their activities because they do not face the strong market entry barriers which used to prevent them from taking global steps. "As the world has become more economically interdependent and is has become obvious that much of the economic success of countries such as South Korea, Singapore and Taiwan are tied to foreign investments, countries are viewing foreign investment as a means of economic growth.". Only some years ago, during the cold war, really global activities were difficult to achieve for a firm because of the division of the world into two different ideologicalparts, not only politically but also economically. The end ofthe cold war, and following this, the opening of the easterncountries for capitalism, meant a significant shift for manycompanies. "An increasing number of countries areencouraging foreign investment with specific guidelinesaimed towards economic goals. Multinational corporationsmay be expected to create local employment, transfertechnology, generate export sales, stimulate growth anddevelopment of local industry....". This shows that the circumstances for investments inforeign countries have significantly changed over the lastfew years. Because of this, today it is often much moreprofitable for companies too choose internationalexpansion than it was some years ago. Especiallycountries in Eastern Europe and in Asia frequently offerattractive markets, because market development in thesecountries is often still in its infancy. International activities inthese lands are of course connected with risk and requirethorough planning, but the opportunity for making hugeprofits and gaining a respectable market share is far muchbetter than in the often saturated domestic Westernmarkets. There are numerous examples of Western firms that haveheavily invested in Eastern European countries.Volkswagen, for example, acquired the ailing Czech carmanufacturer Skoda, streamlined production and qualitymanagement, and through this acquisition now possessesa large market share in the Eastern European automotivemarket (additionally to its already large share in WesternEurope). Often internationalisation is the only way for companies tosell their products, especially when this product requireslarge investments by the buyer. A recent example is thecase of the German Transrapid, a technologicallyrevolutionary magnetic levitation train (maglev) developedby a consortium of firms lead by Siemens. This maglev,originally planned to connect the German cities Hamburgand Berlin, was thwarted by the policy of the newgovernment and by objections of environmentalists andtherefore threatened to become a financial disaster. But theSiemens-lead syndicate managed to reach an agreementwith China and the government decided to buy the train(and the maglev idea) to connect two the city of Shangaiwith its airport, with the option to invest into more trains ifthe project proves to be successful. This will create revenues worth billion of pounds forSiemens and this success is both due to the opening of theChinese markets to Western investments and theinternational marketing activities of the Siemens-leadconsortium. The successful marketing of the Transrapid inChina as well created new interest for the idea in the USand Australia, with the prospect of further huge revenues.

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The example therefore also demonstrates that successful marketing at a new international market can lead to positive synergetic effects on other markets. For some companies, a main motive for internationalisation is the factor of cost-effective production or, in its most sophisticated form, even international outsourcing. Internationalising their activities enables companies to manufacture (or buy) their products abroad for much less costs than in their domestic market. It is widely known that e.g. production in Asia is much less expensive than in Europe or America, mainly due to significantly lower wages. Producing (or buying) at lower costs indirectly gives companies a competitive advantage, because they are able to sell their products at lower prices than competitors and at the same can realise higher profits. A very good example for a firm that takes advantage of this type of globalisation is Nike. Nike does not manufacture its own goods but buys them from independent contractors in underdeveloped countries, where wages are low, and resells them in richer countries for a quite high price, hence obtaining a huge profit margin. Nike has contracts with over 700 factories worldwide that employ 550,000 workers in 70 countries. This case shows, that international expansion does not necessarily mean selling products abroad (although Nike of course does that, too); also buying products on international markets can be quite worthwhile and therefore be a motive to introduce international activities. Of course, one other major incentive for domestic companies to pursue international expansion (if not the main reason) is the chance of achieving huge economies of scale. Selling products internationally is likely to spawn new customers which are a multiple of the domestic consumers. As T. Levitt already noticed in his famous contribution ′The Globalization of Markets′ in 1983: "Almost everyone everywhere wants all the things they′ve heard about, seen or experienced via the new technologies. The result is a new commercial reality- the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude. Corporations geared to this new reality benefit from enormous economies of scale in production, distribution, marketing, and management." This statement is today, 18 years later, more applicable than ever before. The emergence of new technologies and new media (e.g. the Internet, which will be covered later on in this essay due to its significance) makes it more and more easy for companies to reach a huge base of consumers. Companies, which do not want to let competitors let them "snatch away" share in the global market, are advised to make use of these new opportunities. The fact that national or regional preferences tend to get more and more similar further facilitates theselling of the same products in different markets. "Startingfrom opposite sides, the high-tech and the high-touch endsof the commercial spectrum gradually consume theundistributed middle in their cosmopolitan orbit. No one isexempt and nothing can stop the process. Everywhereeverything gets more and more like everything else as theworld′s preference structure is relentlessly homogenized.". How favourable international presence can be for positionand revenues of a company shows the example of French-based Thomson Multimedia (former name: ThomsonConsumer Electronics). Mainly through acquisitions, thecompany managed to rise from the leading Frenchmanufacturer of consumer electronics to one of the fourmajor international companies on this market. The share ofinternational sales accounted for only 34.1% in 1974. In1999, the share of international sales was over 90% andrevenues soared to 6.7 billion Euros. The company hassuccessfully managed to use international expansion tocreate favourable economies of scale and hence increasedsales and revenues by a multiple. As already touched, the development and spawning of newtechnologies and media, especially the Internet, hascreated new opportunities for companies to reach a largenumber of prospective customers all over the world andtherefore increase sales. Additionally the costs of using theInternet as a sales platform are very low; the choice to gointernational via Internet therefore is connected with quite alow risk. Offering products and services via Internetautomatically implicates an international dimension of thebusiness. "A store placed on the Internet anywhere is infact everywhere" Therefore, today it is possible for nearlyevery business, even the smallest craftsman firm, toexpand its activities to a global dimension. For example, asmall shop in Edinburgh that sells art reproductions choseto additionally offer its products on the Internet andsuddenly had sales to customers all over the world(www.therollingstone.co.uk). According to Cateora & Ghauri, the usage of the Internethas increased the international activities and revenues ofestablished firms. They cite computer manufacturer Dell asan example. Dell is selling PCs directly over the Internetand is getting over $1 million of revenue daily by thesemeans. The Internet even has created a new type of businesses.These are characterized by the fact, that they actinternationally right from the start without going through adomestic phase like traditional firms. This new type ofbusiness only uses the Internet as marketplace, but thefirms are often severe competition for existing, biggercompanies. An example for one these new firms isAmazon.com, the online-bookshop. The fact that Amazon

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served as a pioneer in this market offset its size disadvantage by quickly gaining market share. This forced Barnes & Nobles, the much bigger, traditional company also to direct its activities to the Web in order not to loose a considerable part of its global market share. Another example for such a small, internationally operating Internet-firm is chipshot.com, a golf company. The Internetweek-Online calls this firm "one pioneer in the area of globalization" (). The company was started by a student in his dorm room, selling golf equipment aimed at American buyers, but soon the company had 12% of international customers, the majority of whose were from Japan. Today, chipshot.com has its own manufacturing facility and handles more than 500,000 visitors per month. The company racks several million dollars a year. These examples show that the Internet is at the present time the most effective means to reach a large number of customers all over the world in a short time at relatively low costs. Companies which are big international players at the moment but fail to recognize the importance of the new technology are likely to get huge difficulties in defending their global market share against aggressive and flexible upstarts in the future.

At the conclusion, there is enumeration of the several reasons that drive companies to international expansion. Under II. The author has identified the following points: - The need to follow international steps of interrelated firms or competitors - The need to fight off aggressive foreign competitors in the own domestic market - More favourable conditions for investments in foreign countries regarding the environment, i.e. especially political, economic and legal factors - Choosing international expansion because of saturated domestic markets - Seeing international activities as the only chance to sell a certain product - The opportunity to realise huge cost savings by producing abroad or outsourcing to foreign countries - The chance to achieve economies of scale and gain market share - The opportunity offered by new technologies, especially the Internet, to reach a large group of customers atrelatively low costs in a relatively short time These are the main factors that I think can be stated toexplain international activities of companies. Naturally, thislisting does not claim to be exhaustive and there may wellbe some other reasons (which could not all be coveredbecause of the limited size of this articles ), but the authorbelieves that those listed are the major motives for mostcompanies.

• Kim & Wang, in: Czinkota & Ronkainen, 2005, p.76.

• Cateora & Ghauri, 2010, p. 51.

• Cateora & Ghauri, 2010, p. 54

• Levitt, 1983, p. 93

• Savary, in: Nilsson & Dicken, 1996 p. 91;www.thomson.multimedia.com

• Internetweek-Online June 14, 2009