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WHY BUSINESS SEEK INTERNATIONAL MARKETS


Reasons for Businesses trading globally
1. Extending the product life cycle
2. Limited growth in domestic markets (market saturation)
3. Global sourcing
4. Foreign competition in home markets
5. Improvement in transportation and other communication links with countries
6. Less barriers to trading internationally
7. Ability to trade within a trade bloc such as the EU

Extending the product life cycle


Having a new market to sell to me will mean that, there
will be more growth, or the business can keep selling at
maturity level when the popularity of the product is
dwindling in the domestic market.

Extending the product life cycle can work. Improvements


and subtle changes in the product may help it to keep its
market. But if tastes or fashions are involved, the decline
phase of the product life cycle may be surprisingly swift.
New markets may provide sales growth that would be
impossible to achieve in the domestic market through
minor product changes.

Some products have stood the long test of time such as Cadbury’s Dairy Milk, Kelogg’s Cornflakes
and Nestle’s Kit-Kat to name a few.

Limited growth in domestic markets


This is a big problem for the
mobile industry. People in
developed nations have
embraced the benefits of Vodafone has operations in many
technology, and thus new parts of Europe, Africa (especially
subscriptions in mobile phones Egypt), Australia as well North
would be very limited. and South America.

However, in developing, nations, where Orascom Telecom, which is a multinational


people are still adopting the new technology, company from Egypt, has operations in
there is still room for growth. That is why Algeria ("OTA"), Pakistan ("Mobilink"), Egypt
mobile operators seek new developing ("Mobinil"), Tunisia ("Tunisiana"), Bangladesh
markets to increase their global number of ("banglalink"), North Korea (“koryolink”) and
subscriptions. Canada (“Wind Mobile”).
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Global sourcing
Global sourcing essentially means acquiring goods or services from the international market, in an
effort to exploit global efficiency, in the making of a product or service – for example taking
advantage of cheap labour in China, or take advantage of skilled but cheap labour in Malaysia.

Manufacturing costs vary internationally due to currency conversion and the cost of living in
different countries. The costs of labour and materials are lower in developing nations than in North
America. This difference translates into significant savings in salary and benefit costs for the firm.
That is why most technology companies manufacture in China because of the cheap labour costs.

Skilled services such as purchasing, engineering,


information technology professionals and consultants
are a growing area of global sourcing. The level
of skill and knowledge held by these
professional allows them to provide
high quality services to their
employers. Due to the lower cost of
living in different nations, many firms are
building their professional services
departments outside North
America. Many developing countries
such as India and Pakistan have engineers
and doctors that will be willing to work at a
lower rate compared to their fellow
European or North American professionals
because of the difference in their cost of living.

Telephone call centres have grown exponentially in India and other countries where English is the
primary language. The staff, equipment and construction costs for these facilities are significantly
less than in North America or Europe. The fact that there is significant unemployment and low wages
in these developing nations adds to the long list of benefits leading to a large pool of potential
employees who are interested in this type of employment opportunities.

Global sourcing has both benefits and risks. The benefits of sourcing for the employer include lower
labour costs, low cost raw material, less government oversight, a larger pool of potential employees
and customers and other economic factors like tax breaks and low trade tariffs. For the employees,
the benefits include a higher wage, improved working conditions and learning transferable skills. The
risks of global sourcing include higher costs due to cultural and language related issues.

Diversifying business operations across different countries increases business travel and local
management issues. Most companies prefer to transfer knowledgeable staff to global locations for
senior management positions. In addition, they limit local management hiring to the supervisory
levels.

In simple terms it makes production cheaper and more efficient for the business; allowing the
business to make more profit from selling its products.
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Foreign competition in home markets


Trade liberalisation has been going on before the WTO (formed in 1995) e.g. its predecessor was
GATT (General Agreement on Trade and Tariffs). Trade liberalisation has been a big theme since the
end of World War 2.

Firms might want to export to markets overseas which they believe are quite weak and where they
could become more price competitive e.g. China and Vietnam exporting clothing to the EU.

Advantages
• Gains from countries specialising in the production of goods/services where they have a
comparative advantage. This means total output will increase, along with living standards and
employment. For example, Germany specialises in the production and export of motor vehicles -
it then imports other things such as clothing and footwear from China.
• Increased number of markets and potential customers for firms which engage in international
trade - it could lead to more revenue, growth and profits. This should be seen as a benefit
rather than a cost.
• Increased competition which means domestic firms have to increase efficiency to survive - it is a
benefit to consumers.
• Increased consumer choice of products - especially if a country like the UK cannot grow exotic
fruits or produce aluminium for not having bauxite ore deposits.
• Economies of scale in production since firms could have more customers across different
markets to sell to; fall in average costs.

Disadvantages
• Structural unemployment in industries which are not competitive e.g. motor manufacturing
firms in the UK such as Ford and Vauxhall are in decline.
• Possible unfavourable terms of trade for countries when they export - so do not get a decent
price; barriers such as trade quotas and tariffs.
• Danger of over-dependency on the export of goods -- and then these markets might dry up
because of a global recession.
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Improvement in Transportation and Communication links with countries


New technologies reduced transport costs
across the board. Containerisation both cut
costs and made transport more flexible and
controllable. Buying imports became cost
effective for many more products than
previously. Cheaper air travel and transport
boosted tourism and made air freight
realistic for many products. This not only
increased consumer choice but also
increased competition amongst producers,
driving down the prices paid by consumers.

Less barriers to trading internationally


Despite the mutual advantages of global trade, governments often adopt policies that reduce or
eliminate international trade in some markets. Historically, the most important trade barriers have
been tariffs (taxes on imports) and quotas (limits on the number of products that can be imported
into a country).

In recent decades, however, many


countries have used product safety
standards or legal standards controlling
the production or distribution of goods
and services to make it difficult for
foreign businesses to sell in their
markets. This is an example of a non-
tariff barrier.

In recent years the use of nontariff


barriers to trade has increased.
Although these barriers are not
necessarily administered by a government with the intention of regulating trade, they nevertheless
have an impact on foreign businesses. Such nontariff barriers include government health and safety
regulations, business codes of conduct, and domestic tax policies. Direct government support of
various domestic industries is also viewed as a nontariff barrier to trade, because such support puts
the aided industries at an unfair advantage among trading nations.

For example, Russia recently used health standards to limit imports of frozen chicken from the
United States, and the United States has frequently charged Japan with using legal restrictions and
allowing exclusive trade agreements among Japanese companies. These exclusive agreements make
it very difficult for U.S. banks and other firms to operate or sell products in Japan.

Often governments will prevent dumping by foreign businesses. Dumping occurs when products are
made available as imports at prices lower than the prices in which they are sold in the exporting
country.
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Ability to trade within a trade bloc such as the EU


A trade bloc is a group of countries that have signed an agreement to reduce or eliminate trade
barriers between themselves

• TRANSACTION COSTS WILL BE ELIMINATED


o For instance, UK firms currently spend about £1.5 billion a year buying and selling foreign
currencies to do business in the EU. With the EMU this is eliminated, so increasing
profitability of EU firms. Basically, you can go on holiday and not have to worry about getting
your money changed, therefore avoiding high conversion charges.
• PRICE TRANSPARENCY
o EU firms and households often find it difficult to
accurately compare the prices of goods, services
and resources across the EU because of the
distorting effects of exchange rate differences.
This discourages trade.
o According to economic theory, prices should act
as a mechanism to allocate resources in an
optimal way, so as to improve economic
efficiency. There is a far greater chance of this happening across an area where E.M.U exists.
We can buy things without wrecking our brains trying to calculate what price it is in our
currency.
o Thus it gives businesses within the trade bloc but outside the country a better chance of
selling their goods.
• UNCERTAINTY CAUSED BY EXCHANGE RATE FLUCTUATIONS ELIMINATED
o Many firms become wary when investing in other countries because of the uncertainty
caused by the fluctuating currencies in the EU. Investment would rise in the EMU area as the
currency is universal within the area; therefore the anxiety that was previously apparent is
there no more.
• BUSINESSES ARE PROTECTED
o Businesses are protected from other companies outside the trading bloc, as businesses
outside the trading bloc will be met with a custom’s policy, which means quotas and tariffs.
Such protection allows businesses to be shielded from potentially damaging effect of
competition such as price wars.
• FREE ACCESS TO MARKETS (mentioned in initial paragraph of this topic)
o A larger market will mean more customers as well as more opportunities. As the business as
access to the markets to different countries, it can take advantage of the local benefits. Such
as, it can buy cheap land in Portugal for operations; it can employ professionals from
Germany or France, it can hire cheap labour from Poland etc…
o Operating in different markets would be very much like home because all countries in the
trade bloc have to have the criteria for infrastructure.
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• FRIENDLY RIVALRY
o Businesses in domestic nations may become more competitive as there is competition from
their neighbouring countries, this healthy competing may make domestic businesses
stronger.

• CUSTOMS POLICIES
o Customs policies have a disadvantage too. Being a part of the EU means that you will have to
have tariffs on goods and services produced outside the EU. For example, if France imported
flour from America, it would now have to pay more for the flour, as there are new tariffs as
according to the customs policy. This means that importing flour from America would now
be more expensive for the French firms.
o External competition, may have aided the development of domestic businesses. This is
because being sheltered from external competition may result in less incentive for a firm to
become efficient. In the long run it may lead to the deterioration of the firm’s performance.
• FREE ACCESS TO MARKETS
o Competition from within the trade bloc, may damage domestic businesses by reducing their
current market share.
• MARKET ADAPTATION
o The marketing strategy of the business may need to be changed in order to suit the needs of
the customers in different countries, with the trading bloc. This means that there will be
additional costs to product development.