Advanced Corporate Strategy

ST104x

Why global expansion may fail

We have so far discussed all the motives for geographic diversification. Looking at this long
list, one would expect that geographic diversification is an easy way to make money and
improve a company’s performance. However, there are also several reasons for why
international expansion may fail.

I. First, entering a new country leads to what is called as “liability of foreignness”. Why
is being foreign a liability? Foreign firms are often at a disadvantage compared to local
firms since they may not be familiar with the local culture, languages, norms,
economic conditions and government regulations.

For example, India is a country where multiple languages are spoken. So, any company
that enters Indian market has to learn how to deal with this multiple languages.
Another distinctive feature of India is that, about 30% to 40% of Indians do not eat
meat. Any food company that enters India has to deal with this cultural issue.

While MNEs can adapt to local conditions, they sometimes make mistakes that can
lead to their downfall.

Further, many countries discriminate against foreign companies either explicitly or

non-explicitly.

• Explicit discrimination includes high import duties, foreign exchange controls,

advertising restrictions and limits on shareholding.

• Non-explicit discrimination may include unfavourable treatment by the

government as compared to local companies by imposing a higher level of
standards.

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 Advanced Corporate Strategy

ST104x

For example, consider a contamination scare for an MNE like Coca-Cola. A

contamination scare will have much larger repercussions for an MNE and a foreign
firm such as Coca-Cola than a domestic company.

II. Second, as a company enters multiple countries, the governance and coordination
costs increase because of increase in distance, differences in time zones and
differences in languages, customer preferences and government regulations. This
increase in complexity makes it very difficult to manage a global firm. The higher
complexity again leads to mistakes that can have a significant negative impact on a
company’s performance.

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