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Rapid technological advancements in the 20th century led to a major increase in global trade among nations. With the formation of World Trade Organization (WTO), most countries have been forced to reduce trade barriers, resulting in substantial international business opportunities. Large multi-national corporations from the developed countries have made direct and indirect investments in the emerging economies of the world to expand their business horizons internationally. The inherent advantages of business organizations to enter international markets include growth of sales revenues, global economies of scale to improve business efficiencies and attractive profit potential in new markets.
However, a number of challenges still exist in achieving success in international markets. The global corporations are exposed to greater financial risk in new and untested markets. The local laws and government regulations are usually complex and foreign businesses may find it more difficult to operate under such conditions. Foreign currency fluctuations and unpredictability of the financial markets is also key challenge for global corporations. Cultural and linguistic barriers may also pose difficulties for an international firm to establish its business and achieve success against local competition.
Growth in a Global Economy
International business allows an enterprise to have a global vision and achieve the maximum possible sales potential with its innovative goods and services. The business does not have to keep a narrow vision and restrict itself to its native market as long as its products or services have a global appeal and a global demand. If the local market is nearing saturation, it makes good business sense for a company to explore new and unexploited markets where large demand exists for its products and services.
Global Economies of Scale
Operating at a global level allows a company to source its raw materials, components and products from the world’s cheapest destinations. At the same time, global production and sales volumes help to bring down the cost per unit due to economies of scale. This enables a business to become globally competitive and achieve domination in the world markets by producing the best quality products at the lowest cost in the world. As per the WTO data, top 500 multinational corporations alone account for more than 70 percent of the global trade.
New and untapped markets allow the scope for higher profit margins for a business organization. Instead of fight stiff price wars in a saturated market, international business allows a company to reach out to new markets where the demand is exploding and the domestic supply is unable to match the aspirations of the consumers. It eventually helps to improve the profit bottom line of a global corporation.
International business enables a multinational corporation to make full utilization of its investments in technology and intellectual property. It can license the intellectual property or enter into technology transfer agreements with companies in various parts of the world that need such technology. Therefore, the global corporation can maximize its revenues from the technology on an international scale. In an era of rapidly advancing technologies, it is useful to exploit the technology to the fullest before it becomes outdated.
Risk of Political Instability
Companies that operate in an international business environment are constantly exposed to the risk of political, social and economic instability in the foreign markets. Political instability makes it more difficult for multinational companies to do business in a foreign country. If the company has already made large financial investments in the country, it may risk losing the investments in the wake of unexpected political, social or economic events.
Complex Local Laws and Regulations
International business exposes a multinational corporation to a complex web of laws and government regulations in each country of its operation. It can be more difficult for a foreign entity to understand and interpret the local laws, and the chances of legal disputes may increase. Rapidly changing government regulations may also make it more challenging for a global business to operate smoothly in a foreign market.
Fluctuations in Financial Markets and Currency
Global companies face the inherent risk of operating in diverse markets where foreign currency exchange rates may fluctuate significantly. Instability in the financial markets or frequent fluctuations in the interest rates, stock markets and real estate may also pose challenges for a foreign company to invest and run the business in such markets.
International business organizations face the challenge of cultural, ethnic and linguistic barriers in various world markets. They need to comprehend the cultural sensitivities of the local consumers and business associates. Linguistic challenges can also make it more difficult for a multinational company to operate in such markets.
Multinational companies usually hire international business consultants when they plan to enter, operate or expand in foreign markets. Such consulting firms are experts in the local market, but they charge a hefty fee for their services to enable the company to set up its business in the local market. Some global consultants work on a commission basis, which may be a percentage of the total investment made in the foreign country, or a percentage of the sales or export revenues achieved.
Despite the inherent risks and costs involved in international business, it is critical for any large business organization to think in terms of global business. In an increasingly globalized economy, business competencies may not be achieved by confining the business to the native market alone.
Are you looking to globalize your business? International business growth requires considerable effort, time, and persistence. Expanding your business outside of the country can be difficult and quite expensive, but it can also have many benefits for your company. If you do signification research, follow careful strategies, and consider international laws and regulations, your globalization can be very successful.
In order to begin the process of expanding your company on an international level, you will need to analyze other countries' markets. Some countries offer incentives to entice foreign companies because they will benefit from the technology, jobs, and capital that the company will bring. This can be a major advantage to choosing one country over another as a location; however, you need to look at political policies, cultural factors, and geographic influences as well.
When globalizing your business, be sure to protect your brand and worldwide reputation by adhering to labor and human rights standards. Maintaining high ethical standards will translate into good business, strong international partnerships, and positive relations with foreign associates and government officials.
If you would like to learn more about international business growth and how to pursue global expansion for your company, visit the links on the left. Compiled by Business.com, these links will lead you to the information you need to get started on your venture.
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