Foreign expansion allows a business firm to exploit new opportunities in other countries that are likely to have a positive effect on its long term growth. Many business firms expand their operations into other foreign markets to increase their revenues. A business firm is likely to be attracted to a foreign country to take advantage of various market opportunities which exist there.
Therefore, a firm takes time to assess types of consumers in a specific market and their needs and expectations. A firm that seeks to make an impact internationally needs to ensure that its operations are suited to the business environment that exists in a particular country. International expansion helps a business firm choose an appropriate market strategy to make its operations more competitive in a foreign market (.Allen, 2011, p. 79).
A business firm that expands its operations into a foreign market needs to assess all consumer segments that exist there. Misra (2009) insists this approach allows a firm to sell its products to new demographic segments that have a variety of needs in the market (p. 79). A firm is able to explore new market segments consisting of consumers who are interested in unique products that satisfy their needs.
Other firms choose to expand their operations to strengthen the brand appeal of products they sell to consumers. These firms partner with other existing firms in other countries to sustain franchise relationships that help them reach their target customers quickly. Therefore, franchise relationships allow business firms to improve their product and service delivery in foreign markets.
There are various methods of expanding businesses internationally. Many firms that seek to take advantage of opportunities in different foreign markets prefer foreign direct investment.
A business firm may choose to set up operations in a given country by either acquiring an existing firm or starting a new subsidiary. A firm should be willing to spend a lot of money before setting up operations in a given country. Some business firms acquire stakes in other firms that operate in foreign markets to strengthen their presence there (Misra, 2009, p. 102).
A firm needs to assess the level of success enjoyed by another firm operating in a foreign market before acquiring it. A firm that chooses to acquire a stake in another foreign firm needs to agree with its owners on how assets and liabilities are going to be distributed. The extent of ownership is determined after negotiations have been done to determine how the acquisition will benefit both firms involved.
A business firm can also expand its operations into another country by establishing a joint venture with another firm based in that country. A joint venture allows a firm to give up part of its equity to another foreign firm to enable it gain entry into a lucrative foreign market. A firm shares its resources, expertise, risks, profits and losses with its partner that has operated in a particular foreign industry for a longer period.
Hisrich (2010) reveals that a joint venture allows a firm to overcome various entry barriers in a particular market such as high taxes and strict business policies (p. 101). A joint venture also allows a foreign business firm to rely on its partner’s pre-existing distribution networks to sell its products to more consumers. This allows a firm to penetrate a particular market easily which is likely to be beneficial in the long term.
Some business firms hand out franchise licenses to other foreign based firms to transact with consumers in various foreign markets on their behalf. A franchise agreement helps a firm penetrate a particular market easily because it is able to sell its products through extensive retail networks, which saves unnecessary costs.
Some firms grant licensing agreements to foreign firms to expand their operations into various foreign markets. Foreign firms are given patent, trademark, production and distribution rights of specific products in countries where they are based (Hisrich, 2010, p. 112). For a licensing agreement to succeed, a firm must be willing to give up control on some of its crucial internal processes.
Foreign direct investment requires a firm to make lot of capital investments in a particular country. A business firm can acquire a stake in a foreign based company to strengthen its presence in a given country. In many instances, a business uses this expansion strategy purchases a controlling stake in a foreign firm ranging from 51% to 100%. Gaspar (2011) reveals this allows a firm to control crucial decision making processes in its new acquisition to protect its business interests in a particular industry (p. 61).
Some firms opt for direct investment in various countries by setting up their business operations from scratch. A firm may prefer to set up a subsidiary in a particular country to produce goods and services targeting prospective customers who live there. However, this takes longer because a firm has to satisfy various regulatory conditions before it is allowed to operate.
A business firm that chooses to open up a subsidiary in another country avoids giving up control of its crucial internal functions to another firm. However, it may expose itself to various risks that may have a negative effect on its performance in the industry in the long term.
The firm may be affected by strict regulatory conditions, poor knowledge of the local market and low demand for its goods and services. Other firms prefer going into strategic alliances with other firms based in foreign countries they aim to expand their operations to.
A strategic alliance allows a firm to cooperate with a foreign based firm to share technical know how and capital investments to allow it easy access to a particular foreign market. This approach allows both firms to stay independent as they pursue collective business objectives meant to improve their market performance in a particular industry (Gaspar, 2011, p. 75). Therefore, this allows a firm to avoid various regulatory and market risks existing in a foreign country.
A firm that chooses to exploit opportunities in a foreign market is exposed to various risks that have an impact on its operations. Political and economic risks affect the way a firm operates in a foreign market and this requires it to choose an effective expansion strategy to help it overcome such risks.
Therefore, a strategic alliance is a better option for foreign expansion compared to foreign direct investment. A strategic alliance allows a firm to use existing distribution and market channels in a foreign country to sell its products and services to consumers.
A strategic alliance also helps a firm reduce capital expenditure in a foreign market because it does not need to set up physical infrastructure before it starts operating in a given country. As a result, a firm retains control over its ownership structure because agreements made through strategic alliances do not require it to give up part of its equity (Campbell, Stonehouse & Houston, 2002, p. 89).
A strategic alliance allows a firm to share research and market information with another foreign entity that has more experience in a given market. Therefore, this helps a firm come up with an appropriate business model that is suited to local conditions existing in the country it seeks to establish operations in. As a result, both firms in the strategic alliance are able to carry out periodic reviews regarding their relationship and how it impacts their mutual performance.
A strategic alliance gives a firm an opportunity to recoup its investments within a short period of time because it helps it focus more on serving customers’ needs in a given market. As a result, a firm is able to avoid pitfalls associated with low market penetration and regulatory risks that may have a negative impact on its operations (Hitt, Ireland & Hoskisson, 2012, p. 91). A strategic alliance also helps a firm avoid any legal risks that may arise after it has given up part of its equity to a foreign firm.
In conclusion, a firm needs to assess different forms of international expansion to find out how they are beneficial to its long term operations. A firm needs to conduct a study to find out if it has the ability to satisfy different consumer needs in a foreign market. This will help it avoid risks and problems that are associated with a poor expansion strategy.
References
Allen, K. (2011). New venture creation: An entrepreneurial approach. Boston, MA: Cengage Learning.
Campbell, D., Stonehouse, G., & Houston, B. (2002). Business strategy. New York, NY: Elsevier Science.
Gaspar, J. (2011). Introduction to global business: Understanding the international environment. Mason, OH: Cengage Learning.
Hisrich, R.D. (2010). International entrepreneurship: Starting, developing, and managing a global venture. London, UK: Sage Publications.
Hitt, M.A., Ireland, D., & Hoskisson, R.E. (2012). Strategic management cases: Competitiveness and globalization. Mason, OH: Cengage Learning.
Misra, S. (2009). International business: Text and cases. New Delhi, India : PHI Learning.