INTERNATIONAL BUSINESS

International Expansion Will Benefit Financial Performance

International Expansion Will Benefit Financial Performance

Introduction

International expansion and multinational corporations have played an imperative role in globalization. Countries and from time to time subnational regions have to compete against one another for the establishment of subsequent tax revenue, employment, and economic activity. (Christos, Roger Sugden 2000)

It is true that international business is good for companies, and that international expansion has benefited financial performance. (Christos, Roger Sugden 2000)

On initial and early international expansion, a firm encounters liabilities of foreignness (Zaheer/Mosakowski 1997) in terms of their unfamiliarity with the foreign market's institutions and possible discrimination against foreign companies. There are also significant costs of learning about a new nation and culture (Doz Santos Williamson 2001), as well as local adaptation costs. (2) As Caves (1971, p. 5) puts it, "The foreign enterprise must pay dearly for what the native has acquired at no cost to the firm (because it was part of the entrepreneur's general education) or can acquire more cheaply (because as it were the native knows where to look)". While international expansion of a firm will not necessarily always improve performance (during the initial international expansion stage, or in cases where a firm may have over- internationalized), for the most part, over the considerable middle range of expansion, net positive benefits accrue from internationalization. (Christos, Roger Sugden 2000)

Explanation

Initially, the large incremental set-up costs of setting up new international operations, including additional overheads, can only be amortized over one or few foreign markets. Such costs are likely to be high per unit of product sold abroad, per nation, or per whatever index of internationalization is used.

The high upfront costs of international expansion can initially be spread over only a small base of foreign operations. Accordingly, the effect of international expansion on such a company's financial performance is negative. The Performance over Multinational function has a negative slope.

Having passed through Stage 1, further international expansion begins to yield incremental benefits that exceed the firm's incremental costs. (The length or duration that a firm may spend in Stage 1 will vary by sector, home and foreign market characteristics. In that sense, the M/P relation is context-dependent. The context or situation of the firm, or sector, does make a difference. But modification dependent on the context by no means obviates this general theory). For every additional international operation or market added, there would continue to be learning, coordination, local adaptation and legitimacy acquisition costs, but the following benefits begin to outweigh these incremental costs in Stage 2. (Jagdish Bhagwati, 2004)

Expanding into global markets is an exciting and rewarding process for growing technology companies. When it is done properly, it will lead to higher profit margins, wider recognition of the company's technology and, ultimately, a higher market value for the enterprise. ENLASO's strategic partner, The York Group has helped companies of all sizes from different countries expand successfully in international markets. From these experiences, we have developed processes and "best practices" to select and execute channel development ...