Why Companies Engage in International Business

When operating internationally, a company should consider its mission, its objectives, and strategy. Four main operating objectives that may influence companies to engage in international business. They are:

1. To expand sales
2. To acquire resources
3. To diversify sources of sales and supplies
4. To minimize competitive risk




Expand Sales: Companies sales are dependent on two factors: the consumers’ interest in their products or services and the consumers’ willingness and ability to buy them. The number of people and the amount of their purchasing power are higher for the world as a whole than for a single country, so companies may
increase their sales by reaching international business.

Ordinarily, higher sales means higher profits, assuming each unit sold has the same markup. For example, the Star Wars cost millions of dollars to produce, but as more people see the films, the average production cost per viewer decreases.

So, increasing the sales will be major motive for a company’s expansion into international business. Many of the world’s largest companies derive over half their sales from outside their home country. You’ve heard of many of these companies (with their home country in parenthesis) – BASF (Germany), Electrolux (Sweden), Gillette (the United States), Michelin (France), Nestle (Switzerland), Philips (the Netherlands) and Sony (Japan). However, smaller companies also may depend on foreign sales. Many small companies also depend
on sales of components to large companies, which in turn put them in finished products that they sell abroad.


Acquire Resources: Manufacturers and distributors seek out products, services and components produced in foreign countries. They also look for foreign capital, technologies, and information they can use at home. Acquiring resources may enable a company to improve its product quality and differentiate itself from competitors – in both cases, potentially increasing market share and profits. Although a company may initially use domestic resources to expand abroad, once the foreign operations are in place, the foreign earnings may the serve as resources for domestic operations.



Diversify Sources of Sales and Supplies: To minimize swings in sales and profits, companies may seek out foreign markets to take advantage of business cycle—recessions and expansions—differences among countries. Sales decrease in a country that is in a recession and increase in one that is expanding economically. By obtaining supplies of the same product or component from different countries, companies may be able to avoid the full impact of price swings or shortages in any one country.



Minimize Competitive Risk: Many companies enter into international business for defensive reasons. They want to counter advantages competitors mightgain in foreign markets that, in turn, could hurt them domestically. For example Company A and Company B compete in the same domestic market. Company
A may fear that Company B will generate large profits from a foreign market if left alone to serve that market. Company B may then use those profits in various ways (such as additional advertising or development of improved products) to improve its competitive position in the domestic market. Companies harboring such a fear may enter foreign markets primarily to prevent a competitor from gaining advantages.