Any mature firm, that operates in developed market, a firm like McDonald's, usually
seeks opportunities outside the USA or in general the domestic market. As the
business is cash flow positive and growth is slow and competition is high, it
might be wise to seek opportunities outside of the domestic market.
While
these large firms go international the rewards are different for different
firms. For example, when firms like KFC or McDonalds go international, they
really benefit from new customers, cheap labor. Especially firms moving into
populous countries like China and India, where the middle-class population is
increasing will get access to a huge customer base.
When
Firms like Microsoft, Facebook, Google goes international they benefit from
cheap labor. These firms can set up a development center or data center
wherever English speaking and technically skilled people are available. The
products they sell are standard, and sold globally, regardless of where it is
developed. For example, Facebook, Google, Microsoft all these firms have a development center in India, because India has an English speaking population with
Engineering skills. This is known as offshoring, while it is not very popular
as it takes away the potential of job creation in the domestic market. But, it helps
the firms to generate more profit by saving costs.
Offshoring
is not only common among tech firms, but manufacturing companies like Nike
Apple also offshore their manufacturing to countries with cheaper and skilled
labor. China only makes $8 per iPhone. If Apple decides to move the entire
operation of manufacturing iPhone in the USA, the iPhone would cost $100
more(Stewart,2018).
But I
think diversification of markets applies to all firms. When the firms are
operating in a saturated market, it is better to diversify to protect against
any economic slowdown. As the firms go to different geography it gains more
experience in cultural diversity, it gains more customer base, cheap and
skilled labor based on geography. According to Tim Cook, CEO of Apple, China
does not really have cheap labor but they do have skilled labor (Stewart,2018).
Most
of the firms would face similar risks when they go international. Like
currently global trade war is causing major uncertainty in the world, and all the
firms are impacted. The current trade tension, tariff and counter tariff on
Chinese goods can cost US households between $300 - $800 a year(Russ,2019). I
think currently political risk is greatest. Since all countries are moving away
from offshoring. The US and China, two biggest economies are engaging in a trade
war, and this has introduced the risk of a global slowdown.
For entrepreneurial firms, the greatest reward is access to the market.
Although a start-up firm usually still has scope to grow in the domestic market.
They should focus on the domestic market and grow. But they can grow and in the international market too. Like Uber went international markets. To gain access
to more customers. Uber had to back out from most of those markets. As they
could not generate any profit.
For
entrepreneurial firms, currently greatest risk is political risk. As the
political risk is creating an entry barrier in international markets. As current
trade tension is creating an economic slowdown, funding for a start-up is also
getting scares, this would adversely impact entrepreneurial firms.
I
think it makes sense for mature firms to go international, as the potential
reward outweighs potential risks. Since the mature firms have steady cash flow
in the domestic market and the firm is seeking growth so going international would
be one option.
But
for startups or entrepreneurial firms, while they have the opportunity in the domestic
market to grow, the risk outweighs the reward. Most of these firms do not make a profit. Like Uber does not make a profit. When they go international, it requires
a lot of growth capital, and with so much uncertainty it does not make sense.
While the rewards are different for these two firms, I think in 2019 the risks
are the same for different firms.
References –
Stewart, E(September, 2018). How much
would the iPhone cost if it were made in America?. Retrieved from https://www.vox.com/technology/2018/9/13/17851052/apple-iphone-price-china-trump-us-trade
Russ,K. ( May,2019). The Costs of Tariffs
in the U.S.-China Trade War. Reetrieved from https://econofact.org/the-costs-of-tariffs-in-the-u-s-china-trade-war
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