International Business Decisions
In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor conditions, firms mast expand internationally if they are to survive. Discuss. It is not essential for firms to expand in order to survive if in fact their products or services are produced for the national market alone. Products and services that are designed to specifically meet local needs do not have to be sold abroad.
If, however, firms create products or produce services that may be sold abroad – to cater to the needs of international consumers – zero transportation costs, no trade barriers and nontrivial differences between nations with regard to factor conditions would be considered as perfect circumstances for international trade. The firm that decides to expand internationally is likely to meet a great degree of competition in the international markets. Even so, it may not need to expand internationally just to survive.
After all, its goals for profit making may be met in the local market. What is more, the quality of its products or services may be good enough for it to keep local consumers satisfied. What do you see as the main organizational problems that are likely to be associated with implementation of transnational strategy? Most nations around the world enjoy diverse cultures. Apart from different languages, there are negotiation skills that are unique to organisations functioning in different parts of the globe.
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Seeing that problems with respect for diversity exist throughout the world, however, it appears rather farfetched to assume that a global organisational culture would be acceptable within most organisations around the world. Discuss how the need for control over foreign operations varies with firms’ strategies and core competencies. What are the implications for the choice of entry mode (exporting, licensing, franchising, joint-ventures and wholly owned subsidiaries)?
A transnational organisation that does not implement a transnational strategy because the latter might lead to problems within the organisational culture does not need to exercise as much control over foreign operations as the transnational organisation that implements a transnational strategy despite the problems associated with it. Moreover, the need for control over foreign operations is expected to be little for an international organisation that simply manufactures products while allowing foreign subsidiaries to handle the distribution.
Undoubtedly, the choice of entry mode has a major role to play in the decision to exercise control over foreign operations. In the case of franchising, for example, a greater degree of control must be exercised so as to maintain the quality of products or services in the foreign market. However, in the case of exporting, the organisation might decide to leave the entire marketing and distribution operations to the foreign business that agrees to undertake them.
A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Community market. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If there are the firm’s only options, which one would you advise it to choose? Why? a. Manufacture the product at home and let foreign sales agents handle marketing. b. Manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing.
c. Enter into an alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50/50 joint venture and marketed by the European firm. Given that manufacturing must be cheaper for the firm in Canada, it should choose to manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing (Choice ‘b’). The newly developed medical products are valuable. By setting up a wholly owned subsidiary in Europe to handle marketing, the Canadian firm will be able to exercise a high degree of control over marketing its valuable product.
Foreign sales agents may not be trusted with the job of marketing the valuable product because they may not have the expertise to market the unique features of the product. By entering into an alliance with a large European pharmaceutical company, the Canadian firm will have to meet a reduction in the level of profits that may be expected through Choice ‘b’. Besides, it will be sharing its unique biotechnology know-how with the European company when it is best for it to use its know-how to gain an edge in international markets.