Multicountry competition exists when

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Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education

Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021

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chapter 7 Strategies for Competing Internationally or Globally

You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die. —Andrew S. Grove, retired Chairman and CEO, Intel Corporation

You do not choose to become global. The market chooses for you; it forces your hand. —Alain Gomez, Former CEO, Thomson, S.A.

[I]ndustries actually vary a great deal in the pressures they put on a company to sell internationally. —Niraj Dawar and Tony Frost, Professors, Richard Ivey School of Business

Any company that aspires to industry leadership in the 21st century must think in terms of global, not domestic, market leadership. The world economy is globalizing at an accelerating pace as ambitious, growth-minded companies race to build stronger competitive positions in the markets of more and more countries, as companies gain greater access to foreign markets, as country exports and imports increase, and as rapidly growing Internet accessibility and usage erodes the relevance of geographic distance.

Typically, a company will start to compete internationally by entering just one or maybe a select few foreign markets. Competing on a truly global scale comes later, after the company has established operations on several continents and is marketing its products or services in many different geographic regions of the world. Thus, there is a meaningful distinction between the competitive scope of a company that operates in a few foreign countries (and whose strategy is to enter only a few more country markets) and a company with production and/or sales operations in 50 to 100 countries (and whose strategy is to expand rapidly into additional country markets). The former is most accurately termed an international competitor while the latter qualifies as a global competitor.

This chapter focuses on strategy options for expanding beyond domestic boundaries and competing internationally in a few countries or globally in a great many countries across the world. The spotlight is on four strategic issues unique to competing across national borders:

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1. Whether to customize the company’s offerings in each different country market to match local buyers’ tastes and preferences or to offer a mostly standardized product everywhere it operates.

2. Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country to better match local market and competitive conditions.

3. Where to locate the company’s production facilities, distribution centers, and customer service operations to realize the greatest location-related advantages.

4. When and how to efficiently transfer some of the company’s competitively powerful resources and capabilities from certain countries to other countries; such cross-border redeployment of competitively potent resources/capabilities is useful for spearheading the company’s strategic offensives to enter new country markets and more effectively battle local rivals for sales and market share.

In the process of exploring these issues, we introduce such core concepts as multicountry competition, global competition, and profit sanctuaries. The chapter includes sections on why competing across national borders makes strategy-making more complex; the principal strategy options for competing internationally or globally; the importance of locating value chain activities in the most advantageous countries; the strategic value of profit sanctuaries; and the initiation of global strategic offensives.

Why Companies Decide to Enter Foreign Markets

Companies opt to sell their products/services or to locate operations in some or many countries for any of four major reasons:

1. To gain access to new customers. Expanding into the markets of countries around the world becomes an imperative when a company encounters dwindling growth opportunities in its home market or if a company aspires to be among the world leaders in its industry.

2. To achieve lower costs and thereby become more cost competitive. Many companies are driven to seek out foreign buyers for their products and services because they cannot achieve a big enough sales volume domestically to fully capture manufacturing economies of scale or learning-curve effects. The relatively small size of country markets in Europe explains why companies like Michelin, BMW, and Nestlé long ago began selling their products all across Europe and then moved into markets in North America and Latin America. Many manufacturers have located production facilities in foreign countries to take advantage of lower costs for labor and other production-related activities and/or to avoid the payment of tariffs/duties on goods exported to countries with relatively high tariffs/duties on imported goods and/or to mitigate the risks of adverse shifts in currency exchange rates. International expansion can also increase a company’s bargaining power with suppliers because of its increased volume of purchases. Companies in industries based on natural resources often find it necessary to have operations in foreign countries since natural resource supplies (oil, natural gas, minerals, and rubber) are located in many parts of the world and can be accessed most cost effectively at the source.

3. To further exploit competitively valuable resources and capabilities. A company with valuable competitive assets can extend what may be a market-leading position in one or two countries into a position of global market leadership. Walmart is capitalizing on its considerable resources and capabilities in discount retailing to expand its operations in 27 countries outside the United States, including Mexico, China, Japan, Chile, Great Britain, Brazil, Argentina, and parts of both Africa and Central America.

4. To spread business risk across a wider market area. A company distributes its business risk by operating in many countries rather than depending entirely on operations in a few countries. Thus, when a company with operations across much of the world approaches market saturation in certain countries or

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encounters economic downturns or adverse competitive conditions in certain countries, its performance may be bolstered by buoyant sales elsewhere. In general, a company’s business risk is lower when it has a diverse collection of revenue streams coming from many countries rather than being dependent on revenues generated in one or just a few countries,

In addition, the major suppliers of companies expanding internationally often also do so in order to meet their customers’ needs abroad and retain their position as a key supply chain partner. For example, when motor vehicle companies have opened new plants in foreign locations, several big automotive parts suppliers have frequently opened new facilities nearby to permit timely delivery of their parts and components to the plant. Newell- Rubbermaid, one of Walmart’s biggest suppliers of household products, has followed Walmart into foreign markets.

Why Competing Across National Borders Causes Strategy Making to Be More Complex

Crafting a strategy to compete in one or more countries or regions of the world is inherently more complex for four reasons: (1) the presence of important cross-country differences in buyer tastes, market sizes, and growth potential; (2) sizable cross-country differences in wage rates, worker productivity, inflation rates, energy supplies and costs, tax rates, and other factors that impact the pros and cons of locating company facilities in one country versus another; (3) differing governmental policies and regulations that make the business climate more favorable in some countries than in others; and (4) the risks of adverse shifts in currency exchange rates.

Cross-Country Differences in Buyer Tastes, Market Sizes, and Growth Potential Buyer tastes for a particular product or service sometimes differ substantially from country to country. In France, consumers prefer top-loading washing machines, whereas in most other European countries consumers prefer front-loading machines. Soups that appeal to Swedish consumers are not popular in Malaysia. Italian coffee drinkers prefer espressos, but in North America many coffee drinkers prefer milder-roasted coffees. Northern Europeans want large refrigerators because they tend to shop once a week in supermarkets; southern Europeans are satisfied with small refrigerators because they shop daily. In parts of Asia, refrigerators are a status symbol and may be placed in the living room, leading to preferences for stylish designs and colors—in India, bright blue and red are popular colors. In other Asian countries, household space is constrained and many refrigerators are only four feet high so the top can be used for storage. In Hong Kong and Japan, the preference is for compact appliances, but in Taiwan large appliances are more popular. Consequently, companies operating in a global marketplace must wrestle with whether and how much to customize their offerings in each different country market to match local buyers’ tastes and preferences or whether to pursue a strategy of offering a mostly standardized product worldwide. While making products that are closely matched to local tastes makes them more appealing to local buyers, customizing a company’s products country by country may raise production and distribution costs due to the greater variety of designs and components, shorter production runs, and the complications of added inventory handling and distribution logistics. Greater standardization of a global company’s product offering, on the other hand, can lead to scale economies and learning-curve effects, thus reducing production costs per unit and perhaps contributing to the achievement of a low-cost advantage.

CORE CONCEPT The tension between the market pressures to localize a company’s product offerings country by country and the competitive pressures to lower costs by offering mostly standardized products in all countries where a company competes is one of the big strategic issues that companies operating in few or many country markets must address.

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Understandably, differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country. In emerging markets like India, China, Brazil, and Malaysia, the potential for long-term growth in buyer demand for motor vehicles, PCs and tablets, smartphones, steel, big-screen TVs, credit cards, and electric energy is higher than in the more mature economies of Great Britain, Canada, and Japan. Owing to widely differing population demographics and income levels, there is a far bigger market for luxury automobiles and high-fashion apparel in the United States and Western Europe than in Argentina, India, Mexico, and Thailand. Cultural influences can also affect consumer demand for a product. For instance, in China, many parents are reluctant to purchase PCs even when they can afford them because of concerns that their children will be distracted from their schoolwork by surfing the Internet, playing video games, and streaming music, movies, and TV shows.

Similarly, there are country-to-country differences in distribution channels, competitive conditions, and other market-related factors that impact a company’s strategy choices. In India, there are efficient well-developed national channels for distributing trucks, scooters, farm equipment, groceries, personal care items, and other packaged products to the country’s three million retailers; however, in China, distribution is primarily local and there is a limited national network for distributing most products. The marketplace for certain products/services is intensely competitive in some countries and only moderately contested in others. Industry driving forces may be one thing in Spain, quite another in Canada, and different yet again in Turkey, Argentina, and South Korea. Sometimes, product designs suitable in one country are inappropriate in another because of differing local customs and standards. For example, in the United States, electrical devices run on 110-volt electrical systems, but in some European countries the standard is a 240-volt electric system, necessitating the use of different electrical designs, components, and cord plugs.

The managerial challenge at companies with international or global operations is how best to tailor a company’s strategy to take all these cross-country differences into account.

Cross-Country Differences in Operating Costs and Profitability Differences in wage rates, worker productivity, energy costs, environmental regulations, tax rates, inflation rates, tariffs/import duties, and the like from country to country are often so big that a company’s operating costs and profitability are significantly impacted by where its production, distribution, and customer-service activities are located. Wage rates, in particular, vary enormously from country to country. For example, in 2016, hourly compensation for manufacturing workers averaged less than $2.00 in India (2017), $2.06 in the Philippines, $3.60 in China, $3.91 in Mexico, $7.98 in Brazil, $8.60 in Hungary, $9.82 in Taiwan, $10.96 in Portugal, $15.70 in Greece, $22.98 in South Korea, $26.46 in Japan, $30.08 in Canada, $37.72 in France, $39.03 in the United States, $43.18 in Germany, and $48.62 in Norway.1 Not surprisingly, the big cross-country differences in wages rates have turned low-wage countries like China, India, Pakistan, Cambodia, Vietnam, Mexico, Brazil, Guatemala, Honduras, the Philippines, and several countries in Africa and Eastern Europe into production havens for goods that can be manufactured or assembled by a relatively unskilled labor force. Indeed, China has emerged as the manufacturing capital of the world—virtually all of the world’s major manufacturing companies now have facilities in China. A manufacturer can also gain cost advantages by locating its manufacturing and assembly plants in countries with less costly government regulations, low taxes, low energy costs, and cheaper access to essential natural resources.

Clearly, companies that locate production facilities in low-cost countries (or that source their products from contract manufacturers in these countries) have a production-cost advantage over rivals with plants in countries where costs are higher. In such cases, the low-cost countries become principal production sites, with most of the output being exported to markets in other parts of the world. Likewise, concerns about short delivery times and low shipping costs make some countries better locations than others for establishing distribution centers. Many U.S. companies locate customer call centers in such lower wage countries as Ireland and India, where English is spoken and well-educated workers are readily available.

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The Impact of Host Government Policies on the Local Business Climate National governments enact all kinds of measures affecting business conditions and the operation of foreign companies in their markets. It matters whether these measures create a favorable or unfavorable business climate. Governments of countries anxious to spur economic growth, create more jobs, and raise living standards for their citizens (Ireland is a good example) usually make a special effort to create a business climate that outsiders will view favorably. They may provide such incentives as reduced taxes, low-cost loans, site location and site development assistance, and government-sponsored training for workers to both foreign and domestic companies to construct or expand production and distribution facilities. When new business issues or developments arise, “pro-business” governments make a practice of seeking advice and counsel from business leaders. When tougher business regulations are deemed appropriate, they endeavor to make the transition to more costly and stringent regulations somewhat business friendly rather than adversarial.

On the other hand, governments sometimes enact policies that, from a business perspective, make locating facilities within a country’s borders less attractive. For example, the nature of a company’s operations may make it particularly costly to achieve compliance with a country’s environmental regulations. The governments of emerging or developing countries often create uneven playing fields that give domestic companies an advantage— they may enact policies to discourage foreign imports or provide subsidies and low-interest loans to domestic companies to enable them to better compete against foreign companies or enact burdensome procedures and requirements for imported goods to pass customs inspection (to make it harder for imported goods to compete against the products of local businesses), and impose tariffs or quotas on the imports of certain goods (also to help protect local businesses from foreign competition).2 For example, in early 2019, the cheapest Tesla Model 3 (produced at Tesla’s factory in California) had a base price of about $36,500 in the United States but this same Model 3 in Europe carried a price tag of $60,900 due principally to Europe’s value-added tax (VAT) and import duties on U.S.-made vehicles. Foreign governments sometimes also specify that a certain percentage of the parts and components used in manufacturing a product in their country be obtained from local suppliers, require prior approval of a foreign company’s capital spending projects, limit withdrawal of funds from the country, and require minority (sometimes majority) ownership of foreign company operations by local companies or investors. There are times when a government may place restrictions on exports to ensure adequate local supplies and regulate the prices of imported and locally produced goods. Governments controlled by newly elected left- leaning or socialist politicians often impose very high taxes on large corporations to fund new government programs that benefit low-income families and the disadvantaged. Such governmental actions make a country’s business climate unattractive, and in some cases, may be sufficiently onerous to discourage a company from locating production or distribution facilities in that country or maybe even selling its products in that country.

A country’s business climate is also a function of the political and economic risks associated with operating within its borders. Political risks have to do with the instability of weak governments, growing possibilities that a country’s citizenry will revolt against dictatorial government leaders, the likelihood that current or future governmental leaders will pursue legislation or regulations that are onerous or burdensome to businesses, and the potential for future elections to produce government leaders who are corrupt or hostile to companies from certain foreign countries operating within their borders. For example, if socialist politicians gain control of a country’s government, there’s a political risk that a company’s assets will be nationalized and its operations taken over by the government. Economic risks have to do with the stability of a country’s economy and monetary system— whether inflation rates might skyrocket, whether risky bank lending practices could lead to large numbers of bank failures and economic disruptions, or whether out-of-control government spending could spur a meltdown of the country’s credit rating, cause interest rates on government debt to escalate, and cause prolonged economic distress. In some countries, the threat of piracy and lack of protection for a company’s intellectual property pose substantial economic risks.

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The Risks of Adverse Exchange Rate Shifts When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates. The rates of exchange between different currencies can vary by as much as 20 to 40 percent annually, with the changes occurring sometimes gradually and sometimes swiftly. Sizable shifts in exchange rates pose significant risks for two reasons:

1. They are very hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much the various factors affecting exchange rates will change.

2. They shuffle the cards of which countries—either temporarily or long term— represent the low-cost manufacturing location and which rivals have a temporary or longer-term cost-based competitive advantage because of the countries where their production operations are located.

To illustrate the economic and competitive risks associated with fluctuating exchange rates, consider the case of a U.S. company that has located manufacturing facilities in Brazil (where the currency is reals—pronounced ray- alls) and that exports most of its Brazilian-made goods to markets in the European Union (where the currency is euros). To keep the numbers simple, assume that the exchange rate is 4 Brazilian reals for 1 euro and that the product being made in Brazil has a manufacturing cost of 4 Brazilian reals (or 1 euro). Now suppose the exchange rate shifts from 4 reals per euro to 5 reals per euro (meaning that the real has declined in value and the euro is stronger). Making the product in Brazil is now more cost competitive because a Brazilian good costing 4 reals to produce has fallen to only 0.8 euros at the new exchange rate (4 reals divided by 5 reals per euro = 0.8 euros). This clearly puts a producer of the Brazilian-made good in a better position to compete against the European makers of the same good. On the other hand, should the value of the Brazilian real grow stronger in relation to the euro—resulting in an exchange rate of 3 reals to 1 euro—the same Brazilian-made good formerly costing 4 reals (or 1 euro) to produce now has a cost of 1.33 euros (4 reals divided by 3 reals per euro = 1.33), putting a producer of the Brazilian-made good in a weaker competitive position vis-à-vis European producers. Plainly, the attraction of manufacturing a good in Brazil and selling it in Europe is far greater when the euro is strong (an exchange rate of 1 euro for 5 Brazilian reals) than when the euro is weak and exchanges for only 3 Brazilian reals.

But there is one more piece to the story. When the exchange rate changes from 4 reals per euro to 5 reals per euro, not only is the cost competitiveness of the Brazilian manufacturer stronger relative to European manufacturers of the same item, but the Brazilian-made good that formerly cost 1 euro and now costs only 0.8 euros can also be sold to consumers in the European Union for a lower euro price than before. In other words, the combination of a stronger euro and a weaker real acts to lower the price of Brazilian-made goods in all the countries that are members of the European Union, which is likely to spur sales of the Brazilian-made good in Europe and boost Brazilian exports to Europe. Conversely, should the exchange rate shift from 4 reals per euro to 3 reals per euro—which makes a Brazilian manufacturer less cost competitive with rival European manufacturers—the Brazilian-made good that formerly cost 1 euro and now costs 1.33 euros will sell for a higher price in euros than before, which will weaken the demand of European consumers for Brazilian- made goods and reduce Brazilian exports to Europe. Thus, the exporters of Brazilian-made goods are likely to experience (1) rising demand for their goods in Europe whenever the Brazilian real grows weaker relative to the euro and (2) falling demand for their goods in Europe whenever the real grows stronger relative to the euro. Consequently, from the standpoint of a company with Brazilian manufacturing plants, a weaker Brazilian real is a favorable exchange rate shift and a stronger Brazilian real is an unfavorable exchange rate shift.

CORE CONCEPT Companies that export goods to foreign countries always gain in competitiveness when the currency of the country in which the goods are manufactured grows weaker relative to the currencies of countries to which the goods are being exported. A company is disadvantaged when the currency of the country where its goods are being manufactured grows stronger relative to the currencies of countries to which it is exporting its goods.

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It follows from the previous discussion that shifting exchange rates have a big impact on domestic manufacturers’ ability to compete with foreign rivals. For example, U.S.-based manufacturers locked in a fierce competitive battle with low-cost foreign imports benefit from a weaker U.S. dollar for the following reasons:

n Declines in the value of the U.S. dollar against foreign currencies raise the U.S. dollar costs of goods manufactured by foreign rivals at plants located in the countries whose currencies have grown stronger relative to the U.S. dollar. A weaker dollar acts to reduce or eliminate whatever cost advantage foreign manufacturers may have had over U.S. manufacturers (and helps protect the manufacturing jobs of U.S. workers).

n A weaker dollar makes foreign-made goods more expensive in dollar terms to U.S. consumers—this curtails U.S. buyer demand for foreign-made goods, stimulates greater demand on the part of U.S. consumers for U.S.-made goods, and reduces U.S. imports of foreign-made goods.

n A weaker U.S. dollar enables the U.S.-made goods to be sold at lower prices to consumers in those countries whose currencies have grown stronger relative to the U.S. dollar—such lower prices boost foreign buyer demand for the now relatively cheaper U.S.-made goods, thereby stimulating exports of U.S.-made goods to foreign countries and perhaps creating more jobs in U.S.-based manufacturing plants.

n A weaker dollar increases the dollar value of profits a company earns in those foreign country markets where the local currency is stronger relative to the dollar. For example, if a U.S.-based manufacturer earns a profit of €10 million on its sales in Europe, those €10 million convert to a larger number of U.S. dollars when the dollar grows weaker against the euro.

A weaker U.S. dollar is therefore an economically favorable exchange rate shift for manufacturing plants based in the United States. A decline in the value of the U.S. dollar strengthens the cost competitiveness of U.S.- based manufacturing plants and boosts foreign buyers’ demand for U.S.-made goods. When the value of the U.S. dollar is expected to remain weak for some time to come, foreign companies have an incentive to build manufacturing facilities in the United States to make goods for U.S. consumers rather than export the same goods to the United States from foreign plants where production costs in dollar terms have been driven up by the decline in the value of the dollar.

Conversely, a stronger U.S. dollar is an unfavorable exchange rate shift for U.S.-based manufacturing plants because it makes such plants less cost-competitive with foreign plants and weakens foreign demand for U.S.-made goods. A strong dollar also weakens the incentive of foreign companies to locate manufacturing facilities in the United States to make goods for U.S. consumers. The same reasoning applies to companies who have plants in countries in the European Union where euros are the local currency. A weak euro versus other currencies enhances the cost competitiveness of companies manufacturing goods in Europe vis-à-vis foreign rivals with plants in countries whose currencies have grown stronger relative to the euro; a strong euro versus other currencies weakens the cost-competitiveness of companies with plants in the European Union.

CORE CONCEPT Domestic companies facing competitive pressure from lower­cost foreign rivals benefit when their government’s currency grows weaker in relation to the currencies of the countries where the lower­cost foreign rivals have their manufacturing plants.

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The Concepts of Multicountry Competition and Global Competition

Important differences exist in the patterns of international competition from industry to industry.3 At one extreme is multicountry competition, in which there’s so much cross-country variation in market conditions and in the companies contending for leadership that the market contest among rivals in one country is localized to that country and not closely connected to the market contests in other countries. The standout features of multicountry competition are that (1) buyers in different countries are attracted to different product attributes, (2) sellers vary from country to country, and (3) industry conditions and competitive forces in each national market differ in important respects. Take the banking industry in Poland, Mexico, and Australia as an example—the requirements and expectations of banking customers vary among the three countries, the lead banking competitors in Poland differ from those in Mexico or Australia, and the competitive battle going on among the leading banks in Poland is unrelated to the rivalry taking place in Mexico or Australia. Thus, with multicountry competition, rival firms compete for national championships and winning in one country does not necessarily signal the ability to fare well in other countries. In multicountry competition, the power of a company’s resources, capabilities, and strategy in one country may have limited impact on its competitiveness in other countries where it operates. Moreover, any competitive advantage a company secures in one country is largely confined to that country; the spillover effects to other countries are minimal. Industries characterized by multicountry competition include radio and TV broadcasting, consumer banking, metals fabrication, baking, and retailing.

At the other extreme is global competition, in which prices and competitive conditions across country markets are strongly linked and the term global or world market has true meaning. In a globally competitive industry, much the same group of rival companies competes in many different countries, but especially so in countries where sales volumes are large and where having a competitive presence is strategically important to building a strong global position in the industry. Thus, a company’s competitive position in one country both affects and is affected by its position in other countries. In global competition, a firm’s overall competitive advantage grows out of its entire worldwide operations; the competitive advantage it creates at its home base is supplemented by advantages growing out of its operations in other countries (having plants in low-wage countries, being able to transfer competitively valuable expertise from country to country, having the capability to serve customers who also have multinational operations, and having brand name recognition in many parts of the world). Rival firms in globally competitive industries vie for worldwide leadership. Global competition exists in motor vehicles, television sets, tires, cell phones, personal computers, copiers, watches, bicycles, and commercial aircraft.

It is also important to recognize that an industry can be in transition from multicountry competition to global competition. In a number of today’s industries—beer and major home appliances are prime examples—leading domestic competitors have begun expanding into more and more foreign markets, often acquiring local or regional brands, integrating them into their operations, and expanding their distribution to more countries. As some industry members start to build global brands and a global presence, other industry members find themselves pressured to follow the same strategic path. As the industry consolidates to fewer players, such that many of the same companies find themselves in head-to-head competition in more and more country markets,

CORE CONCEPT Multicountry competition exists when competition in one national market is not closely connected to competition in another national market. There is no global or world market, just a collection of self­contained country markets.

CORE CONCEPT Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries.

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global competition begins to replace multicountry competition. Global competition can also replace multicountry competition when consumer tastes and/or uses of a product converge across the world—as has been occurring in the market for smart phones and LED lighting. Less diversity of tastes and preferences enables companies to create global brands and sell essentially the same products in different countries. But even in industries where cross-country consumer tastes remain fairly diverse, global competition can emerge if companies are able to use cost-effective “custom mass production” methods at one or more large-scale plants to economically produce different product versions and thus accommodate the different tastes of people in different countries.

In addition to taking the obvious cultural and political differences between countries into account, a company must shape its strategic approach to competing in foreign markets according to whether its industry is characterized by multicountry competition, global competition, or a transition from one to the other.

Strategy Options for Establishing a Competitive Presence in Foreign Markets

There are five strategic ways a company can establish a competitive presence in foreign markets:

1. Maintain a national (one-country) production base and export goods to foreign markets.

2. License foreign firms to use the company’s technology or to produce and distribute the company’s products.

3. Employ a franchising strategy in foreign markets.

4. Rely upon acquisitions or internal startup ventures to gain entry into foreign markets.

5. Rely on strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets.

The following sections discuss these five strategy options in more detail.

Export Strategies Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales. It is a conservative way to explore competing in markets of foreign countries. The amount of capital needed to begin exporting is often minimal; existing production capacity may well be sufficient to make goods for export. With an export strategy, a manufacturer can limit its involvement in foreign markets by contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function in their countries or regions of the world. If it is more advantageous to maintain control over these functions, however, a manufacturer can establish its own distribution and sales organizations in some or all of the target foreign markets. Either way, a home-based production and export strategy helps the firm minimize its direct investments in foreign countries. Such strategies are commonly favored by Chinese, Korean, and Italian companies—products are designed and manufactured at home and then distributed through local channels in the importing countries. The primary functions performed abroad relate chiefly to establishing a network of distributors and perhaps conducting sales promotion and brand-awareness activities.

Whether an export strategy can be pursued successfully over the long run hinges on the relative cost competitiveness of a company’s home-country production base. In some industries, firms gain additional scale economies and learning-curve benefits from centralizing production in one or several giant plants whose output capability exceeds buyer demand in any one country market; obviously, a company must export to capture such economies. However, an export strategy is vulnerable when (1) manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants, (2) the costs of shipping the product to distant foreign

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markets are relatively high, (3) adverse shifts occur in currency exchange rates, and (4) importing countries impose tariffs or erect other trade barriers. Unless an exporter can both keep its production and shipping costs competitive with rivals, secure adequate local distribution and marketing support of its products, and effectively hedge against unfavorable changes in currency exchange rates, its success will be limited.

Licensing Strategies Licensing makes sense when a firm with valuable technical know-how or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets. Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky. By licensing the technology or the production rights to foreign-based firms, a company can generate income from royalties while shifting the costs and risks of entering foreign markets to the licensee. The big disadvantage of licensing is the risk of providing valuable technological know-how to foreign companies and thereby losing some degree of control over its use; monitoring licensees and safeguarding the company’s proprietary know-how can prove difficult in some circumstances. But if the royalty potential is considerable and the companies to whom licenses are granted are trustworthy and reputable, then licensing can be an attractive option. Many software and pharmaceutical companies use licensing strategies to participate in foreign markets.