Operating global is no longer an alien phenomenon to companies. Initially the efforts of companies were directed towards gaining expertise and grabbing the market share of the local markets. However companies soon realized that their local markets have become saturated. In order to remain the market leaders it was important to find developing markets where their products can perform well. This moved the attention of these companies towards the lucrative market of underdeveloped and developing countries which had a few local players.
Companies believed that moving beyond their local markets would boost up their sales and cost can be decreased through economies of scale. These prospective benefits promoted the local market leaders to enter the untapped global markets. Similarly many companies analyzed that decreasing labour and operating costs and flexible government policies in countries like China, Vietnam and established their production facilities in these countries. Globalization of markets, production and R&D Multinational firms can be considered as key players of globalization.
Considering the opportunities in the global economy MNC’s have entering into the global markets. This has made the world economy as more integrated and interdependent. Converging tastes and preference have promoted companies to start up their businesses in other countries which usually receives a warm welcome from the host customers. Food chains like McDonalds, KFC can be considered as good examples in this case. Developing nations have high rate of unemployment and cheap labour which has encouraged many companies to benefit from, by moving their production facilities.
India, China, Pakistan and Vietnam have proved to be attractive places for companies for setting up their manufacturing operations. Whereas many countries have natural wealth, therefore it becomes lucrative stations for MNC’s. Many countries enjoy expertise of knowledge in various sectors. Japan for example is the leading country in the field of science and technology. R&D required for technological innovations can be assigned to them rather than first building expertise in house and then utilizing it. Data indicates than MNC’s have internationalized R&D since 1980’s (Buckley & Ghauri, 2004).
Entering into the global markets is not a completely new concept rather it has been practiced since older times however the advancement in communication, technology and transportation has expedited this concept and make this option more attractive. Today companies are trading major portion of their GDP through globalization (Hirst & Held, 2002). Understanding competitive advantage In today’s hypercompetitive environment, every firm wants to have competitive edge over others. Today companies focus towards creating competitive advantage which will give them an upper hand over their rivals.
What contributes towards competitive advantage is a difficult question as its unique for every organization depending on the company, its product offering, target market, market place and culture. The benefits gained from one element acting as a source of competitive advantage might not last long. Therefore the company has to continuously innovate and find new ways to lead and move ahead of competitors. By definition, competitive advantage refers that how a company uses different techniques, skills, strategies to grab the larger portion of the market share and form a strong customer base.
It’s all about having a strong foundation, a special advantage which other don’t have therefore it gives the company leverage over competitors. It’s how a company outperforms opponents (Pearl, n. d. ). Competitive edge through globalization is gaining popularity among companies. As AMR Research, 2008 highlights that companies need to focus their efforts towards gaining cost advantage and this can be best achieved through entering into the global arena (Affuso, n. d. ) Foreign direct investment Foreign direct investment is an option adopted by many leading companies.
This involves establishing production facilities in other countries rather than home countries. According to data collected by United Nations, indicates that FDI has expedited economic activity. World GDP increased by 2. 5% annually while world exports increased by 5. 6%, while the increase in FDI was recorded to be 17. 7%. This transferring of manufacturing facilities resulted in imports in order to bring back products to the home country for sales, has initiated the term, “intra firm trade”. MNC’s move their production facilities abroad in order to benefit from lower factory costs.
They also benefit from this option by currency devaluation too. Depreciation of host currency means that less foreign currency will be needed to buy assets. This helps the company to save a considerable amount form manufacturing processes which would have been twice for operating in the home country. One problem faced by MNC’s was double taxation. The home as well as host country used to impose taxes, However, negotiations on (Bilateral Investment Treaties) BITs have enabled the companies to reduce this problem.
Companies got support from (Organization for Economic Co-operation and Development) OECD in this regard who is a strong believer of BITs (Blonigen, 2005). Many companies have moved their efforts towards the global markets in order to get benefit from the available opportunity. The data presented by World Trade and Investment report proves the inclination of MNCs towards FDI. For example FDI inflows to China were mainly accounted for 95% of total flows. 95% of FDI inflows in China were transferred to fixed assets.
China has become a centre of internalization activities. The importance of China as a centre of global activities is increasing and it is expected that DFI outflows will continue increasing in future (Buckley, 2002). Globalization helping the US economy Trade and investment enables the growth of US economy, employment opportunities and increase per capita income. Export contributes 12 million to the economy, whereas imports give better quality and choices available to customers. 97% of the US exporters are small business owners.
With increase in technology and more conducive trade policies make global expansion feasible to these entrepreneurs. These points can be valid and employed to all the countries round the world. Penetration into the global markets benefits both home and host country (Christman, 2007). Benefits of operating in global markets In the article, “Benefits of going global”, the writer summarizes the many benefits of expanding business into global markets. Working global helps the company to gain additional revenue by serving the growing markets.
Along with it provides certain other benefits to the company as well. It enables the company to get insight into the consumer behavior of other countries. It diversifies a company’s vision and ability to analyze different scenarios. Different countries have different infrastructures. In order to improve distribution channels the company has to come up with new and innovatively designed systems for the host country. When Nestle entered the Chinese market to sell milk, it realized that the prevailing road structure was very poor.
In order to easily connect with farmers for fresh supplies of milk, they designed road structure which is known as the Milky Way. It adopted the same strategy when it started its operations in Pakistan. New countries help the company to analyze the untapped needs prevailing or it also brings forward certain needs which aren’t easily visible in the home country. The company might be able to initiate product which might work well round the world. Nestle came up with the idea of Pure Life after considering the poor and unhygienic water in underdeveloped countries.
This product launched to serve the need of clear drinking water in underdeveloped countries became a popular product in the developed nations too. Tapping into global markets helps a company to come up with unique ideas and products which also satisfies the hidden needs of other countries too as P&G’s spokesman said that the more we explore about consumers in different countries we realize that they are similar to one and other. World markets provide an opportunity to increase sales, increase margins, market share and growth.
According to “Software Industry Business Practices Survey” marketing to the market on arms length is n more a useful strategy. Markets and customers are now global. Companies like IBM are able to charge a premium of 100% in their international sales which means that international markets are very lucrative to boost up revenues. According to a research non-English speaking markets are loyal, they appreciate efforts put in by MNCs and respond to the stimuli favourably. According to Microsoft, global make is a valuable resource in front of companies can be utilized as it promises high returns.
Global product development It involves maximizing financial and operational productivity of the product development process by spreading the required tasks among regions in order to reduce cost while gain maximum value. Product development starts from identifying customer needs, designing the product, utilizing engineering skills, planning regarding manufacturing and keeping a track of changes in the market to induce in products. The regions where production cost is low includes India, China, and other Asian countries while high cost countries include the developed countries like US, UK etc.
The theme behind this idea is to assign the less important activities to low cost regions while the critical activities should be delegated to high cost regions. In order to gain the market lead, Boeing decided to outsource its functions. However considering “engine” as the most important and critical element it decided to manufacture this part in house while saving cost on low value tasks through outsourcing them to low cost countries. Companies have started to realize the full potential of global markets and have thus increased their efforts towards off shoring processes or functions.
Companies see globalization as a cost cutting tool. However this is not its sole benefit, companies consider it as a tool to diversify intellectual capabilities, improving quality, and expediting the time required to reach the market with new offerings. Globalization is an important strategic step for most multinational corporations today. Economic indicators predict markets like China and India with high growth potential making it a wise decision to invest and reach them today to drive benefits in future.
Though the company should not adopt a myopic view by considering only these two markets rather it can analyze all the Asian markets especially, for better opportunities. China leads in its low cost manufacturing processes while India has talented individuals with strong knowledge base and expertise in R&D. These added benefits can be seen by investors as growth propositions. Collaboration can be seen as a source of growth in future; getting services for those who are best in that area to ensure that the resulting finished good is best in all aspects (Elfrink, n. d. )