Why go global? – 3 important reasons.
Now this is a question not many of you will ask given today’s scenario where globalization plays a major role in marketing and improving growth perspectives of a firm.
But I will answer this question anyway (read: give greater clarity to your reasons for pursuing international business)
a) Risk reduction due to diversification: Business at the end of the day is a gamble. Consumers may like your good today and not tomorrow and may revert to liking it the day after. Government subsidy and taxation policy keep changing keeping in mind the dynamic economic scenario. Business relations are often fickle. We all have heard of the wisecrack ‘Never put all your eggs in one basket..’ Diversifying your domestic business into the international area helps you to compensate for any possible risk (fall in demand, unfavourable change in currency value or government policies and so on).
b) Lower cost of (equally efficient) resources: India is a labour surplus country while U.S is capital intensive. By that logic, labour is cheaper in India than in the U.S, while capital is cheaper in U.S than in India. How do you think you can take advantage of employing cheaper and efficient resources from different parts of the world without going global?
c) Economies of scale: This is a topic my junior students at Athena love to discuss (and they come up with questions, additional points – am yet to figure out the reason for this special interest though!). When a firm goes global, it is obviously producing goods and services on a mass scale – the focus is to produce a lot and cater to the demand of both – domestic and foreign markets. The benefit? Higher profits due to lower per unit cost. Internal economies or advantages of a large scale MNC for example are labour economies or benefits – division of labour, fall in per unit wages of labour, Technological benefits – bigger and better machines which run for longer duration without much lubrication, Market benefits - greater bargaining power as now your company is buying raw materials in bulk (so you get them at a wholesale rates), financial economies – banks are willing to give you large loans (at lower rate of interest) as now you have a wider market share due to which funds come easily and you are able to pay them back on time. Now think of the indirect benefits of producing large scale due to going global? – large scale companies would contribute to the industrialization process in the country, higher employment rates in that area – skilled and semi - due to industrial concentration, infrastructural development – better roads, uninterrupted power and water supply and so on.
Whether you are running a small business or a large scale firm – expanding your business into the international arena would always be a wise choice. Just remember one thing; going global is not a piece of cake. It will have its fair share of challenges – your business need to have a strong system in place and constant up gradation so that it can easily absorb the challenges of not only the domestic economy but of the international markets as well.
- Prof. Anwesha Ghosh (Athena School of Management - Powai)