Why Globalization?

Developing strategies for expansion on a global scale is not an easy task. Managers have to learn other languages, understand host country laws, deal with foreign currencies, and redesign products to suit different customer needs and expectations.

The firm may have to incur heavy losses, if mistakes occur due to negligence or over confidence. For example Coca-Cola had to withdraw its two-litre bottle in Spain after they discovered that very few Spaniards owned refrigerators with compartments large enough to accommodate those bottles. Without the global thrust, therefore business would be easier and safer. United Airlines discovered that even colours can be a bane for a product. The airline initially used white carnations as their brand symbol when it started flying from Hong Kong, only to discover that for many Asians these flowers represented death and bad luck.

Factors such as the rising income levels  growing awareness of new products, services available in other countries and fascination towards items that are not available in the domestic markets (such as luxury cars, tennis rackets, cellular phones)  have compelled many firms to look at international markets quite seriously. They are forced in a way to realize the fact that people’s desire for products and services are becoming steadily more uniform. Uniform demand means that irrespective of where the customers are located physically, buyers are likely to prefer the same kind of product or service with certain similar characteristics. The tastes, preferences and desire for different products– gives the manufacturers a great opportunity to come out with products that would meet the expectations of customers world-wide (e.g. Sony Walkmans,  Nokia’s Cellular phones, Levi’s jeans, soft drinks such as  Coke and Pepsi etc).

Firms and industries that face an escalating R&D  cost, are compelled to spread their operations globally. Commercial Air craft manufacturers  for example  are forced to secure orders from different national airlines before building a single plane. The large markets provided by international expansion are attractive and in other cases also (e.g. computer hardware, biotechnology, electronics, medical equipment , fibre optics, semiconductors) because they expand, the opportunity to recover a large capital investment and large scale R&D expenditure is possible.

Firms can expand the size of their potential market, quite dramatically by moving into global markets. Faced with limited growth opportunities in their home country, soft drink manufacturers such as Coca-Cola and Pepsi have entered the international arena to take advantage of new growth opportunities. Over 75 per cent of Coke’s revenues come from overseas markets (mostly Asia) now. The secret behind Coca-Cola’s enormous popularity and market success lies with the company’s continuous desire to innovate, bring out new products and enter new markets.

Benetton decided to expand outside its European base because it had a firm belief that its brand value could be extended to other geographical markets. Likewise, when Wal-Mart’s market in the United States became saturated, it sought to apply its competitive cost advantage by distributing branded products to Latin America and Asia (not in India, though).

Firms need a large customer base to achieve economies of scale. Global markets offer exciting opportunities to firms to exploit the demand there and expand their production volumes to profitable levels. For example Japanese automakers such as Toyota, Honda, Nissan are able to penetrate international markets, offer their products at commercial prices and maintain their low cost position compared to their rivals, quite successfully.

Support from the government in the form of subsidies- preferential  tax treatment, export incentives could spur domestic firms to expand their operations globally. Generous loans, subsidies etc. have helped South Korean firms such as Samsung, Daewoo, Lucky – Gold star (LG) to invest huge sums  in new technology and build global sized plants  for export. Low corporate and personal tax rates generally encourage an inflow of capital. Ireland and Puerto Rico offer two compelling examples. Each offers corporate tax rates that are considerably lower than those in many industrialized nations and as a result has attracted considerable foreign direct investment.

In India each state is offering its own incentive to foreign and local industries to set up their industries in their state. There are several advantages these states are deriving like large employment of locals, finance induction, development of small and auxiliary industries and finally the increase in tax revenues and the overall growth of that State.

One of the important reasons that has prompted many firms to go beyond their national boundary is the prevalence of low cost labour and resources in various parts of the world. Countries such as India, Taiwan, and Israel are becoming important engineering, manufacturing and development centres for key skills such as software and computer design. India is becoming an auto hub. Availability of cheap labour, cheap land prices, low energy costs etc in countries such as China, India, Indonesia and other South East Asian countries has encouraged many Japanese, Korean and American companies to build factories there. The resultant savings in costs would help such firms to compete quite effectively in the international markets.