Domestic demand constraints drive many companies to expanding the market beyond the national border.
The market for a number of products tends to saturate or decline in the advanced countries. This often happens when the market potential has been almost fully tapped. In United States, for example, the stock of several consumer durables like cars, TV sets etc. exceed the total number of households. Estimates are that in the first quarter of the 21st century, while the population in some of the advanced economies would saturate or would grow very negligibly, in some others there would be a decline. Such demographic trends have very adverse effects on certain lines of business. For example, the fall in the birth rate implies contraction of market for several baby products.
Another type of domestic market constraint arises from the scale economies. The technological advances have increased the size of the optimum scale of operation substantially in many industries making it necessary to have foreign market, in addition to the domestic market, to take advantage of the scale economies. It is the thrust given to exports that enabled certain countries like South Korea to set up economic size plants. In the absence of foreign markets, domestic market constraint comes in the way of benefiting from the economies of scale in some industries.
Domestic recession often provoke companies to explore foreign markets. One of the factors which prompted the Hindustan machine tools ltd. (HMT) to take up exports very seriously was the recession in the home market in the late 1960s, similarly, encouraged several Indian auto component manufacturers to explore or give a thrust to foreign markets.
Competition may become a driving force behind internationalization. A protected market does not normally motivate companies to seek business outside the home market. Until liberalization which started in July 1991, the Indian economy was a highly protected market. Not only that the domestic producers were protected from foreign competition but also domestic competition was restricted by several policy induced entry barriers, operated by such measures as industrial licensing and the MRTP regulations. Being in a sellerâ€™s market, the Indian companies, in general, did not take the foreign market seriously. The economic liberalization ushered in India since 1991, which has increased competition from foreign firms as well as from those within the country, has, however, significantly changed the scene. Many Indian companies are now systematically planning to go international in a big way.
Many companies also take an offensive international competitive strategy by way of counter competition.
The strategy of counter competition is to penetrate the home market of the potential foreign competitor so as to diminish its competitive strength and to protect the domestic market share from foreign penetration. Effective counter-competition has a destabilizing impact on the foreign companyâ€™s cash flow, product related competitiveness and decision making about integration. Direct market penetration can drain vital cash flows from the foreign companyâ€™s domestic operations. This drain can result in lost opportunities, reduced income, and limited production, impairing the competitorâ€™s ability to make overseas thrusts. Thus, IBM moved early to establish a position of strength in the Japanese main frame computer industry before two key competitors, Fujistu and Hitachi, could gain dominance. Holding almost 25 percent of the market, IBM denied its Japanese competitors vital cash flow and production experience needed to invade the U.S. market. They lacked sufficient resources to develop the distribution and software capabilities essential to success in America. So the Japanese have finally entered into joint ventures with U.S. companies having distribution and software skills. In fact, in Fujitsuâ€™s case, it was an ironic reversal of the counter competitive strategy by expanding abroad to increase its economies of scale for the fight with IBM back home. The Texas instruments established semiconductor production facilities in Japan â€œto prevent Japanese manufacturers from their own markets.â€
Even after much development work, the Japanese producers could muster neither the R&D resource nor the manufacturing capability to compete at home or overseas with acceptable product in sufficiently large quantities.
Government policies and regulations:
Government policies and regulations may also motivate internationalization. There are both positive and negative factors which could cause internationalization.
Many governments give a number of incentives and other positive support to domestic companies to export and to invest in foreign countries. Similarly, several countries give a lot of importance to import development and foreign investment.