Internationalisation of Firms: Forms, Reasons, Advantages, Disadvantages
For your companies, the internationalisation of firms means expanding your business from your home base across national borders to a new geographical market.
There are several reasons for internationalisation. Changes in the environment of your own company, technological innovations and above all globally active competitors play a major role. As a founder, entrepreneur or self-employed person, you must be aware that the internationalisation process is not limited to your product or service. You should take all company activities into account and, when deciding on your strategy, consider which form of market entry you want to choose, at what time and with what speed you want to bring your company to the new market and how you want to integrate the national company organisationally.
Companies that operate globally are usually called global players because they have branches or subsidiaries in several countries that produce and sell locally.
Now you are probably asking yourself whether you can also internationalise your company as a small or medium-sized enterprise, as a founder or self-employed person.
Internationalisation of companies
Many founders and start-ups want to internationalise their company in order to use their knowledge and experience in other markets.
Forms of internationalisation
There are various ways in which you can internationalise your business. Often the internationalisation of a company starts with the export of goods or services abroad. The highest level of internationalisation is the establishment of a subsidiary or branch abroad.
When deciding which type of internationalisation you choose, it depends on how willing you are to take risks and which environmental factors influence your company. You need to consider what capital is available to you or you want to invest. You must also think about how you can use your resources and know-how to bring your products or services to the international market.
For you, export trade means selling your products or services abroad across borders. Due to the low use of resources and the lack of control in the destination country, export is the easiest way to enter the market.
You can transfer the right of use, for example of your trademark, to a person or organisation abroad by means of a contractual agreement. You can decide for yourself to what extent you limit the licence. For example, if you grant a production licence, your licensee only has the right to produce.
If you prefer an efficient and low-risk form of internationalisation, you can transfer the use of your business concept to an independent franchisee. In franchising, the transfer of know-how is a decisive factor, because only then can the franchisee independently and correctly apply your business concept.
A joint venture is a form of cooperation between two or more venturers. Although your company is legally and economically independent, you bear the financial risk together with the venturers. You have only moderate control, but you also need only moderate resources.
A branch office abroad is geographically separate from the headquarters of your company, but legally and economically the permanent establishment is dependent. Your company’s head office provides the branch with skills such as production, business assets, procurement and sales. However, operational functions such as human resources, management, finance, organisation, accounting and marketing are organised at the head office.
A subsidiary is under the management of your parent company. Legally, it can act independently, but economically speaking, the subsidiary is dependent on the parent company. On the one hand, with this form of internationalisation, you have almost complete control of foreign operations. On the other hand, your resource requirements increase and so does the risk. Setting up a subsidiary offers the highest level of control and therefore the greatest chances of success. However, this form of market entry also involves the highest risk due to the high investments required.
Reasons for the internationalisation of companies
There are various motives that can motivate you to internationalise. On the one hand, pull factors can motivate you to actively bring your company to an international level. If you see the certain market potential and can demonstrate special competences, the expansion to international markets is a good option. Furthermore, it is your attitude towards foreign activities, the demand for your product in the target country and the possible cost advantages abroad that make you think about internationalisation.
On the other hand, there are the push factors that force your company to internationalise. On the one hand, this may be due to falling demand at home or increased competitive pressure from your competitors at home. On the other hand, you may feel compelled to internationalise if domestic costs, for example, wage or production costs, are rising, you are dependent on international customers or want to follow important customers abroad.
Advantages and disadvantages of internationalisation
Internationalising your business offers you a number of advantages. You can differentiate yourself from your competitors and secure a strategic competitive advantage. You can open up new markets and win new customers and are therefore less dependent on the Spanish market. Of course, this also increases the growth opportunities for your company. A no less important advantage of the internationalisation of your company is that you are dealing with a different culture and a different language, which definitely broadens your horizon.
Of course, the advantages are always accompanied by certain disadvantages. For example, if you want to operate internationally, you have to venture out of your comfort zone, the home advantage in your own country. Uncertainties, increased financing and the enormous effort of gathering information about the foreign environment also increase the risk. As already mentioned, you need to be aware of cultural differences, possible language barriers and different market and competitive conditions.
You should not make the mistake of taking your product or service one-to-one to the international market. This requires an intensive analysis of the target market and careful preparation of all business areas before internationalisation. If you need professional advice regarding this topic, please contact our tax advisors by email or phone.