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Why Businesses seek International markets

Overview 1. Extend the Product Life Cycle 2. Domestic Limitations

a. Government watchdogs b. Market saturation c. Foreign competition d. Small market

3. Global sourcing 4. Business Objectives 5. Trade Liberalisation 6. Ability to trade within a trade block using the EU as an example 7. Technology

Extending the product life cycle • Businesses can often sell old products or services to new

markets. • This can be mainly because the product has become

mature in the domestic market, and demand is declining. • One great example would be mobile phones, which have

reached market saturation in western economies, but are still new to places such as Africa or South Asia

• This way, the business can sell an old idea in a new place, and there is not additional R&D cost.

Domestic Limitations • Government Watchdogs

o Most governments want to keep their markets competitive and make sure that there is constant innovation. It also means that prices will be kept competitive, which in turns leads to consumers having more purchasing power.

o Government watchdogs, do this by making sure successful businesses do not gain too much influence in the market.

• Market Saturation o When a product reaches market saturation, it means that the growth of sales of products will be

low, on the PLC curve, this is the point of maturation. o What do you do? Reach out to new markets, and often they are international markets.

• Foreign Competetion o Often foreign competetion may provide better quality goods at lower prices,

such as T-Shirts or other clothes made in poorer nations, where labor is cheap. o This will force businesses to search of new markets or make their products

more competetive: making better products, lowering prices etc. Often, when foreign competitiors have acquired significant or a majority of the market share, the business has to export in order to expand it’s business

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• Small Market o If the business is in a country with a little demand for its product, then exporting may be the only

way to expand the business. BitDefender, the antivirus maker originated in Romania, where the market is small. So, it started exporting to more lucrative places such as the USA and Germany.

Global Sourcing • Global sourcing is the procurement (Obtaining something/people)

from a different country than the country the business is from. Essentially, this is to exploit global efficiencies such as cheap labour (in places such as India or South-Asia).

• Exploiting the local efficiencies such as cheap labour, or cheap land or skilled market pool (India for its English-speaking population).

• Due to the differences in the cost of living in poorer nations, skilled labour as well as unskilled labour can be significantly cheaper.

• Skilled engineers from Malaysia or Computer Technicians from India will work at lower wages than those in more developed nations because the cost of living is cheaper.

• The Business has to spend less on production, and there will be more profit as a result. • Key Terminology

o Outsourcing: buying necessary inputs from independent suppliers. o Offshore Outsourcing: buying necessary inputs from overseas suppliers.

Business Objectives • It may the desire of the entrepreneur to expand the business across the borders of

the domestic nation. The reason being that there will be more profit and the bigger the business the more the risks are spread.

• Bigger businesses can take some risks without threatening its futures, and it may be a dream the entrepreneur wants to make a reality.

Trade Liberalisation • International trade barriers such as quotas and

tariffs have decreased massively over the past few decades.

• As a result, it gives businesses more incentive to export as well as import goods.

• The World Trade Organisation (WTO) has helped nations to achieve greater co-operation in making markets more accessible to each other.

• This has resulted in greater FDI (Foreign Direct Investment) flowing into and out of countries. Recently the BRIC nations are being increasingly sought after as the destination for FDI.

• In simple terms, costs for trading internationally have gone down meaning that makes international trade far more lucrative.

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Ability to trade within a Trading Bloc (Using the EU as an example)

What are Trading Blocs? A trading bloc is a group of countries that have no trading restrictions between them such as tariffs or quotas.

Types of Trade Blocs • Free Trade Areas

o Countries have no restriction within themselves but each country determines their own trade policies with the rest of the world. NAFTA (Canada, USA and Mexico)

• Common Markets o Countries that have no trade restrictions within

themselves and also have a common trade policy with the rest of the world. In addition to the free movement of goods and services, there is also free movement of people and capital i.e. a citizen of one country can work in another; businesses can freely invest in any other country within the trading bloc.

• Single Market o A common market is a first stage towards a single market,

and may be limited initially to a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of the trade barriers; a single market is where there are no barriers to trade, just like in a country where there are no barriers and there is a single policy throughout the country, a single market is a place where with regard to trade they are one country.

Figure 1 - Trading Blocs around the world

Figure 2 - EU nations

Figure 3 - The EU Flag, the EU aims to be a single market

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• The EU is highly competitive and there is a competition commissioner that makes sure that all businesses trading in the EU had equal opportunities.

o There is not price fixing and no barriers to trade. • Businesses do not have to spend extra on specialising a product for each region, they can sell a standard

product; businesses benefit from economies of scale • No border controls mean that goods arrive faster to the consumer, benefitting the both the business and the

consumer. • Businesses now have access to a larger market and can chose where to buy their inputs and where to sell

their products, they can exploit economics efficiencies better; lower prices and a larger market result from this – Trade Creation.

• Buyers are driven towards EU products as they will become cheaper than non-EU member goods; at the same time EU businesses are protected – Trade Diversion.

• All prices are quoted in euros, it will be hard for businesses to raise prices above the competition; price transparency

• A common currency results in there being no uncertainty of damage to trade due to appreciation or depreciation. In addition transaction costs are reduced as there is no for foreign exchange deals.

Technology • Shipping containers (containerisation)have made over-seas sale of products much cheaper

o This used to be a labour intensive job, now cranes handle everything. • Plane fares have dropped due to rising fuel efficiency

o Air transport is much cheaper. • Computerised data handling has led to a drop in administration costs • E-commerce has made shopping accessible to people anywhere in the world.

o Websites such as eBay and Amazon make products accessible to almost any place in the world