Going global is a new term that has found a considerable position in people’s lives in the United States. By going global, we mean shedding down the suspicion’s barriers and distrust’s walls between foreign markets to fill the gap where beliefs and ideas can be allowed to cross borders. While international expansion is viewed as an indication of a fruitful future by some investors, others view it as a cause of remarkable tragedy for the global economy. On the other hand, the shortcomings linked to going global can be minimized if the involved parties provide solutions that will address globalization’s underlying issues at the end of the day.
Global advantages and disadvantages of U.S. companies
As international expansion turns out to be a fashion and emerging technologies have enabled transportation and communication globally, many businesses have started to look at globalization as an essential growth strategy. A newsworthy publication by UNCTAD (United Nations Conference on Trade and Development) has shown that international FDI (foreign direct investment) stretched to about USD 1.2 trillion, with steady development in FDI entries into developing countries, showing the desire of firms and investors to explore international territories and expand their markets. While there are apparent paybacks of getting an international attendance, there are also jeopardies related with the entire procedure of global expansion. In the article at hand, I will analyze the benefits and drawbacks of its international development in the United States and make concluding suggestions.
There are several ins and outs for firms to go global. Firms wish to expand internationally to tap into the profitable worldwide market and improve their clientele base. For these businesses, before going global, they deliberated aspects like the magnitude of the host marketplace demonstrated by client preferences, existing clients, potential market growth, populace and GDP per capita, and distance from host to the home country, and closeness to other international and local markets. On top of that, by penetrating fully in a market, it is regarded to be at ease for the firm to become accustomed to the needs, tastes, and likings of the host country’s clients. It is also easier to create a connection with local suppliers and retailers. According to an illustration by UNCTAD (2019), it is not a twist of fate that America is ranked among the topmost three FDI lodestones appealing 226 billion U.S. dollars in 2018.
Seeking resources that are too expensive (like rent or labor) or not readily available (like raw materials or natural resources) in the home country. Developing countries were thirsty in the past for know-how and know-how, and capital handover from the industrialized nations. As a result, they were enthusiastic not just to open up their economy but also to make other nations comfortable to invest in the extraction of their natural resources industries like oil, gas, and mining. On the other hand, with the wave in nationalism and bargaining power improving the developing nations, the natural resource’s surge seeking FDI investment appears to be decreasing. In the recent past, most resource-seeking companies emphasize another resource; labor.
In his research on resource availability and the firm’s global tactic as the main determinants in international expansion, Tulung (2017) proposed that multinational companies have significantly tried to draw not just on the expertise but also on the skills of the workforces in the host country. Specifically, while benefits and wages in developed countries are being increased, labor costs have remained competitive in the developing world, and labor quality has been advancing considerably. The above idea is believed to be among the significant reasons for making many establishments in the United States strategize ongoing global to utilize the opportunities that come with this trend. For instance, Nike, an American multinational company, has been considered a goliath when it comes to adopting the concept of outsourcing and opening many plants across the globe. It is even more surprising to know that more than ninety-nine percent of its employees are foreigners. Globalization has paved the way for companies in the United States like Nike to bear up different slumps of the business cycles, upturn its competitiveness on top of cutting costs.
One of the primary reasons companies in the United States go global is to improve their effectiveness by taking hold of the benefits of economy of scale and scope, creating economic rent, and developing locational advantages. These companies are not just in their mission of advancing their real cost-effectiveness,’ but they are also export-oriented. As a result, their freshly recognized subsidiaries are at most times part and parcel of their existing network in terms of production. Companies have to consider several determinants like availability of local suppliers, logistic cost, cost of production, and the likelihood of cross-border know-how and technology handover to decide on where to invest. For example, it has been proposed that the profit-making achievement of Apple Inc., among the Big Four knowhow corporations, was facilitated by its manufacture base in Asia and to another place across the globe. The company was initially started in California, United States, in 1977, specializing in planning, making, and retailing electrical devices, software, and hardware. It had already subcontracted its manufacturing to its joints in Singapore as early as 1981 and then outsourced to China in the 2000s and other places across the globe. Being in partnership with other firms around the world made it possible for Apple Inc. to lessen its production and operation costs by utilizing the opportunity brought by the particular assets in diverse locations while improving the speed and effectiveness of delivery that has been significant as far as the management of the company is concerned.
Strategic Asset Acquisition
According to Elia & Santangelo (2017) research, companies in the United States practice globalization in the mission of acquiring strategic assets for ultimate access to the business domain, competencies, and skillsets that they do not have at the moment. On top of that, this strategy helps the company control significant assets and gain a competitive edge among its rivals. In the recent past, the international acquisitions and mergers activities have continued to be strong despite global economic and political ambiguity, with overall transaction valued at about USD 4.1 trillion in 2018. Morgan (2019) asserts that part of the above estimation was cross-border transactions that accounted for more than thirty percent of overall merger and acquisition value. This tendency shows the ever more contending nature of companies’ tactical asset-seeking actions.
As alluring as globalization may seem to be, international expansion is among the most challenging business decisions that managers and business owners can make at the end of the day. There are many disadvantages and fundamental risks that are associated with the procedure.
It can be costly to establish a presence in a foreign country. Usually, there are two approaches to entering a foreign market incorporating equity method (like greenfield investment, acquisition, and joint venture) and non-equity approach (like contracting, licensing, franchising, and direct export.) For the entry that employs the equity approach, the company has to commit a large amount of initial capital. This notion is attributable to the resources of hiring and training workforces, developing the infrastructure, carrying out location and market research, in addition to paying other overhead costs. On top of that, it does not just take time but also effort for the established subsidiary to carry out its operations smoothly and create profit at the end of the day.
On the other hand, the non-equity approach also requires capital and time for the company to research the foreign market of interest generate and uphold working relations with the probable indigenous associates. Additionally, the company has to get ready for the nastiest circumstance that regardless of committing all the resources and time, the global expansion tactic can still fail because of fluctuating regulatory and political landscape or unanticipated reasons of the host country. Furthermore, contrary to the hope of many companies that there is a possibility of applying their business model and standardizing their products internationally for the ultimate reduction of the cost when expanding globally, they realize that they have to adapt or customize their business models or products to outfit the foreign market, raising operation and exploration and expansion expenses. For instance, even though Coca-Cola – the international prominent liquid refreshment firm with more than a century of involvement in the sector – needed to have a persistent naming in all marketplaces it explored, the firm came to know that it required a unique branding in China because of the linguistic issues with Chinese. The same problem was noted when the company entered Shanghai and Hong Kong markets, thus developing a new branding in due course.
Intellectual Property Protection
The safeguarding of intellectual property has been among the biggest concerns of businesses regarding making investments in countries that are deemed to have a weak legal structure and insufficient law as far as protection of the intellectual property is concerned. The right of intellectual property can be referred to as the right and exclusive ownership given to the creator of a business secret, trademark, patent, formula, design, process, invention, or idea. The right paves the way for the owner to benefit commercially from their concepts, on top of having a competitive edge over the rivals. When associating with foreign firms, there is a higher danger of revealing those intellectual properties. As a result, if the host nation lacks the lawful structure of solving such issues, there are higher chances of losing those intellectual properties to its rivals. Recent research has revealed that having a robust legal framework as far as safeguarding the intellectuals’ property is concerned the country at hand more attractive to foreign investors at the end of the day. On top of that, the right to intellectual property encourages local businesses to be more innovative and to promote competition.
Uncertainty in Host Country
A company is subject to the host country and international’s cultural, economic, social, and political conditions when investing in a new country. If the host country undergoes particular economic or political havoc or rejects the company, it is expected to suffer accordingly in due course. For instance, in the previous years, the rigidity between South Korea and Japan has escalated, ending in the 1st half of 2019, leading to numerous Japanese firms in South Korea the objective of anti-Japanese demonstration, slowdowns, and impose sanctions (Lee & Reynolds, 2019). In connection to that, the same can happen to American companies doing business abroad. A recent report has shown that many companies in the United States have shown their interest in leaving or reducing their investment in China because of the fear of the growing trade war’s significance between China and America. The situation does not just have a significant impact on small and medium enterprises (SMEs) but also giant firms like Google, who in the recent past had intentions of expanding its business prospects in the China Republic.
While offering businesses with wonderful prospects of increasing their clientele base, competitiveness, heightening effectiveness, and reducing cost, global expansion can be expensive for companies and needs detailed strategizing. To fruitfully go international, there are several aspects for a business to deliberate. First, the company has to spend enough resources on learning about the new nation concerning economic and political state of affairs, local practice, compliance cost, target clients, existing competitors, and culture. On top of that, going international has to bring into line with the firm’s long-term expansion tactic and the vision of the leadership, human resources, and organizational principles. With watchful preparation and implementation, the company has higher chances of joining the globalization movement.
Elia, S., & Santangelo, G. D. (2017). The evolution of strategic asset-seeking acquisitions by emerging market multinationals. International Business Review, 26(5), 855-866.
Lee, J. & Reynolds, I., 2019. South Korea, Japan Strike Calmer Note After Months of Tension. [Online] Available at https://www.bloomberg.com/news/articles/2019-08-14/japan-south-korea-ties-tested-again-as-region-marks-war-s-end [Accessed August 2021].
Morgan, J. P. (2019). Global M&A Outlook Unlocking value in a dynamic market. JP Morgan.
Tulung, J. E. (2017). Resource availability and firm’s international strategy as critical determinants of entry mode choice. Jurnal Aplikasi Manajemen, 15(1), 160-168.
UNCTAD, 2019. Global Investment Trends Monitor. [Online] Available at https://unctad.org/en/PublicationsLibrary/diaeiainf2019d1_en.pdf