The strategy for international expansion depends on two main topics:
- Method of entry
- Country (or region of world) selected
Importantly, the process of resolving these issues is circular, i.e. the choice of one will influence the choice of the other. For example, it might be that the best method of entering a country might be to acquire a company. But the acquisition may be expensive and risky and therefore it might be better to select another country. These two topics are explained separately below but the results may need to be reconsidered as a whole afterwards.
Method of entry
According to the classic work of Johanson and Vahlne 1977 and 1990, the method of entry can be considered a long a continuum of opportunities and risks:
- Export: make in home country
- Set up an overseas office: this will provide a permanent presence in a country selling a product or service
- Begin the first overseas manufacture: this is a big step because it required the recruitment of local people and the commitment of major finance to a country or region
- Develop multinational operations: invest in several countries or a region of the world, e.g. Europe or China.
- Develop a global operation: not just manufacturing in various countries but true, integrated co-operation, as explored in the definitions earlier.
In principle at least, each of the above categories involves greater risk and therefore should also deliver higher rewards (more profits).
‘Develop multinational operations‘ is not necessarily a simple task. It may involve an acquisition, a joint venture with a local company or some other form of co-operation. This may arise because of barriers to entry, lack of local knowledge, existing dominance of a local company and many other factors.
These issues are explained and explored in more depth in the Expansion Method Matrix in Chapter 9 of LynchStrategic Management.
Choosing the country or geographic region
Some basic considerations involved in the choice of countries include the following:
- Population size, density and distribution
- Political issues: ‘dictatorship versus democracy’ and ‘left wing versus right wing’ are simplistic but a start. The degree of change and the stability of politics are probably just as important as the political stance of the country.
- Trading issues: country membership of trade groups, the barriers to entry into the nation and the ability to export not just good from the nation but profits back to the home country
- Financial and tax issues: Taxes imposed, the banking and financial structures, insurance, legal ownership of assets like factories, ownership of intellectual property like patents and brands
- Nature of economic activity: largely rural? degree of urbanisation?
- Methods of distribution, e.g. small shops or supermarkets, roads and transport infrastructure and investment
- Telecommunications and the availability of the internet
- Culture and language
- Education and training: levels, apprenticeships, higher levels of education
- Religeous and ethical issues: these are important and must be respected
- Marketing and communications: how to promote the product? what media available? at what cost?
In choosing a country, it is often appropriate to begin by collecting basic country comparative data on such topics as:
- Growth in national wealth, measured both as total wealth (GPD) and also as wealth per head of the population
- Balance of payments data
- Price inflation and impact on currency
- Unemployment rate
- Export and import trade statistics
- Growth of money supply
- Areas and levels of economic activity
- Basic political and economic stability
This data can often be assembled quite quickly from the web: United Nations, World Bank, UNCTAD, national government data, European Union, commercial websites, etc. Links to these institutions and data are shown in the section on Globalization: What are the main global institutions?
Essentially, the above general data can be used to build a shorter list of countries to be examined in more depth. In practice, gathering such data on a large number of countries is quick using the web but rapidly becomes too much to consider in any depth.
For example, the author (RL) and colleagues once assembled data on all the countries in South America. We found that the data was too much to examine in sufficient depth to make investment decisions. We then reduced the list to just three countries – Brazil, Argentina and Chile – in order to examine them further. We used some simple criteria to establish this list – population size, economic stability and wealth per head of the population. This was no disrespect to the other countries but they were not appropriate for our range of products at that time.