BUS601: Financial Management

International business offers substantial potential risks and returns from an organizational perspective.

Learning Objective

• Recognize the complex factors that may impact an organization's strategic decision to expand internationally

Key Points

• The modern economy is globally connected, and growing more so every day. Weighing the pros and cons of international expansion is a key strategic consideration.
• The multinational enterprise (MNE) is the primary player in international business. MNEs are present in virtually every industry nowadays.
• Entry modes for international businesses include global concentration, global synergies, and other strategic global motivations.
• With the complexity of international operating environments, organizations should consider economic, technological, legal, socio-cultural and environmental factors.
• Weighing the risks and potential returns and determining a required rate of return for an international expansion is a key aspect of global financial management.

Term

• MNE

  Or a multinational enterprise, MNEs are defined as organizations which operate across multiple political borders.

International business is an enormously relevant facet of the modern economy, and will only become more integrated into core business strategy as technology continues to progress. International business is simply the summation of all commercial transactions that take place between various countries (crossing political boundaries). This is not exclusively limited to the domain of business, as NGOs, governments, and coops also operate across country borders with a variety of objectives (aside from simple profitability).

From a business perspective, the primary incumbent in an international business environment is the multinational enterprise (MNE), which is a company that pursues strategic success in global production and sales (i.e. operating within a number of country borders). The number of examples of this type of firm is constantly growing. From fast food chains like McDonald's to auto manufacturers like Honda to smartphone designers like Samsung, the number of international players in most markets is constantly on the rise.

Why Expand Globally?

Global expansion is costly and complex. To offset these costs and risks, organizations must have strong reasons for developing a global strategy. These reasons generally fit one (or more) of the following three strategic areas:

• Global Concentration – Depending upon the competitive concentration of a given industry in a given region, it may make sense to enter a market where competition is relatively scarce (and demand is high).
• Global Synergies – Some organizations have highly developed competencies that are easily scaled. In these situations, global expansion means natural synergy.
• Global Strategic Motivations – Other reasons for expansion to a given country may exist strategically, such as developing new sourcing sites for production or acquiring strategic assets in a given region.

External Factors Impacting Expansion

International expansion can be a costly and complex procedure. Before considering such a significant strategic move, management must weigh the external factors that will impact success during a global transition. These include:

• Socio-cultural: The social environment of a given region can have a significant impact on success. Food companies are highly impacted by this – certain cultures prefer certain types of foods.
• Geographic/Environmental - For example, skiing equipment may not do so well in regions without snow or mountains. Oil companies can only source oil from resource-rich regions.
• Legal/Political – Some countries have high barriers to entry, complex tax rates, and/or unclear legislative practices. Ease of doing business is critical here.
• Economic – The standard of living is different from region to region, and recognizing the value of a given market in terms of spending power, currency, and market size is critical to deciding upon expansion.
• Technology – Access to internet, electricity, clean water and a variety of other technological dependencies must be considered prior to entry if the organizational operations rely on easy access.

Weighing the pros and cons of entering a given reason, and calculating projected cash flows, costs, and required returns on investment are central financial considerations to entering a new international market.

Volume of Merchandise Exports

Despite a dip in 2008 as a result of the banking crisis and subsequent recession, the volume of global exports continues to rise even over this short time period. Globalization is an enormous source of growth.