International markets represent a great opportunity for firms. Why do companies decide to enter a foreign market? Deciding to enter an external market could be a giant leap in each company’s development. Not only providing a higher base of consumers but also diversifying its client base. Almost all modern, successful corporations are already present in many markets. Providing services to customers from many countries is one of the reasons for their success.
Why do firms enter international markets?
Increase of client base size
Home markets often have a limited size that can be already used by it to generate profits. Why do companies decide to enter a foreign market? By entering foreign markets, companies raise their potential customers, therefore enlarging their growth potential thanks to increasing their potential clients.
Companies are not always operating in a favorable geopolitical situation. Sometimes they can originate from countries that are not economically or politically stable. Let us assume a firm was established and works only in Venezuela. Thanks to the country’s unfavorable economic and political situation since 2014, its future operation is at risk. Lack of diversification means that a firm is dependent only on one market that can suddenly change into a place where you no longer want to do business. Why do companies enter foreign markets? By entering a foreign market, companies can diminish this risk and build a stable international foundation. When one of many markets within which a company operates collapses or changes, it does not significantly affect the overall profits of a particular company.
Some companies are highly specialized and produce only one thing. The home market for this type of product could be small or even non-existent. Why do companies expand into foreign markets? Entering a foreign country with their business companies can increase their sales and profits by quite a lot. A company producing luxury yachts may have a small number of potential customers in Poland because the weather isn’t great year-round, and yachting isn’t a popular activity for poles. Thanks to being present in international markets, they can thrive by selling their products in more relevant and lavish markets.
Why do companies expand into foreign markets?
Using excess capacity
Some companies are efficient enough that their output already excesses the capacity of the home market. By offering their excess products to foreign clients, firms can increase their profits and optimize their operations.
Capitalizing on growing economies
Highly developed countries have, on average, a slower pace of growth than the less developed ones. Thanks to a convergence where the still growing economies have a higher average yearly growth that decreases as they get closer to their higher developed counterparts. Let us look at the pace at which China and other Asian tigers keep growing since the 1990s. Achieving such a rate is not possible in an already highly developed nation. Entering a market that is still in its growth stage, companies that originate from already wealthy countries can capitalize on it.
Providing cheaper services
Outsourcing is common nowadays. Thanks to it, companies established in highly developed countries can lower their costs. Firms originating from countries with cheaper labor can provide their services to foreign markets at a lower price, making for a significant competitive advantage. Let us have a look at the presence of India operated Call centers. Many companies chose to do so to lower their operating costs thanks to the cheaper Indian workforce. Why do firms enter international markets?
In the modern, highly globalized world, entering foreign markets is an essential factor in companies’ growth and success. Many firms capitalized on it, and many more are here to follow. Having a good knowledge of the foreign not yet explored market is essential.
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