What are the five main reasons that firms expand into international markets quizlet?

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1. Social Science
2. Business

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Firms may enter international markets in any of five ways: exporting, licensing, forming strategic alliances, making acquisitions, and establishing new, wholly owned subsidiaries (greenfield ventures). Most firms, particularly small ones, begin with exporting (marketing and distributing their products abroad). This involves high transportation costs and possibly tariffs. An exporter has less control over the marketing and distribution of the product than in other methods of entering the international market. In addition, the exporter must pay the distributor or allow the distributor to add to the product price in order to offset its costs and earn a profit. In addition, the strength of the dollar against foreign currencies is a constant uncertainty. But, the advantages are that the company does not have the expense of establishing operations in the host countries. The Internet makes exporting easier than in previous times. Licensing (selling the manufacturing and distribution rights to a foreign firm) is also popular with smaller firms. The licenser is paid a royalty on each unit sold by the licensee. The licensee takes the risks and makes the financial investments in manufacturing and distributing the product. It is the least costly way of entering international markets. It allows a firm to expand returns based on a previous innovation. But there are disadvantages. Licensing provides the lowest returns, because they must be shared between the licensee and the licensor. Licensing gives the licenser less control over the manufacturing and marketing process. There is the risk that the licensee will learn the technology and become a competitor when the original license expires. If the licenser later wishes to use a different ownership arrangement, the licensing arrangement make create some inflexibility. Strategic alliances involve sharing risks and resources with another firm in the host country. The host country partner knows the local conditions; the expanding firm has the technology or other capabilities. Both partners typically enter an alliance in order to learn new capabilities. The partnership allows the entering firm to gain access to a new market and avoid paying tariffs. The host-country firm gains access to new technology and innovative products. Equity-based alliances are more likely to produce positive gains. Alliances work best in the face of high uncertainty and where cooperation is needed between partners and strategic flexibility is important. But, many alliances fail due to incompatibility and conflict between the partners. Cross- border acquisitions provide quick access to a new market, but they are expensive and involve complex negotiations. Cross-border acquisitions have all the problems of domestic acquisitions with the complication of a different culture, legal system and regulatory requirements. Acquisitions are expensive and usually involve debt-
financing. The most expensive and risky means of entering a new international market is through the establishment of a new, wholly owned subsidiary or greenfield venture. Alternatively, it provides the advantages of maximum control for the firm
and, if successful, potentially the greatest returns as well. This alternative is suitable for firms with strong intangible capabilities and/or proprietary technology. The risks are high because of the challenges of operating in an unfamiliar environment. The company must build new manufacturing facilities, establish distribution networks, and learn and implement new marketing strategies.

Research shows that returns vary as the level of diversification increases. At first, returns decrease, then as the firm learns to manage the diversification, returns increase. But, as diversification increases past some point, returns level off and become negative. Firms that are broadly diversified in international markets usually receive the most positive stock returns, especially when they diversify geographically into core business areas. International diversification can lead to economies of scale and experience, location advantages, increased market size, and the potential to stabilize returns (which reduces the firm's overall risk). International diversification improves a firm's ability to increase returns from innovation before competitors can overcome the initial competitive advantage. In addition, as firms move into international markets, they are exposed to new products and processes that stimulate further innovation. The amount of international diversification that can be managed varies from firm to firm and according to the abilities of the firm's managers. The problems of central coordination and integration are mitigated if the firm diversifies into more friendly countries that are geographically and culturally close.

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